G.R. No.
185582               February 29, 2012 the "sponsors"/"licensees")7 entered into a Memorandum
Agreement (MOA),8 pertinent provisions of which read:
TUNA PROCESSING, INC., Petitioner,
vs.
PHILIPPINE KINGFORD, INC., Respondent.
DECISION
PEREZ, J.:
Can a foreign corporation not licensed to do business in the
Philippines, but which collects royalties from entities in the
Philippines, sue here to enforce a foreign arbitral award?
In this Petition for Review on Certiorari under Rule 45,1 petitioner
Tuna Processing, Inc. (TPI), a foreign corporation not licensed to do
business in the Philippines, prays that the Resolution 2 dated 21
November 2008 of the Regional Trial Court (RTC) of Makati City be
declared void and the case be remanded to the RTC for further
proceedings. In the assailed Resolution, the RTC dismissed
petitioner’s Petition for Confirmation, Recognition, and Enforcement
of Foreign Arbitral Award3 against respondent Philippine Kingford,
Inc. (Kingford), a corporation duly organized and existing under the
laws of the Philippines,4 on the ground that petitioner lacked legal
capacity to sue.5
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as
the "licensor"), co-patentee of U.S. Patent No. 5,484,619, Philippine
Letters Patent No. 31138, and Indonesian Patent No. ID0003911
(collectively referred to as the "Yamaoka Patent"), 6 and five (5)
Philippine tuna processors, namely, Angel Seafood Corporation, East
Asia Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz
Seafoods, Inc., and respondent Kingford (collectively referred to as
of
1. Background and objectives. The Licensor, co-owner of
U.S.Patent No. 5,484,619, Philippine Patent No. 31138, and
Indonesian Patent No. ID0003911 xxx wishes to form an
alliance with Sponsors for purposes of enforcing his three
aforementioned patents, granting licenses under those
patents, and collecting royalties.
The Sponsors wish to be licensed under the aforementioned
patents in order to practice the processes claimed in those
patents in the United States, the Philippines, and Indonesia,
enforce those patents and collect royalties in conjunction
with Licensor.
xxx
4. Establishment of Tuna Processors, Inc. The parties
hereto agree to the establishment of Tuna Processors, Inc.
("TPI"), a corporation established in the State of California,
in order to implement the objectives of this Agreement.
5. Bank account. TPI shall open and maintain bank
accounts in the United States, which will be used exclusively
to deposit funds that it will collect and to disburse cash it
will be obligated to spend in connection with the
implementation of this Agreement.
6. Ownership of TPI. TPI shall be owned by the Sponsors
and Licensor. Licensor shall be assigned one share of TPI for
the purpose of being elected as member of the board of
directors. The remaining shares of TPI shall be held by the
Sponsors according to their respective equity shares. 9
xxx
The parties likewise executed a Supplemental Memorandum of
Agreement10 dated 15 January 2003 and an Agreement to Amend
Memorandum of Agreement11 dated 14 July 2003.
Due to a series of events not mentioned in the petition, the licensees,
including respondent Kingford, withdrew from petitioner TPI and
correspondingly reneged on their obligations. 12 Petitioner submitted
the dispute for arbitration before the International Centre for Dispute
Resolution in the State of California, United States and won the case
against respondent.13 Pertinent portions of the award read:
13.1 Within thirty (30) days from the date of transmittal of this
Award to the Parties, pursuant to the terms of this award, the total
sum to be paid by RESPONDENT KINGFORD to CLAIMANT
TPI, is the sum of ONE MILLION SEVEN HUNDRED FIFTY
THOUSAND EIGHT HUNDRED FORTY SIX DOLLARS AND
TEN CENTS ($1,750,846.10).
(A) For breach of the MOA by not paying past due
assessments, RESPONDENT KINGFORD shall
pay CLAIMANT the total sum of TWO HUNDRED
TWENTY NINE THOUSAND THREE HUNDRED
AND FIFTY FIVE DOLLARS AND NINETY CENTS
($229,355.90) which is 20% of MOA assessments since
September 1, 2005[;]
(B) For breach of the MOA in failing to cooperate
with CLAIMANT TPI in fulfilling the objectives of
the MOA, RESPONDENT KINGFORD shall
pay CLAIMANT the total sum of TWO HUNDRED
SEVENTY ONE THOUSAND FOUR HUNDRED
NINETY DOLLARS AND TWENTY CENTS
($271,490.20)[;]14 and
(C) For violation of THE LANHAM ACT and
infringement of the YAMAOKA 619 PATENT,
RESPONDENT KINGFORD shall pay CLAIMANT the
total sum of ONE MILLION TWO HUNDRED FIFTY
THOUSAND DOLLARS AND NO CENTS
($1,250,000.00). xxx
xxx15
To enforce the award, petitioner TPI filed on 10 October 2007
a Petition for Confirmation, Recognition, and Enforcement of
Foreign Arbitral Award before the RTC of Makati City. The petition
was raffled to Branch 150 presided by Judge Elmo M. Alameda.
At Branch 150, respondent Kingford filed a Motion to
Dismiss.16 After the court denied the motion for lack of
merit,17 respondent sought for the inhibition of Judge Alameda and
moved for the reconsideration of the order denying the
motion.18 Judge Alameda inhibited himself notwithstanding "[t]he
unfounded allegations and unsubstantiated assertions in the
motion."19 Judge Cedrick O. Ruiz of Branch 61, to which the case
was re-raffled, in turn, granted respondent’s Motion for
Reconsideration and dismissed the petition on the ground that the
petitioner lacked legal capacity to sue in the Philippines. 20
Petitioner TPI now seeks to nullify, in this instant Petition for
Review on Certiorari under Rule 45, the order of the trial court
dismissing its Petition for Confirmation, Recognition, and
Enforcement of Foreign Arbitral Award.
Issue
The core issue in this case is whether or not the court a quo was
correct in so dismissing the petition on the ground of petitioner’s
lack of legal capacity to sue.
Our Ruling
The petition is impressed with merit.
The Corporation Code of the Philippines expressly provides:
Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency
of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
It is pursuant to the aforequoted provision that the court a
quo dismissed the petition. Thus:
Herein plaintiff TPI’s "Petition, etc." acknowledges that it "is a
foreign corporation established in the State of California" and "was
given the exclusive right to license or sublicense the Yamaoka
Patent" and "was assigned the exclusive right to enforce the said
patent and collect corresponding royalties" in the Philippines. TPI
likewise admits that it does not have a license to do business in the
Philippines.
There is no doubt, therefore, in the mind of this Court that TPI has
been doing business in the Philippines, but sans a license to do so
issued by the concerned government agency of the Republic of the
Philippines, when it collected royalties from "five (5) Philippine tuna
processors[,] namely[,] Angel Seafood Corporation, East Asia Fish
Co., Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc.
and respondent Philippine Kingford, Inc." This being the real
situation, TPI cannot be permitted to maintain or intervene in any
action, suit or proceedings in any court or administrative agency of
the Philippines." A priori, the "Petition, etc." extant of the plaintiff
TPI should be dismissed for it does not have the legal personality to
sue in the Philippines.21
The petitioner counters, however, that it is entitled to seek for the
recognition and enforcement of the subject foreign arbitral award in
accordance with Republic Act No. 9285 (Alternative Dispute
Resolution Act of 2004),22 the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards drafted during the United
Nations Conference on International Commercial Arbitration in 1958
(New York Convention), and the UNCITRAL Model Law on
International Commercial Arbitration (Model Law),23 as none of
these specifically requires that the party seeking for the enforcement
should have legal capacity to sue. It anchors its argument on the
following:
In the present case, enforcement has been effectively refused on a
ground not found in the [Alternative Dispute Resolution Act
of 2004], New York Convention, or Model Law. It is for this reason
that TPI has brought this matter before this most Honorable Court, as
it [i]s imperative to clarify whether the Philippines’ international
obligations and State policy to strengthen arbitration as a means of
dispute resolution may be defeated by misplaced technical
considerations not found in the relevant laws.24
Simply put, how do we reconcile the provisions of the Corporation
Code of the Philippines on one hand, and the Alternative Dispute
Resolution Act of 2004, the New York Convention and the Model
Law on the other?
In several cases, this Court had the occasion to discuss the nature and
applicability of the Corporation Code of the Philippines, a general
law, viz-a-viz other special laws. Thus, in Koruga v. Arcenas,
Jr.,25 this Court rejected the application of the Corporation Code and
applied the New Central Bank Act. It ratiocinated:
Koruga’s invocation of the provisions of the Corporation Code is
misplaced. In an earlier case with similar antecedents, we ruled that:
"The Corporation Code, however, is a general law applying to all
types of corporations, while the New Central Bank Act regulates
specifically banks and other financial institutions, including the
dissolution and liquidation thereof. As between a general and special
law, the latter shall prevail – generalia specialibus non derogant."
(Emphasis supplied)26
Further, in the recent case of Hacienda Luisita, Incorporated v.
Presidential Agrarian Reform Council,27 this Court held:
Without doubt, the Corporation Code is the general law providing for
the formation, organization and regulation of private corporations.
On the other hand, RA 6657 is the special law on agrarian reform. As
between a general and special law, the latter shall prevail—generalia
specialibus non derogant.28
Following the same principle, the Alternative Dispute Resolution Act
of 2004 shall apply in this case as the Act, as its title - 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 - would suggest, is a law
especially enacted "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."29 It specifically provides
exclusive grounds available to the party opposing an application for
recognition and enforcement of the arbitral award. 30
Inasmuch as the Alternative Dispute Resolution Act of 2004, a
municipal law, applies in the instant petition, we do not see the need
to discuss compliance with international obligations under the New
York Convention and the Model Law. After all, both already form
part of the law.
In particular, the Alternative Dispute Resolution Act of
2004 incorporated the New York Convention in the Act by
specifically providing:
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.
xxx
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.
It also expressly adopted the Model Law, to wit:
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 xxx."
Now, does a foreign corporation not licensed to do business in the
Philippines have legal capacity to sue under the provisions of
the Alternative Dispute Resolution Act of 2004? We answer in the
affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides
that the opposing party in an application for recognition and
enforcement of the arbitral award may raise only those grounds that
were enumerated under Article V of the New York Convention, to
wit:
Article V
1. Recognition and enforcement of the award may be
refused, at the request of the party against whom it is
invoked, only if that party furnishes to the competent
authority where the recognition and enforcement is sought,
proof that:
(a) The parties to the agreement referred to in article
II were, under the law applicable to them, under
some incapacity, or the said agreement is not valid
under the law to which the parties have subjected it
or, failing any indication thereon, under the law of
the country where the award was made; or
(b) The party against whom the award is invoked
was not given proper notice of the appointment of
the arbitrator or of the arbitration proceedings or was
otherwise unable to present his case; or
(c) The award deals with a difference not
contemplated by or not falling within the terms of
the submission to arbitration, or it contains decisions
on matters beyond the scope of the submission to
arbitration, provided that, if the decisions on matters
submitted to arbitration can be separated from those
not so submitted, that part of the award which
contains decisions on matters submitted to
arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the
arbitral procedure was not in accordance with the
agreement of the parties, or, failing such agreement,
was not in accordance with the law of the country
where the arbitration took place; or
(e) The award has not yet become binding on the
parties, or has been set aside or suspended by a
competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may
also be refused if the competent authority in the country
where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not
capable of settlement by arbitration under the law of
that country; or
(b) The recognition or enforcement of the award
would be contrary to the public policy of that
country.
Clearly, not one of these exclusive grounds touched on the capacity
to sue of the party seeking the recognition and enforcement of the
award.
Pertinent provisions of the Special Rules of Court on Alternative
Dispute Resolution,31 which was promulgated by the Supreme Court,
likewise support this position.
Rule 13.1 of the Special Rules provides that "[a]ny party to a foreign
arbitration may petition the court to recognize and enforce a foreign
arbitral award." The contents of such petition are enumerated in Rule
13.5.32 Capacity to sue is not included. Oppositely, in the Rule on
local arbitral awards or arbitrations in instances where "the place of
arbitration is in the Philippines," 33 it is specifically required that a
petition "to determine any question concerning the existence, validity
and enforceability of such arbitration agreement" 34 available to the
parties before the commencement of arbitration and/or a petition for
"judicial relief from the ruling of the arbitral tribunal on a
preliminary question upholding or declining its jurisdiction" 35 after
arbitration has already commenced should state "[t]he facts showing
that the persons named as petitioner or respondent have legal
capacity to sue or be sued."36
Indeed, it is in the best interest of justice that in the enforecement of
a foreign arbitral award, we deny availment by the losing party of the
rule that bars foreign corporations not licensed to do business in the
Philippines from maintaining a suit in our courts. When a party
enters into a contract containing a foreign arbitration clause and, as
in this case, in fact submits itself to arbitration, it becomes bound by
the contract, by the arbitration and by the result of arbitration,
conceding thereby the capacity of the other party to enter into the
contract, participate in the arbitration and cause the implementation
of the result. Although not on all fours with the instant case, also
worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P. Romero in her
Dissenting Opinion in Asset Privatization Trust v. Court of
Appeals,37 to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining
adherents in legal and judicial circles here and abroad. If its tested
mechanism can simply be ignored by an aggrieved party, one who, it
must be stressed, voluntarily and actively participated in the
arbitration proceedings from the very beginning, it will destroy the
very essence of mutuality inherent in consensual contracts. 38
Clearly, on the matter of capacity to sue, a foreign arbitral award
should be respected not because it is favored over domestic laws and
procedures, but because Republic Act No. 9285 has certainly erased
any conflict of law question.
Finally, even assuming, only for the sake of argument, that the
court a quo correctly observed that the Model Law, not the New
York Convention, governs the subject arbitral award, 39 petitioner may
still seek recognition and enforcement of the award in Philippine
court, since the Model Law prescribes substantially identical
exclusive grounds for refusing recognition or enforcement. 40
Premises considered, petitioner TPI, although not licensed to do
business in the Philippines, may seek recognition and enforcement of
the foreign arbitral award in accordance with the provisions of
the Alternative Dispute Resolution Act of 2004.
II
The remaining arguments of respondent Kingford are likewise
unmeritorious.
First. There is no need to consider respondent’s contention that
petitioner TPI improperly raised a question of fact when it posited
that its act of entering into a MOA should not be considered "doing
business" in the Philippines for the purpose of determining capacity
to sue. We reiterate that the foreign corporation’s capacity to sue in
the Philippines is not material insofar as the recognition and
enforcement of a foreign arbitral award is concerned.
Second. Respondent cannot fault petitioner for not filing a motion
for reconsideration of the assailed Resolution dated 21 November
2008 dismissing the case. We have, time and again, ruled that the
prior filing of a motion for reconsideration is not required
in certiorari under Rule 45.41
Third. While we agree that petitioner failed to observe the principle
of hierarchy of courts, which, under ordinary circumstances,
warrants the outright dismissal of the case, 42 we opt to relax the rules
following the pronouncement in Chua v. Ang,43 to wit:
[I]t must be remembered that [the principle of hierarchy of courts]
generally applies to cases involving conflicting factual allegations.
Cases which depend on disputed facts for decision cannot be brought
immediately before us as we are not triers of facts. 44 A strict
application of this rule may be excused when the reason behind the
rule is not present in a case, as in the present case, where the issues
are not factual but purely legal.1âwphi1 In these types of questions,
this Court has the ultimate say so that we merely abbreviate the
review process if we, because of the unique circumstances of a case,
choose to hear and decide the legal issues outright. 45
Moreover, the novelty and the paramount importance of the issue
herein raised should be seriously considered. 46 Surely, there is a need
to take cognizance of the case not only to guide the bench and the
bar, but if only to strengthen arbitration as a means of dispute
resolution, and uphold the policy of the State embodied in
the Alternative Dispute Resolution Act of 2004, to wit:
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. xxx
27. xxx Upon confirmation with the Regional Trial Court, Makati
City, Branch 61, a copy of petitioner TPI’s motion was received by
the Metropolitan Trial Court, Makati City, Branch 67. On 8 January
2009, the motion was forwarded to the Regional Trial Court, Makati
City, Branch 61.48
All considered, petitioner TPI, although a foreign corporation not
licensed to do business in the Philippines, is not, for that reason
alone, precluded from filing the Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award before a
Philippine court.
WHEREFORE, the Resolution dated 21 November 2008 of the
Regional Trial Court, Branch 61, Makati City in Special Proceedings
No. M-6533 is hereby REVERSED and SET ASIDE. The case
is REMANDED to Branch 61 for further proceedings.
SO ORDERED.

Fourth. As regards the issue on the validity and enforceability of the

foreign arbitral award, we leave its determination to the court a
quo where its recognition and enforcement is being sought.

Fifth. Respondent claims that petitioner failed to furnish the court of

origin a copy of the motion for time to file petition for review
on certiorari before the petition was filed with this Court. 47 We,
however, find petitioner’s reply in order. Thus:

26. Admittedly, reference to "Branch 67" in petitioner TPI’s "Motion

for Time to File a Petition for Review on Certiorari under Rule 45" is
a typographical error. As correctly pointed out by respondent
Kingford, the order sought to be assailed originated from Regional
Trial Court, Makati City, Branch 61.
 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 Reconsideration2 that the Court erred in holding that
the DENR Panel of Arbitrators was bereft of jurisdiction, reiterating
G.R. No. 161957             January 22, 2007
its argument that the case involves a mining dispute that properly
falls within the ambit of the Panel’s authority. Gonzales adds that the
JORGE GONZALES and PANEL OF Court failed to rule on other issues he raised relating to the
ARBITRATORS, Petitioners, sufficiency of his complaint before the DENR Panel of Arbitrators
vs. and the timeliness of its filing.
CLIMAX MINING LTD., CLIMAX-ARIMCO MINING
CORP., and AUSTRALASIAN PHILIPPINES MINING
Respondents Climax Mining Ltd., et al., (respondents) filed their
INC., Respondents.
Motion for Partial Reconsideration and/or Clarification 3 seeking
reconsideration of that part of the Decision holding that the case
x--------------------------------------------------------------------------------- should not be brought for arbitration under Republic Act (R.A.) No.
x 876, also known as the Arbitration Law.4 Respondents, citing
American jurisprudence5 and the UNCITRAL Model Law,6 argue
G.R. No. 167994            January 22, 2007 that the arbitration clause in the Addendum Contract should be
treated as an agreement independent of the other terms of the
JORGE GONZALES, Petitioner, contract, and that a claimed rescission of the main contract does not
vs. avoid the duty to arbitrate. Respondents add that Gonzales’s
HON. OSCAR B. PIMENTEL, in his capacity as PRESIDING argument relating to the alleged invalidity of the Addendum Contract
JUDGE of BR. 148 of the REGIONAL TRIAL COURT of still has to be proven and adjudicated on in a proper proceeding; that
MAKATI CITY, and CLIMAX-ARIMCO MINING is, an action separate from the motion to compel arbitration. Pending
CORPORATION, Respondents. judgment in such separate action, the Addendum Contract remains
valid and binding and so does the arbitration clause therein.
RESOLUTION Respondents add that the holding in the Decision that "the case
should not be brought under the ambit of the Arbitration Law"
TINGA, J.: appears to be premised on Gonzales’s having "impugn[ed] the
existence or validity" of the addendum contract. If so, it supposedly
conveys the idea that Gonzales’s unilateral repudiation of the
contract or mere allegation of its invalidity is all it takes to avoid
arbitration. Hence, respondents submit that the court’s 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 party’s 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.
16195710 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 19.111 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-Arimco’s 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.1awphi1.net
On 18 May 2000, the RTC issued an order declaring Gonzales’s
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 Gonzales’s
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 court’s 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. Gonzales’s proposition
contradicts both the trial court’s limited jurisdiction and the summary
nature of the proceeding itself.
Climax-Arimco further notes that Gonzales’s 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
Contract—fraud and oppression in the execution thereof—are 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 court’s
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-Arimco’s Motion for
Partial Reconsideration and/or Clarification in G.R. No. 161957 and
Gonzales’s 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 Gonzales’s
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 Appeals28 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 Corporation’s 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,
Gonzales’s 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 arbitrator’s 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 Appeals37 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 Florida42 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 x43
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 & C’s motion, and the
U.S. Supreme Court affirmed.
The U.S. Supreme Court did not address Prima Paint’s 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 Act—which 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 thereof"—the 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. Gonzales’s 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, Gonzales’s 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 party’s 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 Gonzales’s 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-
Arimco’s 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, Gonzales’s 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
Gonzales’s 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.
 This is a Petition for Review on Certiorari under Rule 45 assailing
the February 20, 2006 Decision 1 and the March 30, 2006
Resolution2 of the Court of Appeals (CA) in CA G.R. CEB SP. No.
00623.

THE FACTS

Petitioner Metropolitan Cebu Water District (MCWD) is a

government-owned and controlled corporation (GOCC) created
pursuant to Presidential Decree (PD) No. 198,3 as amended, with its
principal office address at the MCWD Building, Magallanes corner
Lapu-Lapu Streets, Cebu City.4 It is mandated to supply water within
its service area in the cities of Cebu, Talisay, Mandaue, and Lapu-
Lapu and the municipalities of Compostela, Liloan, Consolacion, and
Cordova in the Province of Cebu.

Respondent Metro Rock Industries, Inc. (MRII) is a domestic

corporation with principal office address at the 2nd Level of the
Waterfront Cebu Hotel and Casino, Lahug, Cebu City.6ςrνll

On May 19, 1997, MCWD entered into a Water Supply

Contract7 (the Contract) with MRII wherein it was agreed that the
latter would supply MCWD with potable water, in accordance with
the World Health Organization (WHO) standard or the Philippine
national standard, with a minimum guaranteed annual
volume.8ςrνll

G.R. NO. 172438 - July 4, 2012] On March 15, 2004, MRII filed a Complaint9 against MCWD with
the Construction Industry Arbitration Commission (CIAC), citing the
METROPOLITAN CEBU WATER arbitration clause (Clause 18)10 of the Contract. The case was
DISTRICT, Petitioner, v. MACTAN ROCK INDUSTRIES, docketed as CIAC Case No. 12-2004. In the said complaint, MRII
INC., Respondent. sought the reformation of Clause 17 of the Contract, or the Price
Escalation/De-Escalation Clause, in order to include Capital Cost
DECISION Recovery in the price escalation formula, and to have such revised
formula applied from 1996 when the bidding was conducted, instead
MENDOZA, J.: of from the first day when MRII started selling water to MCWD. It
also sought the payment of the unpaid price escalation/adjustment,
and the payment of unpaid variation/extra work order and
interest/cost of money up to December 31, 2003.
On May 7, 2002, MCWD filed its Answer12 dated April 27, 2004,
which included a motion to dismiss the complaint on the ground that
the CIAC had no jurisdiction over the case, as the Contract was not
one for construction or infrastructure.
1. Ordering the reformation of Clause 17 of the Water Supply
Contract to read:
17[.] Price Escalation and/or De-Escalation shall be based on the
parametric formula:
17.1 Power Rate Price Adjustment/Power Cost Adjustment

The CIAC thereafter issued an order 13 denying MCWD s motion to

Current Power Rate - Base Power
dismiss, and calling the parties to a preliminary conference for the
Rate x 30% of base selling price of
review and signing of the Terms of Reference.
water
Base Power Rate
MCWD, thus, filed a petition for certiorari 15 under Rule 65 with the
CA, questioning the jurisdiction of the CIAC. The petition was
docketed as CA-G.R. SP. No. 85579 (First Petition). 17.2 Consumer Price Index (CPI) Adjustment/Operating Cost
Adjustment:
Meanwhile, the CIAC proceeded with the preliminary conference
scheduled on June 10 and July 22, 2004 which MWCD opted not to
attend. MRII and the CIAC both signed the Terms of Reference. Current CPI Base CPI
Pursuant to the Terms of Reference and the CIAC Order dated July x 40% of base selling price of water
22, 2004, MRII submitted its documentary evidence and affidavits of Base CPI
its witnesses.16
17.3 Capital Cost Recovery Adjustment:
On August 27, 2004, MRII submitted its Formal Offer of Evidence
and its memorandum of arguments in the form of a proposed/draft
decision. MCWD did not attend the hearings. It did not submit
evidence other than those annexed to its Answer. Neither did it file a
Current Peso to Base Peso to US$
formal offer of evidence, or a memorandum of legal arguments.
Decision of the CIAC
US$ Exchange Rate Exchange
18 Rate x 30% of base selling price of
The CIAC promulgated its Decision  on April 14, 2005, the
water
dispositive portion of which reads:
Base Peso to US $ Exchange Rate
WHEREFORE[,] premises considered, judgment is hereby
rendered as follows:
Price escalation shall be reckoned from January 1999 when the water
was first delivered by Mactan Rock Industries, Inc. to the MCWD
facilities in Mactan. The base CPI, base US$ Exchange Rate and the
Base Power Rate shall be the prevailing rate in January 1999, while
the Base Selling Price of water shall mean the 1996 rate per cubic
meter of water as provided for in the Water Supply Contract.
2. Ordering Respondent Metropolitan Cebu Water District to pay
Claimant, Mactan Rock Industries, Inc[.] under the reformed Clause
17 of the Water Supply Contract, the net amount
of Php12,126,296.70 plus legal interest of six percent (6%) per
annum from the (sic) March 15, 2004, the date of filling (sic) of the
case with the Construction Industry Arbitration Commission, the rate
increased to twelve percent (12%) per annum from the date the
herein Decision have (sic) become final and executory until the
foregoing amounts shall have been fully paid[.]
3. Claimant Mactan Rock Industries, Inc. and Metropolitan Cebu
Water District shall share equally the cost of arbitration.
SO ORDERED.
Decision of the CA in CA-G.R. SP No. 85579 - Petition
for certiorari under Rule 65 with the Court of Appeals questioning
the jurisdiction of the CIAC
Meanwhile, on October 28, 2005, the CA in its decision 20 in the First
Petition upheld the jurisdiction of the CIAC over the case. The CA
held that when parties agree to settle their disputes arising from or
connected with construction contracts, the CIAC acquires primary
jurisdiction.21 Citing Philrock Inc. v. Construction Industry
Arbitration Commission,22 the CA stated that the CIAC may resolve
not only the merits of such controversies, but may also award
damages, interest, attorney s fees, and expenses of litigation, when
appropriate.23ςrνll
Second, the CA held that the claims in question fall under the
jurisdiction of the CIAC. Thus
Xxx Section 4 of Executive Order No. 1008, otherwise known as the
Construction Industry Arbitration Law delineates CIAC s jurisdiction
as "original and exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties involved in
construction in the Philippines, whether the disputes arise before or
after the completion of the contract, or after abandonment thereof."
Moreover, Section 5 (k) of Republic Act No. 9184 otherwise known
as [the] Government Procurement Reform Act expressly defines
"infrastructure project" as including "water supply[,]" construction,
rehabilitation[,] demolition, repair, restoration and maintenance.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of
arbitration. It is to be highlighted that the dispute in the case at bar
arose from the parties incongruent positions with regard to clause 17
of the Water Supply Contract[,] specifically the price
escalation/adjustment. The instant case involves technical
discrepancies that are better left to an arbitral body that has expertise
in those areas. Nevertheless, in any event, the inclusion of an
arbitration clause in a contract does not ipso facto divest the courts of
jurisdiction to pass upon the findings of arbitral bodies, because the
awards are still judicially reviewable under certain
conditions.24 (Citations omitted.)
MCWD s motion for reconsideration of the decision in the First
Petition was still pending when it filed the Petition for
Review 25 under Rule 43 (Second Petition) appealing the decision of
the CIAC. The motion for reconsideration was eventually denied in a
Resolution26 dated May 3, 2006. MCWD did not appeal from the
denial of the motion. It, thus, became final and executory. 27ςrνll
Decision of the CA in CA-G.R. CEB SP. No. 00623 Petition for
review under Rule 43 appealing the decision of the CIAC
Aggrieved by the CIAC Decision, MCWD filed a Petition for
Review under Rule 43 with the CA which was docketed as CA-G.R.
CEB SP. No. 00623.
The CA, however, dismissed the petition in its Decision dated
February 20, 2006. The Court therein stated that the issue of
jurisdiction had already been resolved by the 18th Division in the
First Petition, where the CA upheld the jurisdiction of the CIAC over
Arbitration Case No. 12-2004.
Citing jurisprudence, the CA also ruled that there being an arbitration
clause in the Contract, the action for reformation of contract
instituted by MRII in this case fell squarely within the jurisdiction of
the CIAC, not the courts. In relation to this, the CA noted that the
present rule is that courts will look with favor upon amicable
agreements to settle disputes through arbitration, and will only
interfere with great reluctance to anticipate or nullify the action of
the arbitrator. MCWD being a signatory and a party to the Water
Supply Contract, it cannot escape its obligation under the arbitration
clause.28
The CA also held that the CIAC did not err in finding that the Water
Supply Contract is clear on the matter of the reckoning period for the
computation of the escalation cost from January 9, 1999, or the first
day of delivery of water. Moreover, the CA found that the CIAC did
not err in ruling that the contract be reformed to include Capital Cost
Recovery in the parametric formula for price escalation. Neither did
it err in holding that the Capital Cost Recovery shall be 30% of the
Base Selling Price of water as a consequence of the reformation of
Clause 17.
Finally, the CA stressed that "factual findings of administrative
agencies which are deemed to have acquired expertise in matters
within their respective jurisdictions are generally accorded not only
respect but even finality when supported by substantial evidence." 29Ï
MCWD filed a motion for reconsideration but it was denied in the
CA Resolution dated March 30, 2006.
Thus, this petition.
ISSUES
MCWD raises the following issues in its Petition for Review
MAY THE CONSTRUCTION INDUSTRY [ARBITRATION]
COMMISSION EXERCISE JURISDICTION OVER
DISPUTES ARISING FROM A WATER SUPPLY
CONTRACT?
MAY A PARTY, WHO IS A SIGNATORY TO THE WATER
SUPPLY CONTRACT[,] IN EFFECT SUBMITTING ITSELF TO
THE JURISDICTION OF THE CONSTRUCTION INDUSTRY
ARBITRATION COMMISSION, QUESTION THE
JURISDICTION OF [THE] CIAC?
DOES THE CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION HAVE THE (SIC) JURISDICTION OVER A
COMPLAINT PRAYING FOR A REFORMATION OF A WATER
SUPPLY CONTRACT?
MAY THE COURT OF APPEALS REFUSE TO RENDER A [SIC]
JUDGMENT ON AN ISSUE BECAUSE THIS HAS BEEN
ALREADY SETTLED IN A DECISION RENDERED BY
ANOTHER DIVISION OF THE COURT OF APPEALS IN A
PETITION FOR CERTIORARI, EVEN IF THE SAID DECISION
HAS NOT YET BEEN (SIC) FINAL DUE TO A TIMELY FILING
OF A MOTION FOR RECONSIDERATION?
RULING OF THE COURT
Creation of the CIAC
The Construction Industry Arbitration Commission (CIAC) was
created in 1985 under Executive Order (E.O.) No. 1008 (Creating an
Arbitration Machinery for the Philippine Construction Industry), in
recognition of the need to establish an arbitral machinery that would
expeditiously settle construction industry disputes. The prompt
resolution of problems arising from, or connected to, the construction
industry was considered necessary and vital for the fulfillment of
national development goals, as the construction industry provided
employment to a large segment of the national labor force, and was a
leading contributor to the gross national product.31ςrνll
Under Section 4 of E.O. No. 1008, the CIAC s jurisdiction was
specifically delineated as follows
SECTION 4. Jurisdiction - The CIAC shall have original and
exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the
Philippines, whether the disputes arise before or after the completion
of the contract, or after the abandonment or breach thereof. These
disputes may involve government or private contracts. For the Board
to acquire jurisdiction, the parties to a dispute must agree to submit
the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to
violation of specifications for materials and workmanship; violation
of the terms of agreement; interpretation and/or application of
contractual provisions; amount of damages and penalties;
commencement time and delays; maintenance and defects; payment
default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes arising from
employer-employee relationships which shall continue to be covered
by the Labor Code of the Philippines. (Underscoring supplied)
The jurisdiction of the CIAC as a quasi-judicial body is confined to
construction disputes,32 that is, those arising from, or connected to,
contracts involving "all on-site works on buildings or altering
structures from land clearance through completion including
excavation, erection and assembly and installation of components
and equipment."33 The CIAC has jurisdiction over all such disputes
whether the dispute arises before or after the completion of the
contract.34ςrνll
Whether the CIAC has jurisdiction over the dispute
As earlier stated, following the denial of its motion to dismiss by
CIAC, MCWD filed the First Petition with the CA, which decided in
favor of MRII and upheld the jurisdiction of the CIAC.
Not being in conformity, MCWD filed a motion for reconsideration.
While the said motion was pending with the CA, MCWD filed the
Second Petition with the same court. Eventually, the motion was
denied, and MCWD never appealed the case. Thus, the decision of
the CA in the First Petition became final and executory.
The question now is whether such final and executory decision is
binding such that courts are generally precluded from passing
judgment on the issue of jurisdiction in the present petition.
The Court finds in the affirmative.
This Court has held time and again that a final and executory
judgment, no matter how erroneous, cannot be changed, even by this
Court. Nothing is more settled in law than that once a judgment
attains finality, it thereby becomes immutable and unalterable. It may
no longer be modified in any respect, even if such modification is
meant to correct what is perceived to be an erroneous conclusion of
fact or law, and regardless of whether the modification is attempted
to be made by the court rendering it or by the highest court of the
land.35Ï
In its Decision in the First Petition, the CA affirmed the arbitral body
s finding in CIAC Case No. 12-2004 that the case was within its
jurisdiction. Such decision having become final, it is beyond the
jurisdiction of this Court, or any court or body, for that matter, to
review or modify, even supposing for the sake of argument, that it is
indeed erroneous.
Also, the parties apparently characterized the Contract as one
involving construction, as its arbitration clause specifically refers
disputes, controversies or claims arising out of or relating to the
Contract or the breach, termination or validity thereof, if the same
cannot be settled amicably, to an arbitration tribunal, in accordance
with E.O. No. 1008, or the Construction Industry Arbitration Law
V. DISPUTES AND JURISDICTION:
18. Any dispute, controversy or claim arising out of or relating to
this contract or the breach, termination or invalidity thereof, if the
same cannot be settled amicably, may be submitted for arbitration to
an Arbitration Tribunal in accordance with Executive Order No.
1008 dated 4 February 1985, otherwise known as the Construction
Industry Arbitration Law and the place of arbitration shall be the
City of Cebu, Philippines, otherwise said dispute or controversy
arising out of the contract or breach thereof shall be submitted to the
court of law having jurisdiction thereof in the city where MCWD is
located.36ςrνll
Had the parties been of the mutual understanding that the Contract
was not of construction, they could have instead referred the matter
to arbitration citing Republic Act (R.A.) No. 876, or The Arbitration
Law. Having been passed into law in 1953, the said statute was
already in existence at the time the contract was entered into, and
could have been applied to arbitration proceedings other than those
specifically within the arbitral jurisdiction of the CIAC.
Whether the CA erred in refusing to render judgment on the issue
of  jurisdiction ___________
On a related matter, MWCD also raises the issue of whether the 19th
Division of the CA, Cebu City, erred in refusing to render judgment
on the issue of jurisdiction raised in the Second Petition on the
ground that it had already been settled by the 18th Division in its
decision in the First Petition, even if the 18th Division decision had
not yet become final due to a timely filing of a motion for
reconsideration.
The Court rules in the negative.
The 19th Division was correct in refusing to render judgment on the
issue of jurisdiction as, at that time, the issue was still pending before
another division of the CA.
Litis pendentia is predicated on the principle that a party should not
be allowed to vex another more than once regarding the same subject
matter and for the same cause of action. It is founded on the public
policy that the same subject matter should not be the subject of
controversy in courts more than once, in order that possible
conflicting judgments may be avoided for the sake of the stability of
the rights and status of persons, and also to avoid the costs and
expenses incident to numerous suits.37ςrνll
With the two petitions then pending before the CA, all the elements
of litis pendentia were present, that is, identity of the parties in the
two actions, substantial identity in the causes of action and in the
reliefs sought by the parties, and identity between the two actions
such that any judgment that may be rendered in one case, regardless
of which party is successful, would amount to res judicata in the
other.38ςrνll
In both cases, MCWD was the petitioner and MRII, the respondent.
Although they differ in form, in essence, the two cases involved a
common issue, that is, MCWD s challenge to the jurisdiction of the
CIAC over the arbitration proceedings arising from the Water Supply
Contract between the petitioner and respondent.
To determine whether there is identity of the rights asserted and
reliefs prayed for, grounded on the same facts and bases, the
following tests may be utilized: (1) whether the same evidence
would support and sustain both the first and the second causes of
action, also known as the "same evidence" test; or (2) whether the
defenses in one case may be used to substantiate the complaint in the
other.39 Also fundamental is the test of determining whether the
cause of action in the second case existed at the time of the filing of
the first case.40ςrνll
In the First Petition, MCWD argued that the CIAC s issuance of its
Order41 dated May 28, 2004 was tainted with grave abuse of
discretion amounting to excess or lack of jurisdiction. Thus, MCWD
stated in its prayer:
WHEREFORE, in light of the premises laid down, petitioner most
respectfully prays:
1. Upon the filing of this Petition, a Writ of Preliminary Injunction or
restraining order be issued forthwith, enjoining the respondent from
proceeding with the hearing of the case until further orders from the
Honorable Court of Appeals;
2. After consideration, petitioner also prays that the Order dated May
28, 2004, denying petitioner s motion to dismiss be declared without
force and effect;
3. Petitioner also prays that the Construction Industry Arbitration
Commission be barred from hearing the case filed by Mactan Rock
Industries, Inc., private respondent herein.
Other measures of relief, which are just and equitable under the
foregoing premise are also prayed for.
The Second Petition, on the other hand, raised the following issues:
A. Whether or not the Arbitral Tribunal of CIAC gravely erred in
taking and exercising jurisdiction over the complaint filed by the
respondent;
b. Whether or not the Arbitral Tribunal of CIAC gravely erred in
reforming Clause 17 of the Contract;
c. Whether or not the same tribunal gravely committed an error in
considering Capital Cost Recovery Adjustment in awarding in favor
of the complainant, when the same is extraneous to the provisions of
the contract;
Thus, it prayed
WHEREFORE, PREMISES CONSIDERED, it is most respectfully
prayed of the Honorable Court that a Judgment be issued reversing
the findings of the Arbitral Tribunal of the Construction Industry
Arbitration Commission in its Decision dated April 14, 2005, as far
as the order of reformation of the water supply contract and in
granting the monetary award.
It is further prayed that the decision rendered by the Arbitral
Tribunal be declared invalid for want of jurisdiction to arbitrate and
to order the reformation of the water supply contract;
It is also prayed that the decision awarding money to the respondent
be strike (sic) down as erroneous and without legal basis for lack of
jurisdiction by the Arbitral Tribunal, which rendered the Decision.
It is also prayed that a Temporary Restraining Order and a Writ of
Preliminary Injunction be issued at the outset, ordering the stay of
execution pending the resolution of the issues raised in the Petition.
Other measures of relief, which are just and equitable, are also
prayed for.
In both cases, the parties also necessarily relied on the same laws and
arguments in support of their respective positions on the matter of
jurisdiction.
In the First Petition, in support of its argument, that the CIAC had no
jurisdiction to arbitrate the causes of action raised by MRII, MCWD
cited the portions of the Contract on the obligations of the water
supplier, E.O. No. 1008 (specifically Section 4 on jurisdiction), the
Rules of Procedure Governing Construction Arbitration (Section 1,
Article III). It also alleged that in issuing the order denying its
motion to dismiss, the CIAC misread the provisions of LOI No. 1186
and R.A. No. 9184 on the definition of an infrastructure project.
MRII, however, opined that the CIAC had jurisdiction over the
complaint and, therefore, correctly denied petitioner s motion to
dismiss. MRII argued that certiorari was not a proper remedy in case
of denial of a motion to dismiss and that the claims fell squarely
under CIAC s original and exclusive jurisdiction. MRII, in support of
its position, cited Section 1 of LOI No. 1186 and Section 5(k) of
R.A. No. 9184. MRII further proposed that, as shown by MCWD s
pro-forma Water Supply Contract, Specifications, Invitation to
Submit Proposal, Pre-Bid Conference minutes, Addendum No. 1,
and MRII s Technical and Financial Proposals, the undertaking
contemplated by the parties is one of infrastructure and of works,
rather than one of supply or mere services.
In the Second Petition, in support of the issue of jurisdiction, MCWD
again relied on Section 4 of E.O. No. 1008 and Section 1, Article III
of the Rules of Procedure Governing Construction Arbitration. It
also brought to fore the alleged faulty conclusion of MRII that a
water supply contract is subsumed under the definition of an
infrastructure project under LOI 1186.
In its Comment, MRII reiterated and adopted its arguments before
the CIAC, and insisted that the undertaking contemplated by the
parties was one of infrastructure and of works, as distinguished from
"mere supply from off-the-shelf or from mere services." 48 Section 1
of LOI No. 1186, to define "infrastructure" and Section 5(k) of R.A.
No. 9184 to include "water supply," were again cited. In support of
its arguments, MRII cited anew MCWD s pro-forma Water Supply
Contract, Specifications (in its Invitation to Submit Proposal),
pronouncements at the Pre-Bid Conference, Addendum No. 1, and
MRII s Technical and Financial Proposals. MRII further extensively
reproduced the content of the joint affidavit of Messrs. Antonio P.
Tompar and Lito R. Maderazo, MRII s President/CEO and Financial
Manager, respectively.
Given that the same arguments were raised on the matter of CIAC
jurisdiction, the parties thus relied on substantially the same evidence
in both petitions. MCWD annexed to both petitions copies of the
Water Supply Contract, the complaint filed by MRII with the CIAC,
and its Answer to the said complaint. On the other hand, MRII
presented Addendum No. 1 to the Water Supply Contract and its
Technical and Financial Proposals.
Moreover, the first cause of action in the Second Petition, that is, the
CIAC s having assumed jurisdiction, allegedly unlawfully, over the
dispute arising from the Water Supply Contract, obviously existed at
the time the First Petition was filed, as the latter case dealt with the
jurisdiction of the CIAC over the complaint filed.
Finally, any judgment that may be rendered in the First Petition on
the matter of whether the CIAC has jurisdiction over the arbitration
proceedings, regardless of which party was successful, would
amount to res judicata in the Second Petition, insofar as the issue of
jurisdiction is concerned. In fact, what MCWD should have done
was to appeal to the Court after the denial of its motion for
reconsideration in the First Petition. For not having done so, the
decision therein became final and, therefore, immutable.
Thus, following the above discussion, the 19th Division was correct
in refusing to render judgment on the issue of jurisdiction in the
Second Petition.
Whether the CIAC had jurisdiction to order the reformation of the
Water Supply Contract
The jurisdiction of courts and quasi-judicial bodies is determined by
the Constitution and the law. 50 It cannot be fixed by the will of the
parties to the dispute, nor can it be expanded or diminished by
stipulation or agreement.51 The text of Section 4 of E.O. No. 1008 is
broad enough to cover any dispute arising from, or connected with,
construction contracts, whether these involve mere contractual
money claims or execution of the works. This jurisdiction cannot be
altered by stipulations restricting the nature of construction disputes,
appointing another arbitral body, or making that body s decision final
and binding.
Thus, unless specifically excluded, all incidents and matters relating
to construction contracts are deemed to be within the jurisdiction of
the CIAC. Based on the previously cited provision outlining the
CIAC s jurisdiction, it is clear that with regard to contracts over
which it has jurisdiction, the only matters that have been excluded by
law are disputes arising from employer-employee relationships,
which continue to be governed by the Labor Code of the Philippines.
Moreover, this is consistent with the policy against split jurisdiction.
In fact, in National Irrigation Administration v. Court of Appeals,53 it
was held that the CIAC had jurisdiction over the dispute, and not the
contract. Therefore, even if the contract preceded the existence of the
CIAC, since the dispute arose when the CIAC had already been
constituted, the arbitral board was exercising current, and not
retroactive, jurisdiction. In the same case, it was held that as long as
the parties agree to submit to voluntary arbitration, regardless of
what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose
another forum, the parties will not be precluded from electing to
submit their dispute to the CIAC because this right has been vested
upon each party by law.
This is consistent with the principle that when an administrative
agency or body is conferred quasi-judicial functions, all
controversies relating to the subject matter pertaining to its
specialization are deemed to be included within its jurisdiction since
the law does not sanction a split of jurisdiction, as stated in Peña v.
Government Service Insurance System.54
In Peña, the Court held that although the complaint for specific
performance, annulment of mortgage, and damages filed by the
petitioner against the respondent included title to, possession of, or
interest in, real estate, it was well within the jurisdiction of the
Housing and Land Use Regulatory Board (HLURB), a quasi-judicial
body, as it involved a claim against the subdivision developer, Queen
s Row Subdivision, Inc., as well as the Government Service
Insurance System (GSIS).
This case was later cited in Badillo v. Court of Appeals,55 where the
Court concluded that the HLURB had jurisdiction over complaints
for annulment of title. The Court also held that courts will not
determine a controversy where the issues for resolution demand the
exercise of sound administrative discretion, such as that of the
HLURB, the sole regulatory body for housing and land development.
It was further pointed out that the extent to which an administrative
agency may exercise its powers depends on the provisions of the
statute creating such agency.
The ponencia further quoted from C.T. Torres Enterprises, Inc. v.
Hibionada:
The argument that only courts of justice can adjudicate claims
resoluble under the provisions of the Civil Code is out of step with
the fast-changing times. There are hundreds of administrative bodies
now performing this function by virtue of a valid authorization from
the legislature. This quasi-judicial function, as it is called, is
exercised by them as an incident of the principal power entrusted to
them of regulating certain activities falling under their particular
expertise.
In the Solid Homes case for example the Court affirmed the
competence of the Housing and Land Use Regulatory Board to
award damages although this is an essentially judicial power
exercisable ordinarily only by the courts of justice. This departure
from the traditional allocation of governmental powers is justified by
expediency, or the need of the government to respond swiftly and
competently to the pressing problems of the modern world.
In Bagunu v. Spouses Aggabao,57 the Court ruled that the RTC must
defer the exercise of its jurisdiction on related issues involving the
same subject matter properly within its jurisdiction, such as the
distinct cause of action for reformation of contracts involving the
same property, since the DENR assumed jurisdiction over the lot in
question, pursuant to its mandate.
In National Housing Authority v. First United Constructors
Corporation,58 the Court held that there was no basis for the
exclusion of claims for business losses from the jurisdiction of the
CIAC because E.O. No. 1008 "excludes from the coverage of the law
only those disputes arising from employer-employee relationships
which are covered by the Labor Code, conveying an intention to
encompass a broad range of arbitrable issues within the jurisdiction
of CIAC."59 Section 4 provides that "(t)he jurisdiction of the CIAC
may include but is not limited to x x x," underscoring the expansive
character of the CIAC s jurisdiction. Very clearly, the CIAC has
jurisdiction over a broad range of issues and claims arising from
construction disputes, including but not limited to claims for
unrealized profits and opportunity or business losses. What E.O. No.
1008 emphatically excludes is only disputes arising from employer-
employee relationships.
Where the law does not delineate, neither should we. Neither the
provisions of the Civil Code on reformation of contracts nor the law
creating the CIAC exclude the reformation of contracts from its
jurisdiction. Jurisprudence further dictates that the grant of
jurisdiction over related and incidental matters is implied by law.
Therefore, because the CIAC has been held to have jurisdiction over
the Contract, it follows that it has jurisdiction to order the
reformation of the Contract as well.
Whether MCWD can validly refuse to participate in the
arbitration proceedings
In light of the finality of the CA decision on the matter of
jurisdiction, the only remaining issue to be disposed of is whether the
CIAC could proceed with the case even if the MCWD refused to
participate in the arbitration proceedings.
The Court rules in the affirmative. Though one party can refuse to
participate in the arbitration proceedings, this cannot prevent the
CIAC from proceeding with the case and issuing an award in favor
of one of the parties.
Section 4.2 of the Revised Rules of Procedure Governing
Construction Arbitration (CIAC Rules) specifically provides that
where the jurisdiction of the CIAC is properly invoked by the filing
of a Request for Arbitration in accordance with CIAC Rules, the
failure of a respondent to appear, which amounts to refusal to
arbitrate, will not stay the proceedings, notwithstanding the absence
of the respondent or the lack of participation of such party. In such
cases, the CIAC is mandated to appoint the arbitrator/s in accordance
with the Rules, and the arbitration proceedings shall continue. The
award shall then be made after receiving the evidence of the
claimant.
In such a case, all is not lost for the party who did not participate.
Even after failing to appear, a respondent is still given the
opportunity, under the CIAC Rules, to have the proceedings
reopened and be allowed to present evidence, although with the
qualification that this is done before an award is issued:
4.2.1 In the event that, before award, the Respondent who had not
earlier questioned the jurisdiction of the Tribunal, appears and offers
to present his evidence, the Arbitral Tribunal may, for reasons that
justifies (sic) the failure to appear, reopen the proceedings, require
him to file his answer with or without counterclaims, pay the fees,
where required under these Rules, and allow him to present his
evidence, with limited right to cross examine witnesses already in the
discretion of the Tribunal. Evidence already admitted shall remain.
The Tribunal shall decide the effect of such controverting evidence
presented by the Respondent on evidence already admitted prior to
such belated appearance.
Thus, under the CIAC Rules, even without the participation of one of
the parties in the proceedings, the CIAC is still required to proceed
with the hearing of the construction dispute
This Court has held that the CIAC has jurisdiction over a dispute
arising from a construction contract even though only one of the
parties requested for arbitration. 62 In fact, in Philrock, Inc. v.
Construction Industry Arbitration Commission,63 the Court held that
the CIAC retained jurisdiction even if both parties had withdrawn
their consent to arbitrate.
In this case, there being a valid arbitration clause mutually stipulated
by the parties, they are both contractually bound to settle their
dispute
through arbitration before the CIAC. MCWD refused to participate,
but this should not affect the authority of the CIAC to conduct the
proceedings, and, thereafter, issue an arbitral award.
Now, with the CIAC decision being questioned by MCWD, the
Court takes a cursory reading of the said decision. It reveals that the
conclusions arrived at by CIAC are supported by facts and the law.
Article 1359 of the Civil Code states that when there has been a
meeting of the minds of the parties to a contract, but their true
intention is not expressed in the instrument purporting to embody the
agreement by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the
instrument to the end that such true intention may be expressed. The
CIAC, in this case, found that the parametric formula for price
escalation reflected in the Water Supply Contract involved two
items: Power Rate Price Adjustment (30% of the base selling price of
water) and Consumer Price Index Adjustment (40% of the base
selling price of water). The remaining 30% of the selling price of
water, which should have been for Capital Cost Recovery, was
inadvertently left out in this parametric formula. Thus, the Contract
should be reformed accordingly to reflect the intention of the parties
to include in the price escalation formula the Capital Cost Recovery
Adjustment. These conclusions were affirmed by the CA in the
assailed decision of February 20, 2006.
As noted by MCWD in its reply, however, the dispositive portion of Forex
the CIAC decision reforming the price escalation formula is Water
inconsistent with what was stated in the body of the decision. The Base Forex
formula contained in the body of the decision is as follows:
xxx
PRICE ADJUSTMENT COMPUTATION
4. Capital Cost Adjustment Local
Based on Reformed Clause 17 of the Water Supply ContractÏ
xxx
1. Power Cost Adjustment:
Current CPI Base CPI
xxx x 30% of 30% of Base Selling Price of Water
Base CPI
Current Power Rate Base Power
Rate x 30% of Base Selling Price of xxx
water
Base Power Rate 5. Capital Cost Adjustment Foreign

xxx xxx

2. Operating Cost Adjustment - Local Current Forex Base

Forex x 70% of 30% of Base Selling Price of
xxx Water
Base Forex
Current CPI Base CPI
x 30% of 40% of Base Selling Price of Water xxx64Ï‚rνll
Base CPI

xxx
The dispositive portion of the decision, however, reads:
3. Operating Cost Adjustment Foreign
WHEREFORE[,] premises considered, judgment is hereby
xxx rendered as follows:

Current Forex Base x 70% of 40% of Base Selling Price of

1. Ordering the reformation of Clause 17 of the Water Supply the decision that there was a mistake in the dispositive portion, the
Contract to read: body of the decision will prevail.

17[.] Price Escalation and/or De-Escalation shall be based on the Following the reasoning of the CIAC in this case, there are three
parametric formula: components to price adjustment: (1) Power Cost Adjustment (30% of
the base selling price of water); (2) Operating Cost Adjustment (40%
17.1 Power Rate Price Adjustment/Power Cost Adjustment of the base selling price of water); and (3) Capital Cost Adjustment
(30% of the base selling price of water).
Current Power Rate Base Power
Rate x 30% of Base Selling Price of In turn, the second component Operating Cost Adjustment is
water computed based on Local Operating Cost Adjustment (30%), and
Base Power Rate Foreign Operating Cost Adjustment (70%).

17.2 Consumer Price Index (CPI) Adjustment/Operatiing (sic) Cost Capital Cost Adjustment, on the other hand, is composed of Local
Adjustment: Capital Cost Adjustment (30%), and Foreign Capital Cost
Adjustment (70%).
Current CPI Base CPI
x 40% of Base Selling Price of Water This is consistent with the formula set forth in the body of the CIAC
Base CPI decision. If the formula in the dispositive portion were to be
followed, Operating Cost Adjustment would be computed with the
Local Operating Cost Adjustment representing the entire 40% of the
17.3 Capital Cost Recovery Adjustment: base selling price of water instead of just 30% of the Operating Cost
Adjustment. Moreover, if the Capital Cost Recovery Adjustment
Current Peso to Base Peso to US$ were to be computed based solely on Foreign Capital Cost Recovery
Adjustment, it would represent the entire 30% of the base selling
US$ Exchange Rate Exchange price of water, and not just 70% of the Capital Cost Recovery
Rate x 30% of base selling price of Adjustment. The omission of the marked portions of the formula as
water stated in the body of the CIAC decision represents substantial
Base Peso to US $ Exchange Rate changes to the formula for price escalation. It is thus clear that the
formula as stated in the body of the decision should govern.
The general rule is that where there is a conflict between the fallo, or
the dispositive part, and the body of the decision or order, the fallo WHEREFORE, the petition is DENIED. The Decision and
prevails on the theory that the fallo is the final order and becomes the Resolution of the Court of Appeals in C.A.-G.R. CEB SP. No. 00623
subject of execution, while the body of the decision merely contains are AFFIRMED with the modification that the formula for the
the reasons or conclusions of the court ordering nothing. However, computation of the Capital Cost Recovery Adjustment in the fallo of
where one can clearly and unquestionably conclude from the body of the CIAC decision should be amended to read as follows:
WHEREFORE, premises considered, judgment is hereby rendered
as follows:
1. Ordering the reformation of Clause 17 of the Water Supply
Contract to read:
17. Price Escalation and/or De-Escalation shall be based on the
parametric formula:
17.1. Power Rate Price Adjustment/Power Cost Adjustment
Current Power Rate - Base Power Rate
Base Power Rate shall be the prevailing rate in January 1999, while
the Base Selling Price of water shall mean the 1996 rate per cubic
meter of water as provided for in the Water Supply Contract.
2. Ordering Respondent Metropolitan Cebu Water District to pay
Claimant, Mactan Rock Industries, Inc. under the reformed Clause
17 of the Water Supply Contract, the net amount
of Php12,126,296.70 plus legal interest of six percent (6%) per
annum from March 15, 2004, the date of filing of the case with the
Construction Industry Arbitration Commission, and twelve percent
(12%) per annum from the date this Decision becomes final and
executory, until the foregoing amounts shall have been fully paid.

Base Power Rate x 30% of base selling price of water 3. Claimant Mactan Rock Industries, Inc. and Metropolitan Cebu
Water District shall share the cost of arbitration equally.
17.2 Consumer Price Index (CPI) Adjustment/Operating Cost
Adjustment:
SO ORDERED.
Current CPI Base CPI
x 30% of 40% of base selling price of water
Base CPI

17.3 Capital Cost Recovery Adjustment:

Current Peso to Base Peso to US$

US$ Exchange Rate Exchange

Rate
x 70% of 30% of base selling price
of water
Base Peso to US $ Exchange
Rate

Price escalation shall be reckoned from January 1999 when the water
was first delivered by Mactan Rock Industries, Inc. to the MCWD
facilities in Mactan. The base CPI, base US$ Exchange Rate and the
 G.R. No. 199238

BANCO DE ORO UNIBANK, INC., Petitioner,

vs.
COURT OF APPEALS and RCBC CAPITAL
CORPORATION, Respondents.

DECISION

VILLARAMA, JR., J.:

Before the Court are two consolidated petitions separately filed by

the parties in an arbitration case administered by the International
Chamber of Commerce-International Court of Arbitration (ICC-ICA)
pursuant to the arbitration clause in their contract.

The Case

In G.R. No. 196171, a petition for review under Rule 45 of the 1997
Rules of Civil Procedure, as amended, RCBC Capital Corporation
(RCBC) seeks to reverse the Court of Appeals (CA) Decision 1 dated
December 23, 2010 in CA-G.R. SP No. 113525 which reversed and
set aside the June 24, 2009 Order2 of the Regional Trial Court (RTC)
of Makati City, Branch 148 in SP Proc. Case No. M-6046.

In G.R. No. 199238,a petition for certiorari under Rule 65, Banco De
Oro Unibank, Inc. (BDO)assails the Resolution 3 dated September 13,
2011 in CA-G.R. SP No. 120888 which denied BDO’s application
for the issuance of a stay order and/or temporary restraining order
G.R. No. 196171               December 10, 2012 (TRO)/preliminary injunction against the implementation of the Writ
of Execution4 dated August 22, 2011 issued by the Makati City RTC,
RCBC CAPITAL CORPORATION, Petitioners, Branch 148 in SP Proc. Case No. M-6046.
vs.
BANCO DE ORO UNIBANK, INC., Respondent. Factual Antecedents

X- - - - - - - - - - - - - - - - - - - - - - - - - -X
On May 24, 2000, RCBC entered into a Share Purchase
Agreement5 (SPA) with Equitable-PCI Bank, Inc. (EPCIB), George
L. Go and the individual shareholders 6 of Bankard, Inc. (Bankard) for
the sale to RCBC of 226,460,000 shares (Subject Shares) of
Bankard, constituting 67% of the latter’s capital stock. After
completing payment of the contract price (₱1,786,769,400), the
corresponding deeds of sale over the subject shares were executed in
January 2001.
The dispute between the parties arose sometime in May 2003 when
RCBC informed EPCIB and the other selling shareholdersof an
overpayment of the subject shares, claiming there was an
overstatement of valuation of accounts amounting to ₱478 million
and that the sellers violated their warrantyunder Section 5(g)of the
SPA.7
As no settlement was reached, RCBC commenced arbitration
proceedings with the ICC-ICA in accordance with Section 10 of the
SPA which states:
Section 10.Arbitration
Should there be any dispute arising between the parties relating to
this Agreement including the interpretation or performance hereof
which cannot be resolved by agreement of the parties within fifteen
(15) days after written notice by a party to another, such matter shall
then be finally settled by arbitration under the Rules of Conciliation
and Arbitration of the International Chamber of Commerce in force
as of the time of arbitration, by three arbitrators appointed in
accordance with such rules. The venue of arbitration shall be in
Makati City, Philippines and the arbitration proceedings shall be
conducted in the English language. Substantive aspects of the dispute
shall be settled by applying the laws of the Philippines. The decision
of the arbitrators shall be final and binding upon the parties hereto
and the expenses of arbitration (including without limitation the
award of attorney’s fees to the prevailing party) shall be paid as the
arbitrators shall determine.8
In its Request for Arbitration9 dated May 12, 2004, Claimant RCBC
charged Bankard with deviating from and contravening generally
accepted accounting principles and practices, due to which the
financial statements of Bankard prior to the stock purchase were far
from fair and accurate, and resulted in the overpayment of ₱556
million. For this violation of sellers’representations and warranties
under the SPA, RCBC sought its rescission, as well as payment of
actual damages in the amount of ₱573,132,110, legal interest on the
purchase price until actual restitution, moral damages and litigation
and attorney’s fees, with alternative prayer for award of damages in
the amount of at least ₱809,796,082 plus legal interest.
In their Answer,10 EPCIB, Go and the other selling individual
shareholders (Respondents) denied RCBC’s allegations contending
that RCBC’s claim is one for overpayment or price reduction under
Section 5(h) of the SPA which is already time-barred, the remedy of
rescission is unavailable, and even assuming that rescission is
permitted by the SPA, RCBC failed to file its claim within a
reasonable time. They further asserted that RCBC is not entitled to
its alternative prayer for damages, being guilty of laches and failing
to set out the details of the breach as required under Section 7 of the
SPA. A counterclaim for litigation expenses and costs of arbitration
in the amount of US$300,000, as well as moral and exemplary
damages, was likewise raised by the Respondents.
RCBC submitted a Reply11 to the aforesaid Answer.
Subsequently, the Arbitration Tribunal was constituted. Mr. Neil
Kaplan was nominated by RCBC; Justice Santiago M. Kapunan (a
retired Member of this Court) was nominated by the Respondents;
and Sir Ian Barker was appointed by the ICC-ICA as Chairman.
On August 13, 2004, the ICC-ICA informed the parties that they are
required to pay US$350,000 as advance on costs pursuant to Article
30 (3) of the ICC Rules of Arbitration (ICC Rules). RCBC paid its
share of US$107,000, the balance remaining after deducting
payments of US$2,500 and US$65,000 it made earlier. Respondents’
share of the advance on costs was thus fixed at US$175,000.
Respondents filed an Application for Separate Advances on
Costs12 dated September 17, 2004 under Article 30(2) of the ICC
Rules, praying that the ICC fix separate advances on the cost of the
parties’ respective claims and counterclaims, instead of directing
them to share equally on the advance cost of Claimant’s (RCBC)
claim. Respondents deemed this advance cost allocation to be proper,
pointing out that the total amount of RCBC’s claim is substantially
higher – more than 40 times –the total amount of their counterclaims,
and that it would be unfair to require them to share in the costs of
arbitrating what is essentially a price issue that is now time-barred
under the SPA.
On September 20, 2004, the ICC-ICA informed Respondents that
their application for separate advances on costs was premature
pending the execution of the Terms of Reference (TOR). 13 The TOR
was settled by the parties and signed by the Chairman and Members
of the Arbitral Tribunal by October 11, 2004. On December 3,
2004,14 the ICC-ICA denied the application for separate advances on
costs and invited anew the Respondents to pay its share in the
advance on costs. However, despite reminders from the ICC-ICA,
Respondents refused to pay their share in the advance cost fixed by
the ICC-ICA. On December 16, 2004, the ICC-ICA informed the
parties that if Respondents still failed to pay its share in the advance
cost, it would apply Article 30(4) of the ICC Rules and request the
Arbitration Tribunal to suspend its work and set a new time limit,
and if such requested deposit remains unpaid at the expiry thereof,
the counterclaims would be considered withdrawn.15
In a fax-letter dated January 4, 2005, the ICC-ICA invited RCBC to
pay the said amount in substitution of Respondents.It also granted an
extension until January 17, 2005 within which to pay the balance of
the advance cost (US$175,000). RCBC replied that it was not willing
to shoulder the share of Respondents in the advance on costs but
nevertheless requested for a clarification as to the effect of such
refusal to substitute for Respondents’share. 16
On March 10, 2005, the ICC-ICA instructed the Arbitration Tribunal
to suspend its work and granted the parties a final time-limit of 15
days to pay the balance of the advanceon costs, failing which the
claims shall be considered withdrawn, without prejudice to their
reintroduction at a later date in another proceeding. The parties were
advised that if any of them objects to the measure, it should make a
request in writing within such period. 17 For the same reason of non-
receipt of the balance of the advance cost, the ICC-ICA issued
Procedural Order No. 3 for the adjournment of the substantive
hearings and granting the Respondents a two-month extension within
which to submit their brief of evidence and witnesses.
RCBC objected to the cancellation of hearings, pointing out that
Respondents have been given ample time and opportunity to submit
their brief of evidence and prepare for the hearings and that their
request for postponement serves no other purpose but to delay the
proceedings. It alleged that Respondents’ unjustified refusal to pay
their share in the advance on costs warrants a ruling that they have
lost standing to participate in the proceedings. It thus prayed that
Respondents be declared as in default, the substantive hearings be
conducted as originally scheduled, and RCBC be allowed to submit
rebuttal evidence and additional witness statements. 18
On December 15, 2005, the ICC-ICA notified the parties of its
decision to increase the advances on costs from US$350,000 to
US$450,000 subject to later readjustments, and again invited the
Respondents to pay the US$100,000 increment within 30 days from
notice. Respondents, however, refused to pay the increment, insisting
that RCBC should bear the cost of prosecuting its own claim and that
compelling the Respondents to fund such prosecution is inequitable.
Respondents reiterated that it was willing to pay the advance on costs
for their counterclaim.19
On December 27, 2005, the ICC-ICA advised that it was not possible
to fix separate advances on costs as explained in its December 3,
2004 letter, and again invited Respondents to pay their share in the
advance on costs. Respondents’ response contained in the letter
dated January 6, 2006 was still the same: it was willing to pay only
the separate advance on costs of their counterclaim. 20 In view of
Respondents’ continuing refusal to pay its equal share in the advance
on costs and increment, RCBC wrote the ICC-ICA stating that the
latter should compel the Respondents to pay as otherwise RCBC will
be prejudiced and the inaction of the ICC-ICA and the Arbitration
Tribunal will detract from the effectiveness of arbitration as a means
of settling disputes. In accordance with Article 30(4) of the ICC
Rules, RCBC reiterated its request to declare the Respondents as in
default without any personality to participate in the proceedings not
only with respect to their counterclaims but also to the claim of
RCBC.21
Chairman Ian Barker, in a letter dated January 25, 2006, stated in
part:
xxxx
2. The Tribunal has no power under the ICC Rules to
order the Respondents to pay the advance on costs
sought by the ICC or to give the Claimant any relief
against the Respondents’ refusal to pay. The ICC Rules
differ from, for example, the Rules of the LCIA (Article
24.3) which enables a party paying the share of costs which
the other party has refused to pay, to recover "that amount
as a debt immediately due from the defaulting party."
3. The only sanction under the ICC Rules is contained within
Article 30 (4). Where a request for an advance on costs has
not been complied with, after consultation with the Tribunal,
the Secretary-General may direct the Tribunal to suspend its
work. After expiry of a time limit, all claims and
counterclaims are then considered as withdrawn. This
provision cannot assist a Claimant who is anxious to litigate
its claim. Such a Claimant has to pay the sums requested
(including the Respondents’ share) if it wishes the arbitration
to proceed.
4. It may be possible for a Claimant in the course of the
arbitral hearing (or whenever costs are being considered
by the Tribunal) to make submissions based on the
failure of the Respondents to pay their share of the costs
advance.What relief, if any, would have to be then
determined by the Tribunal after having heard
submissions from the Respondents.
5. I should be pleased if the Claimant will advise the
Tribunal of its intention in relation to the costs advance. If
the costs are not paid, the arbitration cannot
proceed.22 (Italics in the original; emphasis supplied)
RCBC paid the additional US$100,000 under the second assessment
to avert suspension of the Arbitration Tribunal’s proceedings.
Upon the commencement of the hearings, the Arbitration Tribunal
decided that hearings will be initially confined to issues of liability
(liability phase) while the substantial issues will be heard on a later
date (quantum phase).
Meanwhile, EPCIB’s corporate name was officially changed to
Banco De Oro (BDO)-EPCIB after its merger with BDO was duly
approved by the Securities and Exchange Commission. As such,
BDO assumed all the obligations and liabilities of EPCIB under the
SPA.
On September 27, 2007, the Arbitration Tribunal rendered a Partial
Award23 (First Partial Award) in ICC-ICA Case No.
13290/MS/JB/JEM,as follows:
15 AWARD AND DIRECTIONS
15.1 The Tribunal makes the following declarations by way
of Partial Award:
(a) The Claimant’s claim is not time-barred under
the provisions of this SPA.
(b) The Claimant is not estopped by its conduct or
the equitable doctrine of laches from pursuing its
claim.
(c) As detailed in the Partial Award, the Claimant
has established the following breaches by the
Respondents of clause 5(g) of the SPA:
i) the assets, revenue and net worth of
Bankard were overstated by reason of its
policy on and recognition of Late Payment
Fees;
ii) reported receivables were higher than
their realisable values by reason of the
‘bucketing’ method, thus overstating
Bankard’s assets; and
iii) the relevant Bankard statements were
inadequate and misleading in that their
disclosures caused readers to be
misinformed about Bankard’s accounting
policies on revenue and receivables.
(d) Subject to proof of loss the Claimant is entitled
to damages for the foregoing breaches.
(e) The Claimant is not entitled to rescission of the
SPA.
(f) All other issues, including any issue relating to
costs, will be dealt with in a further or final
award.
15.2 A further Procedural Order will be necessary
subsequent to the delivery of this Partial Award to deal with
the determination of quantum and in particular, whether
there should be an Expert appointed by the Tribunal under
Article 20(4) of the ICC Rules to assist the Tribunal in this
regard.
15.3 This Award is delivered by a majority of the Tribunal
(Sir Ian Barker and Mr. Kaplan). Justice Kapunan is unable
to agree with the majority’s conclusion on the claim of
estoppel brought by the Respondents.24 (Emphasis supplied)
On October 26, 2007, RCBC filed with the Makati City RTC,
Branch 148 (SP Proc. Case No. M-6046)amotion to confirm the First
Partial Award, while Respondents filed a motion to vacate the same.
ICC-ICA by letter25 dated October 12, 2007 increased the advance on
costs from US$450,000 to US$580,000. Under this third assessment,
RCBC paid US$130,000 as its share on the increment. Respondents
declined to pay its adjudged total share of US$290,000 on account of
its filing in the RTC of a motion to vacate the First Partial
Award.26 The ICC-ICA then invited RCBC to substitute for
Respondents in paying the balance of US$130,000 by December 21,
2007.27 RCBC complied with the request, making its total payments
in the amount of US$580,000.28
While RCBC paid Respondents’ share in the increment
(US$130,000), it reiterated its plea that Respondents be declared as
in default and the counterclaimsdeemed as withdrawn. 29
Chairman Barker’s letter dated December 18, 2007 states in part:
xxxx
8. Contrary to the Complainant’s view, the Tribunal has no
jurisdiction to declare that the Respondents have no right to
participate in the proceedings concerning the claim. Article
30(4) of the ICC Rules applies only to any counterclaim of
the Respondents.
9. The Tribunal interprets the Claimant’s latest letter as
an application by the Claimant to the Tribunal for the
issue of a partial award against the Respondents in
respect of their failure to pay their share of the ICC’s
requests for advance on costs.
10. I should be grateful if the Claimant would confirm that
this is the situation. If so, the Claimant should propose a
timetable for which written submissions should be made by
both parties. This is an application which can be considered
by the Tribunal on written submissions. 30 (Emphasis
supplied)
RCBC, in a letter dated December 26, 2007, confirmed the
Arbitration Tribunal’s interpretation that it was applying for a partial
award against Respondents’ failure to pay their share in the advance
on costs.31
Meanwhile, on January 8, 2008, the Makati City RTC, Branch 148
issued an order in SP Proc. Case No. M-6046 confirming the First
Partial Award and denying Respondents’ separate motions to vacate
and to suspend and inhibit Barker and Kaplan. Respondents’ motion
for reconsideration was likewise denied. Respondents directly filed
with this Court a petition for review on certiorari under Rule 45,
docketed as G.R. No. 182248 and entitled Equitable PCI Banking
Corporation v. RCBC Capital Corporation.32 In our Decision dated
December 18, 2008, we denied the petition and affirmed the RTC’s
ruling confirming the First Partial Award.
On January 18, 2008, the Arbitration Tribunal set a timetable for the
filing of submission by the parties on whether it should issue a
Second Partial Award in respect of the Respondents’ refusal to pay
an advance on costs to the ICC-ICA.
In compliance, RCBC filed on February 7, 2008an Application for
Reimbursement of Advance on Costs Paid, praying for the issuance
of a partial award directing the Respondents to reimburse its
payment in the amount of US$290,000 representing Respondents’
share in the Advance on Costs and to consider Respondents’
counterclaim for actual damages in the amount of US$300,000, and
moral and exemplary damages as withdrawn for their failure to pay
their equal share in the advance on costs. RCBC invoked the plain
terms of Article 30 (2) and (3) to stress the liability of Respondents
to share equally in paying the advance on costs where the Arbitration
Tribunal has fixed the same.33
Respondents, on the other hand, filed their Opposition 34 to the said
application alleging that the Arbitration Tribunal has lost its
objectivity in an unnecessary litigation over the payment of
Respondents’ share in the advance costs. They pointed out that
RCBC’s letter merely asked that Respondents be declared as in
default for their failure to pay advance costs but the Arbitration
Tribunal, while denying the request offered an alternative to RCBC:
a Partial Award for Respondents’ share in the advance costs even if
it was clear from the language of RCBC’s December 11, 2007 letter
that it had no intention of litigating for the advance costs. Chairman
Barker, after ruling earlier that it cannot grant RCBC’s request to
declare the Respondents as having no right to participate in the
proceedings concerning the claim, interpreted RCBC’s letter as an
application for the Arbitration Tribunal to issue a partial award in
respect of such refusal of Respondents to pay their share in the
advance on costs, and subsequently directed the parties to make
submissions on the matter.Aside from violating their right to due
process and to be heard by an impartial tribunal, Respondents also
argued that in issuing the award for advance cost, the
ArbitrationTribunal decided an issue beyond the terms of the TOR.
Respondents also emphasized that the parties agreed on a two-part
arbitration: the first part of the Tribunal’s proceedings would
determine Respondents’ liability, if any, for alleged violation of
Section 5(g) and (h) of the SPA; and the second part of the
proceedings would determine the amounts owed by one party to
another as a consequence of a finding of liability or lack thereof. An
award for "reimbursement of advances for costs" clearly falls outside
the scope of either proceedings. Neither can the Tribunal justify such
proceedings under Article 23 of the ICC Rules (Conservatory and
Interim Measures) because that provision does not contemplate an
award for the reimbursement of advance on costs in arbitration cases.
Respondents further asserted that since the advances on costs have
been paid by the Claimant (RCBC), the main claim and counterclaim
may both be heard by the Arbitration Tribunal.
In his letter dated March 13, 2008, Chairman Barker advised the
parties, as follows:
1. The Tribunal acknowledges the Respondents’ response to
the Claimant’s application for a Partial Award, based on the
Respondents’ failure to pay their share of the costs, as
requested by the ICC.
2. The Tribunal notes that neither party has referred to
an article by Mat[t]hew Secomb on this very subject
which appears in the ICC Bulletin Vol. 14 No.1 (Spring
2003). To assist both sides and to ensure that the Tribunal
does not consider material on which the parties have not
been given an opportunity to address, I attach a copy of this
article, which also contains reference to other scholarly
works on the subject.
3. The Tribunal will give each party seven days within which
to submit further written comments as a consequence of
being alerted to the above authorities. 35 (Additional emphasis
supplied)
The parties complied by submitting their respective comments.
RCBC refuted Respondents’ allegation of partiality on the part of
Chairman Barker and reiterated the prayer in its application for
reimbursement of advance on costs paid to the ICC-ICA. RCBC
contended that based on Mr. Secomb’s article, whether the
"contractual" or "provisional measures" approach is applied, the
Arbitration Tribunal is vested with jurisdiction and authority to
render an award with respect to said reimbursement of advance cost
paid by the non-defaulting party.36
Respondents, on the other hand, maintained that RCBC’s application
for reimbursement of advance cost has no basis under the ICC Rules.
They contended that no manifest injustice can be inferred from an act
of a party paying for the share of the defaulting party as this scenario
is allowed by the ICC Rules. Neither can a partial award for advance
cost be justified under the "contractual approach" since the matter of
costs for arbitration is between the ICC and the parties, not the
Arbitration Tribunal and the parties. An arbitration tribunal can issue
decisions on costs only for those costs not fixed by the ICC. 37
Respondents reiterated their position that Article 30(3) envisions a
situation whereby a party would refuse to pay its share on the
advance on costs and provides a remedy therefor – the other party
"shall be free to pay the whole of the advance on costs." Such party’s
reimbursement for payments of the defaulting party’s share depends
on the final arbitral award where the party liable for costs would be
determined. This is the only remedy provided by the ICC Rules. 38
On May 28, 2008, the Arbitration Tribunal rendered the Second
Partial Award,39 as follows:
7 AWARD
7.1 Having read and considered the submissions of both parties, the
Tribunal AWARDS, DECLARES AND ORDERS as follows:
(a) The Respondents are forthwith to pay to the Claimant the
sum of US$290,000.
(b) The Respondents’ counterclaim is to be considered as
withdrawn.
(c) All other questions, including interest and costs, will be
dealt with in a subsequent award.40
The above partial award was received by RCBC and Respondents on
June 12, 2008.
On July 11, 2008, EPCIB filed a Motion to Vacate Second Partial
Award41 in the Makati City RTC, Branch 148 (SP Proc. Case No. M-
6046). On July 10, 2008, RCBC filed in the same court a Motion to
Confirm Second Partial Award.42
EPCIB raised the following grounds for vacating the Second Partial
Award: (a) the award is void ab initio having been rendered by the
arbitrators who exceeded their power or acted without it; and (b) the
award was procured by undue means or issued with evident partiality
or attended by misbehavior on the part of the Tribunal which resulted
in a material prejudice to the rights of the Respondents. EPCIB
argued that there is no express agreement either in the SPA or the
ICC Rules for such right of reimbursement. There is likewise no
implied agreement because from the ICC Rules, the only inference is
that the parties agreed to await the dispositions on costs liability in
the Final Award, not before.
On the ruling of the Arbitration Tribunal that Respondents’
application for costs are not counterclaims, EPCIB asserted that this
is contrary to Philippine law as it is basic in our jurisdiction that
counterclaims for litigation expenses, moral and exemplary damages
are proper counterclaims, which rule should be recognized in view of
Section 10 of the SPA which provides that "substantive aspects of
the dispute shall be settled by applying the laws of the Philippines."
Finally, EPCIB takes issue with Chairman Barker’s interpretation of
RCBC’s December 11, 2007 letter as an application for a partial
award for reimbursement of the substituted payments. Such conduct
of Chairman Barker is prejudicial and proves his evident partiality in
favor of RCBC.
RCBC filed its Opposition,43 asserting that the Arbitration Tribunal
had jurisdiction to consider Respondents’ counterclaim as
withdrawn, the same having been abandoned by not presenting any
computation or substantiation by evidence, their only computation
relates only to attorney’s fees which are simply cost of litigation
properly brought at the conclusion of the arbitration. It also pointed
out that the Arbitration Tribunal was empowered by the parties’
arbitral clause to determine the manner of payment of expenses of
arbitration, and that the Second Partial Award was based on
authorities and treatiseson the mandatory and contractual nature of
the obligation to pay advances on costs.
In its Reply,44 EPCIB contended that RCBC had the option to agree
to its proposal for separate advances on costs but decided against it;
RCBC’s act of paying the balance of the advance cost in substitution
of EPCIB was for the purpose of having EPCIB defaulted and the
latter’s counterclaim withdrawn. Having agreed to finance the
arbitration until its completion, RCBC is not entitled to immediate
reimbursement of the amount it paid in substitution of EPCIB under
an interim award, as its right to a partial or total reimbursement will
have to be determined under the final award. EPCIB asserted that the
matter of reimbursement of advance cost paid cannot be said to have
properly arisen during arbitration. EPCIB reiterated that Chairman
Barker’s interpretation of RCBC’s December 11, 2007 letter as an
application for interim award for reimbursement is tantamount to a
promise that the award will be issued in due course.
After a further exchange of pleadings, and other motions seeking
relief from the court in connection with the arbitration proceedings
(quantum phase), the Makati City RTC, Branch 148 issued the
Order45 dated June 24, 2009 confirming the Second Partial Award
and denying EPCIB’s motion to vacate the same. Said court held that
since the parties agreed to submit any dispute under the SPA to
arbitration and to be bound by the ICC Rules, they are also bound to
pay in equal shares the advance on costs as provided in Article 30 (2)
and (3). It noted that RCBC was forced to pay the share of EPCIB in
substitution of the latter to prevent a suspension of the arbitration
proceedings, while EPCIB’s non-payment seems more like a scheme
to delay such proceedings. On the Arbitration Tribunal’s ruling on
EPCIB’s counterclaim, no error was committed in considering it
withdrawn for failure of EPCIB to quantify and substantiate it with
supporting evidence. As to EPCIB’s claim for attorney’s fees, the
RTC agreed that these should be brought only at the close of
arbitration.
EPCIB moved to reconsider the June 24, 2009 Order and for the
voluntary inhibition of the Presiding Judge (Judge Oscar B.
Pimentel) on the ground that EPCIB’s new counsel represented
another client in another case before him in which said counsel
assailed his conduct and had likewise sought his inhibition. Both
motions were denied in the Joint Order46 dated March 23, 2010.
On April 14, 2010, EPCIB filed in the CA a petition for review 47 with
application for TRO and/or writ of preliminary injunction (CA-G.R.
SP No. 113525) in accordance with Rule 19, Section 4 of the Special
Rules of Court on Alternative Dispute Resolution48 (Special ADR
Rules). EPCIB assailed the Makati City RTC, Branch 148 in denying
its motion to vacate the Second Partial Award despite (a) said award
having been rendered in excess of jurisdiction or power, and contrary
to public policy; (b) the fact that it was issued with evident partiality
and serious misconduct; (c) the award deals with a dispute not
contemplated within the terms of submission to arbitration or beyond
the scope of such submission, which therefore ought to be vacated
pursuant to Article 34 of the UNCITRAL Model Law; and (d) the
Presiding Judge having exhibited bias and prejudice against BDO
and its counsel as confirmed by his pronouncements in the Joint
Order dated March 23, 2010 in which, instead of recusing himself,
he imputed malice and unethical conduct in the entry of appearance
of Belo Gozon Elma Asuncion and Lucila Law Offices in SP Proc.
Case No. M-6046, which warrants his voluntary inhibition.
Meanwhile, on June 16, 2010, the Arbitration Tribunal issued the
Final Award,49 as follows:
15 AWARD
15.1 The Tribunal by a majority (Sir Ian Barker & Mr. Kaplan)
awards, declares and adjudges as follows:
(a) the Respondents are to pay damages to the Claimant for
breach of the sale and purchase agreement for Bankard
shares in the sum of ₱348,736,920.29.
 (b) The Respondents are to pay to the Claimant the sum of
US$880,000 in respect of the costs of the arbitration as fixed
by the ICC Court.
(c) The Respondents are to pay to the Claimant the sum of
US$582,936.56 for the fees and expenses of Mr. Best.
(d) The Respondents are to pay to the Claimant their
expenses of the arbitration as follows:
(i) Experts’ fees ₱7,082,788.55
(ii) Costs of without prejudice meeting ₱22,571.45
(iii) Costs of arbitration hearings ₱553,420.66
(iv) Costs of transcription service ₱483,597.26
Total ₱8,144,377.62
(e) The Respondents are to pay to the Claimant the sum of
₱7,000,000 for party-and-party legal costs.
(f) The Counterclaims of the Respondents are all dismissed.
(g) All claims of the Claimant are dismissed, other than
those referred to above.
15.2 Justice Kapunan does not agree with the majority of the
members of the Tribunal and has issued a dissenting opinion. He has
refused to sign this Award.50
On July 1, 2010 BDO filed in the Makati City RTC a Petition to
Vacate Final Award Ad Cautelam,51 docketed as SP Proc. Case No.
M-6995, which was raffled to Branch 65.
On July 28, 2010, RCBC filed with the Makati City RTC, Branch
148 (SP Proc. Case No. M-6046) a Motion to Confirm Final
Award.52 BDO filed its Opposition With Motion to Dismiss 53 on
grounds that a Petition to Vacate Final Award Ad Cautelamhad
already been filed in SP Proc. Case No. M-6995. BDO also pointed
out that RCBC did not file the required petition but instead filed a
mere motion which did not go through the process of raffling to a
proper branch of the RTC of Makati City and the payment of the
required docket/filing fees. Even assuming that Branch 148 has
jurisdiction over RCBC’s motion to confirm final award, BDO
asserted that RCBC had filed before the Arbitration Tribunal an
Application for Correction and Interpretation of Award under Article
29 of the ICC Rules, which is irreconcilable with its Motion to
Confirm Final Award before said court. Hence, the Motion to
Confirm Award was filed precipitately.
On August 18, 2010, RCBC filed an Omnibus Motion in SP Proc.
Case No. M-6995 (Branch 65) praying for the dismissal of BDO’s
Petition to Vacate Final Award or the transfer of the same to Branch
148 for consolidation with SP Proc. Case No. M-6046. RCBC
contended that BDO’s filing of its petition with another court is a
blatant violation of the Special ADR Rules and is merely a
subterfuge to commit forum-shopping. BDO filed its Opposition to
the Omnibus Motion.54
On October 28, 2010, Branch 65 issued a Resolution 55 denying
RCBC’s omnibus motion and directing the service of the petition to
RCBC for the latter’s filing of a comment thereon. RCBC’s motion
for reconsideration was likewise denied in the said court’s Order
dated December 15, 2010. RCBC then filed its Opposition to the
Petition to Vacate Final Award Ad Cautelam.
Meanwhile, on November 10, 2010, Branch 148 (SP Proc. Case No.
M-6046) issued an Order56 confirming the Final Award "subject to
the correction/interpretation thereof by the Arbitral Tribunal pursuant
to the ICC Rules and the UNCITRAL Model Law," and denying
BDO’s Opposition with Motion to Dismiss.
On December 30, 2010, George L. Go, in his personal capacity and
as attorney-in-fact of the other listed shareholders of Bankard, Inc. in
the SPA (Individual Shareholders), filed a petition in the CA, CA-
G.R. SP No. 117451, seeking to set aside the above-cited November
10, 2010 Order and to enjoin Branch 148 from further proceeding in
SP Proc. Case No. M-6046. By Decision 57 dated June 15, 2011, the
CA dismissed the said petition. Their motion for reconsideration of
the said decision was likewise denied by the CA in its
Resolution58 dated December 14, 2011.
On December 23, 2010, the CA rendered its Decision in CA-G.R. SP
No. 113525, the dispositive portion of which states:
WHEREFORE, premises considered, the following are
hereby REVERSED and SET ASIDE:
1. the Order dated June 24, 2009 issued in SP Proc. Case No.
M-6046 by the Regional Trial Court of Makati City, Branch
148, insofar as it denied the Motion to Vacate Second Partial
Award dated July 8, 2008 and granted the Motion to
Confirm Second Partial Award dated July 10, 2008;
2. the Joint Order dated March 23, 2010 issued in SP Proc.
Case No. M-6046 by the Regional Trial Court of Makati
City, Branch 148, insofar as it denied the Motion For
Reconsideration dated July 28, 2009 relative to the motions
concerning the Second Partial Award immediately
mentioned above; and
3. the Second Partial Award dated May 28, 2008 issued in
International Chamber of Commerce Court of Arbitration
Reference No. 13290/MS/JB/JEM.
SO ORDERED.59
RCBC filed a motion for reconsideration but the CA denied the same
in its Resolution60 dated March 16, 2011. On April 6, 2011, it filed a
petition for review on certiorari in this Court (G.R. No. 196171).
On February 25, 2011, Branch 65 rendered a Decision 61 in SP Proc.
Case No. M-6995, as follows:
WHEREFORE, premises considered, the Final Award dated June 16,
2010 in ICC Ref. No. 13290/MS/JB/JEM is hereby VACATED with
cost against the respondent.
SO ORDERED.62
In SP Proc. Case No. M-6046, Branch 148 issued an Order 63 dated
August 8, 2011 resolving the following motions: (1) Motion for
Reconsideration filed by BDO, Go and Individual Shareholders of
the November 10, 2010 Order confirming the Final Award; (2)
RCBC’s Omnibus Motion to expunge the motion for reconsideration
filed by Go and Individual Shareholders, and for execution of the
Final Award; (3) Motion for Execution filed by RCBC against BDO;
(4) BDO’s Motion for Leave to File Supplement to the Motion for
Reconsideration; and (5) Motion for Inhibition filed by Go and
Individual Shareholders. Said Order decreed:
WHEREFORE, premises considered, it is hereby ORDERED, to
wit:
1. Banco De Oro’s Motion for Reconsideration, Motion for
Leave to File Supplement to Motion for Reconsideration,
and Motion to Inhibit are DENIED for lack of merit.
2. RCBC Capital’s Motion to Expunge, Motion to Execute
against Mr. George L. Go and the Bankard Shareholders,
 and the Motion to Execute against Banco De Oro are
hereby GRANTED.
3. The damages awarded to RCBC Capital Corporation in
the amount of Ph₱348,736,920.29 is subject to an interest of
6% per annum reckoned from the date of RCBC Capital’s
extra-judicial demand or from May 5, 2003 until the
confirmation of the Final Award. Likewise, this compounded
amount is subject to 12% interest per annum from the date of
the confirmation of the Final Award until its satisfaction.
The costs of the arbitration amounting to US$880,000.00,
the fees and expenses of Mr. Best amounting to
US$582,936.56, the Claimant’s expenses of the arbitration
amounting to Ph₱8,144,377.62, and the party-and-party legal
costs amounting to Ph₱7,000,000.00 all ruled in favor of
RCBC Capital Corporation in the Final Award of the
Arbitral Tribunal dated June 16, 2010 are subject to 12%
legal interest per annum, also reckoned from the date of the
confirmation of the Final Award until its satisfaction.
4. Pursuant to Section 40 of R.A. No. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004 in
relation to Rule 39 of the Rules of Court, since the Final
Award have been confirmed, the same shall be enforced in
the same manner as final and executory decisions of the
Regional Trial Court, let a writ of execution be issued
commanding the Sheriff to enforce this instant Order
confirming this Court’s Order dated November 10, 2010 that
judicially confirmed the June 16, 2010 Final Award.
SO ORDERED.64
Immediately thereafter, RCBC filed an Urgent Motion for Issuance
of a Writ of Execution.65 On August 22, 2011, after approving the
execution bond, Branch 148 issued a Writ of Execution for the
implementation of the said court’s "Order dated August 8, 2011
confirming the November 10, 2010 Order that judicially confirmed
the June 16, 2010 Final Award x x x."66
BDO then filed in the CA, a "Petition for Review (With Application
for a Stay Order or Temporary Restraining Order and/or Writ of
Preliminary Injunction," docketed as CA-G.R. SP No. 120888. BDO
sought to reverse and set aside the Orders dated November 10, 2010
and August 8, 2011, and any writ of execution issued pursuant
thereto, as well as the Final Award dated June 16, 2010 issued by the
Arbitration Tribunal.
In its Urgent Omnibus Motion67 to resolve the application for a stay
order and/or TRO/writ of preliminary injunction, and to quash the
Writ of Execution dated August 22, 2011 and lift the Notices of
Garnishment dated August 22, 2011, BDO argued that the assailed
orders of execution (Writ of Execution and Notice of Garnishment)
were issued with indecent haste and despite the non-compliance with
the procedures in Special ADR Rules of the November 10, 2010
Order confirming the Final Award. BDO was not given sufficient
time to respond to the demand for payment or to elect the method of
satisfaction of the judgment debt or the property to be levied upon. In
any case, with the posting of a bond by BDO, Branch 148 has no
jurisdiction to implement the appealed orders as it would pre-empt
the CA from exercising its review under Rule 19 of the Special ADR
Rules after BDO had perfected its appeal. BDO stressed that the
bond posted by RCBC was for a measly sum of ₱3,000,000.00 to
cause execution pending appeal of a monetary award that may reach
₱631,429,345.29. RCBC also failed to adduce evidence of "good
cause" or "good reason" to justify discretionary execution under
Section 2(a), Rule 39 of the Rules of Court.
BDO further contended that the writ of execution should be quashed
for having been issued with grave abuse of discretion amounting to
lack or excess of jurisdiction as Branch 148 modified the Final
Award at the time of execution by imposing the payment of interests
though none was provided therein nor in the Order confirming the
same.
During the pendency of CA-G.R. SP No. 120888, Branch 148
continued with execution proceedings and on motion by RCBC
designated/deputized additional sheriffs to replace Sheriff Flora who
was supposedly physically indisposed.68 These court personnel went
to the offices/branches of BDO attempting to serve notices of
garnishment and to levy the furniture, fixtures and equipment.
On September 12, 2011, BDO filed a Very Urgent Motion to Lift
Levy and For Leave to Post Counter-Bond 69 before Branch 148
praying for the lifting of the levy of BDO Private Bank, Inc. (BPBI)
shares and the cancellation of the execution sale thereof scheduled
on September 15, 2011, which was set for hearing on September 14,
2011. BDO claimed that the levy was invalid because it was served
by the RTC Sheriffs not to the authorized representatives of BPBI, as
provided under Section 9(b), Rule 39 in relation to Section 7, Rule
57 of the Rules of Court stating that a notice of levy on shares of
stock must be served to the president or managing agent of the
company which issued the shares. However, BDO was advised by
court staff that Judge Sarabia was on leave and the case could not be
set for hearing.
In its Opposition to BDO’s application for injunctive relief, RCBC
prayed for its outright denial as BDO’s petition raises questions of
fact and/or law which call for the CA to substitute its judgment with
that of the Arbitration Tribunal, in patent violation of applicable
rules of procedure governing domestic arbitration and beyond the
appellate court’s jurisdiction. RCBC asserted that BDO’s application
has become moot and academic as the writ of execution was already
implemented and/or enforced. It also contended that BDO has no
clear and unmistakable right to warrant injunctive relief because the
issue of jurisdiction was already ruled upon in CA-G.R. SP No.
117451 which dismissed the petition filed by Go and the Individual
Shareholders of Bankard questioning the authority of Branch 148
over RCBC’s motion to confirm the Final Award despite the earlier
filing by BDO in another branch of the RTC (Branch 65) of a
petition to vacate the said award.
On September 13, 2011, BDO, to avert the sale of the BPBI shares
scheduled on September 15, 2011 and prevent further disruption in
the operations of BDO and BPBI, paid under protest by tendering a
Manager’s Check in the amount of ₱637,941,185.55, which was
accepted by RCBC as full and complete satisfaction of the writ of
execution. BDO manifested before Branch 148 that such payment
was made without prejudice to its appeal before the CA. 70
On even date, the CA denied BDO’s application for a stay order
and/or TRO/preliminary injunction for non-compliance with Rule
19.25 of the Special ADR Rules. The CA ruled that BDO failed to
show the existence of a clear right to be protected and that the acts
sought to be enjoined violated any right. Neither was BDO able to
demonstrate that the injury to be suffered by it is irreparable or not
susceptible to mathematical computation.
BDO did not file a motion for reconsideration and directly filed with
this Court a petition for certiorari with urgent application for writ of
preliminary mandatory injunction (G.R. No. 199238).
The Petitions
In G.R. No. 196171, RCBC set forth the following grounds for the
reversal of the CA Decision dated December 23, 2010:
I.
THE COURT OF APPEALS ACTED CONTRARY TO
LAW AND PRIOR RULINGS OF THIS HONORABLE
COURT AND COMMITTED REVERSIBLE ERROR IN
VACATING THE SECOND PARTIAL AWARD ON THE
BASIS OF CHAIRMAN BARKER’S ALLEGED
 PARTIALITY, WHICH IT CLAIMS IS INDICATIVE OF
BIAS CONSIDERING THAT THE ALLEGATIONS
CONTAINED IN BDO/EPCIB’S PETITION FALL SHORT
OF THE JURISPRUDENTIAL REQUIREMENT THAT
THE SAME BE SUPPORTED BY CLEAR AND
CONVINCING EVIDENCE.
II.
THE COURT OF APPEALS ACTED CONTRARY TO
LAW AND PRIOR RULINGS OF THIS HONORABLE
COURT AND COMMITTED REVERSIBLE ERROR
WHEN IT REVERSED THE ARBITRAL TRIBUNAL’S
FINDINGS OF FACT AND LAW IN THE SECOND
PARTIAL AWARD IN PATENT CONTRAVENTION OF
THE SPECIAL ADR RULES WHICH EXPRESSLY
PROHIBITS THE COURTS, IN AN APPLICATION TO
VACATE AN ARBITRAL AWARD, FROM
DISTURBING THE FINDINGS OF FACT AND/OR
INTERPRE[TA]TION OF LAW OF THE ARBITRAL
TRIBUNAL.71
BDO raises the following arguments in G.R. No. 199238:
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN PERFUNCTORILY DENYING PETITIONER
BDO’S APPLICATION FOR STAY ORDER, AND/OR
TEMPORARY RESTRAINING ORDER AND PRELIMINARY
INJUNCTION DESPITE THE EXISTENCE AND
CONCURRENCE OF ALL THE ELEMENTS FOR THE
ISSUANCE OF SAID PROVISIONAL RELIEFS
A. PETITIONER BDO HAS CLEAR AND
UNMISTAKABLE RIGHTS TO BE PROTECTED BY
THE ISSUANCE OF THE INJUNCTIVE RELIEF
PRAYED FOR, WHICH, HOWEVER, WERE
DISREGARDED BY PUBLIC RESPONDENT WHEN IT
DENIED PETITIONER BDO’S PRAYER FOR ISSUANCE
OF A STAY ORDER AND/OR TRO
B. PETITIONER BDO’S RIGHT TO DUE PROCESS AND
EQUAL PROTECTION OF THE LAW WAS GROSSLY
VIOLATED BY THE RTC-MAKATI CITY BRANCH 148,
THE DEPUTIZED SHERIFFS AND RESPONDENT
RCBC CAPITAL, WHICH VIOLATION WAS AIDED BY
PUBLIC RESPONDENT’S INACTION ON AND
EVENTUAL DENIAL OF THE PRAYER FOR STAY
ORDER AND/OR TRO
C. DUE TO THE ACTS AND ORDERS OF RTC
BRANCH 148, PETITIONER BDO SUFFERED
IRREPARABLE DAMAGE AND INJURY, AND THERE
WAS DIRE AND URGENT NECESSITY FOR THE
ISSUANCE OF THE INJUNCTIVE RELIEF PRAYED
FOR WHICH PUBLIC RESPONDENT DENIED IN
GRAVE ABUSE OF DISCRETION72
Essentially, the issues to be resolved are: (1) whether there is legal
ground to vacate the Second Partial Award; and (2) whether BDO is
entitled to injunctive relief in connection with the execution
proceedings in SP Proc. Case No. M-6046.
In their TOR, the parties agreed on the governing law and rules as
follows:
Laws to be Applied
13 The Tribunal shall determine the issues to be resolved in
accordance with the laws of the Republic of the Philippines.
Procedure to be Applied
14 The proceedings before the Tribunal shall be governed by the ICC
Rules of Arbitration (1 January 1998) and the law currently
applicable to arbitration in the Republic of the Philippines.73
As stated in the Partial Award dated September 27, 2007, although
the parties provided in Section 10 of the SPA that the arbitration
shall be conducted under the ICC Rules, it was nevertheless
arbitration under Philippine law since the parties are both residents
of this country. The provisions of Republic Act No. 876 74 (RA
876),as amended by Republic Act No. 9285 75 (RA 9285)principally
applied in the arbitration between the herein parties. 76
The pertinent provisions of R.A. 9285 provide:
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.
xxxx
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.
Rule 11.4 of the Special ADR Rules sets forth the grounds for
vacating an arbitral award:
Rule 11.4. Grounds.—(A) To vacate an arbitral award. – The
arbitral award may be vacated on the following grounds:
a. The arbitral award was procured through corruption, fraud
or other undue means;
b. There was evident partiality or corruption in the
arbitral tribunal or any of its members;
c. The arbitral tribunal was guilty of misconduct or any form
of misbehavior that has materially prejudiced the rights of
any party such as refusing to postpone a hearing upon
sufficient cause shown or to hear evidence pertinent and
material to the controversy;
d. One or more of the arbitrators was disqualified to act as
such under the law and willfully refrained from disclosing
such disqualification; or
e. The arbitral tribunal exceeded its powers, or so
imperfectly executed them, such that a complete, final and
definite award upon the subject matter submitted to them
was not made.
The award may also be vacated on any or all of the following
grounds:
a. The arbitration agreement did not exist, or is invalid for
any ground for the revocation of a contract or is otherwise
unenforceable; or
b. A party to arbitration is a minor or a person judicially
declared to be incompetent.
xxxx
In deciding the petition to vacate the arbitral award, the court shall
disregard any other ground than those enumerated above. (Emphasis
supplied)
Judicial Review
At the outset, it must be stated that a review brought to this Court
under the Special ADR Rules is not a matter of right. Rule 19.36 of
said Rules specified the conditions for the exercise of this Court’s
discretionary review of the CA’s decision.
Rule 19.36.Review discretionary.—A review by the Supreme Court
is not a matter of right, but of sound judicial discretion, which will be
granted only for serious and compelling reasons resulting in grave
prejudice to the aggrieved party. The following, while neither
controlling nor fully measuring the court’s discretion, indicate the
serious and compelling, and necessarily, restrictive nature of the
grounds that will warrant the exercise of the Supreme Court’s
discretionary powers, when the Court of Appeals:
a. Failed to apply the applicable standard or test for
judicial review prescribed in these Special ADR Rules in
arriving at its decision resulting in substantial prejudice to
the aggrieved party;
b. Erred in upholding a final order or decision despite the
lack of jurisdiction of the court that rendered such final order
or decision;
c. Failed to apply any provision, principle, policy or rule
contained in these Special ADR Rules resulting in
substantial prejudice to the aggrieved party; and
d. Committed an error so egregious and harmful to a party as
to amount to an undeniable excess of jurisdiction.
The mere fact that the petitioner disagrees with the Court of Appeals’
determination of questions of fact, of law or both questions of fact
and law, shall not warrant the exercise of the Supreme Court’s
discretionary power. The error imputed to the Court of Appeals
must be grounded upon any of the above prescribed grounds for
review or be closely analogous thereto.
A mere general allegation that the Court of Appeals has committed
serious and substantial error or that it has acted with grave abuse of
discretion resulting in substantial prejudice to the petitioner without
indicating with specificity the nature of such error or abuse of
discretion and the serious prejudice suffered by the petitioner on
account thereof, shall constitute sufficient ground for the Supreme
Court to dismiss outright the petition. (Emphasis supplied)
The applicable standard for judicial review of arbitral awards in this
jurisdiction is set forth in Rule 19.10 which states:
Rule 19.10. Rule on judicial review on arbitration in the
Philippines.--As a general rule, the court can only vacate or set aside
the decision of an arbitral tribunal upon a clear showing that the
award suffers from any of the infirmities or grounds for vacating
an arbitral award under Section 24 of Republic Act No. 876 or
under Rule 34 of the Model Law in a domestic arbitration, or for
setting aside an award in an international arbitration under Article 34
of the Model Law, or for such other grounds provided under these
Special Rules.
xxxx
The court shall not set aside or vacate the award of the arbitral
tribunal merelyon the ground that the arbitral tribunal committed
errors of fact, or of law, or of fact and law, as the court cannot
substitute its judgment for that of the arbitral tribunal. (Emphasis
supplied)
The above rule embodied the stricter standard in deciding appeals
from arbitral awards established by jurisprudence. In the case
of Asset Privatization Trust v. Court of Appeals,77 this Court held:
As a rule, the award of an arbitrator cannot be set aside for mere
errors of judgment either as to the law or as to the facts.Courts are
without power to amend or overrule merely because of disagreement
with matters of law or facts determined by the arbitrators.They will
not review the findings of law and fact contained in an award, and
will not undertake to substitute their judgment for that of the
arbitrators, since any other rule would make an award the
commencement, not the end, of litigation.Errors of law and fact, or
an erroneous decision of matters submitted to the judgment of the
arbitrators, are insufficient to invalidate an award fairly and honestly
made. Judicial review of an arbitration is, thus, more limited than
judicial review of a trial.78
Accordingly, we examine the merits of the petition before us solely
on the statutory ground raised for vacating the Second Partial Award:
evident partiality, pursuant to Section 24 (b) of the Arbitration Law
(RA 876) and Rule 11.4 (b) of the Special ADR Rules.
Evident Partiality
Evident partiality is not defined in our arbitration laws. As one of the
grounds for vacating an arbitral award under the Federal Arbitration
Act (FAA) in the United States (US), the term "encompasses both an
arbitrator’s explicit bias toward one party and an arbitrator’s inferred
bias when an arbitrator fails to disclose relevant information to the
parties."79
From a recent decision80 of the Court of Appeals of Oregon, we quote
a brief discussion of the common meaning of evident partiality:
To determine the meaning of "evident partiality," we begin with the
terms themselves. The common meaning of "partiality" is
"the inclination to favor one side."Webster’s Third New Int'l
Dictionary 1646 (unabridged ed 2002); see also id. (defining
"partial" as "inclined to favor one party in a cause or one side of a
question more than the other: biased, predisposed" (formatting in
original)). "Inclination," in turn, means "a particular disposition of
mind or character : propensity, bent" or "a tendency to a particular
aspect, state, character, or action."Id. at 1143 (formatting in
original); see also id. (defining "inclined" as "having inclination,
disposition, or tendency").
The common meaning of "evident" is "capable of being perceived
esp[ecially] by sight : distinctly visible : being in evidence :
discernable[;] * * * clear to the understanding : obvious, manifest,
apparent."Id. at 789 (formatting in original); see also id. (stating that
synonyms of "evident" include "apparent, patent, manifest, plain,
clear, distinct, obvious, [and] palpable" and that, "[s]ince evident
rather naturally suggests evidence, it may imply the existence of
signs and indications that must lead to an identification or
inference" (formatting in original)). (Emphasis supplied)
Evident partiality in its common definition thus implies "the
existence of signs and indications that must lead to an identification
or inference" of partiality.81 Despite the increasing adoption of
arbitration in many jurisdictions, there seems to be no established
standard for determining the existence of evident partiality. In the
US, evident partiality "continues to be the subject of somewhat
conflicting and inconsistent judicial interpretation when an
arbitrator’s failure to disclose prior dealings is at issue." 82
The first case to delineate the standard of evident partiality in
arbitration proceedings was Commonwealth Coatings Corp. v.
Continental Casualty Co., et al.83 decided by the US Supreme Court
in 1968. The Court therein addressed the issue of whether the
requirement of impartiality applies to an arbitration proceeding. The
plurality opinion written by Justice Black laid down the rule that the
arbitrators must disclose to the parties "any dealings that might
create an impression of possible bias," 84 and that underlying such
standard is "the premise that any tribunal permitted by law to try
cases and controversies not only must be unbiased but also must
avoid even the appearance of bias." 85 In a separate concurring
opinion, Justice White joined by Justice Marshall, remarked that
"[t]he Court does not decide today that arbitrators are to be held to
the standards of judicial decorum of Article III judges, or indeed of
any judges."86 He opined that arbitrators should not automatically be
disqualified from an arbitration proceeding because of a business
relationship where both parties are aware of the relationship in
advance, or where the parties are unaware of the circumstances but
the relationship is trivial. However, in the event that the arbitrator
has a "substantial interest" in the transaction at hand, such
information must be disclosed.
Subsequent cases decided by the US Court of Appeals Circuit Courts
adopted different approaches, given the imprecise standard of
evident partiality in Commonwealth Coatings.
In Morelite Construction Corp. v. New York District Council
Carpenters Benefit Funds,87 the Second Circuit reversed the
judgment of the district court and remanded with instructions to
vacate the arbitrator’s award, holding that the existence of a father-
son relationship between the arbitrator and the president of appellee
union provided strong evidence of partiality and was unfair to
appellant construction contractor. After examining prior decisions in
the Circuit, the court concluded that –
x x x we cannot countenance the promulgation of a standard for
partiality as insurmountable as "proof of actual bias" -- as the literal
words of Section 10 might suggest. Bias is always difficult, and
indeed often impossible, to "prove." Unless an arbitrator publicly
announces his partiality, or is overheard in a moment of private
admission, it is difficult to imagine how "proof" would be obtained.
Such a standard, we fear, occasionally would require that we enforce
awards in situations that are clearly repugnant to our sense of
fairness, yet do not yield "proof" of anything.
If the standard of "appearance of bias" is too low for the
invocation of Section 10, and "proof of actual bias" too high, with
what are we left? Profoundly aware of the competing forces that
have already been discussed, we hold that "evident partiality"
within the meaning of 9 U.S.C. § 10 will be found where a
reasonable person would have to conclude that an arbitrator was
partial to one party to the arbitration.x x x88 (Emphasis supplied)
In Apperson v. Fleet Carrier Corporation,89 the Sixth Circuit agreed
with the Morelite court’s analysis, and accordingly held that to
invalidate an arbitration award on the grounds of bias, the
challenging party must show that "a reasonable person would have to
conclude that an arbitrator was partial" to the other party to the
arbitration.
This "myriad of judicial interpretations and approaches to evident
partiality" resulted in a lack of a uniform standard, leaving the courts
"to examine evident partiality on a case-by-case basis." 90 The case at
bar does not present a non-disclosure issue but conduct allegedly
showing an arbitrator’s partiality to one of the parties.
EPCIB/BDO, in moving to vacate the Second Partial Award claimed
that the Arbitration Tribunal exceeded its powers in deciding the
issue of advance cost not contemplated in the TOR, and that
Chairman Barker acted with evident partiality in making such award.
The RTC held that BDO failed to substantiate these allegations. On
appeal, the CA likewise found that the Arbitration Tribunal did not
go beyond the submission of the parties because the phrasing of the
scope of the agreed issues in the TOR ("[t]he issues to be determined
by the Tribunal are those issues arising from the said Request for
Arbitration, Answer and Reply and such other issues as may properly
arise during the arbitration")is broad enough to accommodate a
finding on the liability and the repercussions of BDO’s failure to
share in the advances on costs. Section 10 of the SPA also gave the
Arbitration Tribunal authority to decide how the costs should be
apportioned between them.
However, the CA found factual support in BDO’s charge of
partiality, thus:
On the issue on evident partiality, the rationale in the American case
of Commonwealth Coatings Corp. v. Continental Cas. Co. appears
to be very prudent. In Commonwealth, the United States Supreme
Court reasoned that courts "should…be even more scrupulous to
safeguard the impartiality of arbitrators than judges, since the former
have completely free rein to decide the law as well as the facts, and
are not subject to appellate review" in general. This taken into
account, the Court applies the standard demanded of the conduct
of magistrates by analogy. After all, the ICC Rules require that an
arbitral tribunal should act fairly and impartially. Hence, an
arbitrator’s conduct should be beyond reproach and suspicion.
His acts should be free from the appearances of impropriety.
An examination of the circumstances claimed to be illustrative of
Chairman Barker’s partiality is indicative of bias. Although RCBC
had repeatedly asked for reimbursement and the withdrawal of
BDO’s counterclaims prior to Chairman Barker’s December 18,
2007 letter, it is baffling why it is only in the said letter that
RCBC’s prayer was given a complexion of being an application
for a partial award. To the Court, the said letter signaled a
preconceived course of action that the relief prayed for by RCBC
will be granted.
That there was an action to be taken beforehand is confirmed by
Chairman Barker’s furnishing the parties with a copy of the Secomb
article. This article ultimately favored RCBC by advancing its
cause. Chairman Barker makes it appear that he intended good
to be done in doing so but due process dictates the cold neutrality
of impartiality. This means that "it is not enough…[that] cases [be
decided] without bias and favoritism. Nor is it sufficient that…
prepossessions [be rid of]. [A]ctuations should moreover inspire that
belief." These put into the equation, the furnishing of the Secomb
article further marred the trust reposed in Chairman Barker. The
suspicion of his partiality on the subject matter deepened.
Specifically, his act established that he had pre-formed opinions.
Chairman Barker’s providing of copies of the said text is easily
interpretable that he had prejudged the matter before him. In any
case, the Secomb article tackled bases upon which the Second Partial
Award was founded. The subject article reflected in advance the
disposition of the ICC arbitral tribunal. The award can definitely
be viewed as an affirmation that the bases in the Secomb article were
adopted earlier on. To the Court, actuations of arbitrators, like the
language of judges, "must be guarded and measured lest the best of
intentions be misconstrued."
x x x x91 (Emphasis supplied)
We affirm the foregoing findings and conclusion of the appellate
court save for its reference to the obiter in Commonwealth
Coatings that arbitrators are held to the same standard of conduct
imposed on judges. Instead, the Court adopts the reasonable
impression of partiality standard, which requires a showing that a
reasonable person would have to conclude that an arbitrator was
partial to the other party to the arbitration. Such interest or bias,
moreover, "must be direct, definite and capable of demonstration
rather than remote, uncertain, or speculative." 92 When a claim of
arbitrator’s evident partiality is made, "the court must ascertain from
such record as is available whether the arbitrators’ conduct was so
biased and prejudiced as to destroy fundamental fairness." 93
Applying the foregoing standard, we agree with the CA in finding
that Chairman Barker’s act of furnishing the parties with copies of
Matthew Secomb’s article, considering the attendant
circumstances,is indicative of partiality such that a reasonable man
would have to conclude that he was favoring the Claimant, RCBC.
Even before the issuance of the Second Partial Award for the
reimbursement of advance costs paid by RCBC, Chairman Barker
exhibited strong inclination to grant such relief to RCBC,
notwithstanding his categorical ruling that the Arbitration Tribunal
"has no power under the ICC Rules to order the Respondents to pay
the advance on costs sought by the ICC or to give the Claimantany
relief against the Respondents’ refusal to pay." 94 That Chairman
Barker was predisposed to grant relief to RCBC was shown by his
act of interpreting RCBC’s letter, which merely reiterated its plea to
declare the Respondents in default and consider all counterclaims
withdrawn – as what the ICC Rules provide – as an application to the
Arbitration Tribunal to issue a partial award in respect of BDO’s
failure to share in the advance costs. It must be noted that RCBC in
said letter did not contemplate the issuance of a partial order, despite
Chairman Barker’s previous letter which mentioned the possibility of
granting relief upon the parties making submissions to the
Arbitration Tribunal. Expectedly, in compliance with Chairman
Barker’s December 18, 2007 letter, RCBC formally applied for the
issuance of a partial award ordering BDO to pay its share in the
advance costs.
Mr. Secomb’s article, "Awards and Orders Dealing With the
Advance on Costs in ICC Arbitration: Theoretical Questions and
Practical Problems"95 specifically dealt with the situation when one
of the parties to international commercial arbitration refuses to pay
its share on the advance on costs. After a brief discussion of the
provisions of ICC Rules dealing with advance on costs, which did
not provide for issuance of a partial award to compel payment by the
defaulting party, the author stated:
4. As we can see, the Rules have certain mechanisms to deal with
defaulting parties. Occasionally, however, parties have sought to use
other methods to tackle the problem of a party refusing to pay its part
of the advance on costs. These have included seeking an order or
award from the arbitral tribunal condemning the defaulting party to
pay its share of the advance on costs.1âwphi1 Such applications are
the subject of this article.96
By furnishing the parties with a copy of this article, Chairman Barker
practically armed RCBC with supporting legal arguments under the
"contractual approach" discussed by Secomb. True enough, RCBC in
its Application for Reimbursement of Advance Costs Paid utilized
said approach as it singularly focused on Article 30(3) 97 of the ICC
Rules and fiercely argued that BDO was contractually bound to share
in the advance costs fixed by the ICC. 98 But whether under the
"contractual approach" or "provisional approach" (an application
must be treated as an interim measure of protection under Article 23
[1] rather than enforcement of a contractual obligation), both treated
in the Secomb article, RCBC succeeded in availing of a remedy
which was not expressly allowed by the Rules but in practice has
been resorted to by parties in international commercial arbitration
proceedings. It may also be mentioned that the author, Matthew
Secomb, is a member of the ICC Secretariat and the "Counsel in
charge of the file", as in fact he signed some early communications
on behalf of the ICC Secretariat pertaining to the advance costs fixed
by the ICC.99 This bolstered the impression that Chairman Barker
was predisposed to grant relief to RCBC by issuing a partial award.
Indeed, fairness dictates that Chairman Barker refrainfrom
suggesting to or directing RCBC towards a course of action to
advance the latter’s cause, by providing it with legal arguments
contained in an article written by a lawyer who serves at the ICC
Secretariat and was involved or had participation -- insofar as the
actions or recommendations of the ICC – in the case. Though done
purportedly to assist both parties, Chairman Barker’s act clearly
violated Article 15 of the ICC Rules declaring that "[i]n all cases, the
Arbitral Tribunal shall act fairly and impartially and ensure that each
party has a reasonable opportunity to present its case." Having pre-
judged the matter in dispute, Chairman Barker had lost his
objectivity in the issuance of the Second Partial Award.
In fine, we hold that the CA did not err in concluding that the article
ultimately favored RCBC as it reflected in advance the disposition of
the Arbitral Tribunal, as well as "signalled a preconceived course of
action that the relief prayed for by RCBC will be granted." This
conclusion is further confirmed by the Arbitral Tribunal’s
pronouncements in its Second Partial Award which not only adopted
the "contractual approach" but even cited Secomb’s article along
with other references, thus:
6.1 It appears to the Tribunal that the issue posed by this application
is essentially a contractual one. x x x
xxxx
6.5 Matthew Secomb, considered these points in the article in 14 ICC
Bulletin No. 1 (2003) which was sent to the parties. At Para. 19, the
learned author quoted from an ICC Tribunal (Case No. 11330) as
follows:
"The Arbitral Tribunal concludes that the partiesin arbitrations
conducted under the ICC Rules have a mutually binding obligation
to pay the advance on costs as determined by the ICC Court, based
on Article 30-3 ICC Rules which – by reference – forms part of the
parties’ agreement to arbitration under such Rules."100
The Court, however, must clarify that the merits of the parties’
arguments as to the propriety of the issuance of the Second Partial
Award are not in issue here. Courts are generally without power to
amend or overrule merely because of disagreement with matters of
law or facts determined by the arbitrators. They will not review the
findings of law and fact contained in an award, and will not
undertake to substitute their judgment for that of the arbitrators. A
contrary rule would make an arbitration award the commencement,
not the end, of litigation.101 It is the finding of evident partiality
which constitutes legal ground for vacating the Second Partial Award
and not the Arbitration Tribunal’s application of the ICC Rules
adopting the "contractual approach" tackled in Secomb’s article.
Alternative dispute resolution methods or ADRs – like arbitration,
mediation, negotiation and conciliation – are encouraged by this
Court. By enabling parties to resolve their disputes amicably, they
provide solutions that are less time-consuming, less tedious, less
confrontational, and more productive of goodwill and lasting
relationship.102 Institutionalization of ADR was envisioned as "an
important means to achieve speedy and impartial justice and declog
court dockets."103 The most important feature of arbitration, and
indeed, the key to its success, is the public’s confidence and trust in
the integrity of the process.104 For this reason, the law authorizes
vacating an arbitral award when there is evident partiality in the
arbitrators.
Injunction Against Execution Of Arbitral Award
Before an injunctive writ can be issued, it is essential that the
following requisites are present: (1) there must be a right inesse or
the existence of a right to be protected; and (2) the act against which
injunction to be directed is a violation of such right. The onus
probandi is on movant to show that there exists a right to be
protected, which is directly threatened by the act sought to be
enjoined. Further, there must be a showing that the invasion of the
right is material and substantial and that there is an urgent and
paramount necessity for the writ to prevent a serious damage. 105
Rule 19.22 of the Special ADR Rules states:
Rule 19.22. Effect of appeal.—The appeal shall not stay the award,
judgment, final order or resolution sought to be reviewed unless the
Court of Appeals directs otherwise upon such terms as it may deem
just.
We find no reversible error or grave abuse of discretion in the CA’s SO ORDERED.
denial of the application for stay order or TRO upon its finding that
BDO failed to establish the existence of a clear legal right to enjoin
execution of the Final Award confirmed by the Makati City RTC,
Branch 148, pending resolution of its appeal.It would be premature
to address on the merits the issues raised by BDO in the present
petition considering that the CA still has to decide on the validity of
said court's orders confirming the Final Award. But more important,
since BOO had already paid ₱637,941,185.55 m manager's check,
albeit under protest, and which payment was accepted by RCBC as
full and complete satisfaction of the writ of execution, there is no
more act to be enjoined.

Settled is the rule that injunctive reliefs are preservative remedies for
the protection of substantive rights and interests. Injunction is not a
cause of action in itself, but merely a provisional remedy, an adjunct
to a main suit. When the act sought to be enjoined has become fait
accompli, the prayer for provisional remedy should be denied. 106

Thus, the Court ruled in Gov. Looyuko107 that when the events sought
to be prevented by injunction or prohibition have already happened,
nothing more could be enjoined or prohibited. Indeed, it is a
universal principle of law that an injunction will not issue to restrain
the performance of an act already done. This is so for the simple
reason that nothing more can be done in reference thereto. A writ of
injunction becomes moot and academic after the act sought to be
enjoined has already been consummated.
G.R. No. 198075               September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON,
INC.), Petitioner,
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.

WHEREFORE, premises considered, the petition m G.R. No. DECISION

199238 is DENIED. The Resolution dated September 13,2011 ofthe
Court of Appeals in CA-G.R. SP No. 120888 is AFFIRMED. PEREZ, J.:

The petition in G.R. No. 196171 is DENIED. The Decision dated This case is an appeal 1 from the Decision2 dated 19 August 2011 of
December 23, 2010 of the Court of Appeals in CA-G.R. SP No. the Court of Appeals in C.A.-G.R. SP No. 116865.
113525 is hereby AFFIRMED.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-
conditioning products, was the registered owner of a parcel of land
located at Km. 16, South Superhighway, Parañaque City (subject
land).3 Within the subject land are buildings and other improvements
dedicated to the business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the
improvements thereon) in favor of herein respondent Makati Rotary
Club Foundation, Incorporated by way of a conditional
donation.6 The respondent accepted the donation with all of its
conditions.7 On 26 May1975, FKI and the respondent executed a
Deed of Donation8 evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to
lease the subject land back to FKI under terms specified in their
Deed of Donation.9 With the respondent’s acceptance of the
donation, a lease agreement between FKI and the respondent was,
therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of
Donation , were as follows:
1. The period of the lease is for twenty-five (25) years, 10 or
until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-
five (25) years is ₱40,126.00 per annum .11
The Deed of Donation also stipulated that the lease over the subject
property is renewable for another period of twenty-five (25) years "
upon mutual agreement" of FKI and the respondent. 12 In which case,
the amount of rent shall be determined in accordance with item 2(g)
of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual
agreement and in case of disagreement the matter shall be referred to
a Board of three Arbitrators appointed and with powers in
accordance with the Arbitration Law of the Philippines, Republic
Act 878, whose function shall be to decide the current fair market
value of the land excluding the improvements, provided, that, any
increase in the fair market value of the land shall not exceed twenty
five percent (25%) of the original value of the land donated as stated
in paragraph 2(c) of this Deed. The rental for the second 25 years
shall not exceed three percent (3%) of the fair market value of the
land excluding the improvements as determined by the Board of
Arbitrators.13
In October 1976, FKI and the respondent executed an Amended
Deed of Donation14 that reiterated the provisions of the Deed of
Donation , including those relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of
Donation and Amended Deed of Donation , FKI was able to continue
in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation
and Amended Deed of Donation was set to expire, or on 23 May
2000, FKI and respondent executed another contract of lease ( 2000
Lease Contract )15 covering the subject land. In this 2000 Lease
Contract, FKI and respondent agreed on a new five-year lease to take
effect on the 26th of May 2000, with annual rents ranging from
₱4,000,000 for the first year up to ₱4,900,000 for the fifth
year.16 The 2000 Lease Contract also contained an arbitration clause
enforceable in the event the parties come to disagreement about the"
interpretation, application and execution" of the lease, viz :
19. Governing Law – The provisions of this 2000 Lease Contract
shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2000 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to
renew their lease for another five (5) years. This new lease (2005
Lease Contract )18 required FKI to pay a fixed annual rent of
₱4,200,000.19 In addition to paying the fixed rent, however, the 2005
Lease Contract also obligated FKI to make a yearly " donation " of
money to the respondent.20 Such donations ranged from ₱3,000,000
for the first year up to ₱3,900,000for the fifth year. 21 Notably, the
2005 Lease Contract contained an arbitration clause similar to that in
the 2000 Lease Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract
shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2005 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations
"due it per the 2005 Lease Contract. 23 But in June of 2008, FKI sold
all its rights and properties relative to its business in favor of herein
petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and
petitioner executed an Assignment and Assumption of Lease and
Donation25 —wherein FKI, with the conformity of the respondent,
formally assigned all of its interests and obligations under the
Amended Deed of Donation and the 2005 Lease Contract in favor of
petitioner.
The following year, petitioner discontinued the payment of the rent
and " donation " under the 2005 Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from
its belief that the rental stipulations of the 2005 Lease Contract, and
even of the 2000 Lease Contract, cannot be given effect because they
violated one of the" material conditions " of the donation of the
subject land, as stated in the Deed of Donation and Amended Deed
of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of
Donation actually established not only one but two (2) lease
agreements between FKI and respondent, i.e. , one lease for the first
twenty-five (25)years or from 1975 to 2000, and another lease for the
next twenty-five (25)years thereafter or from 2000 to 2025. 27 Both
leases are material conditions of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the
second twenty-five (25) year lease was not fixed in the Deed of
Donation and Amended Deed of Donation , both deeds nevertheless
prescribed rules and limitations by which the same may be
determined. Such rules and limitations ought to be observed in any
succeeding lease agreements between petitioner and respondent for
they are, in themselves, material conditions of the donation of the
subject land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation
and Amended Deed of Donation that supposedly limits the amount
of rent for the lease over the second twenty-five (25) years to only "
three percent (3%) of the fair market value of the subject land
excluding the improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease
Contract and 2005 Lease Contract cannot be enforced as they are
clearly, in view of their exorbitant exactions, in violation of the
aforementioned threshold in item 2(g) of the Deed of Donation and
Amended Deed of Donation . Consequently, petitioner insists that
the amount of rent it has to pay thereon is and must still be governed
by the limitations prescribed in the Deed of Donation and Amended
Deed of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter) 31 to
petitioner notifying the latter of its default " per Section 12 of the
2005 Lease Contract " and demanding for the settlement of the rent
and " donation " due for the year 2009. Respondent, in the same
letter, further intimated of canceling the 2005 Lease Contract should
petitioner fail to settle the said obligations. 32 Petitioner received the
First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent
expressing its disagreement over the rental stipulations of the 2005
Lease Contract — calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals
mandated by the Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled to
₱8,394,000.00, exclusive of interests, petitioner offered to pay only
₱80,502.79,35 in accordance with the rental provisions of the Deed of
Donation and Amended Deed of Donation.36 Respondent refused this
offer.37
On 25 September 2009, respondent sent another letter (Second
Demand Letter)38 to petitioner, reiterating its demand for the
payment of the obligations already due under the 2005 Lease
Contract. The Second Demand Letter also contained a demand for
petitioner to " immediately vacate the leased premises " should it fail
to pay such obligations within seven (7) days from its receipt of the
letter.39 The respondent warned of taking " legal steps " in the event
that petitioner failed to comply with any of the said
demands.40 Petitioner received the Second Demand Letter on
26September 2009.41
Petitioner refused to comply with the demands of the respondent.
Instead, on 30 September 2009, petitioner filed with the Regional
Trial Court (RTC) of Parañaque City a complaint42 for the rescission
or cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. This case is currently pending
before Branch 257 of the RTC, docketed as Civil Case No. CV 09-
0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer
case43 against the petitioner before the Metropolitan Trial Court
(MeTC) of Parañaque City. The ejectment case was raffled to Branch
77 and was docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory
Counterclaim.44 In it, petitioner reiterated its objection over the rental
stipulations of the 2005 Lease Contract for being violative of the
material conditions of the Deed of Donation and Amended Deed of
Donation.45 In addition to the foregoing, however, petitioner also
interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction
over the instant unlawful detainer case in view of the
insufficiency of respondent’s demand.46 The First Demand
Letter did not contain an actual demand to vacate the
 premises and, therefore, the refusal to comply there with
does not give rise to an action for unlawful detainer. 47
2. Assuming that the MeTC was able to acquire jurisdiction,
it may not exercise the same until the disagreement between
the parties is first referred to arbitration pursuant to the
arbitration clause of the 2005 Lease Contract. 48
3. Assuming further that the MeTC has jurisdiction that it
can exercise, ejectment still would not lie as the 2005 Lease
Contract is void abinitio.49 The stipulation in the 2005 Lease
Contract requiring petitioner to give yearly " donations " to
respondent is a simulation, for they are, in fact, parts of the
rent. 50 Such grants were only denominated as " donations "
in the contract so that the respondent—anon-stock and non-
profit corporation—could evade payment of the taxes
otherwise due thereon.51
In due course, petitioner and respondent both submitted their
position papers, together with their other documentary
evidence.52 Remarkably, however, respondent failed to submit the
Second Demand Letter as part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment 53 in favor of the
petitioner. While the MeTC refused to dismiss the action on the
ground that the dispute is subject to arbitration, it nonetheless sided
with the petitioner with respect to the issues regarding the
insufficiency of the respondent’s demand and the nullity of the 2005
Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x
x, without pronouncement as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This
appeal was assigned to Branch 274 of the RTC of Parañaque City
and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the
eviction of the petitioner from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed
Decision of the Metropolitan Trial Court, Branch 77, Parañaque
City, is hereby reversed, judgment is thus rendered in favor of the
plaintiff-appellant and against the defendant-appellee, and ordering
the latter –
(1) to vacate the lease[d] premises made subject of the case
and to restore the possession thereof to the plaintiff-
appellant;
(2) to pay to the plaintiff-appellant the amount of Nine
Million Three Hundred Sixty Two Thousand Four Hundred
Thirty Six Pesos (₱9,362,436.00), penalties and net of 5%
withholding tax, for the lease period from May 25, 2009 to
May 25, 2010 and such monthly rental as will accrue during
the pendency of this case;
(3) to pay attorney’s fees in the sum of ₱100,000.00 plus
appearance fee of ₱3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-
appellee, as these were built in good faith, the provisions of Art.
1678of the Civil Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
 1. The respondent had adequately complied with the xxxx
requirement of demand as a jurisdictional precursor to an
unlawful detainer action.58 The First Demand Letter, in SO ORDERED.67
substance, contains a demand for petitioner to vacate when it
mentioned that it was a notice " per Section12 of the 2005 Hence, this appeal.
Lease Contract."59 Moreover, the issue of sufficiency of the
respondent’s demand ought to have been laid to rest by the On 5 September 2011, this Court granted petitioner’s prayer for the
Second Demand Letter which, though not submitted in issuance of a Temporary Restraining Order 68 staying the immediate
evidence, was nonetheless admitted by petitioner as implementation of the decisions adverse to it.
containing a" demand to eject " in its Answer with
Compulsory Counterclaim.60 OUR RULING
2. The petitioner cannot validly invoke the arbitration clause Independently of the merits of the case, the MeTC, RTC and Court
of the 2005 Lease Contract while, at the same time, impugn of Appeals all erred in overlooking the significance of the arbitration
such contract’s validity.61 Even assuming that it can, clause incorporated in the 2005 Lease Contract . As the Court sees it,
petitioner still did not file a formal application before the that is a fatal mistake.
MeTC so as to render such arbitration clause
operational.62 At any rate, the MeTC would not be precluded
For this reason, We grant the petition.
from exercising its jurisdiction over an action for unlawful
detainer, over which, it has exclusive original jurisdiction. 63
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
3. The 2005 Lease Contract must be sustained as a valid
Agreement Contract
contract since petitioner was not able to adduce any evidence
to support its allegation that the same is void. 64 There was, in
this case, no evidence that respondent is guilty of any tax Going back to the records of this case, it is discernable that the
evasion.65 dispute between the petitioner and respondent emanates from the
rental stipulations of the 2005 Lease Contract. The respondent insists
upon the enforce ability and validity of such stipulations, whereas,
Aggrieved, the petitioner appealed to the Court of Appeals.
petitioner, in substance, repudiates them. It is from petitioner’s
apparent breach of the 2005 Lease Contract that respondent filed the
On 19 August 2011, the Court of Appeals affirmed66 the decision of instant unlawful detainer action.
the RTC:
One cannot escape the conclusion that, under the foregoing premises,
WHEREFORE , the petition is DENIED . The assailed Decision of the dispute between the petitioner and respondent arose from the
the Regional Trial Court of Parañaque City, Branch 274, in Civil application or execution of the 2005 Lease Contract . Undoubtedly,
Case No. 10-0255 is AFFIRMED. such kinds of dispute are covered by the arbitration clause of the
2005 Lease Contract to wit:
19. Governing Law – The provisions of this 2005 Lease Contract
shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2005 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any
disagreement" as to the " interpretation, application or execution " of
the 2005 Lease Contract ought to be submitted to arbitration. 70 To the
mind of this Court, such stipulation is clear and is comprehensive
enough so as to include virtually any kind of conflict or dispute that
may arise from the 2005 Lease Contract including the one that
presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract
in this case carries with it certain legal effects. However, before
discussing what these legal effects are, We shall first deal with the
challenges posed against the application of such arbitration clause.
Challenges Against the Application of the
Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005
Lease Contract, the petitioner, as well as the MeTC, RTC and the
Court of Appeals, vouched for the non-application of the same in the
instant case. A plethora of arguments was hurled in favor of
bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following
arguments were offered against the application of the arbitration
clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is
non-arbitrable as it will inevitably touch upon the issue of
the validity of the 2005 Lease Contract. 71 It was submitted
that one of the reasons offered by the petitioner in justifying
its failure to pay under the 2005 Lease Contract was the
nullity of such contract for being contrary to law and public
policy.72 The Supreme Court, in Gonzales v. Climax Mining,
Ltd.,73 held that " the validity of contract cannot be subject of
arbitration proceedings " as such questions are " legal in
nature and require the application and interpretation of laws
and jurisprudence which is necessarily a judicial
function ." 74
2. The petitioner cannot validly invoke the arbitration clause
of the 2005 Lease Contract while, at the same time, impugn
such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause
whilst denying the validity of the 2005 Lease Contract ,
petitioner still did not file a formal application before the
MeTC so as to render such arbitration clause
operational.76 Section 24 of Republic Act No. 9285 requires
the party seeking arbitration to first file a " request " or an
application therefor with the court not later than the
preliminary conference.77
4. Petitioner and respondent already underwent Judicial
Dispute Resolution (JDR) proceedings before the
RTC.78 Hence, a further referral of the dispute to arbitration
would only be circuitous.79 Moreover, an ejectment case, in
view of its summary nature, already fulfills the prime
purpose of arbitration, i.e. , to provide parties in conflict with
an expedient method for the resolution of their
dispute.80 Arbitration then would no longer be necessary in
this case.81
None of the arguments have any merit.
First. As highlighted in the previous discussion, the disagreement
between the petitioner and respondent falls within the all-
encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such
disagreement, the validity of the 2005 Lease Contract, or at least, of
such contract’s rental stipulations would have to be determined, the
same would not render such disagreement non-arbitrable. The
quotation from Gonzales that was used to justify the contrary
position was taken out of context. A rereading of Gonzales would fix
its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of
Arbitrators of the Mines and Geosciences Bureau (PA-MGB)
seeking the nullification of a Financial Technical Assistance
Agreement and other mining related agreements entered into by
private parties.82
Grounds invoked for the nullification of such agreements include
fraud and unconstitutionality.83 The pivotal issue that confronted the
Court then was whether the PA-MGB has jurisdiction over that
particular arbitration complaint. Stated otherwise, the question was
whether the complaint for arbitration raises arbitrable issues that the
PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-
MGB was devoid of any jurisdiction to take cognizance of the
complaint for arbitration, this Court pointed out to the provisions of
R.A. No. 7942, or the Mining Act of 1995, which granted the PA-
MGB with exclusive original jurisdiction only over mining disputes,
i.e., disputes involving " rights to mining areas," "mineral
agreements or permits," and " surface owners, occupants, claim
holders or concessionaires" requiring the technical knowledge and
experience of mining authorities in order to be
resolved.84 Accordingly, since the complaint for arbitration in
Gonzales did not raise mining disputes as contemplated under R.A.
No. 7942 but only issues relating to the validity of certain mining
related agreements, this Court held that such complaint could not be
arbitrated before the PA-MGB.85 It is in this context that we made
the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there
is a disagreement between the parties as to some provisions of the
contract between them, which needs the interpretation and the
application of that particular knowledge and expertise possessed by
members of that Panel. It is not proper when one of the parties
repudiates the existence or validity of such contract or agreement on
the ground of fraud or oppression as in this case. The validity of the
contract cannot be subject of arbitration proceedings. Allegations of
fraud and duress in the execution of a contract are matters within the
jurisdiction of the ordinary courts of law. These questions are legal
in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function. 86 (Emphasis
supplied)
The Court in Gonzales did not simply base its rejection of the
complaint for arbitration on the ground that the issue raised therein,
i.e. , the validity of contracts, is per se non-arbitrable. The real
consideration behind the ruling was the limitation that was placed by
R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral
body . Gonzales rejected the complaint for arbitration because the
issue raised therein is not a mining dispute per R.A. No. 7942 and it
is for this reason, and only for this reason, that such issue is rendered
non-arbitrable before the PA-MGB. As stated beforehand, R.A. No.
7942 clearly limited the jurisdiction of the PA-MGB only to mining
disputes.87
Much more instructive for our purposes, on the other hand, is the
recent case of Cargill Philippines, Inc. v. San Fernando Regal
Trading, Inc.88 In Cargill , this Court answered the question of
whether issues involving the rescission of a contract are arbitrable.
The respondent in Cargill argued against arbitrability, also citing
therein Gonzales . After dissecting Gonzales , this Court ruled in
favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract
and the arbitration clause is conceded, the CA's decision declining
referral of the parties' dispute to arbitration is still correct. It claims
that its complaint in the RTC presents the issue of whether under the
facts alleged, it is entitled to rescind the contract with damages; and
that issue constitutes a judicial question or one that requires the
exercise of judicial function and cannot be the subject of an
arbitration proceeding. Respondent cites our ruling in Gonzales,
wherein we held that a panel of arbitrator is bereft of jurisdiction
over the complaint for declaration of nullity/or termination of the
subject contracts on the grounds of fraud and oppression attendant to
the execution of the addendum contract and the other contracts
emanating from it, and that the complaint should have been filed
with the regular courts as it involved issues which are judicial in
nature.
Such argument is misplaced and respondent cannot rely on the
Gonzales case to support its argument.90 (Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005
Lease Contract notwithstanding the fact that it assails the validity of
such contract. This is due to the doctrine of separability. 91
Under the doctrine of separability, an arbitration agreement is
considered as independent of the main contract. 92 Being a separate
contract in itself, the arbitration agreement may thus be invoked
regardless of the possible nullity or invalidity of the main contract. 93
Once again instructive is Cargill, wherein this Court held that, as a
further consequence of the doctrine of separability, even the very
party who repudiates the main contract may invoke its arbitration
clause.94
Third . The operation of the arbitration clause in this case is not at all
defeated by the failure of the petitioner to file a formal "request" or
application therefor with the MeTC. We find that the filing of a
"request" pursuant to Section 24 of R.A. No. 9285 is not the sole
means by which an arbitration clause may be validly invoked in a
pending suit.
Section 24 of R.A. No. 9285 reads:
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.
[Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn,
implemented by Rules 4.1 to 4.3 of A.M. No. 07-11-08-SC or the
Special Rules of Court on Alternative Dispute Resolution (Special
ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed
in violation of the arbitration agreement, whether contained in an
arbitration clause or in a submission agreement, may request the
court to refer the parties to arbitration in accordance with such
agreement.
Rule 4.2. When to make request. - (A) Where the arbitration
agreement exists before the action is filed . - The request for referral
shall be made not later than the pre-trial conference. After the pre-
trial conference, the court will only act upon the request for referral
if it is made with the agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration
agreement at the time the case is filed but the parties subsequently
enter into an arbitration agreement, they may request the court to
refer their dispute to arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in
the form of a motion, which shall state that the dispute is covered by
an arbitration agreement.
A part from other submissions, the movant shall attach to his motion
an authentic copy of the arbitration agreement.
The request shall contain a notice of hearing addressed to all parties
specifying the date and time when it would be heard. The party
making the request shall serve it upon the respondent to give him the
opportunity to file a comment or opposition as provided in the
immediately succeeding Rule before the hearing. [Emphasis ours;
italics original]
Attention must be paid, however, to the salient wordings of Rule
4.1.It reads: "a party to a pending action filed in violation of the
arbitration agreement x x x may request the court to refer the parties
to arbitration in accordance with such agreement."
In using the word " may " to qualify the act of filing a " request "
under Section 24 of R.A. No. 9285, the Special ADR Rules clearly
did not intend to limit the invocation of an arbitration agreement in a
pending suit solely via such "request." After all, non-compliance
with an arbitration agreement is a valid defense to any offending suit
and, as such, may even be raised in an answer as provided in our
ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a
separate " request " of arbitration before the MeTC. However, it is
equally conceded that the petitioner, as early as in its Answer with
Counterclaim ,had already apprised the MeTC of the existence of the
arbitration clause in the 2005 Lease Contract 96 and, more
significantly, of its desire to have the same enforced in this
case.97 This act of petitioner is enough valid invocation of his right to
arbitrate. Fourth . The fact that the petitioner and respondent already
under went through JDR proceedings before the RTC, will not make
the subsequent conduct of arbitration between the parties
unnecessary or circuitous. The JDR system is substantially different
from arbitration proceedings.
The JDR framework is based on the processes of mediation,
conciliation or early neutral evaluation which entails the submission
of a dispute before a " JDR judge " who shall merely " facilitate
settlement " between the parties in conflict or make a " non-binding
evaluation or assessment of the chances of each party’s case." 98 Thus
in JDR, the JDR judge lacks the authority to render a resolution of
the dispute that is binding upon the parties in conflict. In arbitration,
on the other hand, the dispute is submitted to an arbitrator/s —a
neutral third person or a group of thereof— who shall have the
authority to render a resolution binding upon the parties. 99
Clearly, the mere submission of a dispute to JDR proceedings would
not necessarily render the subsequent conduct of arbitration a mere
surplusage. The failure of the parties in conflict to reach an amicable
settlement before the JDR may, in fact, be supplemented by their
resort to arbitration where a binding resolution to the dispute could
finally be achieved. This situation precisely finds application to the
case at bench.
Neither would the summary nature of ejectment cases be a valid
reason to disregard the enforcement of the arbitration clause of the
2005 Lease Contract . Notwithstanding the summary nature of
ejectment cases, arbitration still remains relevant as it aims not only
to afford the parties an expeditious method of resolving their dispute.
A pivotal feature of arbitration as an alternative mode of dispute
resolution is that it is, first and foremost, a product of party
autonomy or the freedom of the parties to " make their own
arrangements to resolve their own disputes." 100 Arbitration
agreements manifest not only the desire of the parties in conflict for
an expeditious resolution of their dispute. They also represent, if not
more so, the parties’ mutual aspiration to achieve such resolution
outside of judicial auspices, in a more informal and less antagonistic
environment under the terms of their choosing. Needless to state, this
critical feature can never be satisfied in an ejectment case no matter
how summary it may be.
Having hurdled all the challenges against the application of the
arbitration clause of the 2005 Lease Agreement in this case, We shall
now proceed with the discussion of its legal effects.
Legal Effect of the Application of the
Arbitration Clause
Since there really are no legal impediments to the application of the
arbitration clause of the 2005 Contract of Lease in this case, We find
that the instant unlawful detainer action was instituted in violation of
such clause. The Law, therefore, should have governed the fate of
the parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or
proceeding be brought upon an issue arising out of an agreement
providing for the arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue involved in
such suit or proceeding is referable to arbitration, shall stay the
action or proceeding until an arbitration has been had in accordance
with the terms of the agreement: Provided, That the applicant for the
stay is not in default in proceeding with such arbitration.[Emphasis
supplied]
R.A. No. 9285
Section 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, in operative or incapable of being performed.
[Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action
should have been stayed;101 the petitioner and the respondent should
have been referred to arbitration pursuant to the arbitration clause of
the 2005 Lease Contract . The MeTC, however, did not do so in
violation of the law—which violation was, in turn, affirmed by the
RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A.
Nos.876 and 9285 renders invalid all proceedings it undertook in the
ejectment case after the filing by petitioner of its Answer with
Counterclaim —the point when the petitioner and the respondent
should have been referred to arbitration. This case must, therefore, be
remanded to the MeTC and be suspended at said point. Inevitably,
the decisions of the MeTC, RTC and the Court of Appeals must all
be vacated and set aside.
The petitioner and the respondent must then be referred to arbitration
pursuant to the arbitration clause of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision
that it is about to make. Nonetheless, this Court must make the same
if only to stress the point that, in our jurisdiction, bona fide
arbitration agreements are recognized as valid; 102 and that
laws,103 rules and regulations104 do exist protecting and ensuring their
enforcement as a matter of state policy. Gone should be the days
when courts treat otherwise valid arbitration agreements with disdain
and hostility, if not outright " jealousy," 105 and then get away with it.
Courts should instead learn to treat alternative means of dispute
resolution as effective partners in the administration of justice and, in
the case of arbitration agreements, to afford them judicial
restraint.106 Today, this Court only performs its part in upholding a
once disregarded state policy.
Civil Case No. CV 09-0346
a. Decision dated 19 August 2011 of the Court of
Appeals in C.A.-G.R. SP No. 116865,
b. Decision dated 29 October 2010 of the Regional
Trial Court, Branch 274, of Parañaque City in Civil
Case No. 10-0255,

This Court notes that, on 30 September 2009, petitioner filed with
the RTC of Parañaque City, a complaint107 for the rescission or
cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. The case is currently pending
before Branch 257 of the RTC, docketed as Civil Case No. CV 09-
0346.
This Court recognizes the great possibility that issues raised in Civil
Case No. CV 09-0346 may involve matters that are rightfully
arbitrable per the arbitration clause of the 2005 Lease Contract.
However, since the records of Civil Case No. CV 09-0346 are not
before this Court, We can never know with true certainty and only
speculate. In this light, let a copy of this Decision be also served to
Branch 257of the RTC of Parañaque for its consideration and,
possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby
GRANTED . Accordingly, We hereby render a Decision:
c. Decision dated 27 April 2010 of the Metropolitan
Trial Court, Branch 77, of Parañaque City in Civil
Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to
arbitration pursuant to the arbitration clause of the 2005
Lease Contract, repeatedly included in the 2000 Lease
Contract and in the 1976 Amended Deed of Donation.
Let a copy of this Decision be served to Branch 257 of the RTC of
Parañaque for its consideration and, possible, application to Civil
Case No. CV 09-0346.
No costs.
SO ORDERED.

1. SETTING ASIDE all the proceedings undertaken by the G.R. No. 220546, December 07, 2016
Metropolitan Trial Court, Branch 77, of Parañaque City in
relation to Civil Case No. 2009-307 after the filing by LUZON IRON DEVELOPMENT GROUP CORPORATION
petitioner of its Answer with Counterclaim ; AND CONSOLIDATED IRON SANDS,
LTD., Petitioners, v. BRIDESTONE MINING AND
2. REMANDING the instant case to the MeTC, DEVELOPMENT CORPORATION AND ANACONDA
SUSPENDED at the point after the filing by petitioner of its MINING AND DEVELOPMENT
Answer with Counterclaim; CORPORATION, Respondents.

3. SETTING ASIDE the following:

DECISION
MENDOZA, J.:
This petition for review on certiorari with prayer for the issuance of
a writ of preliminary injunction and/or temporary restraining order
(TRO) seeks to reverse and set aside the September 8, 2015
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 133296,
which affirmed the March 18, 20132 and September 18, 20133 Orders
of the Regional Trial Court, Branch 59, Makati City (RTC), in the
consolidated case for rescission of contract and damages.
The Antecedents.
On October 25, 2012, respondents Bridestone Mining and
Development Corporation (Bridestone) and Anaconda Mining and
Development Corporation (Anaconda) filed separate complaints
before the RTC for rescission of contract and damages against
petitioners Luzon Iron Development Group Corporation (Luzon Iron)
and Consolidated Iron Sands, Ltd. (Consolidated Iron), docketed as
Civil Case No. 12-1053 and Civil Case No. 12-1054, respectively.
Both complaints sought the rescission of the Tenement Partnership
and Acquisition Agreement (TPAA)4 entered into by Luzon Iron and
Consolidated Iron, on one hand, and Bridestone and Anaconda, on
the other, for the assignment of the Exploration Permit Application
of the former in favor of the latter. The complaints also sought the
return of the Exploration Permits to Bridestone and Anaconda. 5
Thereafter, Luzon Iron and Consolidated Iron filed their Special
Appearance with Motion to Dismiss6 separately against Bridestone's
complaint and Anaconda's complaint. Both motions to dismiss
presented similar grounds for dismissal. They contended that the
RTC could not acquire jurisdiction over Consolidated Iron because it
was a foreign corporation that had never transacted business in the
Philippines. Likewise, they argued that the RTC had no jurisdiction
over the subject matter because of an arbitration clause in the TPAA.
On December 19, 2012, the RTC ordered the consolidation of the
two cases.7 Subsequently, Luzon Iron and Consolidated Iron filed
their Special Appearance and Supplement to Motions to
Dismiss,8 dated January 31, 2013, seeking the dismissal of the
consolidated cases. The petitioners alleged that Bridestone and
Anaconda were guilty of forum shopping because they filed similar
complaints before the Department of Environment and Natural
Resources (DENR), Mines and Geosciences Bureau, Regional Panel
of Arbitrators against Luzon Iron.
The RTC Orders
In its March 18, 2013 Order, the RTC denied the motions to dismiss,
as well as the supplemental motion to dismiss, finding that
Consolidated Iron was doing business in the Philippines, with Luzon
Iron as its resident agent. The RTC ruled that it had jurisdiction over
the subject matter because under clause 14.8 of the TPAA, the
parties could go directly to courts when a direct and/or blatant
violation of the provisions of the TPAA had been committed. The
RTC also opined that the complaint filed before the DENR did not
constitute forum shopping because there was neither identity of
parties nor identity of reliefs sought.
Luzon Iron and Consolidated Iron moved for reconsideration, but the
RTC denied their motion in its September 18, 2013 Order.
Undaunted, they filed their petition for review with prayer for the
issuance of a writ of preliminary injunction and/or TRO before the
CA.
The CA Ruling
In its September 8, 2015 Decision, the CA affirmed the March 18,
2013 and September 18, 2013 RTC Orders in denying the motions to
dismiss and the supplemental motions to dismiss. It agreed that the
court acquired jurisdiction over the person of Consolidated Iron
because the summons may be validly served through its agent Luzon
Iron, considering that the latter was merely the business conduit of
the former. The CA also sustained the jurisdiction of the RTC over
the subject matter opining that the arbitration clause in the TPAA
provided for an exception where parties could directly go to court.
Further, the CA also disregarded the averment of forum shopping,
explaining that in the complaint before the RTC, both Consolidated
Iron and Luzon Iron were impleaded but in the complaint before the
DENR only the latter was impleaded. It stated that there was no
identity of relief and no identity of cause of action.
Hence, this appeal raising the following:
ISSUES
I contained similar causes of action and reliefs sought. They stress that
WHETHER THE COURT OF APPEALS ERRED IN RULING
THAT THE TRIAL COURT ACQUIRED JURISDICTION
OVER THE PERSON OF CONSOLIDATED IRON;
II
WHETHER THE COURT OF APPEALS ERRED IN RULING
THAT THE TRIAL COURT HAS JURISDICTION OVER THE
SUBJECT MATTER OF THE CONSOLIDATED CASES; AND
III
WHETHER THE COURT OF APPEALS ERRED IN RULING
THAT BRIDESTONE/ANACONDA WERE NOT GUILTY OF
FORUM SHOPPING.9
Petitioners Luzon Iron and Consolidated Iron insist that the RTC has
no jurisdiction over the latter because it is a foreign corporation
which is neither doing business nor has transacted business in the
Philippines. They argue that there could be no means by which the
trial court could acquire jurisdiction over the person of Consolidated
Iron under any mode of service of summons. The petitioners claim
that the service of summons to Consolidated Iron was defective
because the mere fact that Luzon Iron was a wholly-owned
subsidiary of Consolidated Iron did not establish that Luzon Iron was
the agent of Consolidated Iron. They emphasize that Consolidated
Iron and Luzon Iron are two distinct and separate entities.
The petitioners further assert that the trial court had no jurisdiction
over the consolidated cases because of the arbitration clause set forth
in the TPAA. They reiterate that Luzon Iron and Consolidated Iron
were guilty of forum shopping because their DENR complaint
the very evil sought to be prevented by the prohibition on forum
shopping had occurred when the DENR and the RTC issued
conflicting orders in dismissing or upholding the complaints filed
before them.
Position of Respondents
In their Comment/Opposition,10 dated January 7, 2016, respondents
Bridestone and Anaconda countered that the RTC validly acquired
jurisdiction over the person of Consolidated Iron. They posited that
Consolidated Iron was doing business in the Philippines as Luzon
Iron was merely its conduit. Thus, they insisted that summons could
be served to Luzon Iron as Consolidated Iron's agent. Likewise, they
denied that they were guilty of forum shopping as the issues and the
reliefs prayed for in the complaints before the RTC and the DENR
differed.
Further, the respondents asserted that the trial court had jurisdiction
over the complaints because the TPAA itself allowed a direct resort
before the courts in exceptional circumstances. They cited paragraph
14.8 thereof as basis explaining that when a direct and/or blatant
violation of the TPAA had been committed, a party could go directly
to the courts. They faulted the petitioners in not moving for the
referral of the case for arbitration instead of merely filing a motion to
dismiss. They added that actions that are subject to arbitration
agreement were merely suspended, and not dismissed.
Reply of Petitioners
In their Reply,11 dated April 29, 2016, the petitioners stated that
Consolidated Iron was not necessarily doing business in the
Philippines by merely establishing a wholly-owned subsidiary in the
form of Luzon Iron. Also, they asserted that Consolidated Iron had
not been validly served the summons because Luzon Iron is neither
its resident agent nor its representative in the Philippines. The
petitioners explained that Luzon Iron, as a wholly-owned subsidiary,
had a separate and distinct personality from Consolidated Iron.
The petitioners explained that Paragraph 14.8 of the TPAA should
not be construed as an authority to directly resort to court action in
case of a direct and/or blatant violation of the TPAA because such
interpretation would render the arbitration clause nugatory. They
contended that, even for the sake of argument, the judicial action
under the said provisions was limited to issues or matters which were
inexistent in the present case. They added that a party was not
required to file a formal request for arbitration before an arbitration
clause became operational. Lastly, they insisted that the respondents
were guilty of forum shopping in simultaneously filing complaints
before the trial court and the DENR.
The Court's Ruling
The petition is impressed with merit.
Filing of complaints
before the RTC and the
DENR is forum shopping
Forum shopping is committed when multiple suits involving the
same parties and the same causes of action are filed, either
simultaneously or successively, for the purpose of obtaining a
favorable judgment through means other than appeal or
certiorari.12 The prohibition on forum shopping seeks to prevent the
possibility that conflicting decisions will be rendered by two
tribunals.13
In Spouses Arevalo v. Planters Development Bank,14 the Court
elaborated that forum shopping vexed the court and warranted the
dismissal of the complaints. Thus:
Forum shopping is the act of litigants who repetitively avail
themselves of multiple judicial remedies in different fora,
simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances; and
raising substantially similar issues either pending in or already
resolved adversely by some other court; or for the purpose of
increasing their chances of obtaining a favorable decision, if not in
one court, then in another. The rationale against forum-shopping
is that a party should not be allowed to pursue simultaneous
remedies in two different courts, for to do so would constitute
abuse of court processes which tends to degrade the
administration of justice, wreaks havoc upon orderly judicial
procedure, and adds to the congestion of the heavily burdened
dockets of the courts.
xxxx
What is essential in determining the existence of forum-shopping
is the vexation caused the courts and litigants by a party who
asks different courts and/or administrative agencies to rule on
similar or related causes and/or grant the same or substantially
similar reliefs, in the process creating the possibility of
conflicting decisions being rendered upon the same issues.
xxxx
We emphasize that the grave evil sought to be avoided by the rule
against forum-shopping is the rendition by two competent tribunals
of two separate and contradictory decisions. To avoid any
confusion, this Court adheres strictly to the rules against forum
shopping, and any violation of these rules results in the dismissal
of a case. The acts committed and described herein can possibly
constitute direct contempt.15 [Emphases supplied]
There is forum shopping when the following elements are present:
(a) identity of parties, or at least such parties representing the same
interests in both actions; (b) identity of rights asserted and reliefs
prayed for, the relief being founded on the same facts; and (c) the
identity of the two preceding particulars, such that any judgment
rendered in the other action will, regardless of which party is
successful, amounts to res judicata in the action under
consideration.16 All the above-stated elements are present in the case
at bench.
First, there is identity of parties. In both the complaints before the
RTC and the DENR, Luzon Iron was impleaded as defendant while
Consolidated Iron was only impleaded in the complaint before the
RTC. Even if Consolidated Iron was not impleaded in the DENR
complaint, the element still exists. The requirement is only
substantial, and not absolute, identity of parties; and there is
substantial identity of parties when there is community of interest
between a party in the first case and a party in the second case, even
if the latter was not impleaded in the other case.17 Consolidated Iron
and Luzon Iron had a common interest under the TPAA as the latter
was a wholly-owned subsidiary of the former.
Second, there is identity of causes of action. A reading of the
complaints filed before the RTC and the DENR reveals that they had
almost identical causes of action and they prayed for similar reliefs
as they ultimately sought the return of their respective Exploration
Permit on the ground of the alleged violations of the TPAA
committed by the petitioners.18 In Yap v. Chua,19 the Court ruled that
identity of causes of action did not mean absolute identity.
Hornbook is the rule that identity of causes of action does not mean
absolute identity; otherwise, a party could easily escape the operation
of res judicata by changing the form of the action or the relief
sought. The test to determine whether the causes of action are
identical is to ascertain whether the same evidence will sustain
both actions, or whether there is an identity in the facts essential
to the maintenance of the two actions. If the same facts or
evidence would sustain both, the two actions are considered the
same, and a judgment in the first case is a bar to the subsequent
action. Hence, a party cannot, by varying the form of action or
adopting a different method of presenting his case, escape the
operation of the principle that one and the same cause of action shall
not be twice litigated between the same parties or their privies.
xxx20 [Emphases supplied]
In the case at bench, both complaints filed before
different fora involved similar facts and issues, the resolution of
which depends on analogous evidence. Thus, the filing of two
separate complaints by the petitioners with the RTC and the DENR
clearly constitutes forum shopping.
It is worth noting that the very evil which the prohibition against
forum shopping sought to prevent had happened—the RTC and the
DENR had rendered conflicting decisions. The trial court ruled that it
had jurisdiction notwithstanding the arbitration clause in the TPAA.
On the other hand, the DENR found that it was devoid of jurisdiction
because the matter was subject to arbitration.
Summons were not
validly served
Section 12 of Rule 14 of the Revised Rules of Court provides that
"[w]hen the defendant is a foreign private juridical entity which
has transacted business in the Philippines, service may be made on
its resident agent designated in accordance with law for that purpose,
or, if there be no such agent, on the government official designated
by law to that effect, or on any of its officers or agents within the
Philippines."
The Rule on Summons, as it now reads, thus, makes the question
whether Consolidated Iron was "doing business in the Philippines"
irrelevant as Section 12, Rule 14 of the Rules of Court was broad
enough to cover corporations which have "transacted business in the
Philippines."
In fact, under the present legal milieu, the rules on service of
summons on foreign private juridical entities had been expanded as it
recognizes additional modes by which summons may be served. A.M
No. 11-3-6-SC21 thus provides:
Section 12. Rule 14 of the Rules of Court is hereby amended to read
as follows:
"SEC. 12. Service upon foreign private juridical entity. — When the
defendant is a foreign private juridical entity which has transacted
business in the Philippines, service may be made on its resident
agent designated in accordance with law for that purpose, or, if there
be no such agent, on the government official designated by law to
that effect, or on any of its officers or agents within the Philippines.
If the foreign private juridical entity is not registered in the
Philippines or has no resident agent, service may, with leave of
court, be effected out of the Philippines through any of the following
means:
a) By personal service coursed through the appropriate court in the
foreign country with the assistance of the Department of Foreign
Affairs;
b) By publication once in a newspaper of general circulation in the
country where the defendant may be found and by serving a copy of
the summons and the court order by registered mail at the last known
address of the defendant;
c) By facsimile or any recognized electronic means that could
generate proof of service; or
d) By such other means as the court may in its discretion direct."
The petitioners are mistaken in arguing that it cannot be served
summons because under Section 15, Rule 14 of the Rules of Court,
extrajudicial service of summons may be resorted to only when the
action is in rem or quasi in rem and not when the action is
in personam. The premise of the petitioners is erroneous as the rule
on extraterritorial service of summons provided in Section 15, Rule
14 of the Rules of Court is a specific provision dealing precisely with
the service of summons on a defendant which does not reside and is
not found in the Philippines. On the other hand, Section 12, Rule 14
thereof, specifically applies to a defendant foreign private juridical
entity which had transacted business in the Philippines. Both rules
may provide for similar modes of service of summons, nevertheless,
they should only be applied in particular cases, with one applicable
to defendants which do not reside and are not found in the
Philippines and the other to foreign private juridical entities which
had transacted business in the Philippines.
In the case at bench, it is crystal clear that Consolidated Iron
transacted business in the Philippines as it was a signatory in the
TPAA that was executed in Makati. Hence, as the respondents
argued, it may be served with the summons in accordance with the
modes provided under Section 12, Rule 14 of the Rules of Court.
In Atiko Trans, Inc. v. Prudential Guarantee and Assurance,
Inc.,23 the Court elucidated on the means by which summons could
be served on a foreign juridical entity, to wit:
On this score, we find for the petitioners. Before it was amended by
A.M. No. 11-3-6-SC, Section 12 of Rule 14 of the Rules of Court
reads:
SEC. 12. Service upon foreign private juridical entity. — When the
defendant is a foreign private juridical entity which has transacted
business in the Philippines, service may be made on its resident
agent designated in accordance with law for that purpose, or, if there
be no such agent, on the government official designated by law to
that effect, or on any of its officers or agents within the Philippines.
Elucidating on the above provision of the Rules of Court, this Court
declared in Pioneer International, Ltd. v. Guadiz, Jr. that when the
defendant is a foreign juridical entity, service of summons maybe
made upon:
1. Its resident agent designated in accordance with
law for that purpose;
2. The government official designated by law to
receive summons if the corporation does not have a
resident agent; or,
3. Any of the corporation's officers or agents within
the Philippines.24 [Emphasis supplied]
The Court, however, finds that Consolidated Iron was not properly
served with summons through any of the permissible modes under
the Rules of Court. Indeed, Consolidated Iron was served with
summons through Luzon Iron. Such service of summons, however,
was defective.
It is undisputed that Luzon Iron was never registered before the
Securities and Exchange Commission (SEC) as Consolidated Iron's
resident agent. Thus, the service of summons to Consolidated Iron
through Luzon Iron cannot be deemed a service to a resident
agent25cralawred under the first mode of service.
Likewise, the respondents err in insisting that Luzon Iron could be
served summons as an agent of Consolidated Iron, it being a wholly-
owned subsidiary of the latter. The allegations in the complaint must
clearly show a connection between the principal foreign corporation
and its alleged agent corporation with respect to the transaction in
question as a general allegation of agency will not suffice. 26 In other
words, the allegations of the complaint taken as whole should be able
to convey that the subsidiary is but a business conduit of the
principal or that by reason of fraud, their separate and distinct
personality should be disregarded.27 A wholly-owned subsidiary is a
distinct and separate entity from its mother corporation and the fact
that the latter exercises control over the former does not justify
disregarding their separate personality. It is true that under the
TPAA, Consolidated Iron wielded great control over the actions of
Luzon Iron under the said agreement. This, nonetheless, does not
warrant the conclusion that Luzon Iron was a mere conduit of
Consolidated Iron. In Pacific Rehouse Corporation v. CA,28 the Court
ruled:
Albeit the RTC bore emphasis on the alleged control exercised by
Export Bank upon its subsidiary E-Securities, "[c]ontrol, by itself,
does not mean that the controlled corporation is a mere
instrumentality or a business conduit of the mother company. Even
control over the financial and operational concerns of a
subsidiary company does not by itself call for disregarding its
corporate fiction. There must be a perpetuation of fraud behind the
control or at least a fraudulent or illegal purpose behind the control
in order to justify piercing the veil of corporate fiction. Such
fraudulent intent is lacking in this case.29 [Emphasis supplied]
In the case at bench, the complaint merely contained a general
statement that Luzon Iron was the resident agent of Consolidated
Iron, and that it was a wholly-owned subsidiary of the latter. There
was no allegation showing that Luzon Iron was merely a business
conduit of Consolidated Iron, or that the latter exercised control over
the former to the extent that their separate and distinct personalities
should be set aside. Thus, Luzon Iron cannot be deemed as an agent
of Consolidated Iron in connection with the third mode of service of
summons.
To reiterate, the Court did not acquire jurisdiction over Consolidated
Iron because the service of summons, coursed through Luzon Iron,
was defective. Luzon Iron was neither the resident agent nor the
conduit or agent of Consolidated Iron.
On the abovementioned procedural issues alone, the dismissal of the
complaints before the RTC was warranted. Even granting that the
complaints were not procedurally defective, there still existed
enough reason for the trial court to refrain from proceeding with the
case.
Controversy must be
referred for arbitration
The petitioners insisted that the RTC had no jurisdiction over the
subject matter because under Paragraph 15.1 of the TPAA, any
dispute out of or in connection with the TPAA must be resolved by
arbitration. The said provision provides:
If, for any reasonable reason, the Parties cannot resolve a material
fact, material event or any dispute arising out of or in connection
with this TPAA, including any question regarding its existence,
validity or termination, within 90 days from its notice, shall be
referred to and finally resolved by arbitration in Singapore in
accordance with the Arbitration Rules of the Singapore International
Arbitration Centre ("SIAC Rules") for the time being in force, which
rules are deemed to be incorporated by reference in this clause
15.1.30
The RTC, as the CA agreed, countered that Paragraph 14.8 of the
TPAA allowed the parties to directly resort to courts in case of a
direct and/or blatant violation of the provisions of the TPAA.
Paragraph 14.8 stated:
Each Party agrees not to commence or procure the commencement
of any challenge or claim, action, judicial or legislative enquiry,
review or other investigation into the sufficiency, validity, legality or
constitutionality of (i) the assignments of the Exploration Permit
Applications(s) (sic) to LIDGC, (ii) any other assignments
contemplated by this TPAA, and/or (iii) or (sic) any agreement to
which the Exploration Permit Application(s) may be converted,
unless a direct and/or blatant violation of the provisions of the TPAA
has been committed.31
In Bases Conversion Development Authority v. DMCI Project
Developers, Inc.,32 the Court emphasized that the State favored
arbitration, to wit:
The state adopts a policy in favor of arbitration. Republic Act No.
9285 expresses this policy:
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 parties 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.
Our policy in favor of party autonomy in resolving disputes has
been reflected in our laws as early as 1949 when our Civil Code
was approved. Republic Act No. 876 later explicitly recognized the
validity and enforceability of parties' decision to submit disputes and
related issues to arbitration.
Arbitration agreements are liberally construed in favor of
proceeding to arbitration. We adopt the interpretation that
would render effective an arbitration clause if the terms of the
agreement allow for such interpretation.33 [Emphases supplied]
Thus, consistent with the state policy of favoring arbitration, the
present TPAA must be construed in such a manner that would give
life to the arbitration clause rather than defeat it, if such
interpretation is permissible. With this in mind, the Court views the
interpretation forwarded by the petitioners as more in line with the
state policy favoring arbitration.
Paragraphs 14.8 and 15.1 of the TPAA should be harmonized in such
a way that the arbitration clause is given life, especially since such
construction is possible in the case at bench. A synchronized reading
of the abovementioned TPAA provisions will show that a claim or
action raising the sufficiency, validity, legality or constitutionality
of: (a) the assignments of the EP to Luzon Iron; (b) any other
assignments contemplated by the TPAA; or (c) any agreement to
which the EPs may be converted, may be instituted only when there
is a direct and/or blatant violation of the TPAA. In turn, the said
action or claim is commenced by proceeding with arbitration, as
espoused in the TPAA.
The Court disagrees with the respondents that Paragraph 14.8 of the
TPAA should be construed as an exception to the arbitration clause
where direct court action may be resorted to in case of direct and/or
blatant violation of the TPAA occurs. If such interpretation is to be
espoused, the arbitration clause would be rendered inutile as
practically all matters may be directly brought before the courts.
Such construction is anathema to the policy favoring arbitration.
A closer perusal of the TPAA will also reveal that paragraph 14 and
all its sub-paragraphs are general provisions, whereas paragraphs 15
and all its sub-clauses specifically refer to arbitration. When general
and specific provisions are inconsistent, the specific provision shall
be paramount and govern the general provision.34
The petitioners' failure to refer the case for arbitration, however, does
not render the arbitration clause in the TPAA inoperative. In Koppel,
Inc. v. Makati Rotary Club Foundation, Inc. (Koppel),35 the Court
explained that an arbitration clause becomes operative,
notwithstanding the lack of a formal request, when a party has
appraised the trial court of the existence of an arbitration clause, viz:
xxx The operation of the arbitration clause in this case is not at
all defeated by the failure of the petitioner to file a formal
"request" or application therefor with the MeTC. We find that the
filing of a "request" pursuant to Section 24 of R.A. No. 9285 is not
the sole means by which an arbitration clause may be validly
invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
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.
The "request" referred to in the above provision is, in turn,
implemented by Rules 4.1 to 4.3 of A.M. No. 07-11-08-SC or
the Special Rules of Court on Alternative Dispute
Resolution (Special ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. — A party to a pending action
filed in violation of the arbitration agreement, whether contained in
an arbitration clause or in a submission agreement, may request the
court to refer the parties to arbitration in accordance with such
agreement.
xxxx
Attention must be paid, however, to the salient wordings of Rule 4.1.
It reads: "[a] party to a pending action filed in violation of the
arbitration agreement xxx may request the court to refer the parties
to arbitration in accordance with such agreement."
In using the word "may" to qualify the act of filing a "request"
under Section 24 of R.A. No. 9285, the Special ADR Rules clearly
did not intend to limit the invocation of an arbitration agreement
in a pending suit solely via such "request." After all, non-
compliance with an arbitration agreement is a valid defense to any
offending suit and, as such, may even be raised in an answer as
provided in our ordinary rules of procedure.
In this case, it is conceded that petitioner was not able to file a
separate "request" of arbitration before the MeTC. However, it is
equally conceded that the petitioner, as early as in its Answer
with Counterclaim, had already apprised the MeTC of the
existence of the arbitration clause in the 2005 Lease Contract and,
more significantly, of its desire to have the same enforced in this
case. This act of petitioner is enough valid invocation of his right
to arbitrate. xxx36 [Emphases supplied; italics in the original]
It is undisputed that the petitioners Luzon Iron and Consolidated Iron
never made any formal request for arbitration. As expounded
in Koppel, however, a formal request is not the sole means of
invoking an arbitration clause in a pending suit. Similar to the said
case, the petitioners here made the RTC aware of the existence of the
arbitration clause in the TPAA as they repeatedly raised this as an
issue in all their motions to dismiss. As such, it was enough to
activate the arbitration clause and, thus, should have alerted the RTC
in proceeding with the case.
Moreover, judicial restraint should be exercised pursuant to the
competence-competence principle embodied in Rule 2.4 of the
Special Rules of Court on Alternative Dispute Resolution. 37 The said
provision reads:
RULE 2.4. Policy Implementing Competence-Competence Principle.
— The arbitral tribunal shall be accorded the first opportunity or
competence to rule on the issue of whether or not it has the
competence or jurisdiction to decide a dispute submitted to it for
decision, including any objection with respect to the existence or
validity of the arbitration agreement. When a court is asked to rule
upon issue/s affecting the competence or jurisdiction of an
arbitral tribunal in a dispute brought before it, either before or
after the arbitral tribunal is constituted, the court must exercise
judicial restraint and defer to the competence or jurisdiction of
the arbitral tribunal by allowing the arbitral tribunal the first
opportunity to rule upon such issues.
Where the court is asked to make a determination of whether the
arbitration agreement is null and void, inoperative or incapable of
being performed, under this policy of judicial restraint, the court
must make no more than a prima facie determination of that issue.
Unless the court, pursuant to such prima facie determination,
concludes that the arbitration agreement is null and void, inoperative
or incapable of being performed, the court must suspend the action
before it and refer the parties to arbitration pursuant to the arbitration
agreement. [Emphasis supplied]

Generally, the action of the court is stayed if the matter raised before
it is subject to arbitration.38 In the case at bench, however, the
complaints filed before the RTC should have been dismissed
considering that the petitioners were able to establish the ground for
their dismissal, that is, violating the prohibition on forum shopping.
The parties, nevertheless, are directed to initiate arbitration
proceedings as provided under Paragraph 15.1 of the TPAA.

WHEREFORE, the petition is GRANTED. The September 8, 2015

Decision of the Court of Appeals in CA-G.R. SP No. 133296,
affirming the March 18, 2013 and September 18, 2013 Orders of the
Regional Trial Court, Branch 59, Makati City, is hereby SET
ASIDE. The complaints in Civil Case Nos. 12-1053 and 12-1054
are DISMISSED. The parties, however, are ORDERED to
commence arbitration proceedings pursuant to Paragraph 15.1 of the
Tenement Partnership and Acquisition Agreement.

SO ORDERED.

G.R. No. 212081               February 23, 2015

DEPARTMENT OF ENVIRONMENT AND NATURAL

RESOURCES (DENR), Petitioner,
vs.
UNITED PLANNERS CONSULTANTS , INC.
(UPCI), Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 is the
Decision2 dated March 26, 2014 of the Court of Appeals (CA) in
CA-G.R. SP No. 126458 which dismissed the petition for certiorari
filed by petitioner the Department of Environment and Natural
Resources (petitioner).
The Facts
On July 26, 1993, petitioner, through the Land Management Bureau
(LMB), entered into an Agreement for Consultancy
Services3 (Consultancy Agreement) with respondent United Planners
Consultants, Inc. (respondent) in connection with the LMB' s Land
Resource Management Master Plan Project (LRMMP). 4 Under the
Consultancy Agreement, petitioner committed to pay a total contract
price of ₱4,337,141.00, based on a predetermined percentage
corresponding to the particular stage of work accomplished. 5
In December 1994, respondent completed the work required, which
petitioner formally accepted on December 27, 1994. 6 However,
petitioner was able to pay only 47% of the total contract price in the
amount of ₱2,038,456.30.7
On October 25, 1994, the Commission on Audit (COA) released the
Technical Services Office Report8 (TSO) finding the contract price
of the Agreement to be 84.14% excessive. 9 This notwithstanding,
petitioner, in a letter dated December 10, 1998, acknowledged its
liability to respondent in the amount of ₱2,239,479.60 and assured
payment at the soonest possible time.10
For failure to pay its obligation under the Consultancy Agreement
despite repeated demands, respondent instituted a
Complaint11 against petitioner before the Regional Trial Court of
Quezon City, Branch 222 (RTC), docketed as Case No. Q-07-
60321.12
Upon motion of respondent, the case was subsequently referred to
arbitration pursuant to the arbitration clause of the Consultancy
Agreement,13 which petitioner did not oppose.14 As a result, Atty.
Alfredo F. Tadiar, Architect Armando N. Alli, and Construction
Industry Arbitration Commission (CIAC) Accredited Arbitrator
Engr. Ricardo B. San Juan were appointed as members of the
Arbitral Tribunal. The court-referred arbitration was then docketed
as Arbitration Case No. A-001.15
During the preliminary conference, the parties agreed to adopt the
CIAC Revised Rules Governing Construction Arbitration 16 (CIAC
Rules) to govern the arbitration proceedings. 17 They further agreed to
submit their respective draft decisions in lieu of memoranda of
arguments on or before April 21, 2010, among others.18
On the due date for submission of the draft decisions, however, only
respondent complied with the given deadline, 19 while petitioner
moved for the deferment of the deadline which it followed with
another motion for extension of time, asking that it be given until
May 11, 2010 to submit its draft decision.20
In an Order21 dated April 30, 2010, the Arbitral Tribunal denied
petitioner’s motions and deemed its non-submission as a waiver, but
declared that it would still consider petitioner’s draft decision if
submitted before May 7, 2010, or the expected date of the final
award’s promulgation.22 Petitioner filed its draft decision 23 only on
May 7, 2010.
The Arbitral Tribunal rendered its Award24 dated May 7, 2010
(Arbitral Award) in favor of respondent, directing petitioner to pay
the latter the amount of (a) ₱2,285,089.89 representing the unpaid
progress billings, with interest at the rate of 12% per annum from the
date of finality of the Arbitral Award upon confirmation by the RTC
until fully paid; (b) ₱2,033,034.59 as accrued interest thereon; (c)
₱500,000.00 as exemplary damages; and (d) ₱150,000.00 as
attorney’s fees.25 It also ordered petitioner to reimburse respondent
its proportionate share in the arbitration costs as agreed upon in the
amount of ₱182,119.44.26
Unconvinced, petitioner filed a motion for reconsideration, 27 which
the Arbitral Tribunal merely noted without any action, claiming that
it had already lost jurisdiction over the case after it had submitted to
the RTC its Report together with a copy of the Arbitral Award. 28
Consequently, petitioner filed before the RTC a Motion for
Reconsideration29 dated May 19, 2010 (May 19, 2010 Motion for
Reconsideration)and a Manifestation and Motion30 dated June 1,
2010 (June 1, 2010 Manifestation and Motion), asserting that it was
denied the opportunity to be heard when the Arbitral Tribunal failed
to consider its draft decision and merely noted its motion for
reconsideration.31 It also denied receiving a copy of the Arbitral
Award by either electronic or registered mail. 32 For its part,
respondent filed an opposition thereto and moved for the
confirmation33 of the Arbitral Award in accordance with the Special
Rules of Court on Alternative Dispute Resolution (Special ADR
Rules).34
In an Order35 dated March 30, 2011, the RTC merely noted
petitioner’s aforesaid motions, finding that copies of the Arbitral
Award appear to have been sent to the parties by the Arbitral
Tribunal, including the OSG, contrary to petitioner’s claim. Onthe
other hand, the RTC confirmed the Arbitral Award pursuant to Rule
11.2 (A)36 of the Special ADR Rules and ordered petitioner to pay
respondent the costs of confirming the award, as prayed for, in the
total amount of ₱50,000.00. From this order, petitioner did not file a
motion for reconsideration.
Thus, on June 15, 2011, respondent moved for the issuance of a writ
of execution, to which no comment/opposition was filed by
petitioner despite the RTC’s directive therefor. In an Order 37 dated
September 12, 2011, the RTC granted respondent’s motion.38
Petitioner moved to quash39 the writ of execution, positing that
respondent was not entitled to its monetary claims. It also claimed
that the issuance of said writ was premature since the RTC should
have first resolved its May 19, 2010 Motion for Reconsideration and
June 1, 2010 Manifestation and Motion, and not merely noted them,
thereby violating its right to due process.40
The RTC Ruling
In an Order41 dated July 9, 2012, the RTC denied petitioner’s motion
to quash.
It found no merit in petitioner’s contention that it was denied due
process, ruling that its May 19, 2010 Motion for Reconsideration
was a prohibited pleading under Section 17.2, 42 Rule 17 of the CIAC
Rules. It explained that the available remedy to assail an arbitral
award was to file a motion for correction of final award pursuant to
Section 17.143 of the CIAC Rules, and not a motion for
reconsideration of the said award itself. 44 On the other hand, the RTC
found petitioner’s June 1, 2010 Manifestation and Motion seeking
the resolution of its May 19, 2010 Motion for Reconsideration to be
defective for petitioner’s failure to observe the three day notice
rule.45 Having then failed to avail of the remedies attendant to an
order of confirmation, the Arbitral Award had become final and
executory.46
On July 12, 2012, petitioner received the RTC’s Order dated July 9,
2012 denying its motion to quash.47
Dissatisfied, it filed on September 10, 2012a petition for
certiorari48 before the CA, docketed as CA-G.R. SP No. 126458,
averring in the main that the RTC acted with grave abuse of
discretion in confirming and ordering the execution of the Arbitral
Award.
The CA Ruling
In a Decision49 dated March 26, 2014, the CA dismissed the
certiorari petition on two (2) grounds, namely: (a) the petition
essentially assailed the merits of the Arbitral Award which is
prohibited under Rule 19.750 of the Special ADR Rules;51 and (b) the
petition was filed out of time, having been filed way beyond 15 days
from notice of the RTC’s July 9, 2012 Order, in violation of Rule
19.2852 in relation to Rule 19.853 of said Rules which provide that a
special civil action for certiorari must be filed before the CA within
15 days from notice of the judgment, order, or resolution sought to
be annulled or set aside (or until July 27, 2012). Aggrieved,
petitioner filed the instant petition.
The Issue Before the Court
The core issue for the Court’s resolution is whether or not the CA
erred in applying the provisions of the Special ADR Rules, resulting
in the dismissal of petitioner’s special civil action for certiorari.
The Court’s Ruling
The petition lacks merit.
I.
Republic Act No. (RA) 9285,54 otherwise known as the Alternative
Dispute Resolution Act of 2004," institutionalized the use of an
Alternative Dispute Resolution System (ADR System) 55 in the
Philippines. The Act, however, was without prejudice to the adoption
by the Supreme Court of any ADR system as a means of achieving
speedy and efficient means of resolving cases pending before all
courts in the Philippines.56
Accordingly, A.M. No. 07-11-08-SC was created setting forth the
Special Rules of Court on Alternative Dispute Resolution (referred
herein as Special ADR Rules) that shall govern the procedure to be
followed by the courts whenever judicial intervention is sought in
ADR proceedings in the specific cases where it is allowed. 57
Rule 1.1 of the Special ADR Rules lists down the instances when the
said rules shall apply, namely: "(a) Relief on the issue of Existence,
Validity, or Enforceability of the Arbitration Agreement; (b) Referral
to Alternative Dispute Resolution ("ADR"); (c) Interim Measures of
Protection; (d) Appointment of Arbitrator; (e) Challenge to
Appointment of Arbitrator; (f) Termination of Mandate of Arbitrator;
(g) Assistance in Taking Evidence; (h) Confirmation, Correction or
Vacation of Award in Domestic Arbitration; (i) Recognition and
Enforcement or Setting Aside of an Award in International
Commercial Arbitration; (j) Recognition and Enforcement of a
Foreign Arbitral Award; (k) Confidentiality/Protective Orders; and
(l) Deposit and Enforcement of Mediated Settlement Agreements." 58
Notably, the Special ADR Rules do not automatically govern the
arbitration proceedings itself. A pivotal feature of arbitration as an
alternative mode of dispute resolution is that it is a product of party
autonomy or the freedom of the parties to make their own
arrangements to resolve their own disputes. 59 Thus, Rule 2.3 of the
Special ADR Rules explicitly provides that "parties are free to agree
on the procedure to be followed in the conduct of arbitral
proceedings. Failing such agreement, the arbitral tribunal may
conduct arbitration in the manner it considers appropriate." 60
In the case at bar, the Consultancy Agreement contained an
arbitration clause.61 Hence, respondent, after it filed its complaint,
moved for its referral to arbitration62 which was not objected to by
petitioner.63 By its referral to arbitration, the case fell within the
coverage of the Special ADR Rules. However, with respect to the
arbitration proceedings itself, the parties had agreed to adopt the
CIAC Rules before the Arbitral Tribunal in accordance with Rule 2.3
of the Special ADR Rules.
On May 7, 2010, the Arbitral Tribunal rendered the Arbitral Award
in favor of respondent. Under Section 17.2, Rule 17 of the CIAC
Rules, no motion for reconsideration or new trial may be sought, but
any of the parties may file a motion for correction 64 of the final
award, which shall interrupt the running of the period for
appeal,65 based on any of the following grounds, to wit: a. an evident
miscalculation of figures, a typographical or arithmetical error;
b. an evident mistake in the description of any party, person,
date, amount, thing or property referred to in the award;
c. where the arbitrators have awarded upon a matter not
submitted to them, not affecting the merits of the decision
upon the matter submitted;
d. where the arbitrators have failed or omitted to resolve
certain issue/s formulated by the parties in the Terms of
Reference (TOR) and submitted to them for resolution, and
e. where the award is imperfect in a matter of form not
affecting the merits of the controversy.
The motion shall be acted upon by the Arbitral Tribunal or the
surviving/remaining members.66
Moreover, the parties may appeal the final award to the CA through
a petition for review under Rule43 of the Rules of Court. 67
Records do not show that any of the foregoing remedies were availed
of by petitioner. Instead, it filed the May 19, 2010 Motion for
Reconsideration of the Arbitral Award, which was a prohibited
pleading under the Section 17.2, 68 Rule 17 of the CIAC Rules, thus
rendering the same final and executory.
Accordingly, the case was remanded to the RTC for confirmation
proceedings pursuant to Rule 11 of the Special ADR Rules which
requires confirmation by the court of the final arbitral award. This is
consistent with Section 40, Chapter 7 (A) of RA 9285 which
similarly requires a judicial confirmation of a domestic award to
make the same enforceable:
SEC. 40. Confirmation of Award.– The confirmation of a domestic
arbitral award shall be governed by Section 2369 of R.A. 876.70
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. (Emphases
supplied)
During the confirmation proceedings, petitioners did not oppose the
RTC’s confirmation by filing a petition to vacate the Arbitral Award
under Rule 11.2 (D)71 of the Special ADR Rules. Neither did it seek
reconsideration of the confirmation order in accordance with Rule
19.1 (h) thereof. Instead, petitioner filed only on September 10, 2012
a special civil action for certiorari before the CA questioning the
propriety of (a) the RTC Order dated September 12, 2011 granting
respondent’s motion for issuance of a writ of execution, and (b)
Order dated July 9,2012 denying its motion to quash. Under Rule
19.26 of the Special ADR Rules, "[w]hen the Regional Trial Court,
in making a ruling under the Special ADR Rules, has acted without
or in excess of its jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal or
any plain, speedy, and adequate remedy in the ordinary course of
law, a party may file a special civil action for certiorari to annul or
set aside a ruling of the Regional Trial Court." Thus, for failing to
avail of the foregoing remedies before resorting to certiorari, the CA
correctly dismissed its petition.
II.
Note that the special civil action for certiorari described in Rule
19.26 above may be filed to annul or set aside the following orders
of the Regional Trial Court.
a. Holding that the arbitration agreement is in existent,
invalid or unenforceable;
b. Reversing the arbitral tribunal’s preliminary determination
upholding its jurisdiction;
c. Denying the request to refer the dispute to arbitration;
d. Granting or refusing an interim relief;
e. Denying a petition for the appointment of an arbitrator;
f. Confirming, vacating or correcting a domestic arbitral
award;
g. Suspending the proceedings to set aside an international
commercial arbitral award and referring the case back to the
arbitral tribunal;
h. Allowing a party to enforce an international commercial
arbitral award pending appeal;
i. Adjourning or deferring a ruling on whether to set aside,
recognize and or enforce an international commercial arbitral
award;
j. Allowing a party to enforce a foreign arbitral award
pending appeal; and
k. Denying a petition for assistance in taking evidence.
(Emphasis supplied)
Further, Rule 19.772 of the Special ADR Rules precludes a party to
an arbitration from filing a petition for certiorari questioning the
merits of an arbitral award.
If so falling under the above-stated enumeration, Rule 19.28 of the
Special ADR Rules provide that said certiorari petition should be
filed "with the [CA] within fifteen (15) days from notice of the
judgment, order or resolution sought to be annulled or set aside. No
extension of time to file the petition shall be allowed."
In this case, petitioner asserts that its petition is not covered by the
Special ADR Rules (particularly, Rule 19.28 on the 15-day
reglementary period to file a petition for certiorari) but by Rule 65 of
the Rules of Court (particularly, Section 4 thereof on the 60-day
reglementary period to file a petition for certiorari), which it claimed
to have suppletory application in arbitration proceedings since the
Special ADR Rules do not explicitly provide for a procedure on
execution. The position is untenable.
Execution is fittingly called the fruit and end of suit and the life of
the law. A judgment, if left unexecuted, would be nothing but an
empty victory for the prevailing party.73
While it appears that the Special ADR Rules remain silent on the
procedure for the execution of a confirmed arbitral award, it is the
Court’s considered view that the Rules’ procedural mechanisms
cover not only aspects of confirmation but necessarily extend to a
confirmed award’s execution in light of the doctrine of necessary
implication which states that every statutory grant of power, right or
privilege is deemed to include all incidental power, right or privilege.
In Atienza v. Villarosa,74 the doctrine was explained, thus:
No statute can be enacted that can provide all the details involved in
its application.1âwphi1 There is always an omission that may not
meet a particular situation. What is thought, at the time of enactment,
to be an all embracing legislation may be inadequate to provide for
the unfolding of events of the future. So-called gaps in the law
develop as the law is enforced. One of the rules of statutory
construction used to fill in the gap is the doctrine of necessary
implication. The doctrine states that what is implied in a statute is as
much a part thereof as that which is expressed. Every statute is
understood, by implication, to contain all such provisions as may be
necessary to effectuate its object and purpose, or to make effective
rights, powers, privileges or jurisdiction which it grants, including all
such collateral and subsidiary consequences as may be fairly and
logically inferred from its terms. Ex necessitate legis. And every
statutory grant of power, right or privilege is deemed to include all
incidental power, right or privilege. This is so because the greater
includes the lesser, expressed in the maxim, in eo plus sit, simper
inest et minus.75 (Emphases supplied)
As the Court sees it, execution is but a necessary incident to the
Court’s confirmation of an arbitral award. To construe it otherwise
would result in an absurd situation whereby the confirming court
previously applying the Special ADR Rules in its confirmation of the
arbitral award would later shift to the regular Rules of Procedure
come execution. Irrefragably, a court’s power to confirm a judgment
award under the Special ADR Rules should be deemed to include the
power to order its execution for such is but a collateral and
subsidiary consequence that may be fairly and logically inferred
from the statutory grant to regional trial courts of the power to
confirm domestic arbitral awards.
All the more is such interpretation warranted under the principle of
ratio legis est anima which provides that a statute must be read
according to its spirit or intent,76 for what is within the spirit is within
the statute although it is not within its letter, and that which is within
the letter but not within the spirit is not within the
statute.77 Accordingly, since the Special ADR Rules are intended to
achieve speedy and efficient resolution of disputes and curb a
litigious culture,78 every interpretation thereof should be made
consistent with these objectives.
Thus, with these principles in mind, the Court so concludes that the
Special ADR Rules, as far as practicable, should be made to apply
not only to the proceedings on confirmation but also to the confirmed
award’s execution.
Further, let it be clarified that – contrary to petitioner’s stance –
resort to the Rules of Court even in a suppletory capacity is not
allowed. Rule 22.1 of the Special ADR Rules explicitly provides that
"[t]he provisions of the Rules of Court that are applicable to the
proceedings enumerated in Rule 1.1 of these Special ADR Rules
have either been included and incorporated in these Special ADR
Rules or specifically referred to herein." 79 Besides, Rule 1.13 thereof
provides that "[i]n situations where no specific rule is provided under
the Special ADR Rules, the court shall resolve such matter
summarily and be guided by the spirit and intent of the Special ADR
Rules and the ADR Laws."
As above-mentioned, the petition for certiorari permitted under the
Special ADR Rules must be filed within a period of fifteen (15) days
from notice of the judgment, order or resolution sought to be
annulled or set aside.80 Hence, since petitioner’s filing of its certiorari
petition in CA-G.R. SP No. 126458 was made nearly two months
after its receipt of the RTC’s Order dated July 9, 2012,or on
September 10, 2012,81 said petition was clearly dismissible.82
III.
Discounting the above-discussed procedural considerations, the
Court still finds that the certiorari petition had no merit.
Indeed, petitioner cannot be said to have been denied due process as
the records undeniably show that it was accorded ample opportunity
to ventilate its position. There was clearly nothing out of line when
the Arbitral Tribunal denied petitioner’s motions for extension to file
its submissions having failed to show a valid reason to justify the
same or in rendering the Arbitral Award sans petitioner’s draft
decision which was filed only on the day of the scheduled
promulgation of final award on May 7, 2010. 83 The touchstone of
due process is basically the opportunity to be heard. Having been
given such opportunity, petitioner should only blame itself for its
own procedural blunder.
On this score, the petition for certiorari in CA-G.R. SP No. 126458
was likewise properly dismissed.
IV.
Nevertheless, while the Court sanctions the dismissal by the CA of
the petition for certiorari due to procedural infirmities, there is a need
to explicate the matter of execution of the confirmed Arbitral Award
against the petitioner, a government agency, in the light of
Presidential Decree No. (PD) 1445 84 otherwise known as the
"Government Auditing Code of the Philippines." Section 26 of PD
1445 expressly provides that execution of money judgment against
the Government or any of its subdivisions, agencies and
instrumentalities is within the primary jurisdiction of the COA, to
wit:
SEC. 26. General jurisdiction. The authority and powers of the
Commission shall extend to and comprehend all matters relating to
auditing procedures, systems and controls, the keeping of the general
accounts of the Government, the preservation of vouchers pertaining
thereto for a period of ten years, the examination and inspection of
the books, records, and papers relating to those accounts; and the
audit and settlement of the accounts of all persons respecting funds
or property received or held by them in an accountable capacity, as
well as the examination, audit, and settlement of all debts and claims
of any sort due from or owing to the Government or any of its
subdivisions, agencies and instrumentalities. The said jurisdiction
extends to all government-owned or controlled corporations,
including their subsidiaries, and other self-governing boards,
commissions, or agencies of the Government, and as herein
prescribed, including non-governmental entities subsidized by the
government, those funded by donation through the government,
those required to pay levies or government share, and those for
which the government has put up a counterpart fund or those partly
funded by the government. (Emphases supplied)
From the foregoing, the settlement of respondent’s money claim is
still subject to the primary jurisdiction of the COA despite finality of
the confirmed arbitral award by the RTC pursuant to the Special
ADR Rules.85 Hence, the respondent has to first seek the approval of
the COA of their monetary claim. This appears to have been
complied with by the latter when it filed a "Petition for Enforcement
and Payment of Final and Executory Arbitral Award" 86 before the
COA. Accordingly, it is now the COA which has the authority to
rule on this latter petition. WHEREFORE, the petition is DENIED.
The Decision dated March 26, 2014 of the Court of Appeals in CA-
G.R. SP No. 126458 which dismissed the petition for certiorari filed
by petitioner the Department of Environment and Natural Resources
is hereby AFFIRMED.
SO ORDERED.

G.R. No. 160071, June 06, 2016
ANDREW D. FYFE, RICHARD T. NUTTALL, AND
RICHARD J. WALD, Petitioners, v. PHILIPPINE AIRLINES,
INC., Respondent.
DECISION
BERSAMIN, J.:
This case concerns the order issued by the Regional Trial Court
granting the respondent's application to vacate the adverse arbitral
award of the panel of arbitrators, and the propriety of the recourse
from such order.
The Case
Under review are the resolutions promulgated in C.A.-G.R. No.
71224 entitled Andrew D. Fyfe, Richard T. Nuttall and Richard J.
Wald v. Philippine Airlines, Inc. on May 30, 20031 and September
19, 2003,2 whereby the Court of Appeals (CA) respectively granted
the respondent's Motion to Dismiss Appeal (without Prejudice to the
Filing of Appellee's Brief), and denied the petitioners' Motion for
Reconsideration.
Antecedents
In 1998, the respondent underwent rehabilitation proceedings in the
Securities and Exchange Commission (SEC),3 which issued an order
dated July 1, 1998 decreeing, among others, the suspension of all
claims for payment against the respondent. 4 To convince its creditors
to approve the rehabilitation plan, the respondent decided to hire
technical advisers with recognized experience in the airline industry.
This led the respondent through its then Director Luis Juan K. Virata
to consult with people in the industry, and in due course came to
meet Peter W. Foster, formerly of Cathay Pacific Airlines. 5 Foster,
along with Michael R. Scantlebury, negotiated with the respondent
on the details of a proposed technical services agreement. 6 Foster and
Scantlebury subsequently organized Regent Star Services Ltd.
(Regent Star) under the laws of the British Virgin Islands. 7 On
January 4, 1999, the respondent and Regent Star entered into
a Technical Services Agreement (TSA) for the delivery of technical
and advisory or management services to the respondent, 8 effective
for five years, or from January 4, 1999 until December 31, 2003. 9 On
the same date, the respondent, pursuant to Clause 6 of the
TSA,10 submitted a Side Letter," the relevant portions of which
stated:
For and in consideration of the services to be faithfully performed by
Regent Star in accordance with the terms and conditions of the
Agreement, the Company agrees to pay Regent Star as follows:
1.1 Upon execution of the Agreement, Four Million Seven Hundred
Thousand US Dollars (US$4,700,000.00), representing advisory fees
for two (2) years from the date of signature of the Agreement, with
an additional amount of not exceeding One Million Three Hundred
Thousand US Dollars (US$1,300,000.00) being due and demandable
upon Regent Star's notice to the Company of its engagement of an
individual to assume the position of CCA under the Agreement;
x x x x
In addition to the foregoing, the Company agrees as follows:
x x x x
In the event of a full or partial termination of the Agreement for
whatever reason by either the Company or a Senior Technical
Adviser/Regent Star prior to the end of the term of the Agreement,
the following penalties are payable by the terminating party:
 terminating the TSA on the ground of lack of confidence effective
A. During the first 2 years July 31, 1999.16 In its notice, the respondent demanded the offsetting
of the penalties due to the petitioners with the two-year advance
1. Senior Company Adviser (CCA) - US$800,000.00 advisory fees it had paid to Regent Star, thus:

2. Senior Commercial Adviser (SCA) - 800,000.00 The side letter stipulates that "[i]n the event of a full or partial
termination of the Agreement for whatever reason by either the
3. Senior Financial Adviser (FSA) - 700,000.00
Company or a Senior Technical Adviser/Regent Star prior to the end
4. Senior Ground Services and Training Adviser 500,000.00 of the term of the Agreement, the following penalties are payable by
(SAG) - the terminating party:"
5. Senior Engineering and Maintenance Adviser 500,000.00
(SAM) - During the first 2 years:  
Senior Company Adviser - US$800,000.00
x x x x
Senior Commercial Adviser - 800,000.00
For the avoidance of doubt, it is understood and agreed that in the Senior Financial Adviser - 700,000.00
event that the terminating party is an individual Senior Technical
Adviser the liability to pay such Termination Amount to the Senior Ground Services and Training - 500.000.00
Company shall rest with that individual party, not with RSS. Adviser
Similarly, if the terminating party is the Company, the liability to the Senior Engineering and Maintenance - 500,000.00
aggrieved party shall be the individual Senior Technical Adviser, not Adviser
to RSS.12
TOTAL   US$3,300,000.00
Regent Star, through Foster, conformed to the terms stated in the
Side Letter.13 The SEC approved the TSA on January 19, 1999. 14
There is, therefore, due to RSS from PAL the amount of
In addition to Foster and Scantlebury, Regent Star engaged the US$3,300,000.00 by way of stipulated penalties.
petitioners in respective capacities, specifically: Andrew D. Fyfe as
Senior Ground Services and Training Adviser; Richard J. Wald as However, RSS has been paid by PAL advance "advisory fee for two
Senior Maintenance and Engineering Adviser; and Richard T. Nuttall (2) years from date of signature of the Agreement" the amount of
as Senior Commercial Adviser. The petitioners commenced to render US$5,700,000. Since RSS has rendered advisory services from 4
their services to the respondent, immediately after the TSA was January to 31 July 1999, or a period of seven months, it is entitled to
executed.15 retain only the advisory fees for seven months. This is computed as
follows:
On July 26, 1999, the respondent dispatched a notice to Regent Star
US$5,700.000 - US$237,500/month x7 = US$1,662,500
  24 months
The remaining balance of the advance advisory fee, which
corresponds to the unserved period of 17 months, or US$4,037,500,
should be refunded by RSS to PAL.
Off-setting the amount of US$3,300,000 due from PAL to RSS
against the amount of US$4,037,500 due from RSS to PAL, there
remains a net balance of US$737,500 due and payable to PAL.
Please settle this amount at your early convenience, but not later than
August 15, 1999.17ChanRoblesVirtualawlibrary
On June 8, 1999, the petitioners, along with Scantlebury and Wald,
wrote to the respondent, through its President and Chief Operating
Officer, Avelino Zapanta, to seek clarification on the status of the
TSA in view of the appointment of Foster, Scantleburry and Nuttall
as members of the Permanent Rehabilitation Receiver (PRR) for the
respondent.18 A month later, Regent Star sent to the respondent
another letter expressing disappointment over the respondent's
ignoring the previous letter, and denying the respondent's claim for
refund and set-off. Regent Star then proposed therein that the issue
be submitted to arbitration in accordance with Clause 14 19 of the
TSA.20
Thereafter, the petitioners initiated arbitration proceedings in the
Philippine Dispute Resolution Center, Inc. (PDRCI) pursuant to the
TSA.
Ruling of the PDRCI
After due proceedings, the PDRCI rendered its decision ordering the
respondent to pay termination penalties,21viz.:
On issue No. 1 we rule that the Complainants are entitled to their
claim for termination penalties.
When the PAL, terminated the Technical Services Agreement on
July 26, 1999 which also resulted in the termination of the services
of the senior technical advisers including those of the Complainants
it admitted that the termination penalties in the amount of
US$3,300,000.00 as provided in the Letter dated January 4, 1999 are
payable to the Senior Technical Advisers by PAL. Xxx. PAL's
admission of its liability to pay the termination penalties to the
complainants was made also in its Answer. PAIAs counsel even
stipulated during the hearing that the airline company admits that it is
liable to pay Complainants the termination penalties.xxx.
However, PAL argued that although it is liable to pay termination
penalties the Complainants are not entitled to their respective claims
because considering that PAL had paid RSS advance "advisory fees
for two (2) years" in the total amount of US$5,700,000.00 and RSS
had rendered advisory services for only seven (7) months from
January 4, 1999 to July 31, 1999 that would entitle RSS to an (sic)
advisory fees of only US$1,662,500.00 and therefore the unserved
period of 17 months equivalent to US$4,037,500.00 should be
refunded. And setting off the termination penalties of
US$3,300,000.00 due RSS from PAL against the amount of
US$4,037,500.00 still due PAL from RSS there would remain a net
balance of US$737,500.00 still due PAL from RSS and/or the Senior
Technical Advisers which the latter should pay pro-rata as follows:
Peter W. Forster, the sum of US$178,475.00; Richard T. Nuttall, the
sum of US$178,475.00; Michael R. Scantlebury; the sum of
US$156,350.00, Andrew D. Fyfe, the sum of US$111,362.50; and
Richard J. Wald the sum of US$111,362.50. RSS is a special
company which the Senior Technical Advisers had utilized for the
specific purpose of providing PAL with technical advisory services
they as a group had contracted under the Agreement. Hence when
PAL signed the Agreement with RSS, it was for all intents and
purposes an Agreement signed individually with the Senior
Technical Advisers including the Complainants. The RSS and the
five (5) Senior Technical Advisers should be treated as one and the
same,
The Arbitration Tribunals is not convinced.
x x x x
PAL cannot refuse to pay Complainants their termination penalties
by setting off against the unserved period of seventeen (17) months
of their advance advisory fees as the Agreement and the Side Letter
clearly do not allow refund. This Arbitration Tribunal cannot read
into the contract, which is the law between the parties, what the
contract docs not provide or what the parties did not intend. It is
basic in contract interpretation that contracts that are not ambiguous
are to be interpreted according to their literal meaning and should
not be interpreted beyond their obvious intendment. x x x. The
penalties work as security for the Complainants against the
uncertainties of their work at PAL whose closure was a stark reality
they were facing. (TSN Hearing on April 27, 2000, pp. 48-49) This
would not result in unjust enrichment for the Complainants because
the termination of the services was initiated by PAL itself without
cause. In feet, PAL admitted that at the time their services were
terminated the Complainants were performing well in their
respective assigned works,22 x x x.
PAL also presented hypothetical situations and certain computations
that it claims would result to an "injustice" to PAL which would then
"lose a very substantial amount of money" if the claimed refund is
not allowed. PAL had chosen to prc-terminate the services of the
complainants and must therefore pay the termination penalties
provided in the Side Letter. If it finds itself losing "substantial" sums
of money because of its contractual commitments, there is nothing
this Arbitration Tribunal can do to remedy the situation.
Jurisprudence teaches us that neither the law nor the courts will
extricate a party from an unwise or undesirable contract that he or
she entered into with all the required formalities and with full
awareness of its consequences. (Opulencia vs. Cowl of Appeals, 293
SCRA 385 (1998)23
Decision of the RTC
Dissatisfied with the outcome, the respondent filed its Application to
Vacate Arbitral Award in the Regional Trial Court, in Makati City
(RTC), docketed as SP Proc. M-5147 and assigned to Branch
57,24 arguing that the arbitration decision should be vacated in view
of the July 1, 1998 order of the SEC placing the respondent under a
state of suspension of payment pursuant to Section 6(c) of
Presidential Decree No. 902-A, as amended by P.D. No.
1799.25cralawred
The petitioners countered with their Motion to Dismiss, 26 citing the
following grounds, namely: (a) lack of jurisdiction over the persons
of the petitioners due to the improper service of summons; (b) the
application did not state a cause of action; and (c) the application
was an improper remedy because the respondent should have filed an
appeal in the CA pursuant to Rule 43 of the Rules of
Court.27cralawred
On March 7, 2001, the RTC granted the respondent's Application to
Vacate Arbitral Award,28 disposing:
WHEREFORE, the subject arbitral award dated September 29, 2000
is hereby vacated and set aside, without prejudice to the
complainants' filing with the SEC rehabilitation receiver of PAL
their subject claim for appropriate adjudication. The panel of
arbitrators composed of lawyers Beda Fajardo, Arturo de Castro and
Bienvenido Magnaye is hereby ordered discharged on the ground of
manifest partiality.
No pronouncement as to cost and attorney's fees.
SO ORDERED.29ChanRoblesVirtualawlibrary
Anent jurisdiction over the persons of the petitioners, the RTC
opined:
On the objection that the Court has not acquired jurisdiction over the
person of the complainants because summonses were not issued and
served on them, the Court rules that complainants have voluntarily
submitted themselves to the jurisdiction of the Court by praying the
Court to grant them affirmative relief, i.e., that the Court confirm and
declare final and executory the subject arbitral award. Moreover,
under Sections 22 and 26 of the Arbitration Law (R.A. 876), an
application or petition to vacate arbitral award is deemed a motion
and service of such motion on the adverse party or his counsel is
enough to confer jurisdiction upon the Court over the adverse party.
It is not disputed that complainants were duly served by personal
delivery with copies of the application to vacate. In feet, they have
appeared through counsel and have filed pleadings. In line with this
ruling, the objection that the application to vacate does not state a
cause of action against complainants must necessarily fall inasmuch
as this present case is a special proceeding (Sec. 22, Arbitration
Law), and Section 3(a), Rule 1 of the 1997 Rules of Civil Procedure
is inapplicable here.30
On whether or not the application to vacate was an appropriate
remedy under Sections 24 and 26 of the Arbitration Law, and
whether or not the July 1, 1998 order of the SEC deprived the Panel
of Arbitrators of the authority to hear the petitioners' claim, the RTC
held:
The rationale for the suspension is to enable the rehabilitation
receiver to exercise his powers without any judicial or extra-judicial
interference that might unduly hinder the rescue of the distressed
corporation, x x x. PD No. 902-A does not provide for the duration
of the suspension; therefore, it is deemed to be effective during the
entire period that the corporate debtor is under SEC receivership.
There is no dispute that PAL is under receivership (Exhibits "1" and
"2"). In its Order dated 1 July 1998, the SEC declared that "all claims
for payment against PAL are deemed suspended."' This Order
effectively deprived all other tribunals of jurisdiction to hear and
decide all actions for claims against PAL for the duration of the
receivership.
x x x x
Unless and until the SEC lifts the Order dated 1 July 1998, the Panel
of Arbitrators cannot take cognizance of complainant' claims against
PAL without violating the exclusive jurisdiction of the SEC. The law
has granted SEC the exclusive jurisdiction to pursue the
rehabilitation of a private corporation through the appointment of a
rehabilitation receiver (Sec 6 (d), PD No. 902-A, as amended by PD
1799). "exclusive jurisdiction precludes the idea of co-existence and
refers to jurisdiction possessed to the exclusion of others, x x x.
Thus, "(I)nstead of vexing the courts with suits against the distressed
firm, they are directed to file their claims with the receiver who is the
duly appointed officer of the SEC.
x x x.31ChanRoblesVirtualawlibrary
After their motion for reconsideration 32 was denied,33 the petitioners
appealed to the CA by notice of appeal.
Resolution of the CA
The respondent moved to dismiss the appeal, 34 arguing against the
propriety of the petitioners' remedy, and positing that Section 29 of
the Arbitration Law limited appeals from an order issued in a
proceeding under the Arbitration Law to a review on certiorari upon
questions of law.35
On May 30, 2003, the CA promulgated the now assailed resolution
granting the respondent's Motion to Dismiss Appeal. 36 It declared
that the appropriate remedy against the order of the RTC vacating the
award was a petition for review on certiorari under Rule 45, viz.:
The term "certiorari" in the aforequoted provision refers to an
ordinary appeal under Rule 45, not the special action of certiorari
under Rule 65. As Section 29 proclaims, it is an "appeal." This being
the case, the proper forum for this action is, under the old and the
new rules of procedure, the Supreme Court. Thus, Section 2(c) of
Rule 41 of the 1997 Rules of Civil Procedure states that,
"In all cases where only questions of law are raised or involved, the
appeal shall be to the Supreme Court by petition for review on
certiorari in accordance with Rule 45. "
Furthermore, Section 29 limits the appeal to "questions of law,"
another indication that it is referring to an appeal by certiorari under
Rule 45 which, indeed, is the customary manner of reviewing such
issues.
Based on the foregoing, it is clear that complainants-in-
arbitration/appellants filed the wrong action with the wrong forum.
WHEREFORE, premises considered, the Motion to Dismiss Appeal
(Without Prejudice to the Filing of Appellee's Brief)
is GRANTED and the instant appeal is hereby
ordered DISMISSED.
SO ORDERED.37ChanRoblesVirtualawlibrary
The petitioners moved for reconsideration, 38 but the CA denied their
motion.39
Hence, this appeal by the petitioners.
Issues
The petitioners anchor this appeal on the following grounds, namely:
I
SECTION 29 OF THE ARBITRATION LAW, WHICH LIMITS
THE MODE OF APPEAL FROM THE ORDER OF A REGIONAL
TRIAL COURT IN A PROCEEDING MADE UNDER THE
ARBITRATION LAW TO A PETITION FOR REVIEW
ON CERTIORARI UNDER RULE 45 OF THE RULES, IS
UNCONSTITUTIONAL FOR UNDULY EXPANDING THE
JURISDICTION OF THIS HONORABLE COURT WITHOUT
THIS HONORABLE COURT'S CONCURRENCE;
II
THE COURT OF APPEALS HAD JURISDICTION OVER THE
CA APPEAL BECAUSE:
A.
THIS HONORABLE COURT HAS PREVIOUSLY UPHELD THE
EXERCISE BY THE COURT OF APPEALS OF JURISDICTION
OVER AN APPEAL INVOLVING QUESTIONS OF FACT OR OF
MIXED QUESTIONS OF FACT AND LAW FROM A REGIONAL
TRIAL COURT'S ORDER VACATING AN ARBITRAL AWARD
B.
WHERE, AS IN THIS CASE, TFIE ISSUES ON APPEAL
CONCERNED THE ABSENCE OF EVIDENCE AND LACK OF
LEGAL BASIS TO SUPPORT THE REGIONAL TRIAL COURT'S
ORDER VACATING THE ARBITRAL AWARD, GRAVE
MISCHIEF WOULD RESULT IF THE REGIONAL TRIAL
COURT'S BASELESS FINDINGS OF FACT OR MIXED
FINDINGS OF FACT ARE PLACED BEYOND APPELLATE
REVIEW; AND
C.

THE COURT OF APPEALS' DISMISSAL OF THE CA APPEAL
V/OULD IN EFFECT RESULT IN THE AFFIRMATION OF THE
REGIONAL TRIAL COURT'S EXERCISE OF JURISDICTION,
OVER PERSONS UPON WHOM IT FAILED TO VALIDLY
ACQUIRE SUCH JURISDICTION AND OF APPELLATE
JURISDICTION OVER THE PDRCI ARBITRAL AWARD EVEN
IF SUCH APPELLATE POWER IS EXCLUSIVELY LODGED
WITH THE COURT OF APPEALS UNDER RULE 43 OF THE
RULES
III
INSTEAD OF DISMISSING THE CA APPEAL OUTRIGHT, THE
COURT OF APPEALS SHOULD HAVE SHORTENED THE
PROCEEDINGS AND EXPEDITED JUSTICE BY EXERCISING
ORIGINAL JURISDICTION OVER THE APPLICATION TO
VACATE PURSUANT TO RULE 43 OF THE RULES,
ESPECIALLY CONSIDERING THAT THE PARTIES HAD IN
FACT ALREADY FILED THEIR RESPECTIVE BRIEFS AND
THE COMPLETE RECORDS OF BOTH THE RTC
APPLICATION TO VACATE AND THE PDRCI ARBITRATION
WERE ALREADY IN ITS POSSESSION; AND
IV
IN THE EVENT THAT AN APPEAL FROM AN ORDER
VACATING AN ARBITRAL AWARD MAY BE MADE ONLY
IN CERTIORARI PROCEEDINGS AND ONLY TO THE
SUPREME COURT, THE COURT OF APPEALS SHOULD NOT
HAVE DISMISSED THE CA APPEAL, BUT IN THE HIGHER
INTEREST OF JUSTICE, SHOULD HAVE INSTEAD
ENDORSED THE SAME TO THIS HONORABLE COURT, AS
WAS DONE IN SANTIAGO V. GONZALES.40
The petitioners contend that an appeal from the order arising from
arbitration proceedings cannot be by petition for review
on certiorari under Rule 45 of the Rules of Court because the appeal
inevitably involves mixed questions of law and fact; that their appeal
in the CA involved factual issues in view of the RTC's finding that
the panel of arbitrators had been guilty of evident partiality even
without having required the respondent to submit independent proof
thereon; that the appropriate remedy was either a petition
for certiorari under Rule 65 of the Rules of Court, or an ordinary
appeal under Rule 41 of the Rules of Court, conformably with the
rulings in Asset Privatization Trust v. Court of
Appeals41 and Adamson v. Court of Appeals,42 respectively; and that
the CA erroneously upheld the RTC's denial of their Motion To
Dismiss Appeal on the basis of their counsel's voluntary appearance
to seek affirmative relief because under Section 20, Rule 14 of
the Rules of Court their objection to the personal jurisdiction of the
court was not a voluntary appearance even if coupled with other
grounds for a motion to dismiss.
In riposte, the respondent avers that the petition for review
on certiorari should be denied due course because of the defective
verification/certification signed by the petitioners' counsel; and that
the special powers of attorney (SPAs) executed by the petitioners in
favor of their counsel did not sufficiently vest the latter with the
authority to execute the verification/certification in their behalf.
On the merits, the respondent maintains that: (a) the
term certiorari used in Section 29 of the Arbitration Law refers to a
petition for review under Rule 45 of the Rules of Court; (b) the
constitutional challenge against Section 29 of the Arbitration Law
was belatedly made; (c) the petitioners' claim of lack of jurisdiction
on the part of the RTC should fail because an application to vacate
an arbitral award under Sections 22 and 26 of the Arbitration Law is
only required to be in the form of a motion; and (d) the complete
record of the arbitration proceedings submitted to the RTC
sufficiently proved the manifest partiality and grave abuse of
discretion on the part of the panel of arbitrators.

To be resolved are: (a) whether or not the petition for review should
be dismissed for containing a defective verification/certification; and
(b) whether or not the CA erred in dismissing the appeal of the
petitioners for being an inappropriate remedy.
Ruling of the Court
We deny the petition for review on certiorari.
I
There was sufficient compliance with the rule on
verification and certification against forum shopping
The respondent insists that the verification/certification attached to
the petition was defective because it was executed by the petitioners'
counsel whose authority under the SPAs was only to execute the
certification of non-forum shopping; and that the signing by the
counsel of the certification could not also be allowed because
the Rules of Court and the pertinent circulars and rulings of the Court
require that the petitioners must themselves execute the same.
The insistence of the respondent is unwarranted. The SPAs
individually signed by the petitioners vested in their counsel the
authority, among others, "to do and perform on my behalf any act
and deed relating to the case, which it could legally do and perform,
including any appeals or further legal proceedings." The authority
was sufficiently broad to expressly and specially authorize their
counsel, Atty. Ida Maureen V. Chao-Kho, to sign the
verification/certification on their behalf.
The purpose of the verification is to ensure that the allegations
contained in the verified pleading are true and correct, an d are not
the product of the imagination or a matter of speculation; and that the
pleading is filed in good faith. 43 This purpose was met by the
verification/certification made by Atty. Chao-Kho in behalf of the
petitioners, which pertinently stated that:
2. Petitioners caused the preparation of the foregoing Petition for
Review on Certiorari, and have read and understood all the
allegations contained therein. Further, said allegations are true and
correct based on their own knowledge and authentic records in their
and the Finn's possession.44
The tenor of the verification/certification indicated that the
petitioners, not Atty. Chao-Kho, were certifying that the allegations
were true and correct based on their knowledge and authentic
records. At any rate, a finding that the verification was defective
would not render the petition for review invalid. It is settled that the
verification was merely a formal requirement whose defect did not
ne gate the validity or efficacy of the verified pleading, or affect the
jurisdiction of the court.45
We also uphold the efficacy of the certification on non-forum
shopping executed by Atty. Chao-Kho on the basis of the
authorization bestowed under the SPAs by the petitioners. The
lawyer of the party, in order to validly execute the certification, must
be "specifically authorized" by the client for that purpose. 46 With the
petitioners being non-residents of the Philippines, the sworn
certification on non-forum shopping by Atty. Chao-Kho sufficiently
complied with the objective of ensuring that no similar action had
been brought by them or the respondent against each other, to wit:
5. Significantly, Petitioners are foreign residents who reside and are
presently abroad. Further, the Firm is Petitioners' sole legal counsel
in the Philippines, and hence, is in a position to know that Petitioners
have no other cases before any court o[r] tribunal in the
Philippines;47
In this regard, we ought not to exact a literal compliance with
Section 4, Rule 45, in relation to Section 2, Rule 42 of the Rules of
Court, that only the party himself should execute the certification.
After all, we have not been shown by the respondent any intention on
the part of the petitioners and their counsel to circumvent the
requirement for the verification and certification on non-forum
shopping.48
II
Appealing the RTC order
vacating an arbitral award
The petitioners contend that the CA gravely erred in dismissing their
appeal for being an inappropriate remedy, and in holding that a
petition for review on certiorari under Rule 45 was the sole remedy
under Section 29 of the Arbitration Law. They argue that the
decision of the RTC involving arbitration could be assailed either by
petition for certiorari under Rule 65, as held in Asset Privatization
Trust, or by an ordinary appeal under Rule 41, as opined
in Adamson.
The petitioners are mistaken.
Firstly, the assailed resolution of the CA did not expressly declare
that the petition for review on certiorari under Rule 45 was the sole
remedy from the RTC's order vacating the arbitral award. The CA
rather emphasized that the petitioners should have filed the petition
for review on certiorari under Rule 45 considering that Section 29 of
the Arbitration Law has limited the ground of review to "questions of
law." Accordingly, the CA correctly dismissed the appeal of the
petitioners because pursuant to Section 2, 49 Rule 41 of the Rules of
Court an appeal of questions of law arising in the courts in the first
instance is by petition for review on certiorari under Rule 45.
It is noted, however, that since the promulgation of the assailed
decision by the CA on May 30, 2003, the law on the matter
underwent changes. On February 4, 2004. Republic Act No. 9285
(Alternative Dispute Resolution Act of 2004) was passed by
Congress, and was approved by the President on April 2, 2004.
Pursuant to Republic Act No. 9285, the Court promulgated on
September 1, 2009 in A.M. No. 07-11-08-SC the Special Rules of
Court on Alternative Dispute Resolution, which are now the present
rules of procedure governing arbitration. Among others, the Special
Rules of Court on Alternative Dispute Resolution requires an appeal
by petition for review to the CA of the final order of the
RTC confirming, vacating, correcting or modifying a domestic
arbitral award, to wit:
Rule 19.12 Appeal to the Court of Appeals. - An appeal to the Court
of Appeals through a petition for review under this Special Rule shall
only be allowed from the following orders of the Regional Trial
Court:
a. Granting or denying an interim measure of
protection;
b. Denying a petition for appointment of an arbitrator;
c. Denying a petition for assistance in taking evidence;
d. Enjoining or refusing to enjoin a person from
divulging confidential information;
e. Confirming, vacating or correcting/modifying a
domestic arbitral award;
f. Setting aside an international commercial arbitration
award;
g. Dismissing the petition to set aside an international
commercial arbitration award even if the court does
not decide to recognize or enforce such award;
h. Recognizing and/or enforcing an international
commercial arbitration award;
i. Dismissing a petition to enforce an international
commercial arbitration award;
 j. Recognizing and/or enforcing a foreign arbitral
award;
k. Refusing recognition and/or enforcement of a
foreign arbitral award;
l. Granting or dismissing a petition to enforce a
deposited mediated settlement agreement; and
m. Reversing the ruling of the arbitral tribunal
upholding its jurisdiction.
Although the Special Rules of Court on Alternative Dispute
Resolution provides that the appropriate remedy from an order of the
RTC vacating a domestic arbitral award is an appeal by petition for
review in the CA, not an ordinary appeal under Rule 41 of the Rules
of Court, the Court cannot set aside and reverse the assailed decision
on that basis because the decision was in full accord with the law or
rule in force at the time of its promulgation.
The ruling in Asset Privatization Trust v. Court of Appeals50 cannot
be the governing rule with respect to the order of the RTC vacating
an arbitral award. Asset Privatization Trust justified the resort to the
petition for certiorari under Rule 65 only upon finding that the RTC
had acted without jurisdiction or with grave abuse of discretion in
confirming the arbitral award. Nonetheless, it is worth reminding that
the petition for certiorari cannot be a substitute for a lost appeal. 51
Also, the petitioners have erroneously assumed that the appeal filed
by the aggrieved party in Adamson v. Court of Appeals52 was an
ordinary one. Adamson concerned the correctness of the ruling of the
CA in reversing the decision of the trial court, not the propriety of
the remedy availed of by the aggrieved party. Nor
did Adamson expressly declare that an ordinary appeal could be
availed of to assail the RTC's ruling involving arbitration. As such,
the petitioners' reliance on Adamson to buttress their resort to the
erroneous remedy was misplaced.
We remind that the petitioners cannot insist on their chosen remedy
despite its not being sanctioned by the Arbitration Law. Appeal as a
remedy is not a matter of right, but a mere statutory privilege to be
exercised only in the manner and strictly in accordance with the
provisions of the law.53
III
Panel of Arbitrators had no jurisdiction
to hear and decide the petitioners' claim
The petitioners' appeal is dismissible also because the arbitration
panel had no jurisdiction to hear their claim. The RTC correctly
opined that the SEC's suspension order effective July 1, 1998
deprived the arbitration panel of the jurisdiction to hear any claims
against the respondent. The Court has clarified in Castillo v.
Uniwide Warehouse Club, Inc.54 why the claim for payment brought
against a distressed corporation like the respondent should not
prosper following the issuance of the suspension order by the SEC,
regardless of when the action was filed, to wit:
Jurisprudence is settled that the suspension of proceedings referred to
in the law uniformly applies to all actions for claims filed against a
corporation, partnership or association under management or
receivership, without distinction, except only those expenses
incurred in the ordinary course of business. In the oft-cited case
of Rubberworld (Phils.) Inc. v. NLRC, the Court noted that aside
from the given exception, the law is clear and makes no distinction
as to the claims that are suspended once a management committee is
created or a rehabilitation receiver is appointed. Since the law makes
no distinction or exemptions, neither should this Court. Ubi lex non
dislinguit nee nos distinguere debemos. Philippine Airlines, Inc. v.
Zamora declares that the automatic suspension of an action for
claims against a corporation under a rehabilitation receiver or
management committee embraces all phases of the suit, that is, the
entire proceedings of an action or suit and not just the payment of
claims.
The reason behind the imperative nature of a suspension or stay
order in relation to the creditors claims cannot be downplayed,
for indeed the indiscriminate suspension of actions for claims
intends to expedite the rehabilitation of the distressed
corporation by enabling the management committee or the
rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extrajudicial interference that might unduly
hinder or prevent the rescue of the debtor company. To allow
such other actions to continue would only add to the burden of
the management committee or rehabilitation receiver, whose
time, effort and resources would be wasted in defending claims
against the corporation, instead of being directed toward its
restructuring and rehabilitation.
At this juncture, it must be conceded that the date when the claim
arose, or when the action was filed, has no bearing at all in
deciding whether the given action or claim is covered by the stay
or suspension order. What matters is that as long as the
corporation is under a management committee or a
rehabilitation receiver, all actions for claims against it, whether
for money or otherwise, must yield to the greater imperative of
corporate revival, excepting only, as already mentioned, claims
for payment of obligations incurred by the corporation in the
ordinary course of business.55 (Bold emphasis supplied)
IV
The requirement of due process was observed
The petitioners' challenge against the jurisdiction of the RTC on the
ground of the absence of the service of the summons on them also
fails.
Under Section 2256 of the Arbitration Law, arbitration is deemed a
special proceeding, by virtue of which any application should be
made in the manner provided for the making and hearing of motions,
except as otherwise expressly provided in the Arbitration Law.
The RTC observed that the respondent's Application to Vacate
Arbitral Award was duly served personally on the petitioners, who
then appeared by counsel and filed pleadings. The petitioners
countered with their Motion to Dismiss vis-a-vis the respondent's
application, specifying therein the various grounds earlier mentioned,
including the lack of jurisdiction over their persons due to the
improper service of summons. Under the circumstances, the
requirement of notice was fully complied with, for Section 26 57 of
the Arbitration Law required the application to be served upon the
adverse party or his counsel within 30 days after the award was filed
or delivered "as prescribed by law for the service upon an attorney in
an action."
V
Issue of the constitutionality of the
Arbitration Law is devoid of merit
The constitutionality of Section 29 of the Arbitration Law is being
challenged on the basis that Congress has thereby increased the
appellate jurisdiction of the Supreme Court without its advice and
concurrence, as required by Section 30, Article VI of the 1987
Constitution, to wit:
Section 30. No law shall be passed increasing the appellate
jurisdiction of the Supreme Court as provided in this Constitution
without its advice and concurrence.
The challenge is unworthy of consideration. Based on the tenor and
text of Section 30, Article VI of the 1987 Constitution, the
prohibition against increasing the appellate jurisdiction of the
Supreme Court without its advice and concurrence applies
prospectively, not retrospectively. Considering that the Arbitration
Law had been approved on June 19, 1953, and took effect under its
terms on December 19, 1953, while the Constitution was ratified
only on February 2, 1987, Section 29 of the Arbitration Law could
not be declared unconstitutional.
WHEREFORE, the Court DENIES the petition for review on
certiorari for lack of merit; AFFIRMS the resolution promulgated on
May 30, 2003 by the Court of Appeals in CA-G.R. CV No. 71224;
and ORDERS the petitioners to pay the costs of suit.
SO ORDERED.
G.R. No. 174938               October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O.
OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC.,
ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G.
LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the corporation
they represent if there are allegations of bad faith or malice in their
acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11,
2006 decision and October 5, 2006 resolution. The Court of Appeals
affirmed the trial court's decision holding that petitioners, as director,
should submit themselves as parties tothe arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-
La).
In 1993, BF Corporation filed a collection complaint with the
Regional Trial Court against Shangri-Laand the members of its board
of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes,
Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C.
Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989
and May 30, 1991, it entered into agreements with Shangri-La
wherein it undertook to construct for Shangri-La a mall and a
multilevel parking structure along EDSA. 2
Shangri-La had been consistent in paying BF Corporation in
accordance with its progress billing statements. 3 However, by
October 1991, Shangri-La started defaulting in payment. 4
BF Corporation alleged that Shangri-La induced BF Corporation to
continue with the construction of the buildings using its own funds
and credit despite Shangri-La’s default. 5 According to BF
Corporation, ShangriLa misrepresented that it had funds to pay for
its obligations with BF Corporation, and the delay in payment was
simply a matter of delayed processing of BF Corporation’s progress
billing statements.6
BF Corporation eventually completed the construction of the
buildings.7 Shangri-La allegedly took possession of the buildings
while still owing BF Corporation an outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La
refused to pay the balance owed to it. 9 It also alleged that the
Shangri-La’s directors were in bad faith in directing Shangri-La’s
affairs. Therefore, they should be held jointly and severally liable
with Shangri-La for its obligations as well as for the damages that
BF Corporation incurred as a result of Shangri-La’s default. 10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B.
Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a
motion to suspend the proceedings in view of BF Corporation’s
failure to submit its dispute to arbitration, in accordance with the
arbitration clauseprovided in its contract, quoted in the motion as
follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise
between the Owner or the Project Manager on his behalf and the
Contractor, either during the progress or after the completion or
abandonment of the Works as to the construction of this Contract or
as to any matter or thing of whatsoever nature arising there under or
inconnection therewith (including any matter or thing left by this
Contract to the discretion of the Project Manager or the withholding
by the Project Manager of any certificate to which the Contractor
may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights and
liabilities of the parties under clauses 25, 26, 32 or 33 of these
Conditions), the owner and the Contractor hereby agree to exert all
efforts to settle their differences or dispute amicably. Failing these
efforts then such dispute or difference shall be referred to arbitration
in accordance with the rules and procedures of the Philippine
Arbitration Law.
x x x           x x x          x x x
(6) The award of such Arbitrators shall be final and binding on the
parties. The decision of the Arbitrators shall be a condition precedent
to any right of legal action that either party may have against the
other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend
proceedings.13
In the November 18, 1993 order, the Regional Trial Court denied the
motion to suspend proceedings.14
On December 8, 1993, petitioners filed an answer to BF
Corporation’s complaint, with compulsory counter claim against BF
Corporation and crossclaim against Shangri-La. 15 They alleged that
they had resigned as members of Shangri-La’s board of directors as
of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the
motion for reconsideration of its November 18, 1993 order, Shangri-
La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and
Benjamin Ramos filed a petition for certiorari with the Court of
Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for
certiorari and ordered the submission of the dispute to arbitration. 18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a
petition for review on certiorari with this court. 19 On March 27, 1998,
this court affirmed the Court of Appeals’ decision, directing that the
dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration
proceedings. BF Corporation and Shangri-La failed to agree as to the
law that should govern the arbitration proceedings. 21 On October 27,
1998, the trial court issued the order directing the parties to conduct
the proceedings in accordance with Republic Act No. 876. 22
Shangri-La filed an omnibus motion and BF Corporation an urgent
motion for clarification, both seeking to clarify the term, "parties,"
and whether Shangri-La’s directors should be included in the
arbitration proceedings and served with separate demands for
arbitration.23
Petitioners filed their comment on Shangri-La’s and BF
Corporation’s motions, praying that they be excluded from the
arbitration proceedings for being non-parties to Shangri-La’s and BF
Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of
demands for arbitration upon all defendants in BF Corporation’s
complaint.25 According to the trial court, Shangri-La’s directors were
interested parties who "must also be served with a demand for
arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective
positions."26 Petitioners’ motion for reconsideration ofthis order was
denied by the trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals,
alleging grave abuse of discretion in the issuance of orders
compelling them to submit to arbitration proceedings despite being
third parties to the contract between Shangri-La and BF
Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed
petitioners’ petition for certiorari. The Court of Appeals ruled that
ShangriLa’s directors were necessary parties in the arbitration
proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were]
sued for their acts in representation of the party to the contract
pursuant to Art. 31 of the Corporation Code, and that as directors of
the defendant corporation, [they], in accordance with Art. 1217 of
the Civil Code, stand to be benefited or injured by the result of the
arbitration proceedings, hence, being necessary parties, they must be
joined in order to have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in the arbitration
proceedings and an arbitral award is rendered, holding [Shangri-La]
and its board of directors jointly and solidarily liable to private
respondent BF Corporation, a problem will arise, i.e., whether
petitioners will be bound bysuch arbitral award, and this will prevent
complete determination of the issues and resolution of the
controversy.31
The Court of Appeals further ruled that "excluding petitioners in the
arbitration proceedings . . . would be contrary to the policy against
multiplicity of suits."32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders
dated July 28, 2003 and January 19, 2005 of public respondent RTC,
Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED. 33
The Court of Appeals denied petitioners’ motion for reconsideration
in the October 5, 2006 resolution.34
On November 24, 2006, petitioners filed a petition for review of the
May 11, 2006 Court of Appeals decision and the October 5, 2006
Court of Appeals resolution.35
The issue in this case is whether petitioners should be made parties
to the arbitration proceedings, pursuant to the arbitration clause
provided in the contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for
corporate acts or obligations. 36 The corporation is a separate being,
and nothing justifies BF Corporation’s allegation that they are
solidarily liable with Shangri-La. 37 Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s
obligations should it fail in its obligations. 38 BF Corporation also
failed to establish fraud or bad faith on their part. 39
Petitioners also argue that they are third parties to the contract
between BF Corporation and Shangri-La.40 Provisions including
arbitration stipulations should bind only the parties. 41 Based on our
arbitration laws, parties who are strangers to an agreement cannot be
compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote
the autonomy of parties in resolving their disputes. 43 Compelling
them to submit to arbitration is against this purpose and may be
tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and
Maximo G. Licauco III, Alfredo C.Ramos and Benjamin C. Ramos. 45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos
agreed with petitioners that Shangri-La’sdirectors, being non-parties
to the contract, should not be made personally liable for Shangri-La’s
acts.46 Since the contract was executed only by BF Corporation and
Shangri-La, only they should be affected by the contract’s
stipulation.47 BF Corporation also failed to specifically allege the
unlawful acts of the directors that should make them solidarily liable
with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’
ruling that the parties should undergo arbitration "clearly
contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners
were not parties to the agreement, they were still impleaded under
Section 31 of the Corporation Code. 50 Section 31 makes directors
solidarily liable for fraud, gross negligence, and bad
faith.51 Petitioners are not really third parties to the agreement
because they are being sued as Shangri-La’s representatives, under
Section 31 of the Corporation Code.52
BF Corporation further argued that because petitioners were
impleaded for their solidary liability, they are necessary parties to the
arbitration proceedings.53 The full resolution of all disputes in the
arbitration proceedings should also be done in the interest of
justice.54
In the manifestation dated September 6, 2007, petitioners informed
the court that the Arbitral Tribunal had already promulgated its
decision on July 31, 2007.55 The Arbitral Tribunal denied BF
Corporation’s claims against them.56 Petitioners stated that "[they]
were included by the Arbitral Tribunal in the proceedings
conducted . . . notwithstanding [their] continuing objection
thereto. . . ."57 They also stated that "[their] unwilling participation in
the arbitration case was done ex abundante ad cautela, as manifested
therein on several occasions." 58 Petitioners informed the court that
they already manifested with the trial court that "any action taken on
[the Arbitral Tribunal’s decision] should be without prejudice to the
resolution of [this] case."59
Upon the court’s order, petitioners and Shangri-La filed their
respective memoranda. Petitioners and Maximo G. Licauco III,
Alfredo C. Ramos, and Benjamin C. Ramos reiterated their
arguments that they should not be held liable for Shangri-La’s
default and made parties to the arbitration proceedings because only
BF Corporation and Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were
impleaded for their solidary liability under Section 31 of the
Corporation Code. Shangri-La added that their exclusion from the
arbitration proceedings will result in multiplicity of suits, which "is
not favored in this jurisdiction." 60 It pointed out that the case had
already been mooted by the termination of the arbitration
proceedings, which petitioners actively participated in. 61 Moreover,
BF Corporation assailed only the correctness of the Arbitral
Tribunal’s award and not the part absolving Shangri-La’s directors
from liability.62
BF Corporation filed a counter-manifestation with motion to
dismiss63 in lieu of the required memorandum.
In its counter-manifestation, BF Corporation pointed out that since
"petitioners’ counterclaims were already dismissed with finality, and
the claims against them were likewise dismissed with finality, they
no longer have any interest orpersonality in the arbitration case.
Thus, there is no longer any need to resolve the present Petition,
which mainly questions the inclusion of petitioners in the arbitration
proceedings."64 The court’s decision in this case will no longer have
any effect on the issue of petitioners’ inclusion in the arbitration
proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability,
and its binding effect on BF Corporation, have rendered this case
moot and academic.
The mootness of the case, however, had not precluded us from
resolving issues so that principles may be established for the
guidance of the bench, bar, and the public. In De la Camara v. Hon.
Enage,66 this court disregarded the fact that petitioner in that case
already escaped from prison and ruled on the issue of excessive
bails:
While under the circumstances a ruling on the merits of the petition
for certiorari is notwarranted, still, as set forth at the opening of this
opinion, the fact that this case is moot and academic should not
preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court
judges to the unequivocal command of the Constitution that
excessive bail shall not be required.67
This principle was repeated in subsequent cases when this court
deemed it proper to clarify important matters for guidance. 68
Thus, we rule that petitioners may be compelled to submit to the
arbitration proceedings in accordance with Shangri-Laand BF
Corporation’s agreement, in order to determine if the distinction
between Shangri-La’s personality and their personalities should be
disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration
allows the parties to avoid litigation and settle disputes amicably and
more expeditiously by themselves and through their choice of
arbitrators.
The policy in favor of arbitration has been affirmed in our Civil
Code,69 which was approved as early as 1949. It was later
institutionalized by the approval of Republic Act No. 876, 70 which
expressly authorized, made valid, enforceable, and irrevocable
parties’ decision to submit their controversies, including incidental
issues, to arbitration. This court recognized this policy in Eastboard
Navigation, Ltd. v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an
arbitration agreement, defendant raises the issue that, even if it be
granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts
to removing said dispute from the jurisdiction of the courts in which
the parties are domiciled or where the dispute occurred. It is true that
there are authorities which hold that "a clause in a contract providing
that all matters in dispute between the parties shall be referred to
arbitrators and to them alone, is contrary to public policy and cannot
oust the courts of jurisdiction" (Manila Electric Co. vs. Pasay
Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as
an inexpensive, speedy and amicable method of settling disputes, and
as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without
contravening sound public policy or settled law" (3 Am. Jur., p. 835).
Congress has officially adopted the modern view when it reproduced
in the new Civil Code the provisions of the old Code on Arbitration.
And only recently it approved Republic Act No. 876 expressly
authorizing arbitration of future disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling
disputes, arbitration clauses are liberally construed to favor
arbitration. Thus, in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitration — along with mediation, conciliation and
negotiation — is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind. It is thus regarded as the
"wave of the future" in international civil and commercial disputes.
Brushing aside a contractual agreement calling for arbitration
between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of
arbitration.74 (Emphasis supplied)
A more clear-cut statement of the state policy to encourage
arbitration and to favor interpretations that would render effective an
arbitration clause was later expressed in Republic Act No. 9285: 75
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. 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 whomare 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. (Emphasis
supplied)
Thus, if there is an interpretation that would render effective an
arbitration clause for purposes ofavoiding litigation and expediting
resolution of the dispute, that interpretation shall be adopted.
Petitioners’ main argument arises from the separate personality given
to juridical persons vis-à-vis their directors, officers, stockholders,
and agents. Since they did not sign the arbitration agreement in any
capacity, they cannot be forced to submit to the jurisdiction of the
Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the
time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of
Shangri-La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This
means that while it is not a person, naturally, the law gives it a
distinct personality and treats it as such. A corporation, in the legal
sense, is an individual with a personality that is distinct and separate
from other persons including its stockholders, officers, directors,
representatives,77 and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their
own.78 For instance, they have the power to sue and enter into
transactions or contracts. Section 36 of the Corporation Code
enumerates some of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate
ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with
the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance with
this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers asmay be essential or
necessary to carry out its purpose or purposes as stated in its
articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can
only exercise its rights and powers through itsdirectors, officers, or
agents, who are all natural persons. A corporation cannot sue or enter
into contracts without them.
A consequence of a corporation’s separate personality is that consent
by a corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official
acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director or
representative.
Hence, a corporation’s representatives are generally not bound by the
terms of the contract executed by the corporation. They are not
personally liable for obligations and liabilities incurred on or in
behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties’
autonomy in resolving their disputes. This court recognized in Heirs
of Augusto Salas, Jr. v. Laperal Realty Corporation 79 that an
arbitration clause shall not apply to persons who were neither parties
to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement,
containing the stipulation on arbitration, binds the parties thereto, as
well as their assigns and heirs. But only they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals, 81 this
court ruled:
The 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. Clearly, only parties to the Agreement . . . are bound by
the Agreement and its arbitration clause as they are the only
signatories thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine
International Air Terminals Co., Inc. 83 and Stanfilco Employees v.
DOLE Philippines, Inc., et al.84
As a general rule, therefore, a corporation’s representative who did
not personally bind himself or herself to an arbitration agreement
cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she
is generally not considered a party to that agreement.
However, there are instances when the distinction between
personalities of directors, officers,and representatives, and of the
corporation, are disregarded. We call this piercing the veil of
corporate fiction.
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate fraud or
an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues." 85 It is
also warranted in alter ego cases "where a corporation is merely a
farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation."86
When corporate veil is pierced, the corporation and persons who are
normally treated as distinct from the corporation are treated as one
person, such that when the corporation is adjudged liable, these
persons, too, become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself
under certain circumstances are its directors and officers. Section 31
of the Corporation Code provides the instances when directors,
trustees, or officers may become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed inhim in confidence, as
to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the
corporation. (n)
Based on the above provision, a director, trustee, or officer of a
corporation may be made solidarily liable with it for all damages
suffered by the corporation, its stockholders or members, and other
persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for
or assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or
bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary
interest in conflict with his or her duties as director or
trustee.
Solidary liability with the corporation will also attach in the
following instances:
a) "When a director or officer has consented to the issuance
of watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written
objection thereto";87
b) "When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and solidarily
liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate action." 89
When there are allegations of bad faith or malice against corporate
directors or representatives, it becomes the duty of courts or tribunals
to determine if these persons and the corporation should be treated as
one. Without a trial, courts and tribunals have no basis for
determining whether the veil of corporate fiction should be pierced.
Courts or tribunals do not have such prior knowledge. Thus, the
courts or tribunals must first determine whether circumstances exist
towarrant the courts or tribunals to disregard the distinction between
the corporation and the persons representing it. The determination of
these circumstances must be made by one tribunal or court in a
proceeding participated in by all parties involved, including current
representatives of the corporation, and those persons whose
personalities are impliedly the sameas the corporation. This is
because when the court or tribunal finds that circumstances exist
warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be
held liable for corporate acts. The corporation’s distinct personality
is disregarded, and the corporation is seen as a mere aggregation of
persons undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a case
against a corporation, alleging malice orbad faith on their part in
directing the affairs of the corporation, complainants are effectively
alleging that the directors and the corporation are not acting as
separate entities. They are alleging that the acts or omissions by the
corporation that violated their rights are also the directors’ acts or
omissions.90 They are alleging that contracts executed by the
corporation are contracts executed by the directors. Complainants
effectively pray that the corporate veilbe pierced because the cause
of action between the corporation and the directors is the same.
In that case, complainants have no choice but to institute only one
proceeding against the parties.1âwphi1 Under the Rules of Court,
filing of multiple suits for a single cause of action is prohibited.
Institution of more than one suit for the same cause of action
constitutes splitting the cause of action, which is a ground for the
dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not
institute more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or
more suits are instituted on the basis of the same cause of action, the
filing of one or a judgment upon the merits in any one is available as
a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may
later be found to be indistinct that we rule that petitioners may be
compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to
the arbitration proceedings, we are not overturning Heirs of Augusto
Salas wherein this court affirmed the basic arbitration principle that
only parties to an arbitration agreement may be compelled to submit
to arbitration. In that case, this court recognizedthat persons other
than the main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered parties to
an arbitration agreement entered into by their assignor because the
assignor’s rights and obligations are transferred to them upon
assignment. In other words, the assignor’s rights and obligations
become their own rights and obligations. In the same way, the
corporation’s obligations are treated as the representative’s
obligations when the corporate veil is pierced. Moreover, in Heirs of
Augusto Salas, this court affirmed its policy against multiplicity of
suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties
would "result in multiplicity of suits, duplicitous procedure and
unnecessary delay."91 This court also intimated that the interest of
justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to
direct the trial court to proceed to determine the issues of thatcase, it
did not prohibit courts from allowing the case to proceed to
arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of
complainant’s rights, and the incidental issue of whether piercing of
the corporate veil is warranted, should be determined in a single
proceeding. Such finding would determine if the corporation is
merely an aggregation of persons whose liabilities must be treated as
one with the corporation.
However, when the courts disregard the corporation’s distinct and
separate personality from its directors or officers, the courts do not
say that the corporation, in all instances and for all purposes, is the
same as its directors, stockholders, officers, and agents. It does not
result in an absolute confusion of personalities of the corporation and
the persons composing or representing it. Courts merely discount the
distinction and treat them as one, in relation to a specific act, in order
to extend the terms of the contract and the liabilities for all damages
to erring corporate officials who participated in the corporation’s
illegal acts. This is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or
praying for the piercing of the corporate veil, parties who are
normally treated as distinct individuals should be made to participate
in the arbitration proceedings in order to determine ifsuch distinction
should indeed be disregarded and, if so, to determine the extent of
their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that
BF Corporation failed to prove the existence of circumstances that
render petitioners and the other directors solidarily liable. It ruled
that petitioners and Shangri-La’s other directors were not liable for
the contractual obligations of Shangri-La to BF Corporation. The
Arbitral Tribunal’s decision was made with the participation of
petitioners, albeit with their continuing objection. In view of our
discussion above, we rule that petitioners are bound by such
decision.
WHEREFORE, the petition is DENIED. The Court of Appeals'
decision of May 11, 2006 and resolution of October 5, 2006 are
AFFIRMED.
SO ORDERED.
[G.R. NO. 182248 : December 18, 2008]
EQUITABLE PCI BANKING CORPORATION,1 GEORGE L.
GO, PATRICK D. GO, GENEVIEVE W.J. GO, FERDINAND
MARTIN G. ROMUALDEZ, OSCAR P. LOPEZ-DEE, RENE J.
BUENAVENTURA, GLORIA L. TAN-CLIMACO, ROGELIO
S. CHUA, FEDERICO C. PASCUAL, LEOPOLDO S. VEROY,
WILFRIDO V. VERGARA, EDILBERTO V. JAVIER,
ANTHONY F. CONWAY, ROMULAD U. DY TANG,
WALTER C. WESSMER, and ANTONIO N.
COTOCO, Petitioners, v. RCBC CAPITAL
CORPORATION, Respondent.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the
reversal of the January 8, 2008 2 and March 17, 20083 Orders of the
Regional Trial Court (RTC), Branch 148 in Makati City in SP Proc.
Case No. 6046, entitled In the Matter of ICC Arbitration Ref. No.
13290/MS/JB/JEM Between RCBC Capital Corporation, (Claimant),
and Equitable PCI Banking Corporation, Inc. et al., (Respondents).
The assailed January 8, 2008 Order confirmed the Partial Award
dated September 27, 20074 rendered by the International Chamber
of Commerce-International Court of Arbitration (ICC-ICA) in Case
No. 13290/MS/JB/JEM, entitled RCBC Capital Corporation
(Philippines) v. Equitable PCI Bank, Inc. & Others
(Philippines). The March 17, 2008 Order denied petitioners' motion
for reconsideration of the January 8, 2008 Order.
The Facts
On May 24, 2000, petitioners Equitable PCI Bank, Inc. (EPCIB) and
the individual shareholders of Bankard, Inc., as sellers, and
respondent RCBC Capital Corporation (RCBC), as buyer, executed
a Share Purchase Agreement5 (SPA) for the purchase of petitioners'
interests in Bankard, representing 226,460,000 shares, for the price
of PhP 1,786,769,400. To expedite the purchase, RCBC agreed to
dispense with the conduct of a due diligence audit on the financial
status of Bankard.
Under the SPA, RCBC undertakes, on the date of contract execution,
to deposit, as downpayment, 20% of the purchase price, or PhP
357,353,880, in an escrow account. The escrowed amount, the SPA
stated, should be released to petitioners on an agreed-upon release
date and the balance of the purchase price shall be delivered to the
share buyers upon the fulfillment of certain conditions agreed upon,
in the form of a manager's check.
The other relevant provisions of the SPA are:
Section 5. Sellers' Representations and Warranties
The SELLERS jointly and severally represent and warrant to the
BUYER that:
xxx
The Financial Condition of Bankard
g. The audited financial statements of Bankard for the three (3) fiscal
years ended December 31, 1997, 1998 and 1999, and the unaudited
financial statements for the first quarter ended 31 March 2000, are
fair and accurate, and complete in all material respects, and have
been prepared in accordance with generally accepted accounting
principles consistently followed throughout the period indicated and:
i) the balance sheet of Bankard as of 31 December 1999, as prepared
and certified by SGV & Co. ("SGV"), and the unaudited balance
sheet for the first quarter ended 31 March 2000, present a fair and
accurate statement as of those dates, of Bankard's financial condition
and of all its assets and liabilities, and is complete in all material
respects; andcralawlibrary
ii) the statements of Bankard's profit and loss accounts for the fiscal
years 1996 to 1999, as prepared and certified by SGV, and the
unaudited profit and loss accounts for the first quarter ended 31
March 2000, fairly and accurately present the results of the
operations of Bankard for the periods indicated, and are complete in
all material respects.
h. Except as disclosed in the Disclosures, and except to the extent set
forth or reserved in the audited financial statements of Bankard as of
31 December 1999 and its unaudited financial statements as of 31
March 2000, Bankard, as of such dates and up to 31 May 2000, had
and shall have no liabilities, omissions or mistakes in its records
which will have material adverse effect on the net worth or financial
condition of Bankard to the extent of more than One Hundred
Million Pesos (P100,000,000.00) in the aggregate. In the event such
material adverse effect on the net worth or financial condition of
Bankard exceeds One Hundred Million Pesos (P100,000,000.00), the
Purchase Price shall be reduced in accordance with the following
formula:
Reduction in Purchase Price = X multiplied by 226,460,000
where
Amount by which negative adjustment
exceeds P100 Million
X= - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1.925)
- - - - - - - - - - - - - - -
338,000,000
xxx
Section 7. Remedies for Breach of Warranties
A. If any of the representations and warranties of any or all of the
SELLERS or the BUYER (the "Defaulting Party") contained in
Sections 5 and 6 shall be found to be untrue when made and/or as of
the Closing Date, the other party, i.e., the BUYER if the Defaulting
Party is any or all of the SELLERS and the SELLERS if the
Defaulting Party is the BUYER (hereinafter referred to as the "Non-
Defaulting Party") shall have the right to require the Defaulting
Party, at the latter's expense, to cure such breach, and/or seek
damages, by providing notice or presenting a claim to the Defaulting
Party, reasonably specifying therein the particulars of the breach.
The foregoing remedies shall be available to the Non-Defaulting
Party only if the demand therefor is presented in writing to the
Defaulting Party within three (3) years from the Closing Date except
that the remedy for a breach of the SELLERS' representation and
warrant in Section 5 (h) shall be available only if the demand
therefor is presented to the Defaulting Party in writing together with
schedules and to substantiate such demand, within six (6) months
from the Closing Date.6
On June 2, 2000, RCBC deposited the stipulated downpayment
amount in an escrow account after which it was given full
management and operational control of Bankard. June 2, 2000 is
also considered by the parties as the Closing Date referred to in the
SPA.
Thereafter, the parties executed an Amendment to Share Purchase
Agreement (ASPA) dated September 19, 2000.7 Its paragraph 2(e)
provided that:
2. Notwithstanding any provisions to the contrary in the Share
Purchase Agreement and/or any agreement, instrument or document
entered into or executed by the Parties in relation thereto (the
"Related Agreements"), the Parties hereby agree that:
xxx
e) Notwithstanding the provisions of Sec. 7 of the Share Purchase
Agreement to the contrary, the remedy for a breach of the
SELLERS' representation and warranty in Section 5(h) of the
Share Purchase Agreement shall be available if the demand
therefor is presented to the SELLERS in writing together with
schedules and data to substantiate such demand, on or before 31
December 2000. (Emphasis added.)
Sometime in September 2000, RCBC had Bankard's accounts
audited, creating for the purpose an audit team led by a certain
Rubio, the Vice-President for Finance of RCBC at the time. Rubio's
conclusion was that the warranty, as contained in Section 5(h) of the
SPA (simply Sec. 5[h] hereinafter), was correct.
On December 28, 2000, RCBC paid the balance of the contract price.
The corresponding deeds of sale for the shares in question were
executed in January 2001.
Thereafter, in a letter of May 5, 2003, RCBC informed petitioners of
its having overpaid the purchase price of the subject shares, claiming
that there was an overstatement of valuation of accounts amounting
to PhP 478 million, resulting in the overpayment of over PhP 616
million. Thus, RCBC claimed that petitioners violated their warranty,
as sellers, embodied in Sec. 5(g) of the SPA (Sec. 5[g] hereinafter).
Following unsuccessful attempts at settlement, RCBC, in accordance
with Sec. 10 of the SPA, filed a Request for Arbitration dated May
12, 20048 with the ICC-ICA. In the request, RCBC charged Bankard
with deviating from, contravening and not following generally
accepted accounting principles and practices in maintaining their
books. Due to these improper accounting practices, RCBC alleged
that both the audited and unaudited financial statements of Bankard
prior to the stock purchase were far from fair and accurate and,
hence, violated the representations and warranties of petitioners in
the SPA. Per RCBC, its overpayment amounted to PhP 556 million.
It thus prayed for the rescission of the SPA, restitution of the
purchase price, payment of actual damages in the amount of PhP
573,132,110, legal interest on the purchase price until actual
restitution, moral damages, and litigation and attorney's fees. As
alternative to rescission and restitution, RCBC prayed for damages in
the amount of at least PhP 809,796,092 plus legal interest.
To the Request for Arbitration, petitioners filed an Answer dated
July 28, 2004,9 denying RCBC's inculpatory averments and setting
up the following affirmative allegations: the period for filing of the
asserted claim had already lapsed by force of Sec. 7 of the SPA;
RCBC is not entitled to rescission having had ample opportunity and
reasonable time to file a claim against petitioners; RCBC is not
entitled to its alternative prayer of damages, being guilty of laches
and failing to set out the details of the breach as required under Sec.
7.
Arbitration in the ICC-ICA proceeded after the formation of the
arbitration tribunal consisting of retired Justice Santiago M.
Kapunan, nominated by petitioners; Neil Kaplan, RCBC's nominee;
and Sir Ian Barker, appointed by the ICC-ICA.
After drawn out proceedings with each party alleging deviation and
non-compliance by the other with arbitration rules, the tribunal, with
Justice Kapunan dissenting, rendered a Partial Award dated
September 27, 2007,10 the dispositive portion of which states:
15 AWARD AND DIRECTIONS
15.1 The Tribunal makes the following declarations by way of
Partial Award:
(a) The Claimant's claim is not time-barred under the provisions of
this SPA.
(b) The Claimant is not estopped by its conduct or the equitable
doctrine of laches from pursuing its claim.
(c) As detailed in the Partial Award, the Claimant has established the
following breaches by the Respondents of clause 5(g) of the SPA:
i) the assets, revenue and net worth of Bankard were overstated by
reason of its policy on and recognition of Late Payment Fees;
ii) reported receivables were higher than their realizable values by
reason of the 'bucketing' method, thus overstating Bankard's assets;
andcralawlibrary
iii) the relevant Bankard statements were inadequate and misleading
in that their disclosures caused readers to be misinformed about
Bankard's accounting policies on revenue and receivables.
(d) Subject to proof of loss the Claimant is entitled to damages for
the foregoing breaches.
(e) The Claimant is not entitled to rescission of the SPA.
(f) All other issues, including any issue relating to costs, will be dealt
with in a further or final award.
15.2 A further Procedural Order will be necessary subsequent to the
delivery of this Partial Award to deal with the determination of
quantum and in particular, whether there should be an Expert
appointed by the Tribunal under Article 20(4) of the ICC Rules to
assist the Tribunal in this regard.
15.3 This Award is delivered by a majority of the Tribunal (Sir Ian
Barker and Mr. Kaplan). Justice Kapunan is unable to agree with the
majority's conclusion on the claim of estoppel brought by the
respondents.
On the matter of prescription, the tribunal held that RCBC's claim is
not time-barred, the claim properly falling under the contemplation
of Sec. 5(g) and not Sec. 5(h). As such, the tribunal concluded,
RCBC's claim was filed within the three (3)-year period under Sec.
5(g) and that the six (6)-month period under Sec. 5(h) did not apply.
The tribunal also exonerated RCBC from laches, the latter having
sought relief within the three (3)-year period prescribed in the SPA.
On the matter of estoppel suggested in petitioners' answer, the
tribunal stated in par. 10.27 of the Partial Award the following:
10.27 Clearly, there has to be both an admission or representation by
(in this case) the Claimant [RCBC], plus reliance upon it by (in this
case) the Respondents [herein petitioners]. The Tribunal cannot find
as proved any admission/representation that the Claimant was
abandoning a 5(g) claim, any reliance by the Respondents on an
admission, and any detriment to the Respondents such as would
entitle them to have the Claimant deprived of the benefit of clause
5(g). These aspects of the claim for estoppels are rejected. 11
Notably, the tribunal considered the rescission of the SPA and ASPA
as impracticable and "totally out of the question." 12
In his Dissenting Opinion13 which he submitted to and which was
received on September 24, 2007 by the ICC-ICA, Justice Kapunan
stated the observation that RCBC's claim is time-barred, falling as
such claim did under Sec. 5(h), which prescribes a comparatively
shorter prescriptive period, not 5(g) as held by the majority of the
tribunal, to wit:
Claimant admits that the Claim is for recovery of P431 million on
account of alleged "overvaluation of the net worth of Bankard,"
allegedly for "improper accounting practices" resulting in "its book
value per share as of 31 December 1999 [being] overstated."
Claimant's witness, Dean Echanis asserts that "the inadequate
provisioning for Bankard's doubtful accounts result[ed] in an
overstatement of its December 31, 1999 total assets and net worth of
by [sic] least P418.2 million."
In addition, Claimant's demand letter addressed to the Respondents
alleged that "we overpaid for the Shares to the extent of the impact
of the said overstatement on the Book Value per share".
These circumstances establish beyond dispute that the Claim is based
on the alleged overstatement of the 1999 net worth of Bankard,
which the parties relied on in setting the purchase price of the shares.
Moreover, it is clear that there was an overstatement because of
"improper accounting practices" which led Claimant to overpay for
the shares.
Ultimately, the Claim is one for recovery of overpayment in the
purchase price of the shares. x x x
As to the issue of estoppel, Justice Kapunan stated:
Moreover, Mr. Rubio's findings merely corroborated the disclosures
made in the Information Memorandum that Claimant received from
the Respondents prior to the execution of the SPA. In this
connection, I note that Bankard's policy on provisioning and setting
of allowances using the Bucketed Method and income recognition
from AR/Principal, AR/Interest and AR/LPFs were disclosed in the
Information Memorandum. Thus, these alleged improper accounting
practices were known to the Claimant even prior to the execution of
the SPA.
Thus, when Claimant paid the balance of the purchase price, it did so
with full knowledge of these accounting practices of Bankard that it
now assails. By paying the balance of the purchase price without
taking exception or objecting to the accounting practices disclosed
through Mr. Rubio' s review and the Information Memorandum,
Claimant is deemed to have accepted such practices as correctly
reporting the 1999 net worth. x x x
xxx
As last point, I note that my colleagues invoke a principle that for
estoppels to apply there must be positive indication that the right to
sue was waived. I am of the view that there is no such principle
under Philippine law. What is applicable is the holding in Knecht
and in Coca - Cola that prior knowledge of an unfavorable fact is
binding on the party who has such knowledge; "when the purchaser
proceeds to make investigations by himself, and the vendor does
nothing to prevent such investigation from being as complete as the
former might wish, the purchaser cannot later allege that the vendor
made false representations to him" (Cf. Songco v. Sellner, 37 Phil
254 citations omitted).
Applied to this case, the Claimant cannot seek relief on the basis that
when it paid the purchase price in December 2000, it was unaware
that the accounting practices that went into the reporting of the 1999
net worth as amounting to P1,387,275,847 were not in conformity
with GAAP [generally accepted accounting principles]. (Emphasis
added.)
On October 26, 2007, RCBC filed with the RTC a Motion to
Confirm Partial Award. On the same day, petitioners countered with
a Motion to Vacate the Partial Award. On November 9, 2007,
petitioners again filed a Motion to Suspend and Inhibit Barker and
Kaplan.
On January 8, 2008, the RTC issued the first assailed order
confirming the Partial Award and denying the adverted separate
motions to vacate and to suspend and inhibit. From this order,
petitioners sought reconsideration, but their motion was denied by
the RTC in the equally assailed second order of March 17, 2008.
From the assailed orders, petitioners came directly to this Court
through this Petition for Review .
The Issues
This petition seeks the review, reversal and setting aside of the
orders Annexes A and B and, in lieu of them, it seeks judgment
vacating the arbitrators' liability award, Annex C, on these grounds:
(a) The trial court acted contrary to law and judicial authority in
refusing to vacate the arbitral award, notwithstanding it was rendered
in plain disregard of the parties' contract and applicable Philippine
law, under which the claim in arbitration was indubitably time-
barred.
(b) The trial court acted contrary to law and judicial authority in
refusing to vacate and in confirming the arbitral award,
notwithstanding that the arbitrators had plainly and admittedly failed
to accord petitioners' due process by denying them a hearing on the
basic factual matter upon which their liability is predicated.
(c) The trial court committed grave error in confirming the
arbitrators' award, which held petitioners-sellers liable for an alleged
improper recording of accounts, allegedly affecting the value of the
shares they sold, notwithstanding that the respondent-buyer knew
before contracting that the accounts were kept in the manner
complained of, and in fact ratified and adopted the questioned
accounting practice and policies.14
The Court's Ruling
The petition must be denied.
On Procedural Misstep of Direct Appeal to This Court
As earlier recited, the ICC-ICA's Partial Award dated September 27,
2007 was confirmed by the RTC in its first assailed order of January
8, 2008. Thereafter, the RTC, by order of March 17, 2008, denied
petitioners' motion for reconsideration. Therefrom, petitioners came
directly to this Court on a Petition for Review under Rule 45 of the
Rules of Court.
This is a procedural miscue for petitioners who erroneously bypassed
the Court of Appeals (CA) in pursuit of its appeal. While this
procedural gaffe has not been raised by RCBC, still we would be
remiss in not pointing out the proper mode of appeal from a decision
of the RTC confirming, vacating, setting aside, modifying, or
correcting an arbitral award.
Rule 45 is not the remedy available to petitioners as the proper mode
of appeal assailing the decision of the RTC confirming as arbitral
award is an appeal before the CA pursuant to Sec. 46 of Republic
Act No. (RA) 9285, otherwise known as the Alternative Dispute
Resolution Act of 2004, or completely, 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, promulgated on April 2, 2004 and became
effective on April 28, 2004 after its publication on April 13, 2004.
In Korea Technologies Co., Ltd v. Lerma, we explained, inter alia,
that the RTC decision of an assailed arbitral award is appealable to
the CA and may further be appealed to this Court, thus:
Sec. 46 of RA 9285 provides for an appeal before the CA as the
remedy of an aggrieved party in cases where the RTC sets aside,
rejects, vacates, modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or 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 and procedure to
be promulgated by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court
to post a 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.
Thereafter, the CA decision may further be appealed or reviewed
before this Court through a Petition for Review under Rule 45 of the
Rules of Court.15
It is clear from the factual antecedents that RA 9285 applies to the
instant case. This law was already effective at the time the arbitral
proceedings were commenced by RCBC through a request for
arbitration filed before the ICC-ICA on May 12, 2004. Besides, the
assailed confirmation order of the RTC was issued on March 17,
2008. Thus, petitioners clearly took the wrong mode of appeal and
the instant petition can be outright rejected and dismissed.
Even if we entertain the petition, the outcome will be the same.
The Court Will Not Overturn an Arbitral Award
Unless It Was Made in Manifest Disregard of the Law
In Asset Privatization Trust v. Court of Appeals,16 the Court passed
on similar issues as the ones tendered in the instant petition. In that
case, the arbitration committee issued an arbitral award which the
trial court, upon due proceedings, confirmed despite the opposition
of the losing party. Motions for reconsideration by the losing party
were denied. An appeal interposed by the losing party to the CA was
denied due course. On appeal to this Court, we established the
parameters by which an arbitral award may be set aside, to wit:
As a rule, the award of an arbitrator cannot be set aside for mere
errors of judgment either as to the law or as to the facts. Courts
are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the
arbitrators. They will not review the findings of law and fact
contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would
make an award the commencement, not the end, of litigation.
Errors of law and fact, or an erroneous decision of matters
submitted to the judgment of the arbitrators, are insufficient to
invalidate an award fairly and honestly made. Judicial review of
an arbitration is, thus, more limited than judicial review of a
trial.
Nonetheless, the arbitrators' awards is not absolute and without
exceptions. The arbitrators cannot resolve issues beyond the scope of
the submission agreement. The parties to such an agreement are
bound by the arbitrators' award only to the extent and in the manner
prescribed by the contract and only if the award is rendered in
conformity thereto. Thus, Sections 24 and 25 of the Arbitration Law
provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038, 2039 and
2040 of the Civil Code applicable to compromises and arbitration are
attendant, the arbitration award may also be annulled.
xxx
Finally, it should be stressed that while a court is precluded from
overturning an award for errors in determination of factual issues,
nevertheless, if an examination of the record reveals no support
whatever for the arbitrators' determinations, their award must be
vacated. In the same manner, an award must be vacated if it was
made in "manifest disregard of the law."17 (Emphasis supplied.)
Following Asset Privatization Trust, errors in law and fact would not
generally justify the reversal of an arbitral award. A party asking for
the vacation of an arbitral award must show that any of the grounds
for vacating, rescinding, or modifying an award are present or that
the arbitral award was made in manifest disregard of the law.
Otherwise, the Court is duty-bound to uphold an arbitral award.
The instant petition dwells on the alleged manifest disregard of the
law by the ICC-ICA.
The US case of Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Jaros18 expounded on the phrase "manifest disregard of the law" in
the following wise:
This court has emphasized that manifest disregard of the law is a
very narrow standard of review. Anaconda Co. v. District Lodge No.
27, 693 F.2d 35 (6th Cir.1982). A mere error in interpretation or
application of the law is insufficient. Anaconda, 693 F.2d at 37-38.
Rather, the decision must fly in the face of clearly established legal
precedent. When faced with questions of law, an arbitration panel
does not act in manifest disregard of the law unless (1) the applicable
legal principle is clearly defined and not subject to reasonable
debate; and (2) the arbitrators refused to heed that legal principle.
Thus, to justify the vacation of an arbitral award on account of
"manifest disregard of the law," the arbiter's findings must clearly
and unequivocally violate an established legal precedent. Anything
less would not suffice.
In the present case, petitioners, in a bid to establish that the arbitral
award was issued in manifest disregard of the law, allege that the
Partial Award violated the principles of prescription, due process,
and estoppel. A review of petitioners' arguments would, however,
show that their arguments are bereft of merit. Thus, the Partial
Award dated September 27, 2007 cannot be vacated.
RCBC's Claim Is Not Time-Barred
Petitioners argue that RCBC's claim under Sec. 5(g) is based on
overvaluation of Bankard's revenues, assets, and net worth, hence,
for price reduction falling under Sec. 5(h), in which case it was
belatedly filed, for RCBC presented the claim to petitioners on May
5, 2003, when the period for presenting it under Sec. 5(h) expired on
December 31, 2000. As a counterpoint, RCBC asserts that its claim
clearly comes under Sec. 5(g) in relation to Sec. 7 which thus gave it
three (3) years from the closing date of June 2, 2000, or until June 1,
2003, within which to make its claim. RCBC contends having acted
within the required period, having presented its claim-demand on
May 5, 2003.
To make clear the issue at hand, we highlight the pertinent portions
of Secs. 5(g), 5(h), and 7 bearing on what petitioners warranted
relative to the financial condition of Bankard and the remedies
available to RCBC in case of breach of warranty:
g. The audited financial statements of Bankard for the three (3)
fiscal years ended December 31, 1997, 1998 and 1999, and the
unaudited financial statements for the first quarter ended 31
March 2000, are fair and accurate, and complete in all material
respects, and have been prepared in accordance with generally
accepted accounting principles consistently followed throughout
the period indicated and:
i) the balance sheet of Bankard as of 31 December 1999, as
prepared and certified by SGV & Co. ("SGV"), and the unaudited
balance sheet for the first quarter ended 31 March 2000, present a
fair and accurate statement as of those dates, of Bankard's
financial condition and of all its assets and liabilities, and is
complete in all material respects; andcralawlibrary
ii) the statements of Bankard's profit and loss accounts for the
fiscal years 1996 to 1999, as prepared and certified by SGV, and
the unaudited profit and loss accounts for the first quarter ended
31 March 2000, fairly and accurately present the results of the
operations of Bankard for the periods indicated, and are complete
in all material respects.
h. Except as disclosed in the Disclosures, and except to the extent set
forth or reserved in the audited financial statements of Bankard as of
31 December 1999 and its unaudited financial statements for the first
quarter ended 31 March 2000, Bankard, as of such dates and up to
31 May 2000, had and shall have no liabilities, omissions or
mistakes in its records which will have a material adverse effect
on the net worth or financial condition of Bankard to the extent
of more than One Hundred Million Pesos (P 100,000,000.00) in
the aggregate. In the event such material adverse effect on the net
worth or financial condition of Bankard exceeds One Hundred
Million Pesos (P 100,000,000.00), the Purchase Price shall be
reduced in accordance with the following formula:
xxx
Section 7. Remedies for Breach of Warranties
If any of the representations and warranties of any or all of the
SELLERS or the BUYER (the "Defaulting Party") contained in
Sections 5 and 6 shall be found to be untrue when made and/or as of
the Closing Date, the other party, i.e., the BUYER if the Defaulting
is any of the SELLERS and the SELLERS if the Defaulting Party is
the BUYER (hereinafter referred to as the "Non-Defaulting
Party") shall have the right to require the Defaulting Party, at the
latter's expense, to cure such breach, and/or seek damages, by
providing notice or presenting a claim to the Defaulting Party,
reasonably specifying therein the particulars of the breach. The
foregoing remedies shall be available to the Non-Defaulting Party
only if the demand therefor is presented in writing to the
Defaulting Party within three (3) years from the Closing Date,
except that the remedy for a breach of the SELLERS'
representation and warranty in Section 5 (h) shall be available
only if the demand therefor is presented to the Defaulting Party in
writing together with schedules and data to substantiate such
demand, within six (6) months from the Closing Date. (Emphasis
supplied.)
Before we address the issue put forward by petitioners, there is a
necessity to determine the nature and application of the reliefs
provided under Sec. 5(g) and Sec. 5(h) in conjunction with Sec. 7,
thus:
(1) The relief under Sec. 5(h) is specifically for price reduction as
said section explicitly states that the "Purchase Price shall be reduced
in accordance with the following formula x x x." In addition, Sec. 7
gives the aggrieved party the right to ask damages based on the
stipulation that the non-defaulting party "shall have the right to
require the Defaulting Party, at the latter's expense, to cure such
breach and/or seek damages."
On the other hand, the remedy under Sec. 5(g) in conjunction with
Sec. 7 can include specific performance, damages, and other
reliefs excluding price reduction.
(2) Sec. 5(g) warranty covers the audited financial statements (AFS)
for the three (3) years ending December 31, 1997 to 1999 and the
unaudited financial statements (UFS) for the first quarter ending
March 31, 2000. On the other hand, the Sec. 5(h) warranty refers
only to the AFS for the year ending December 31, 1999 and the UFS
up to May 31, 2000. It is undenied that Sec. 5(h) refers to price
reduction as it covers "only the most up-to-date audited and
unaudited financial statements upon which the price must have been
based."19
(3) Under Sec. 5(h), the responsibility of petitioners for its warranty
shall exclude the disclosures and reservations made in AFS of
Bankard as of December 31, 1999 and its UFS up to May 31, 2000.
No such exclusions were made under Sec. 5(g) with respect to the
warranty of petitioners in the AFS and UFS of Bankard.
(4) Sec. 5(h) gives relief only if there is material adverse effect in the
net worth in excess of PhP 100 million and it provides a formula for
price reduction.20 On the other hand, Sec. 5(g) can be the basis for
remedies like specific performance, damages, and other reliefs,
except price reduction, even if the overvaluation is less or above PhP
100 million and there is no formula for computation of damages.
(5) Under Sec. 7, the aggrieved party shall present its written demand
to the defaulting party within three (3) years from closing date.
Under Sec. 5(h), the written demand shall be presented within six (6)
months from closing date. In accordance with par. 2(c) of the ASPA,
the deadline to file the demand under Sec. 5(h) was extended to
December 31, 2000.
From the above determination, it becomes clear that the aggrieved
party is entitled to two (2) separate alternative remedies under Secs.
5 and 7 of the SPA, thus:
1. A claim for price reduction under Sec. 5(h) and/or damages based
on the breach of warranty by Bankard on the absence of liabilities,
omissions and mistakes on the financial statements as of 31
December 1999 and the UFS as of 31 May 2000, provided that the
material adverse effect on the net worth exceeds PhP 100M and the
written demand is presented within six (6) months from closing date
(extended to 31 December 2000); andcralawlibrary
2. An action to cure the breach like specific performance and/or
damages under Sec. 5(g) based on Bankard's breach of warranty
involving its AFS for the three (3) fiscal years ending 31 December
1997, 1998, and 1999 and the UFS for the first quarter ending 31
March 2000 provided that the written demand shall be presented
within three (3) years from closing date.
Has RCBC the option to choose between Sec. 5(g) or Sec. 5(h)?cra
lawlibrary
The answer is yes. Sec. 5 and Sec. 7 are clear that it is discretionary
on the aggrieved parties to avail themselves of any remedy
mentioned above. They may choose one and dispense with the other.
Of course, the relief for price reduction under Sec. 5(h) will have to
conform to the prerequisites and time frame of six (6) months;
otherwise, it is waived.
Preliminarily, petitioners' basic posture that RCBC's claim is for the
recovery of overpayment is specious. The records show that in
its Request for Arbitration dated May 12, 2004, RCBC prayed for the
rescission of the SPA, restitution of the whole purchase price, and
damages not for reduction of price or for the return of any
overpayment. Even in its May 5, 2000 letter, 21 RCBC did not ask for
the recovery of any overpayment or reduction of price, merely
stating in it that the accounts of Bankard, as reflected in its AFS for
1999, were overstated which, necessarily, resulted in an overpayment
situation. RCBC was emphatic and unequivocal that petitioners
violated their warranty covered by Sec. 5(g) of the SPA.
It is thus evident that RCBC did not avail itself of the option under
Sec. 5(h), i.e., for price reduction or the return of any overpayment
arising from the overvaluation of Bankard's financial condition.
Clearly, RCBC invoked Sec. 5(g) to claim damages from petitioners
which is one of the alternative reliefs granted under Sec. 7 in
addition to rescission and restitution of purchase price.
Petitioners do not deny that RCBC formally filed its claim under
Sec. 5(g) which is anchored on the material overstatement or
overvaluation of Bankard's revenues, assets, and net worth and,
hence, the overstatement of the purchase price. They, however, assert
that such claim for overpayment is actually a claim under Sec. 5(h)
of the SPA for price reduction which it forfeited after December 31,
2000.
We cannot sustain petitioners' position.
It cannot be disputed that an overstatement or overvaluation of
Bankard's financial condition as of closing date translates into a
misrepresentation not only of the accuracy and truthfulness of the
financial statements under Sec. 5(g), but also as to Bankard's actual
net worth mentioned in Sec. 5(h). Overvaluation presupposes
mistakes in the entries in the financial statements and amounts to a
breach of petitioners' representations and warranties under Sec. 5.
Consequently, such error in the financial statements would impact on
the figure representing the net worth of Bankard as of closing date.
An overvaluation means that the financial condition of Bankard as of
closing date, i.e., June 2, 2000, is overstated, a situation that will
definitely result in a breach of EPCIB's representations and
warranties.
A scrutiny of Sec. 5(g) and Sec. 5(h) in relation to Sec. 7 of the SPA
would indicate the following remedies available to RCBC should it
be discovered, as of closing date, that there is overvaluation which
will constitute breach of the warranty clause under either Sec. 5(g) or
(h), to wit:
(1) An overvaluation of Bankard's actual financial condition as of
closing date taints the veracity and accuracy of the AFS for 1997,
1998, and 1999 and the UFS for the first quarter of 2000 and is an
actionable breach of petitioners' warranties under Sec. 5(g).
(2) An overvaluation of Bankard's financial condition as of May 31,
2000, encompassing the warranted financial condition as of
December 31, 1999 through the AFS for 1999 and as of March 31,
2000 through the UFS for the first quarter of 2000, is a breach of
petitioners' representations and warranties under Sec. 5(h).
Thus, RCBC has two distinct alternative remedies in case of an
overvaluation of Bankard's financial condition. It may invoke Sec.
5(h) when the conditions of the threshold aggregate overvaluation
and the claim made within the six-month time-bar are present. In the
alternative, it may invoke Sec. 5(g) when it finds that a claim for
"curing the breach" and/or damages will be more advantageous to its
interests provided it is filed within three (3) years from closing date.
Since it has two remedies, RCBC may opt to exercise either one. Of
course, the exercise of either one will preclude the other.
Moreover, the language employed in Sec. 5(g) and Sec. 5(h) is clear
and bereft of any ambiguity. The SPA's stipulations reveal that the
non-use or waiver of Sec. 5(h) does not preclude RCBC from
availing itself of the second relief under Sec. 5(g). Article 1370 of
the Civil Code is explicit that "if terms of a contract are clear and
leave no doubt upon the intention of the contracting parties the literal
meaning of its stipulations shall control." Since the terms of a
contract have the force of law between the parties, 22 then the parties
must respect and strictly conform to it. Lastly, it is a long held
cardinal rule that when the terms of an agreement are reduced to
writing, it is deemed to contain all the terms agreed upon and no
evidence of such terms can be admitted other than the contents of the
agreement itself.23 Since the SPA is unambiguous, and petitioners
failed to adduce evidence to the contrary, then they are legally bound
to comply with it.
Petitioners agreed ultimately to the stipulation that:
Each of the representations and warranties of the SELLERS is
deemed to be a separate representation and warranty, and the
BUYER has placed complete reliance thereon in agreeing to the
Purchase Price and in entering into this Agreement. The
representations and warranties of the SELLERS shall be correct as of
the date of this Agreement and as of the Closing Date with the same
force and effect as though such representations and warranties had
been made as of the Closing Date.24 (Emphasis supplied.)
The Court sustains the finding in the Partial Award that Sec. 5(g) of
the SPA is a free standing warranty and not constricted by Sec. 5(h)
of the said agreement.
Upon the foregoing premises and in the light of the undisputed facts
on record, RCBC's claim for rescission of the SPA and damages due
to overvaluation of Bankard's accounts was properly for a breach of
the warranty under Sec. 5(g) and was not time-barred. To repeat,
RCBC presented its written claim on May 5, 2003, or a little less
than a month before closing date, well within the three (3)-year
prescriptive period provided under Sec. 7 for the exercise of the right
provided under Sec. 5(g).
Petitioners bemoan the fact that "the arbitrators' liability award (a)
disregarded the 6-month contractual limitation for RCBC's
'overprice' claim, and [b] substituted in its place the 3-year limitation
under the contract for other claims," 25 adopting in that regard the
interpretation of the SPA made by arbitral tribunal member, retired
Justice Kapunan, in his Dissenting Opinion, in which he asserted:
Ultimately, the Claim is one for recovery of overpayment in the
purchase price of the shares. And it is in this context, that I
respectfully submit that Section 5(h) and not Section 5(g), applies to
the present controversy.26
xxx
True, without Section 5(h), the Claim for price recovery would fall
under Section 5(g). The recovery of the pecuniary loss of the
Claimant in the form of the excess price paid would be in the nature
of a claim for actual damages by way of compensation. In that
situation, all the accounts in the 1999 financial statements would be
the subject of the warranty in Section 5(g).
However, since the parties explicitly included Section 5(h) in their
SPA, which assures the Claimant that there were no "omissions or
mistakes in the records" that would misstate the 1999 net worth
account, I am left with no other conclusion but that the accuracy
of the net worth was the subject of the warranty in Section 5(h),
while the accuracy or correctness of the other accounts that did
not bear on, or affect Bankard's net worth, were guaranteed by
Section 5(g).
xxx
This manner of reconciling the two provisions is consistent with the
principle in Rule 130, Section 12 of the Rules of Court that "when a
general and a particular provision are inconsistent, the latter is
paramount to the former' [so] a particular intent will control a general
one that is inconsistent with it." This is also consistent with existing
doctrines on statutory construction, the application of which is
illustrated in the case of Commissioner of Customs v. Court of Tax
Appeals, GR No. L-41861, dated March 23, 1987 x x x.
xxx
The Claim is for recovery of the excess price by way of actual
damages.27 x x x (Emphasis supplied.)
Justice Kapunan noted that without Sec. 5(h), RCBC's claim would
fall under Sec. 5(g), impliedly admitting that both provisions could
very well cover RCBC's claim, except that Sec. 5(h) excludes the
situation contemplated in it from the general terms of Sec. 5(g).
Such view is incorrect.
While it is true that Sec. 5(h), as couched, is a warranty on the
accuracy of the Bankard's net worth while Sec. 5(g), as also couched,
is a warranty on the veracity, accuracy, and completeness of the AFS
in all material respects as prepared in accordance with generally
accepted accounting principles consistently followed throughout the
period audited, yet both warranties boil down to the same thing and
stem from the same accounts as summarized in the AFS. Since
the net worth is the balance of Bankard's assets less its liabilities,
it necessarily includes all the accounts under the AFS. In
short, there are no accounts in the AFS that do not bear on the
net worth of Bankard. Moreover, as earlier elucidated, any
overvaluation of Bankard's net worth is necessarily a
misrepresentation of the veracity, accuracy, and completeness of the
AFS and also a breach of the warranty under Sec. 5(g). Thus, the
subject of the warranty in Sec. 5(h) is also covered by the warranty
in Sec. 5(g), and Sec. 5(h) cannot exclude such breach from the
ambit of Sec. 5(g). There is no need to rely on Sec. 12, Rule 130 of
the Rules of Court for both Sec. 5(g) and Sec. 5(h) as alternative
remedies are of equal footing and one need not categorize one
section as a general provision and the other a particular provision.
More importantly, a scrutiny of the four corners of the SPA does not
explicitly reveal any stipulation nor even impliedly that the parties
intended to limit the scope of the warranty in Sec. 5(g) or gave
priority to Sec. 5(h) over Sec. 5(g).
The arbitral tribunal did not find any legal basis in the SPA that Sec.
5(h) "somehow cuts down" the scope of Sec. 5(g), thus:
9.10 In the opinion of the Tribunal, there is nothing in the wording
used in the SPA to give priority to one warranty over the other.
There is nothing in the wording used to indicate that the parties
intended to limit the scope of the warranty in 5(g). If it be
contended that, on a true construction of the two warranties, 5(h)
somehow cuts down the scope of 5(g), the Tribunal can find no
justification for such conclusion on the wording used.
Furthermore, the Tribunal is of the view that very clear words would
be needed to cut down the scope of the 5(g) warranty. 28
The Court upholds the conclusion of the tribunal and rules that the
claim of RCBC under Sec. 5(g) is not time-barred.
Petitioners Were Not Denied Due Process
Petitioners impute on RCBC the act of creating summaries of the
accounts of Bankard which "in turn were used by its experts to
conclude that Bankard improperly recorded its receivables and
committed material deviations from GAAP requirements." 29 Later,
petitioners would assert that "the arbitrators' partial award admitted
and used the Summaries as evidence, and held on the basis of the
'information' contained in them that petitioners were in breach of
their warranty in GAAP compliance."
To petitioners, the ICC-ICA's use of such summaries but without
presenting the source documents violates their right to due process.
Pressing the point, petitioners had moved, but to no avail, for the
exclusion of the said summaries. Petitioners allege that they had
reserved the right to cross-examine the witnesses of RCBC who
testified on the summaries, pending the resolution of their motion to
exclude. But, according to them, they were effectively denied the
right to cross-examine RCBC's witnesses when the ICC-ICA
admitted the summaries of RCBC as evidence.
Petitioners' position is bereft of merit.
Anent the use but non-presentation of the source documents as the
jumping board for a claim of denial of due process, petitioners
cite Compania Maritima v. Allied Free Worker's Union.30 It may be
stated, however, that such case is not on all fours with the instant
case and, therefore, cannot be applied here considering that it does
not involve an administrative body exercising quasi-judicial function
but rather the regular court.
In a catena of cases, we have ruled that "[t]he essence of due process
is the opportunity to be heard. What the law prohibits is not the
absence of previous notice but the absolute absence thereof and the
lack of opportunity to be heard."31
We also explained in Lastimoso v. Asayo that "[d]ue process in an
administrative context does not require trial type proceedings similar
to those in courts of justice. Where an opportunity to be heard either
through oral arguments or through pleadings is accorded, there is no
denial of procedural due process."32
Were petitioners afforded the opportunity to refute the summaries
and pieces of evidence submitted by RCBC which became the bases
of the experts' opinion?cra lawlibrary
The answer is in the affirmative.
We recall the events that culminated in the issuance of the
challenged Partial Award, thus:
On May 17, 2004, the ICC-ICA received the Request for
Arbitration dated May 12, 2004 from RCBC seeking rescission of
the SPA and restitution of all the amounts paid by RCBC to
petitioners, with actual and moral damages, interest, and costs of
suit.
On August 8, 2004, petitioners filed an Answer to the Request for
Arbitration dated July 28, 2004, setting up a counterclaim for USD
300,000 for actual and exemplary damages.
RCBC filed its Reply33 dated August 31, 2004 to petitioners' Answer
to the Request for Arbitration.
On October 4, 2004, the parties entered into the Terms of
Reference.34 At the same time, the chairperson of the arbitral tribunal
issued a provisional timetable35 for the arbitration.
On October 25, 2004, as previously agreed upon in the meeting on
October 4, 2004, petitioners filed a Motion to Dismiss 36 while RCBC
filed a "Claimant's Position Paper (Re: [Petitioners'] Assertion that
RCBC CAPITAL CORPORATION's Present Claim Is Time
Barred)."37
Then, the tribunal issued Procedural Order No. 1 dated January 12,
2005,38 denying the motion to dismiss and setting the initial hearing
of the case on April 11, 2005.
In a letter dated February 9, 2005, 39 petitioners requested that the
tribunal direct RCBC to produce certain documents. At the same
time, petitioners sought the postponement of the hearing on April 11,
2005 to March 21, 2005, in light of their own request.
On February 11, 2005, petitioners received RCBC's brief of evidence
and supporting documentation in accordance with the provisional
timetable.40 In the brief of evidence, RCBC provided summaries of
the accounts of Bankard, which petitioners now question.
Later, in a letter dated February 14, 2005, 41 petitioners complained to
the tribunal with regard to their lack of access to RCBC's external
auditor. Petitioners sought an audit by an accounting firm of the
records of Bankard with respect to the claims of RCBC. By virtue of
such requests, petitioners also sought a rescheduling of the
provisional timetable, despite their earlier assurance to the tribunal
that if they received the documents that they requested on February
9, 2005 on or before February 21, 2005, they would abide by the
provisional timetable.
Thereafter, the tribunal issued Procedural Order No. 2 dated
February 18, 2005,42 in which it allowed the discovery and inspection
of the documents requested by petitioners that were also scheduled
on February 18, 2005. The request for an audit of Bankard's accounts
was denied without prejudice to the conduct of such audit during the
course of the hearings. Consequently, the tribunal amended the
provisional timetable, extending the deadline for petitioners to file
their brief of evidence and documents to March 21, 2005. The date
of the initial hearing, however, remained on April 11, 2005.
On February 18, 2005, petitioners were furnished the documents that
they requested RCBC.43 The parties also agreed to meet again on
February 23, 2005 to provide petitioners with a "walk-through" of
Bankard's Statistical Analysis System and to provide petitioners with
a soft copy of all of Bankard's cardholders. 44
During the February 23, 2005 meeting, EPCIB's
counsels/representatives were accompanied to the Bankard's Credit-
MIS Group. There, Bankard's representative, Amor Lazaro,
described and explained to petitioners' representatives the steps
involved in procuring and translating raw data on customer
transactions. Lazaro explained that Bankard captures cardholder
information and transactions through encoding or electronic data
capture. Thereafter, such data are transmitted to its main credit card
administration system. Such raw data are then sent to Bankard's
Information Technology Group. Using a proprietary software called
SAS, the raw data is then converted into SAS files which may be
viewed, handled, and converted into Excel files for reporting
purposes. During the walk-through, petitioners' representatives asked
questions which were answered in detail by Lazaro.
At the same time, another Bankard representative, Felix L.
Sincoñegue, accompanied two auditors/representatives of
petitioners to examine the journal vouchers and supporting
documents of Bankard consisting of several boxes. The auditors
randomly sifted through the boxes which they had earlier requested
to be inspected.
In addition, petitioners were furnished with an electronic copy of the
details of all cardholders, including relevant data for aging of
receivables for the years 2000 to 2003, as well as data containing
details of written-off accounts from 1999 to March 2000 contained in
compact discs.45
On March 4, 2005, petitioners sent a letter46 to the tribunal requesting
for a postponement of the April 11, 2005 hearing of the case.
Petitioners claim that they could not confirm the summaries prepared
by RCBC, considering that RCBC allegedly did not cooperate in
providing data that would facilitate their verification. Petitioners
specifically mentioned the following data: (1) list of names of
cardholders whose accounts are sources of data gathered or
calculated in the summaries; (2) references to the basic cardholder
documents from which such data were collected; and (3) access to
the underlying cardholder documents at a time and under conditions
mutually convenient to the parties. As regards the compact discs of
information provided to petitioners, it is claimed that such
information could not be accessed as the software necessary for the
handling of the data could not be made immediately available to
them.
In Procedural Order No. 3 dated March 11 2005, 47 the initial hearing
was moved to June 13 to 16, 2005, considering that petitioners failed
to pay the advance on costs of the tribunal.
On March 23, 2005, RCBC paid the balance of the advance on
costs.48
On April 22, 2005, petitioners sent the tribunal a letter, 49 requesting
for the postponement of the hearing scheduled on June 13 to 16,
2005 on the ground that they could not submit their witness'
statements due to the volume of data that they acquired from RCBC.
In a letter dated April 25, 2005, 50 petitioners demanded from RCBC
that they be allowed to examine the journal vouchers earlier made
available to them during the February 23, 2005 meeting. This
demand was answered by RCBC in a letter dated April 26,
2005,51 stating that such demand was being denied by virtue of
Procedural Order No. 2, in which it was ruled that further requests
for discovery would not be made except with leave of the
chairperson of the tribunal.
In Procedural Order No. 4, 52 the tribunal granted petitioners' request
for the postponement of the hearing on June 13, 2005 and
rescheduled it to November 21, 2005 in light of the pending motions
filed by EPCIB with the RTC in Makati City.
On July 29, 2005, the parties held a meeting wherein it was agreed
that petitioners would be provided with hard and soft copies of the
inventory of the journal vouchers earlier presented to its
representatives, while making the journal vouchers available to
petitioners for two weeks for examination and photocopying. 53
On September 2, 2005, petitioners applied for the postponement of
the November 21, 2005 hearing due to the following: (1) petitioners
had earlier filed a motion dated August 11, 2005 with the RTC, in
which the issue of whether the non-Filipino members of the tribunal
were illegally practicing law in the Philippines by hearing their case,
which was still pending; and (2) the gathering and processing of the
data and documents made available by RCBC would require 26
weeks.54 Such application was denied by the tribunal in Procedural
Order No. 5 dated September 16, 2005.55
On October 21, 2005, the tribunal issued Procedural Order No.
6,56 postponing the November 21, 2005 hearing by virtue of an order
issued by the RTC in Makati City directing the tribunal to reset the
hearing for April 21 and 24, 2006.
Thereafter, in a letter dated January 18, 2006, 57 petitioners wrote the
tribunal requesting that RCBC be directed to: (1) provide petitioners
with information identifying the journal vouchers and other
supporting documents that RCBC used to arrive at the figures set out
in the summaries and other relevant information necessary to enable
them to reconstruct and/or otherwise understand the figures or
amounts in each summary; and (2) submit to petitioners the
requested pieces of information as soon as these are or have become
available, or in any case not later than five days.
In response to such letter, RCBC addressed a letter dated January 31,
200658 to the tribunal claiming that the pieces of information that
petitioners requested are already known to petitioners considering
that RCBC merely maintained the systems that they inherited when it
bought Bankard from petitioners. RCBC added that the documents
that EPCIB originally transmitted to it when RCBC bought Bankard
were all being made available to petitioners; thus, any missing
supporting documents from these files were never transmitted to
them in the first place.
Later, petitioners sent to the tribunal a letter dated February 10,
2006,59 asking that it direct RCBC to provide petitioners with the
supporting documents that RCBC mentioned in its letter dated
January 31, 2006. Petitioners wrote that should RCBC fail to present
such documents, RCBC's summaries should be excluded from the
records.
In a letter dated March 10, 2006, 60 petitioners requested that they be
given an additional period of at least 47 days within which to submit
their evidence-in-chief with the corresponding request for the
cancellation of the hearing on April 24, 2006. Petitioners submit that
should such request be denied, RCBC's summaries should be
excluded from the records.
On April 6, 2006, petitioners filed their arbitration briefs and witness
statements. By way of reply, on April 17, 2006, RCBC submitted
Volumes IV and V of its exhibits and Volume II of its evidence-in-
chief.61
On April 18, 2006, petitioners requested the tribunal that they be
allowed to file rejoinder briefs, or otherwise exclude RCBC's reply
brief and witness statements.62 In this request, petitioners also
requested that the hearing set for April 24, 2006 be moved. These
requests were denied.
Consequently, on April 24 to 27, 2006, the arbitral tribunal
conducted hearings on the case.63
On December 4, 2006, petitioners submitted rejoinder affidavits,
raising new issues for the first time, to which RCBC submitted
Volume III of its evidence-in-chief by way of a reply.
On January 16, 2007, both parties simultaneously submitted their
memoranda. On January 26, 2007, both parties simultaneously filed
their reply to the other's memorandum.64
Thus, on September 27, 2007, the Partial Award was rendered by the
Tribunal.
Later, petitioners moved to vacate the said award before the RTC.
Such motion was denied by the trial court in the first assailed order
dated January 8, 2008. Petitioners then moved for a reconsideration
of such order, but their motion was also denied in the second assailed
order dated March 17, 2008.
The foregoing events unequivocally demonstrate ample opportunity
for petitioners to verify and examine RCBC's summaries, accounting
records, and reports. The pleadings reveal that RCBC granted
petitioners' requests for production of documents and accounting
records. More so, they had more than three (3) years to prepare for
their defense after RCBC's submission of its brief of evidence.
Finally, it must be emphasized that petitioners had the opportunity to
appeal the Partial Award to the RTC, which they in fact did. Later,
petitioners even moved for the reconsideration of the denial of their
appeal. Having been able to appeal and move for a reconsideration of
the assailed rulings, petitioners cannot claim a denial of due
process.65
Petitioners' right to due process was not breached.
As regards petitioners' claim that its right to due process was violated
when they were allegedly denied the right to cross-examine RCBC's
witnesses, their claim is also bereft of merit.
Sec. 15 of RA 876 or the Arbitration Law provides that:
Section 15. Hearing by arbitrators. - Arbitrators may, at the
commencement of the hearing, ask both parties for brief statements
of the issues in controversy and/or an agreed statement of facts.
Thereafter the parties may offer such evidence as they desire, and
shall produce such additional evidence as the arbitrators shall require
or deem necessary to an understanding and determination of the
dispute. The arbitrators shall be the sole judge of the relevancy
and materiality of the evidence offered or produced, and shall
not be bound to conform to the Rules of Court pertaining to
evidence. Arbitrators shall receive as exhibits in evidence any
document which the parties may wish to submit and the exhibits
shall be properly identified at the time of submission. All exhibits
shall remain in the custody of the Clerk of Court during the course of
the arbitration and shall be returned to the parties at the time the
award is made. The arbitrators may make an ocular inspection of any
matter or premises which are in dispute, but such inspection shall be
made only in the presence of all parties to the arbitration, unless any
party who shall have received notice thereof fails to appear, in which
event such inspection shall be made in the absence of such party.
(Emphasis supplied.)
The well-settled rule is that administrative agencies exercising quasi-
judicial powers shall not be fettered by the rigid technicalities of
procedure, albeit they are, at all times required, to adhere to the basic
concepts of fair play. The Court wrote in CMP Federal Security
Agency, Inc. v. NLRC:
While administrative tribunals exercising quasi-judicial powers, like
the NLRC and Labor Arbiters, are free from the rigidity of certain
procedural requirements, they are nonetheless bound by law and
practice to observe the fundamental and essential requirements of
due process. The standard of due process that must be met in
administrative tribunals allows a certain degree of latitude as long as
fairness is not ignored. Hence, it is not legally objectionable, for
being violative of due process, for the Labor Arbiter to resolve a case
based solely on the position papers, affidavits or documentary
evidence submitted by the parties. The affidavits of witnesses in such
case may take the place of their direct testimony. 66
Of the same tenor is our holding in Quiambao v. Court of Appeals:
In resolving administrative cases, conduct of full-blown trial is not
indispensable to dispense justice to the parties. The requirement of
notice and hearing does not connote full adversarial proceedings.
Submission of position papers may be sufficient for as long as the
parties thereto are given the opportunity to be heard. In
administrative proceedings, the essence of due process is simply
an opportunity to be heard, or an opportunity to explain one's
side or opportunity to seek a reconsideration of the action or
ruling complained of. This constitutional mandate is deemed
satisfied if a person is granted an opportunity to seek
reconsideration of an action or a ruling. It does not require trial-
type proceedings similar to those in the courts of justice. Where
opportunity to be heard either through oral arguments or through
pleadings is accorded, there is no denial of procedural due
process.67 (Emphasis supplied.)
Citing Vertudes v. Buenaflor, petitioners also cry denial of due
process when they were allegedly denied the right to cross-examine
the witnesses presented by RCBC. It is true that in Vertudes, we
stated: "The right of a party to confront and cross-examine opposing
witnesses in a judicial litigation, be it criminal or civil in nature, or in
proceedings before administrative tribunals with quasi-judicial
powers, is a fundamental right which is part of due process." 68
It is, however, equally true that:
[T]he right is a personal one which may be waived expressly or
impliedly by conduct amounting to a renunciation of the right of
cross-examination. Thus, where a party has had the opportunity
to cross-examine a witness but failed to avail himself of it, he
necessarily forfeits the right to cross-examine and the testimony
given on direct examination of the witness will be received or
allowed to remain in the record.69 (Emphasis supplied.)
We also held in one case:
However, the right has always been understood as requiring not
necessarily an actual cross-examination but merely an
opportunity to exercise the right to cross-examine if desired.
What is proscribed by statutory norm and jurisprudential
precept is the absence of the opportunity to cross-examine. The
right is a personal one and may be waived expressly or impliedly.
There is an implied waiver when the party was given the opportunity
to confront and cross-examine an opposing witness but failed to take
advantage of it for reasons attributable to himself alone. If by his
actuations, the accused lost his opportunity to cross-examine wholly
or in part the witnesses against him, his right to cross-examine is
impliedly waived.70 (Emphasis supplied.)
And later in Velez v. De Vera, the Court En Banc expounded on the
above rulings, adding that in administrative proceedings, cross-
examination is not indispensable, thus:
Due process of law in administrative cases is not identical with
"judicial process" for a trial in court is not always essential to due
process. While a day in court is a matter of right in judicial
proceedings, it is otherwise in administrative proceedings since they
rest upon different principles. The due process clause guarantees no
particular form of procedure and its requirements are not technical.
Thus, in certain proceedings of administrative character, the right to
a notice or hearing [is] not essential to due process of law. The
constitutional requirement of due process is met by a fair hearing
before a regularly established administrative agency or tribunal. It is
not essential that hearings be had before the making of a
determination if thereafter, there is available trial and tribunal before
which all objections and defenses to the making of such
determination may be raised and considered. One adequate hearing is
all that due process requires. What is required for "hearing" may
differ as the functions of the administrative bodies differ.
The right to cross-examine is not an indispensable aspect of due
process.71 x x x (Emphasis supplied.)
Clearly, the right to cross-examine a witness, although a fundamental
right of a party, may be waived. Petitioners themselves admit having
had the opportunity to cross-examine RCBC's witnesses during the
hearings before the tribunal, but declined to do so by reserving such
right at a later time. Having had the opportunity to cross-examine
RCBC's witnesses, petitioners were not denied their right to due
process.
RCBC Is Not Estopped from Questioning
the Financial Condition of Bankard
On estoppel, petitioners contend that RCBC already knew the
recording of the Bankard accounts before it paid the balance of the
purchase price and could no longer challenge the financial statements
of Bankard. RCBC, they claim, had full control of the operations of
Bankard since June 2, 2000 and RCBC's audit team reviewed the
accounts in September 2000. Thus, RCBC is now precluded from
denying the fairness and accuracy of said accounts since it did not
seek price reduction under Sec. 5(h). Lastly, they asseverate that
RCBC continued with Bankard's accounting policies and practices
and found them to conform to the generally accepted accounting
principles, contrary to RCBC's allegations.
It also bears stating that in his dissent, retired Justice Kapunan, an
arbitral tribunal member, argued that Bankard's accounting practices
were disclosed in the information memorandum provided to RCBC;
hence, RCBC was supposed to know such accounting practices and
to have accepted their propriety even before the execution of the
SPA. He then argued that when it paid the purchase price on
December 29, 2000, RCBC could no longer claim that the
accounting practices that went into the reporting of the 1999 AFS of
Bankard were not in accord with generally accepted accounting
principles. He pointed out that RCBC was bound by the audit
conducted by a certain Rubio prior to the full payment of the
purchase price of Bankard. Anchored on these statements by Justice
Kapunan, petitioners conclude that RCBC is estopped from claiming
that the former violated their warranties under the SPA.
Petitioners' contention is not meritorious.
Art. 1431 of the Civil Code, on the subject of estoppel, provides:
"Through estoppel an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon."
The doctrine of estoppel is based upon the grounds of public policy,
fair dealing, good faith, and justice; and its purpose is to forbid one
to speak against one's own acts, representations, or commitments to
the injury of one to whom they were directed and who reasonably
relied on them.72
We explained the principle of estoppel in Philippine Savings Bank v.
Chowking Food Corporation:
x x x The equitable doctrine of estoppel was explained by this Court
in Caltex (Philippines), Inc. v. Court of Appeals:
Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. A party may not
go back on his own acts and representations to the prejudice of the
other party who relied upon them. In the law of evidence, whenever
a party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true, to act
upon such belief, he cannot, in any litigation arising out of such
declaration, act, or omission, be permitted to falsify it.
The principle received further elaboration in Maneclang v. Baun:
In estoppel by pais, as related to the party sought to be estopped, it is
necessary that there be a concurrence of the following requisites: (a)
conduct amounting to false representation or concealment of material
facts or at least calculated to convey the impression that the facts are
otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at least expectation that
this conduct shall be acted upon, or at least influenced by the other
party; and (c) knowledge, actual or constructive of the actual facts.
Estoppel may vary somewhat in definition, but all authorities agree
that a party invoking the doctrine must have been misled to one's
prejudice. That is the final and, in reality, most important of the
elements of equitable estoppel. It is this element that is lacking
here.73 (Emphasis supplied.)
The elements of estoppel pertaining to the party estopped are:
(1) conduct which amounts to a false representation or concealment
of material facts, or, at least, which calculated to convey the
impression that the facts are otherwise than, and inconsistent with,
those which the party subsequently attempts to assert; (2) intention,
or at least expectation, that such conduct shall be acted upon by the
other party; and (3) knowledge, actual or constructive, of the actual
facts.74
In the case at bar, the first element of estoppel in relation to the party
sought to be estopped is not present. Petitioners claim that RCBC
misrepresented itself when RCBC made it appear that they
considered petitioners to have sufficiently complied with its
warranties under Sec. 5(g) and 5(h), in relation to Sec. 7 of the SPA.
Petitioners' position is that "RCBC was aware of the manner in
which the Bankard accounts were recorded, well before it
consummated the SPA by taking delivery of the shares and paying
the outstanding 80% balance of the contract price." 75
Petitioners, therefore, theorize that in this case, the first element of
estoppel in relation to the party sought to be estopped is that RCBC
made a false representation that it considered Bankard's accounts to
be in order and, thus, RCBC abandoned any claim under Sec. 5(g)
and 5(h) by its inaction.
Such contention is incorrect.
It must be emphasized that it was only after a second audit that
RCBC presented its claim to petitioners for violation of Sec. 5(g),
within the three (3)-year period prescribed. In other words, RCBC,
prior to such second audit, did not have full and thorough knowledge
of the correctness of Bankard's accounts, in relation to Sec. 5(g).
RCBC, therefore, could not have misrepresented itself considering
that it was still in the process of verifying the warranties covered
under Sec. 5(g). Considering that there must be a concurrence of the
elements of estoppel for it to arise, on this ground alone such claim is
already negated. As will be shown, however, all the other elements
of estoppel are likewise absent in the case at bar.
As to the second element, in order to establish estoppel, RCBC must
have intended that petitioners would act upon its actions. This
element is also missing. RCBC by its actions did not mislead
petitioners into believing that it waived any claim for violation of a
warranty. The periods under Sec. 5(g) and 5(h) were still available to
RCBC.
The element that petitioners relied on the acts and conduct of RCBC
is absent. The Court finds that there was no reliance on the part of
petitioners on the acts of RCBC that would lead them to believe that
the RCBC will forego the filing of a claim under Sec. 5(g). The
allegation that RCBC knew that the Bankard accounts did not
comply with generally accepted accounting principles before
payment and, hence, it cannot question the financial statements of
Bankard is meritless. Precisely, the SPA explicitly provides that
claims for violation of the warranties under Sec. 5(g) can still be
filed within three (3) years from the closing date. Petitioners'
contention that RCBC had full control of Bankard operations after
payment of the price and that an audit undertaken by the Rubio team
did not find anything wrong with the accounts could not have
plausibly misled petitioners into believing that RCBC will waive its
right to file a claim under Sec. 5(g). After all, the period to file a
claim under Sec. 5(g) is three (3) years under Sec. 7, much longer
than the six (6)-month period under Sec. 5(h). Petitioners are fully
aware that the warranties under Sec. 5(g) (1997 up to March 2000)
are of a wider scope than that of Sec. 5(h) (AFS of 1999 and UFS up
to May 31, 2000), necessitating a longer audit period than the six (6)-
month period under Sec. 5(h).
The third element of estoppel in relation to the party sought to be
estopped is also absent considering that, as stated, RCBC was still in
the process of verifying the correctness of Bankard's accounts prior
to presenting its claim of overvaluation to petitioners. RCBC,
therefore, had no sufficient knowledge of the correctness of
Bankard's accounts.
On another issue, RCBC could not have immediately changed the
Bankard accounting practices until it had conducted a more extensive
and thorough audit of Bankard's voluminous records and transactions
to uncover any irregularities. That would be the only logical
explanation why Bankard's alleged irregular practices were
maintained for more than two (2) years from closing date. The fact
that RCBC continued with the audit of Bankard's AFS and records
after the termination of the Rubio audit can only send the clear
message to petitioners that RCBC is still entertaining the possibility
of filing a claim under Sec. 5(g). It cannot then be said that
petitioners' reliance on RCBC's acts after full payment of the price
could have misled them into believing that no more claim will be
presented by RCBC.
The Arbitral Tribunal explained in detail why estoppel is not present
in the case at bar, thus:
10.18 The audit exercise conducted by Mr. Legaspi and Mr. Rubio
was clearly not one comprehensive enough to have discovered the
problems later unearthed by Dr. Laya and Dean Ledesma. x x x
10.19 Although the powers of the TC [Transition Committee] may
have been widely expressed in the view of Mr. Rogelio Chua, then in
charge of Bankard x x x the TC conducted meetings only to get
updated on the status and progress of Bankard's operations.
Commercially, one would expect that an unpaid vendor expecting to
receive 80% of a large purchase price would not be receptive to a
purchaser making vast policy changes in the operation of the
business until the purchaser has paid up its money. It is more likely
that, until the settlement date, there was a practice of maintaining
the status quo at Bankard.
10.20 But neither the Claimant nor the TC did anything, in the
Tribunal's view, which would have given the Respondents the
impression that they were being relieved over the next three years of
susceptibility to a claim under clause 5(g). Maybe the TC could have
been more proactive in commissioning further or more in-depth
audits but it was not. It did not have to be. It is commercially
unlikely that it have been done so, with the necessary degree of
attention to detail, within the relatively short time between the
appointment of the TC and the ultimate settlement date of the
purchase - a period of some three months. An interim arrangement
was obviously sensible to enable the Claimant and its staff to become
familiar with the practices and procedures of Bankard.
10.21 The core consideration weighing with the Tribunal in
assessing these claims for estoppel is that the SPA allowed two types
of claim; one within six months under 5(h) and one within three
years under 5(g). The Tribunal has already held the present claim is
not barred by clause 5(h). It must therefore have been within the
reasonable contemplation of the parties that a 5(g) claim could
surface within the three-year period and that it could be somewhat
differently assessed than the claim under 5(h). The Tribunal cannot
find estoppel by conduct either from the formation of the TC or from
the limited auditing exercise done by Mr. Rubio and Mr. Legaspi.
The onus proving estoppel is on the Respondents and it has not been
discharged.
10.22 If the parties had wished the avenues of relief for
misrepresentation afforded to the Claimant to have been restricted to
a claim under Clause 5(h), then they could have said so. The 'special
audit' may have provided an answer to any claim based on clause
5(h) but it cannot do so in respect of a claim based on Clause 5(g).
Clause 5(g) imposed a positive obligation on the Respondents from
which they cannot be excused, simply by reason of either the
formation and conduct of the TC or of the limited audit.
10.23 The three-year limitation period obviously contemplated that it
could take some time to ascertain whether there had been a breach of
the GAAP standards, etc. Such was the case. A six-month limitation
period under Clause 5(h), in contrast, presaged a somewhat less
stringent enquiry of the kind carried out by Mr. Rubio and Mr.
Legaspi.
10.24 Clause 2(3) of the Amendment to the SPA strengthens the
conclusion that the parties were concerned only with a 5(h) claim
during the TC's reign. The focus of the 'audit' - however intense it
was - conducted by Mr. Rubio and Mr. Legaspi, was on establishing
possible liability under that section and thus as a possible reduction
in the price to be paid on settlement.
10.25 The fact that the purchase price was paid over in full without
any deduction in terms of clause 5(h) is not a bar to the Claimant
bringing a claim under 5(g) within the three-year period. The fact
that payment was made can be, as the Tribunal has held, a barrier to
a claim for rescission and restitution ad inegrum. A claim for
estoppel needs a finding of representation by words of conduct or a
shared presumption that a right would not be relied upon. The party
relying on estoppel has to show reliance to its detriment or that,
otherwise, it would be unconscionable to resile from the provision.
10.26 Article 1431 of the Civil Code states:
"Through estoppel an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon."
10.27 Clearly, there has to both an admission or representation by (in
this case) the Claimant, plus reliance upon it by (in this case) the
Respondents. The Tribunal cannot find as proved any
admission/representation that the Claimant was abandoning a 5(g)
claim, any reliance by Respondents on an admission, and any
detriment to the Respondents such as would entitle them to have the
Claimant deprived of the benefit of clause 5(g). These aspects of the
claim of estoppel are rejected.
xxx
10.42 The Tribunal is not the appropriate forum for deciding whether
there have been any regulatory or ethical infractions by Bankard
and/or the Claimant in setting the 'buy-back' price. It has no bearing
on whether the Claimant must be considered as having waived its
right to claim against the Respondents.
10.43 In the Tribunal's view, neither any infraction by Bankard in
failing to advise the Central Bank of the experts' findings, nor a
failure to put a tag on the accounts nor to have said something to the
shareholders in the buy-back exercise operates as a "technical knock-
out" of Claimant's claim.
10.44 The Tribunal notes that the conciliation process mandated by
the SPA took most of 2003 and this may explain a part of the delay
in commencing arbitral proceedings.
10.45 Whatever the status of Mr. Rubio's and Mr. Legaspi's enquiries
in late 2000, the Claimant was quite entitled to commission
subsequent reports from Dr. Laya and Dr. Echanis and, on the basis
of those reports, make a timeous claim under clause 5(g) of the SPA.
10.46 In the Tribunal's view, therefore, there is no merit in
Respondents' various submissions that the Claimant is debarred from
prosecuting its claims on the grounds of estoppel. There is just no
proof of the necessary representation to the Respondent, nor any
detriment to the Respondent proved. The grounds of delay and laches
are not substantiated.
In summary, the tribunal properly ruled that petitioners failed to
prove that the formation of the Transition Committee and the
conduct of the audit by Rubio and Legaspi were admissions or
representations by RCBC that it would not pursue a claim under Sec.
5(g) and that petitioners relied on such representation to their
detriment. We agree with the findings of the tribunal that estoppel is
not present in the situation at bar.
Additionally, petitioners claim that in Knecht v. Court of
Appeals76 and Coca-Cola Bottlers Philippines, Inc. v. Court of
Appeals (Coca-Cola),77 this Court ruled that the absence of the
element of reliance by a party on the representation of another does
not negate the principle of estoppel. Those cases are, however, not
on all fours with and cannot be applied to this case.
In Knecht, the buyer had the opportunity of knowing the conditions
of the land he was buying early on in the transaction, but proceeded
with the sale anyway. According to the Court, the buyer was
estopped from claiming that the vendor made a false representation
as to the condition of the land. This is not true in the instant case.
RCBC did not conduct a due diligence audit in relation to Sec.5(g)
prior to the sale due to petitioners' express representations and
warranties. The examination conducted by RCBC, through Rubio,
after the execution of the SPA on June 2, 2000, was confined to
finding any breach under Sec. 5(h) for a possible reduction of the
purchase price prior to the payment of its balance on December 31,
2000. Further, the parties clearly agreed under Sec. 7 of the SPA to a
three (3)-year period from closing date within which to present a
claim for damages for violation of the warranties under the SPA.
Hence, Knecht is not a precedent to the case at bar.
So is Coca-Cola. As lessee, Coca-Cola Bottlers was well aware of
the nature and situation of the land relative to its intended use prior
to the signing of the contract. Its subsequent assertion that the land
was not suited for the purpose it was leased was, therefore, cast aside
for being unmeritorious. Such circumstance does not obtain in the
instant case. There was no prior due diligence audit conducted by
RCBC, it having relied, as earlier stated, on the warranties of
petitioners with regard to the financial condition of Bankard under
Sec. 5(g). As such, Sec. 5(g) guaranteed RCBC that it could file a
claim for damages for any mistakes in the AFS and UFS of Bankard.
Clearly, Coca-Cola also cannot be applied to the instant case.

It becomes evident from all of the foregoing findings that the ICC-
ICA is not guilty of any manifest disregard of the law on estoppel.
As shown above, the findings of the ICC-ICA in the Partial Award
are well-supported in law and grounded on facts. The Partial Award
must be upheld.

We close this disposition with the observation that a member of the

three-person arbitration panel was selected by petitioners, while
another was respondent's choice. The respective interests of the G.R. No. 204689, January 21, 2015
parties, therefore, are very much safeguarded in the arbitration
proceedings. Any suggestion, therefore, on the partiality of the
STRONGHOLD INSURANCE COMPANY,
arbitration tribunal has to be dismissed.
INC., Petitioner, v. SPOUSES RUNE AND LEA
STROEM, Respondents.
WHEREFORE, the instant petition is hereby DENIED. The
assailed January 8, 2008 and March 17, 2008 Orders of the RTC,
DECISION
Branch 148 in Makati City are hereby AFFIRMED.
LEONEN, J.:
SO ORDERED.
For resolution is a Petition for Review1 under Rule 45 of the Rules of
Court assailing the Decision2 dated November 20, 2012 of the Court
of Appeals in CA-G.R. CV No. 96017.  The Court of Appeals
affirmed the Decision3 of the Regional Trial Court of Makati, Branch
133 in Civil Case No. 02-1108 for collection of a sum of money.

This case involves the proper invocation of the Construction Industry

Arbitration Committee’s (CIAC) jurisdiction through an arbitration
clause in a construction contract.  The main issue here is whether the
dispute — liability of a surety under a performance bond — is
connected to a construction contract and, therefore, falls under the
exclusive jurisdiction of the CIAC.
Spouses Rune and Lea Stroem (Spouses Stroem) entered into an
Owners-Contractor Agreement4 with Asis-Leif & Company, Inc.
(Asis-Leif) for the construction of a two-storey house on the lot
owned by Spouses Stroem.  The lot was located at Lot 4A, Block 24,
Don Celso Tuason Street, Valley Golf Subdivision, Barangay
Mayamot, Antipolo, Rizal.5
On November 15, 1999, pursuant to the agreement, Asis-Leif
secured Performance Bond No. LP/G(13)83056 in the amount of
P4,500,000.00 from Stronghold Insurance Company, Inc.
(Stronghold).6  Stronghold and Asis-Leif, through Ms. Ma. Cynthia
Asis-Leif, bound themselves jointly and severally to pay the Spouses
Stroem the agreed amount in the event that the construction project is
not completed.7
Asis-Leif failed to finish the project on time despite repeated
demands of the Spouses Stroem. 8
Spouses Stroem subsequently rescinded the agreement. 9  They then
hired an independent appraiser to evaluate the progress of the
construction project.10
Appraiser Asian Appraisal Company, Inc.’s evaluation resulted in
the following percentage of completion: 47.53% of the residential
building, 65.62% of the garage, and 13.32% of the swimming pool,
fence, gate, and land development.11
On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting
that the company settle its obligations with the Spouses Stroem.  No
response was received from Asis-Leif. 12
On September 12, 2002, the Spouses Stroem filed a Complaint (with
Prayer for Preliminary Attachment) 13 for breach of contract and for
sum of money with a claim for damages against Asis-Leif, Ms.
Cynthia Asis-Leif, and Stronghold. 14  Only Stronghold was served
summons.  Ms. Cynthia Asis-Leif allegedly absconded and moved
out of the country.15
On July 13, 2010, the Regional Trial Court rendered a judgment in
favor of the Spouses Stroem.  The trial court ordered Stronghold to
pay the Spouses Stroem ?4,500,000.00 with 6% legal interest from
the time of first demand.16  The dispositive portion of the trial court
Decision reads
WHEREFORE, finding plaintiffs’ cause of action to be sufficiently
established being supported by evidence on records, judgement is
hereby rendered in favor of the plaintiff spouses Rune and Lea
Stroem and against the defendant Stronghold Insurance Company
Incorporated ordering the latter to pay the plaintiff the sums of
1)  Php4,500,000.00 with six (6%) percent legal interest from the
time of first demand and interest due shall earn legal interest from
the time of judicial demand until fully paid.
2)  Php35,000.00 by way of attorney’s fees and other litigation
expenses.
Defendant is further ordered to pay the costs of this suit.
SO ORDERED.17
Both Stronghold and the Spouses Stroem appealed to the Court of
Appeals.18
The Court of Appeals affirmed with modification the trial court’s
Decision.  It increased the amount of attorney’s fees to ?50,000.00. 19
The dispositive portion of the Court of Appeals Decision reads
WHEREFORE, the appeal of Stronghold Company, Inc[.]
is DISMISSED, while the appeal of spouses Rune and Lea Stroem
is PARTLY GRANTED.  The November 27, 2009 Decision of the
Regional Trial Court of Makati City
is AFFIRMED with MODIFICATION that the award of attorney’s
fees is increased to P50,000.00
SO ORDERED.20
On March 20, 2013, this court required the Spouses Stroem to submit
their Comment on the Petition. 21
We noted the Spouses Stroem’s Comment on July 31, 2013. 22  We
also required Stronghold to file its Reply to the Comment, 23 which
was noted on December 9, 2013. 24
Stronghold argues that the trial court did not acquire jurisdiction over
the case and, therefore, the Court of Appeals committed reversible
error when it upheld the Decision of the Regional Trial Court. 25  The
lower courts should have dismissed the case in view of the
arbitration clause in the agreement and considering that “[Republic
Act No. 876] explicitly confines the court’s authority only to pass
upon the issue of whether there is [an] agreement . . . 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.’” 26
Moreover, “the stipulations in said Agreement are part and parcel of
the conditions in the bond.  Were it not for such stipulations in said
agreement, [Stronghold] would not have agreed to issue a bond in
favor of the Spouses Stroem.  The parties to the bond are ALB/Ms.
Asis-[L]eif, Spouses Stroem and [Stronghold] such that ALB/Ms.
Asis-[L]eif never ceased to be a party to the surety agreement.” 27
In any case, Stronghold’s liability under the performance bond is
limited only to additional costs for the completion of the project. 28  In
addition, the Court of Appeals erred in holding that Stronghold
changed its theory with regard to the notice requirement 29 and in
modifying the trial court’s award of attorney’s fees. 30
On the other hand, the Spouses Stroem argue that Stronghold
committed forum shopping warranting dismissal of the case. 31 
According to the Spouses Stroem, Stronghold deliberately
committed forum shopping when it filed the present petition despite
the pendency of the Spouses Stroem’s Motion for Partial
Reconsideration of the Court of Appeals Decision dated November
20, 2012.32
More importantly, the Owners-Contractor Agreement is “separate
and distinct from the Bond.  The parties to the Agreement are
ALB/Ms. Asis-Leif and Spouses Stroem, while the parties to the
Bond are Spouses Stroem and Stronghold.  The considerations for
the two contracts are likewise distinct.  Thus, the arbitration clause in
the Agreement is binding only on the parties thereto, specifically
ALB/Ms. Asis-Leif and Spouses Stroem[.]” 33
Contrary to Stronghold’s argument, Spouses Stroem argues that
stronghold is liable for the full amount of the performance bond. 
The terms of the bond clearly show that Stronghold is liable as
surety.34  Verily, notice to Stronghold is not required for its liability
to attach.35
The issues for consideration are
(1) Whether the dispute involves a construction contract;
(2) Whether the CIAC has exclusive jurisdiction over the
controversy between the parties;
(3) Whether the Regional Trial Court should have dismissed the
petition outright as required by law and jurisprudence and
referred the matter to the CIAC; and
(4) Whether petitioner Stronghold Insurance Company, Inc. is
liable under Performance Bond No. LP/G(13)83056.
(a) Whether petitioner Stronghold Insurance Company, Inc. is
only liable as to the extent of any additional cost for the
completion of the project due to any increase in prices for
labor and materials.
 (b) Whether the case involves ordinary suretyship or corporate
suretyship.
After considering the parties’ arguments and the records of this case,
this court resolves to deny the Petition.
On forum-shopping
Respondents argue that petitioner committed forum shopping; hence,
the case should have been dismissed outright.
Records show that petitioner received a copy of the Decision of the
Court of Appeals on December 5, 2012. 36  Petitioner did not file a
Motion for Reconsideration of the assailed Decision.  It filed before
this court a Motion for Extension of Time To File Petition for
Review requesting an additional period of 30 days from December
20, 2012 or until January 19, 2013 to file the Petition. 37
Respondents filed their Motion for Partial Reconsideration of the
Court of Appeals Decision on December 11, 2012. 38  They sought
the modification of the Decision as to the amounts of moral
damages, exemplary damages, attorney’s fees, and costs of the suit. 39
Respondents alleged in their Comment that as early as January 9,
2013, petitioner received a copy of the Court of Appeals’ Resolution
requiring Comment on the Motion for Partial Reconsideration. 40  similar action or proceeding before other courts or tribunals.  The
Still, petitioner did not disclose in its Verification and Certification
Against Forum Shopping the pendency of respondents’ Motion for
Partial Reconsideration.41
For its part, petitioner claims that it did not commit forum shopping. 
It fully disclosed in its Petition that what it sought to be reviewed
was the Decision dated November 20, 2012 of the Court of Appeals.  following on January 21, 2013
“Petitioner merely exercised its available remedy with respect to the
Decision of the Court of Appeals by filing [the] Petition.” 42  What
the rules mandate to be stated in the Certification Against Forum
Shopping is the status of “any other action.”  This other action
involves the same issues and parties but is an entirely different case.
Indeed, petitioner is guilty of forum shopping.
There is forum shopping when
as a result of an adverse opinion in one forum, a party seeks a
favorable opinion (other than by appeal or certiorari) in another.  The
principle applies not only with respect to suits filed in the courts but
also in connection with litigations commenced in the courts while an
administrative proceeding is pending[.]43  (Citation omitted)
This court has enumerated the elements of forum-shopping: “(a)
identity of parties, or at least such parties as represent the same
interests in both actions; (b) identity of rights asserted and reliefs
prayed for, the reliefs being founded on the same facts; and (c) the
identity with respect to the two preceding particulars in the two cases
is such that any judgment rendered in the pending cases, regardless
of which party is successful, amount to res judicata in the other
case.”44
Rule 42, Section 245 in relation to Rule 45, Section 4 of the Rules of
Court mandates petitioner to submit a Certification Against Forum
Shopping and promptly inform this court about the pendency of any
rule’s purpose is to deter the unethical practice of pursuing
simultaneous remedies in different forums, which “wreaks havoc
upon orderly judicial procedure.”46  Failure to comply with the rule is
a sufficient ground for the dismissal of the petition. 47
Records show that petitioner’s duly authorized officer certified the
4. I further certify that: (a) I have not commenced any other action or
proceeding involving the same issues in the Supreme Court, Court of
Appeals, or any other tribunal or agency; (b) to the best of my
knowledge, no such action or proceeding is pending in the Supreme
Court, the Court of Appeals or different Divisions thereof, or any
tribunal or agency; (c) if I should thereafter learn that a similar action
or proceeding has been filed or is pending before the Supreme Court,
the Court of Appeals, or different Divisions thereof, or any other
tribunal or agency, I undertake to promptly inform the aforesaid
courts and such tribunal or agency of the fact within five (5) days
therefrom.48
Petitioner failed to carry out its duty of promptly informing this court
of any pending action or proceeding before this court, the Court of
Appeals, or any other tribunal or agency.  This court cannot
countenance petitioner’s disregard of the rules.
This court has held before that
[u]ltimately, what is truly important to consider in determining
whether forum-shopping exists or not is the vexation caused the
courts and parties-litigant by a party who asks different courts
and/or administrative agencies to rule on the same or related causes
and/or to grant the same or substantially the same reliefs, in the
process creating the possibility of conflicting decisions being
rendered by the different fora upon the same issue. 49  (Emphasis
supplied)
On this basis, this case should be dismissed.
On arbitration and the CIAC’s jurisdiction
Petitioner changed the theory of its case since its participation in the
trial court proceedings.  It raised the issue of lack of jurisdiction in
view of an arbitration agreement for the first time.
Generally, parties may not raise issues for the first time on appeal. 50 
Such practice is violative of the rules and due process and is frowned
upon by the courts.  However, it is also well-settled that jurisdiction
can never be waived or acquired by estoppel. 51  Jurisdiction is
conferred by the Constitution or by law. 52  “Lack of jurisdiction of
the court over an action or the subject matter of an action cannot be
cured by the silence, by acquiescence, or even by express consent of
the parties.”53
Section 4 of Executive Order No. 100854 is clear in defining the
exclusive jurisdiction of the CIAC
SECTION 4. Jurisdiction – The CIAC shall have original and
exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion
of the contract, or after the abandonment or breach thereof.  These
disputes may involve government or private contracts.  For the Board
to acquire jurisdiction, the parties to a dispute must agree to submit
the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to
violation of specifications for materials and workmanship; violation
of the terms of agreement; interpretation and/or application of
contractual time and delays; maintenance and defects; payment,
default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes arising from
employer-employee relationships which shall continue to be covered
by the Labor Code of the Philippines.  (Emphasis supplied)
Similarly, Section 35 of Republic Act No. 9285 or the Alternative
Dispute Resolution Act of 2004 states
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.  (Emphasis
supplied)
In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation,55 this
court held that “there are two acts which may vest the CIAC with
jurisdiction over a construction dispute.  One is the presence of an
arbitration clause in a construction contract, and the other is the
agreement by the parties to submit the dispute to the CIAC.” 56
This court has ruled that when a dispute arises from a construction
contract, the CIAC has exclusive and original jurisdiction. 57  party
Construction has been defined as referring to “all on-site works on
buildings or altering structures, from land clearance through
completion including excavation, erection and assembly and
installation of components and equipment.” 58
In this case, there is no dispute as to whether the Owners-Contractor
Agreement between Asis-Leif and respondents is a construction
contract.  Petitioner and respondents recognize that CIAC has
jurisdiction over disputes arising from the agreement.
What is at issue in this case is the parties’ agreement, or lack thereof,
to submit the case to arbitration.  Respondents argue that petitioner is
not a party to the arbitration agreement.  Petitioner did not consent to
arbitration.  It is only respondent and Asis-Leif that may invoke the
arbitration clause in the contract.
This court has previously held that a performance bond, which is
meant “to guarantee the supply of labor, materials, tools, equipment,
and necessary supervision to complete the project[,]” 59 is
significantly and substantially connected to the construction contract
and, therefore, falls under the jurisdiction of the CIAC. 60
Prudential Guarantee and Assurance Inc. v. Anscor Land,
Inc.61 involved circumstances similar to the present case. 
In Prudential, property owner Anscor Land, Inc. (ALI) entered into
a contract for the construction of an eight-unit townhouse located in
Capitol Hills, Quezon City with contractor Kraft Realty and
Development Corporation (KRDC).62  KRDC secured the completion
of the construction project through a surety and performance bond
issued by Prudential Guarantee and Assurance Inc. (PGAI). 63
The delay in the construction project resulted in ALI’s termination of
the contract and claim against the performance bond. 64  “ALI
[subsequently] commenced arbitration proceedings against KRDC
and PGAI in the CIAC.”65  PGAI, however, argued that it was not a
to the construction contract. 66
The CIAC ruled that PGAI was not liable under the performance
bond.67  Upon review, the Court of Appeals held that PGAI was
jointly and severally liable with KRDC under the performance
bond.68
PGAI appealed the Court of Appeals Decision and claimed that
CIAC did not have jurisdiction over the performance bond. 69  This
court ruled
A guarantee or a surety contract under Article 2047 of the Civil Code
of the Philippines is an accessory contract because it is dependent for
its existence upon the principal obligation guaranteed by it.
In fact, the primary and only reason behind the acquisition of the
performance bond by KRDC was to guarantee to ALI that the
construction project would proceed in accordance with the contract
terms and conditions.  In effect, the performance bond becomes
liable for the completion of the construction project in the event
KRDC fails in its contractual undertaking.
Because of the performance bond, the construction contract between
ALI and KRDC is guaranteed to be performed even if KRDC fails in
its obligation.  In practice, a performance bond is usually a condition
or a necessary component of construction contracts.  In the case at
bar, the performance bond was so connected with the construction
contract that the former was agreed by the parties to be a condition
for the latter to push through and at the same time, the former is
reliant on the latter for its existence as an accessory contract.
Although not the construction contract itself, the performance bond
is deemed as an associate of the main construction contract that it
cannot be separated or severed from its principal.  The Performance
Bond is significantly and substantially connected to the construction
contract that there can be no doubt it is the CIAC, under Section 4 of
EO No. 1008, which has jurisdiction over any dispute arising from
or connected with it.70  (Emphasis supplied, citations omitted)
At first look, the Owners-Contractor Agreement and the performance
bond reference each other; the performance bond was issued
pursuant to the construction agreement.
A performance bond is a kind of suretyship agreement.  A suretyship
agreement is an agreement “whereby a party, called the surety,
guarantees the performance by another party, called the principal or
obligor, of an obligation or undertaking in favor of another party,
called the obligee.”71  In the same vein, a performance bond is
“designed to afford the project owner security that the . . . contractor,
will faithfully comply with the requirements of the contract . . . and
make good [on the] damages sustained by the project owner in case
of the contractor’s failure to so perform.” 72
It is settled that the surety’s solidary obligation for the performance
of the principal debtor’s obligation is indirect and merely
secondary.73  Nevertheless, the surety’s liability to the “creditor or
promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal.” 74
Verily, “[i]n enforcing a surety contract, the ‘complementary-
contracts-construed-together’ doctrine finds application.  According
to this principle, an accessory contract must be read in its entirety
and together with the principal agreement.” 75  Article 1374 of the
Civil Code provides
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.
Applying the “complementary-contracts-construed-together”
doctrine, this court in Prudential held that the surety willingly
acceded to the terms of the construction contract despite the silence
of the performance bond as to arbitration
In the case at bar, the performance bond was silent with regard to
arbitration.  On the other hand, the construction contract was clear as
to arbitration in the event of disputes.  Applying the said doctrine, we
rule that the silence of the accessory contract in this case could only
be construed as acquiescence to the main contract.  The construction
contract breathes life into the performance bond.  We are not ready
to assume that the performance bond contains reservations with
regard to some of the terms and conditions in the construction
contract where in fact it is silent.  On the other hand, it is more
reasonable to assume that the party who issued the performance
bond carefully and meticulously studied the construction contract
that it guaranteed, and if it had reservations, it would have and
should have mentioned them in the surety contract. 76  (Emphasis
supplied)
This court, however, cannot apply the ruling in Prudential to the
present case.  Several factors militate against petitioner’s claim.
The contractual stipulations in this case and in Prudential are Philippines, as amended by the Executive Order 1008 dated
different.  The relevant provisions of the Owners-Contractor February 4, 1985.77 (Emphasis in the original)
Agreement in this case state
In contrast, the provisions of the construction contract in Prudential
ARTICLE 5.  THE CONTRACT DOCUMENTS
provide
The following documents prepared by the CONTRACTOR shall Article 1
constitute an integral part of this contract as fully as if hereto CONTRACT DOCUMENTS
attached or herein stated, except as otherwise modified by mutual
agreement of parties, and attached to this agreement. 1.1 The following shall form part of this Contract and together with
this Contract, are known as the “Contract Documents”
Attachment 5.1 Working Drawings
Attachment 5.2 Outline Specifications a.   Bid Proposal
Attachment 5.3 Bill of Quantities
Attachment 5.4 CONTRACTOR Business License . . . .
. . . .cralawred d.   Notice to proceed

ARTICLE 7. PERFORMANCE (SURETY) BOND . . . .

7.1 Within 30 days of the signing of this j.  Appendices A & B (respectively, Surety Bond for Performance
agreement, CONTRACTOR shall provide to OWNERS a and, Supply of Materials by the Developer)78 (Emphasis supplied)
performance bond, issued by a duly licensed authority acceptable to
the OWNERS, and equal to the amount of PHP 4,500,000.00 (Four This court in Prudential held that the construction contract expressly
Million and Five Hundred Thousand Philippine Pesos), with incorporated the performance bond into the contract. 79  In the present
the OWNERS as beneficiary. case, Article 7 of the Owners-Contractor Agreement merely stated
that a performance bond shall be issued in favor of respondents, in
7.2 The performance bond will guarantee the satisfactory and faithful which case petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia
performance by the CONTRACTOR of all provisions stated within Asis-Leif shall pay P4,500,000.00 in the event that Asis-Leif fails to
this contract. perform its duty under the Owners-Contractor Agreement. 80 
Consequently, the performance bond merely referenced the contract
ARTICLE 8. ARBITRATION
entered into by respondents and Asis-Leif, which pertained to Asis-
Leif’s duty to construct a two-storey residence building with attic,
8.1 Any dispute between the parties hereto which cannot be pool, and landscaping over respondents’ property. 81
amicably settled shall be finally settled by arbitration in
accordance with the provision of Republic Act 876, of The To be clear, it is in the Owners-Contractor Agreement that the
arbitration clause is found.  The construction agreement was signed a repetition or similar violation of the rule on Certification Against
only by respondents and the contractor, Asis-Leif, as represented by Forum Shopping will be dealt with more severely.
Ms. Ma. Cynthia Asis-Leif.  It is basic that “[c]ontracts take effect
only between the parties, their assigns and heirs[.]” 82  Not being a SO ORDERED.
party to the construction agreement, petitioner cannot invoke the
arbitration clause. Petitioner, thus, cannot invoke the jurisdiction of
the CIAC.

Moreover, petitioner’s invocation of the arbitration clause

defeats the purpose of arbitration in relation to the construction
business.  The state has continuously encouraged the use of dispute
resolution mechanisms to promote party autonomy. 83 
In LICOMCEN, Incorporated v. Foundation Specialists, Inc., 84 this
court upheld the CIAC’s jurisdiction in line with the state’s policy to
promote arbitration:

The CIAC was created through Executive Order No. 1008 (E.O. G.R. No. 173137, January 11, 2016
1008), in recognition of the need to establish an arbitral machinery
that would expeditiously settle construction industry disputes.  The BASES CONVERSION DEVELOPMENT
prompt resolution of problems arising from or connected with the AUTHORITY, Petitioner, v. DMCI PROJECT DEVELOPERS,
construction industry was considered of necessary and vital for the INC., Respondent.
fulfillment of national development goals, as the construction
industry provides employment to a large segment of the national G.R. NO. 173170
labor force and is a leading contributor to the gross national
product.85  (Citation omitted) NORTH LUZON RAILWAYS
CORPORATION, Petitioner, v. DMCI PROJECT
DEVELOPERS, INC. Respondent.
However, where a surety in a construction contract actively
participates in a collection suit, it is estopped from raising
jurisdiction later.  Assuming that petitioner is privy to the DECISION
construction agreement, we cannot allow petitioner to invoke
arbitration at this late stage of the proceedings since to do so would LEONEN, J.:
go against the law’s goal of prompt resolution of cases in the
construction industry. An arbitration clause in a document of contract may extend to
subsequent documents of contract executed for the same purpose.
WHEREFORE, the petition is DENIED.  The case Nominees of a party to and beneficiaries of a contract containing an
is DISMISSED.  Petitioner’s counsel is STERNLY WARNED that arbitration clause may become parties to a proceeding initiated based
on that arbitration clause.
On June 10, 1995, Bases Conversion Development Authority
(BCDA) entered into a Joint Venture Agreement 1 with Philippine
National Railways (PNR) and other foreign corporations. 2
Under the Joint Venture Agreement, the parties agreed to construct
a railroad system from Manila to Clark with possible extensions to
Subic Bay and La Union and later, possibly to Ilocos Norte and
Nueva Ecija.3 BCDA shall establish North Luzon Railways
Corporation (Northrail) for purposes of constructing, operating, and
managing the railroad system.4 The Joint Venture Agreement
contained the following provision:
ARTICLE XVI
ARBITRATION
16. If any dispute arise hereunder which cannot be
settled by mutual accord between the parties to such
dispute, then that dispute shall be referred to
arbitration. The arbitration shall be held in
whichever place the parties to the dispute decide and
failing mutual agreement as to a location within
twenty-one (21) days after the occurrence of the
dispute, shall be held in Metro Manila and shall be
conducted in accordance with the Philippine
Arbitration Law (Republic Act No. 876)
supplemented by the Rules of Conciliation and
Arbitration of the International Chamber of
Commerce. All award of such arbitration shall be
final and binding upon the parties to the dispute.5
BCDA organized and incorporated Northrail. 6 Northrail was
registered with the Securities and Exchange Commission on August
22, 1995.7
BCDA invited investors to participate in the railroad project's
financing and implementation. Among those invited were D.M.
Consunji, Inc. and Metro Pacific Corporation. 8
On February 8, 1996, the Joint Venture Agreement was amended
to include D.M. Consunji, Inc. and/or its nominee as
party.9 Under the amended Joint Venture Agreement, D.M.
Consunji, Inc. shall be an additional investor of Northrail. 10 It shall
subscribe to 20% of the increase in Northrail's authorized capital
stock.11
On February 8, 1996, BCDA and the other parties to the Joint
Venture Agreement, including D.M. Consunji, Inc. and/or its
nominee, entered into a Memorandum of Agreement.12 Under this
agreement, the parties agreed that the initial seed capital of P600
million shall be infused to Northrail. 13 Of that amount, P200 million
shall be D.M. Consunji, Inc.'s share, which shall be converted to
equity upon NorthraiPs privatization. 14 Later, D.M. Consunji, Inc.'s
share was increased to P300 million. 15
Upon BCDA and Northrail's request, 16 DMCI Project Developers,
Inc. (DMCI-PDI) deposited P300 million into NorthraiPs account
with Land Bank of the Philippines.17 The deposit was made on
August 7, 199618 for its "future subscription of the Northrail shares
of stocks."19 In NorthraiPs 1998 financial statements submitted to the
Securities and Exchange Commission, this amount was reflected as
"Deposits For Future Subscription."20 At that time, NorthraiPs
application to increase its authorized capital stock was still pending
with the Securities and Exchange Commission. 21
In letters22dated April 4, 1997, D.M. Consunji, Inc. informed
PNR and the other parties that DMCI-PDI shall be its
designated nominee for all the agreements it entered and would
enter with them in connection with the railroad project. Pertinent Northrail and was regularly informed of the corporation's financial
portions of the letters provide: condition.30

[I]n order to formalize the inclusion of [DMCI Project Developers,

Upon BCDA's request, the Office of the Government Corporate
Inc.] as a party to the JVA and MOA, DMCI would like to notify all
Counsel (OGCC) issued Opinion No. 116, Series of 2001 31 on June
the parties that it is designating PDI as its nominee in both
27, 2001. The OGCC stated that "since no increase in capital stock
agreements and such other agreements that may be signed by the
was implemented, it is but proper to return the investments of both
parties in furtherance of or in connection with the PROJECT. By
FBDC and DMCI[.]"32
this nomination, all the rights, obligations, warranties and
commitments of DMCI under the JVA and MOA shall henceforth be
In a January 19, 2005 letter,33 DMCI-PDI reiterated the request for
assumed performed and delivered by PDI.23 (Emphasis supplied)
the refund of its P300 million deposit for future Northrail
subscription. On March 18, 2005, BCDA denied 34 DMCI-PDI's
Later, Northrail withdrew from the Securities and Exchange request:
Commission its application for increased authorized capital
stock.24 Moreover, according to DMCI-PDI, BCDA applied for We regret to say that we are of the position that the P300 [million]
Official Development Assistance from Obuchi Fund of Japan. 25 This contribution should not be returned to DMCI for the following
required Northrail to be a 100% government-owned and controlled reasons:
corporation.26
a. the P300 million was in the nature of a contribution,
On September 27, 2000, DMCI-PDI started demanding from BCDA not deposits for future subscription; and
and Northrail the return of its P300 million deposit. 27 DMCI-PDI
cited Northrail's failure to increase its authorized capital stock as b. DMCI, as a joint venture partner, must share in
reason for the demand.28 BCDA and Northrail refused to return the profits and losses.35
deposit29 for the following reasons:

a) At the outset, DMCI PDI/FBDC's participation in Northrail was as On August 17, 2005,36 DMCI-PDI served a demand for arbitration to
a joint venture partner and co-investor in the Manila Clark Rapid BCDA and Northrail, citing the arbitration clause in the June 10,
Railway Project, and as such, was granted corresponding 1995 Joint Venture Agreement. 37 BCDA and Northrail failed to
representation in the Northrail Board. respond.38

b) DMCI PDI/FBDC was privy to all the deliberations of the DMCI-PDI filed before the Regional Trial Court of Makati 39 a
Northrail Board and participated in the decisions made and policies Petition to Compel Arbitration40 against BCDA and Northrail,
adopted to pursue the project. pursuant to the alleged arbitration clause in the Joint Venture
Agreement.41 DMCI-PDI prayed for "an order directing the parties to
c) DMCI PDI/FBDC had full access to the financial statements of proceed to arbitration in accordance with the terms and conditions of
the agreement."42

BCDA filed a Motion to Dismiss 43 on the ground that there was no
arbitration clause that DMCI-PDI could enforce since DMCI-PDI
was not a party to the Joint Venture Agreement containing the
arbitration clause.44 Northrail filed a separate Motion to Dismiss 45 on
the ground that the court did not have jurisdiction over it and that
DMCI-PDI had no cause for arbitration against it. 46
In the Decision47 dated February 9, 2006, the trial court denied
BCDA's and Northrail's Motions to Dismiss and granted DMCI-
PDI's Petition to Compel Arbitration. The dispositive portion of the
decision reads:
WHEREFORE, the petition is granted. The parties are ordered to
present their dispute to arbitration in accordance with Article XVI of
the Joint Agreement.
SO ORDERED.48
The trial court ruled that the arbitration clause in the Joint Venture
Agreement should cover all subsequent documents including the
amended Joint Venture Agreement and the Memorandum of
Agreement. The three (3) documents constituted one contract for the
formation and funding of Northrail. 49
The trial court also ruled that even though DMCI-PDI was not a
signatory to the Joint Venture Agreement and the Memorandum of
Agreement, it was an assignee of D.M. Consunji, Inc.'s rights.
Therefore, it could invoke the arbitration clause in the Joint Venture
Agreement.50
In an Order51 dated June 9, 2006, the trial court denied BCDA and
Northrail's Motion for Reconsideration of the February 9, 2006 trial
court Decision.
BCDA filed a Rule 45 Petition before this court, assailing the
February 9, 2006 trial court Order granting DMCI-PDI's Petition to
Compel Arbitration and the June 9, 2006 Order denying BCDA and
Northrail's Motion for Reconsideration. 52
The issue in this case is whether DMCI-PDI may compel BCDA and
Northrail to submit to arbitration.
BCDA argued that only the parties to an arbitration agreement can be
bound by that agreement.53 The arbitration clause that DMCI-PDI
sought to enforce was in the Joint Venture Agreement, to which
DMCI-PDI was not a party.54 There was also no evidence that the
right to compel arbitration under the Joint Venture Agreement was
assigned to DMCI-PDI.55 Assuming that there was such an
assignment, BCDA did not consent to or recognize it. 56 Therefore,
the trial court's conclusion that DMCI-PDI was D.M. Consunji, Inc.'s
assignee had no basis.57 In BCDA's view, DMCI-PDI had no right to
compel BCDA to submit to arbitration. 58
BCDA also argued that the trial court decided the Motion to Dismiss
in violation of the parties' right to due process. The trial court should
have conducted a hearing so that the parties could have presented
their respective positions on the issue of assignment. The trial court
merely accepted DMCI-PDI's allegations, without basis. 59
In a separate Petition for Review, 60 Northrail argued that it cannot be
compelled to submit itself to arbitration because it was not a party to
the arbitration agreement.61
Northrail also argued that DMCI-PDI cannot initiate an action to
compel BCDA and Northrail to arbitration because DMCI-PDI itself
was not a party to the arbitration agreement. DMCI-PDI was not
D.M. Consunji, Inc.'s assignee because BCDA did not consent to that
assignment.62
In its Comment63 on BCDA's Petition, DMCI-PDI argued that Rule
45 was a wrong mode of appeal. 64 The issues raised by BCDA did
not involve questions of law.65
DMCI-PDI pointed out that BCDA breached their agreement when it
failed to apply the P300 million deposit to Northrail subscriptions. It
turned out that such application was rendered impossible by the
alleged loan requirement that Northrail be wholly owned by the
government and by Northrail's withdrawal from the Securities and
Exchange Commission of its application for an increase in
authorized capital stock.66
DMCI-PDI also argued that it is an assignee and nominee of D.M.
Consunji, Inc., which is a party to the contracts. Therefore, it is also
a party to the arbitration clause. 67
DMCI-PDI contended that the arbitration agreement extended to all
documents relating to the project. 68 Even though the agreement was
expressed only in the Joint Venture Agreement, its effect extends to
the amendment to the Joint Venture Agreement and Memorandum of
Agreement.69
DMCI-PDI emphasized that BCDA had always recognized it as
D.M. Consunji's assignee in its correspondences with the OGCC and
with the President of DMCI, Mr. Isidro Consunji. 70 In those letters,
BCDA described DMCI-PDI's participation as being the "joint
venture partner . . . and co-investor in the Manila Clark Rapid
Railway Project[.]"71 Hence, it is now estopped from denying its
personality in this case.72
We rule for DMCI-PDI.
I impartial justice and declog court dockets. As such, the State shall
The state has a policy in favor of arbitration
At the outset, we must state that BCDA and Northrail invoked the
correct remedy. Rule 45 is applicable when the issues raised before
this court involved purely questions of law. In Villamor v.
Balmores:73
[t]here is a question of law "when there is doubt or controversy as to
what the law is on a certain [set] of facts." The test is "whether the
appellate court can determine the issue raised without reviewing or
evaluating the evidence." Meanwhile, there is a question of fact
when there is "doubt ... as to the truth or falsehood of facts." The
question must involve the examination of probative value of the
evidence presented.74
BCDA and Northrail primarily ask us to construe the arbitration
clause in the Joint Venture Agreement. They assert that the clause
does not bind DMCI-PDI and Northrail. This issue is a question of
law. It does not require us to examine the probative value of the
evidence presented. The prayer is essentially for this court to
determine the scope of an arbitration clause.
Arbitration is a mode of settling disputes between parties. 75 Like
many alternative dispute resolution processes, it is a product of the
meeting of minds of parties submitting a pre-defined set of disputes.
They agree among themselves to a process of dispute resolution that
avoids extended litigation.
The state adopts a policy in favor of arbitration. Republic Act No.
928576 expresses this policy:
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 parties 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
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. (Emphasis supplied)
Our policy in favor of party autonomy in resolving disputes has been
reflected in our laws as early as 1949 when our Civil Code was
approved.77 Republic Act No. 87678 later explicitly recognized the
validity and enforceability of parties' decision to submit disputes and
related issues to arbitration.79
Arbitration agreements are liberally construed in favor of proceeding
to arbitration.80 We adopt the interpretation that would render
effective an arbitration clause if the terms of the agreement allow for
such interpretation.81 In LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,82 this court said:
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of
arbitration.83
This manner of interpreting arbitration clauses is made explicit in
Section 25 of Republic Act No. 9285:
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 to an arbitration agreement, the court shall
refer to arbitration those 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.
Hence, we resolve the issue of whether DMCI-PDI may compel
BCDA and Northrail to submit to arbitration proceedings in light of
the policy in favor of arbitration.
BCDA and Northrail assail DMCI-PDI's right to compel them to
submit to arbitration based on the assumption that DMCI-PDI was
not a party to the agreement containing the arbitration clause.
Three documents — (a) Joint Venture Agreement, (b) amended Joint
Venture Agreement, and (c) Memorandum of Agreement —
represent the agreement between BCDA, Northrail, and D.M.
Consunji, Inc. Among the three documents, only the Joint Venture
Agreement contains the arbitration clause. DMCI-PDI was allegedly
not a party to the Joint Venture Agreement.
To determine the coverage of the arbitration clause, the relation
among the three documents and DMCI-PDI's involvement in the
execution of these documents must first be understood.
The Joint Venture Agreement was executed by BCDA, PNR, and
some foreign corporations.84 The purpose of the Joint Venture
Agreement was for the construction of a railroad system from Manila
to Clark with a possible extension to Subic Bay and later to San
Fernando, La Union, Laoag, Ilocos Norte, and San Jose, Nueva
Ejica.85 Under the Joint Venture Agreement, BCDA agreed to
incorporate Northrail, which shall have an authorized capital stock of
F5.5 billion.86 The parties agreed that BCDA/PNR shall have a 30%
equity with Northrail.87 Other Filipino partners shall have a total of
50% equity, while foreign partners shall have at most 20%
equity.88 Pertinent provisions of the Joint Venture Agreement are as
follows:
JOINT VENTURE AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Joint Venture Agreement (JVA) made and executed at development of the Northern Luzon Grid and to accelerate the
Makati, Metro Manila, this__ day of June 1995 by and between: development of Central Luzon and finally to decongest Metro
Manila of its vehicular traffic;
The BASES CONVERSION DEVELOPMENT AUTHORITY
WHEREAS, in order to implement and provide such a mass transit
. . . hereinafter referred to as BASECON; and access system, the parties hereto agreed to construct a double-
trac[k] railway system from Manila to Clark with a possible
The PHILIPPINE NATIONAL RAILWAYS ...; extension to Subic Bay and later to San Fernando, La Union, as the
second phase, and finally to Laoag, Ilocos Norte and to San Jose,
The following corporations collectively referred to as the Foreign Nueva Ecija, as the third phase of the project, hereinafter referred to
Group: as the PROJECT;

a) CONSTRUCCIONES Y AUXILIAR DE ARTICLE I

FERROCARRILES, S.A... .; DEFINITION OF TERMS

b) ENTRECANALES Y TAVORA, SA . . .; . . . .

c) CUBIERTAS MZOV, S.A. . . .; 1.5 "PROJECT" means the construction, operation and

management of a double-track railway system from Manila to Clark
d) COBRA, S.A....; and with an extension to Subic Bay, and a possible extension to San
Fernando, La Union, as the second phase, and finally to Laoag,
e) Others who may later participate in the JVA. Ilocos Norte and to San Jose, Nueva Ecija, as the third phase of the
PROJECT.
-and-
1.6 "North Luzon Railways Corporation (NORTHRAIL)
EUROMA DEVELOPMENT CORPORATION . . . ["] means the joint venture corporation to be established in
accordance with Article II hereof.
WITNESSETH: ....

ARTICLE II
. . . . THE NORTH LUZON RAILROAD CORPORATION

WHEREAS, a project identified pursuant to the aforesaid policy is

the establishment of a Premier International Airport Complex located 2.1 BASECON shall establish and incorporate in accordance with
at the former Clark Air Base as expressed in Executive Order 174 s. the laws of the Republic of the Philippines a corporation to be known
1994 in order to accommodate the expected heavy flow of passenger as NORTH LUZON RAILWAYS CORPORATION
and cargo traffic to and from the Philippines, to start the (NORTHRAIL) with an initial capitalization of one hundred million
pesos (PI 00,000,000.00). BASECON, PNR, EUROMA Development Corporation and
hereinafter to be owned by Filipino corporations shall not be less
2.2 NORTHRAIL shall eventually have an authorized capital stock than sixty percent (60%) at any given time.
of FIVE BILLION FIVE HUNDRED MILLION PESOS (P 5.5 ....
Billion) divided into 55,000,000 shares with par value of P 100 per
share. ARTICLE XVI
....
ARBITRATION
ARTICLE III
16. If any dispute arise hereunder which cannot be settled by mutual
PURPOSE OF NORTHRAIL accord between the parties to such dispute, then that dispute shall be
referred to arbitration. The arbitration shall be held in whichever
A. PRIMARY PURPOSE place the parties to the dispute decide and failing mutual agreement
as to a location within twenty-one (21) days after the occurrence of
3.1 To construct, operate and manage a railroad system to serve the dispute, shall be held in Metro Manila and shall be conducted in
Northern and Central Luzon; and to develop, construct, manage, accordance with the Philippine Arbitration Law (Republic Act No.
own, lease, sublease and operate establishments and facilities of all 876) as supplemented by the Rules of Conciliation and Arbitration of
kinds related to the railroad system; the International Chamber of Commerce. All award of such
.... arbitration shall be final and binding upon the parties to the dispute.

ARTICLE IV ARTICLE XVII

ASSIGNMENT
PARTICIPATION/TRANSFER/ENCUMBRANCE OF
SHARES
17.1 No party to this Agreement may assign, transfer or convey this
4.1 NORTHRAIL shall increase its authorized capital stock upon the Agreement, create or incur any encumbrance of its rights or any part
subscription thereon by the parties to this JVA in accordance with of its rights and obligations hereunder or any shares of stocks of
the following equity proportion/participation: NORTHRAIL to any person, firm or corporation without the prior
written consent of the other parties or except as provided in the
Foreign Group                          up to 20% Articles of Incorporation and By-Laws of NORTHRAIL and this
Euroma/Filipino partners                  50% Agreement.
BASECON/PNR                               30%
17.2 This Agreement shall inure to the benefit of and be binding
. . . . upon the parties hereto and their respective successors and permitted
assignees and designees or nominees whenever possible. 89
4.4 The shares owned by Filipino stockholders including
 Other local investors to be represented by EUROMA
The Joint Venture Agreement was amended on February 8, 1996 90 to DEVELOPMENT CORPORATION . . .
include D.M. Consunji, Inc. and/or its nominee as party. 91 The
participations of the parties in Northrail were also modified. and
Pertinent provisions of the amended Joint Venture Agreement are
reproduced as follows: P.M. CONSUNJI. INC. and/or its nominee . . .

This Amendment to the Joint Venture Agreement dated 10 th of June WITNESSETH THAT
1995 (the Agreement) made and executed at_____________ , Metro
Manila, on this 8th day of February 1996 by and among: WHEREAS, a Joint Venture Agreement (JVA) was executed on the
10th of June 1995 between BASECON, PNR, FOREIGN GROUP,
BASES CONVERSION DEVELOPMENT AUTHORITY . . . and EUROMA;
hereinafter referred to as BASECON; . . . .

with NOW, THEREFORE, for and in consideration of the foregoing

premises and of the mutual covenant contained therein, THE
PHILIPPINE NATIONAL RAILWAYS ... PARTIES HEREBY AGREE that the JVA should be amended as
follows:
and
1. In Article 1.3, D.M. CONSUNJI, INC. shall
The following corporations collectively referred to as the FOREIGN be included as strategic partner, being one of
GROUP: the Philippine registered companies selected
by BASECON, PNR and the Lead Group on
CONSTRUCCIONES Y AUXILIAR DE FERROCARRILES, the basis of its qualifications for the
S.A.. . .; implementation of the Project.

ENTRECANALES Y TAVORA, S.A....; CUBIERTAS Y MZOV, 2. Article 4.1 should read as follows:

S.A. . . .;
"NORTHRAIL shall increase its authorized
COBRA INSTALACIONES Y SERVICIOS, S.A.. . .; and capital stock upon the subscription thereon
by the Parties to this JVA in accordance
Other investors who may later participate in the Joint Venture; with the following equity
proportion/participation:
and
SRG.............................................. up
to 10%
 DMCI................................................ WHEREAS, NORTHRAIL is wholly owned and controlled by
..... 20% BASECON;
BASECON/PNR.............................
up to 30% WHEREAS, the privatization of NORTHRAIL is necessary in order
Others................................................ to accelerate the implementation of the Project by tapping the
..... 40% financial resources and expertise of the private sector;
. . . .

WHEREAS, the Parties of the Joint Venture Agreement (JVA) of 10

3. In Article 4.4, the Filipino corporations June 1995, namely BASECON, PNR, SPANISH RAILWAY
whose total shares in NORTHRAIL's capital GROUP and EUROMA, agreed to invite other private investors to
stock, which should not be less than sixty help in the financing and implementation of the Project, and to raise
percent (60%) at any given time, shall the required equity in order to accelerate the privatization of
include D.M. CONSUNJI, NORTHRAIL;
INC.93 (Underscoring supplied)
WHEREAS, DMCI and other private investors. . . have manifested
their desire to be strategic partners in implementing the Project;
On February 8, 1996, the same date of the execution of the amended
Joint Venture Agreement, the same parties executed a Memorandum WHEREAS, DMCI and other private investors have the financial
of Agreement94 "to set up the mechanics for raising the seed capability to implement the Project;
capitalization needed by NORTHRAIL[.]" 95 Pertinent provisions of
the Memorandum of Agreement are reproduced as follows: WHEREAS, Phase I of the Project covers the Manila - Clark section
of the North Luzon railway network as defined by the JVA of 10
WITNESSETH THAT June 1995 . . .[;]
....
WHEREAS, the Manila - Clark Rapid Railway System Project,
hereinafter referred to as the Project, was identified as one of the ARTICLE I
major infrastructure projects to accelerate the development of PURPOSE
Central Luzon, particularly the former U.S. bases at Clark and Subic;
. . . . 1.1 Purpose. This Agreement is entered into by the Parties in order
to set up the mechanics for raising the seed capitalization needed by
WHEREAS, the North Luzon Railways Corporation NORTHRAIL to accelerate the implementation of the Project.
(NORTHRAIL) was organized and incorporated to implement the ....
development, construction, operation and maintenance of the railway
system in Northern Luzon; ARTICLE II
TERMS OF AGREEMENT

. . . .
2.1 The Parties agree to put up the necessary seed capitalization
needed by NORTHRAIL to fast-track the implementation of the
Rapid Rail Transit System Project according to the following
schedule:
BCDA/PNR...................... PHP 300
DMCI..................................................... PHP 200
SRG...................................................... PHP 100
TOTAL................................................... PHP 600 Million
. . . .
2.3 The amounts contributed by BCDA/PNR, DMCI, SRG, and
others are committed to be converted to equity when NORTHRAIL
is privatized.96
There is no rule that a contract should be contained in a single
document.97 A whole contract may be contained in several
documents that are consistent with one other. 98
Moreover, at any time during the lifetime of an agreement,
circumstances may arise that may cause the parties to change or add
to the terms they previously agreed upon. Thus, amendments or
supplements to the agreement may be executed by contracting parties
to address the circumstances or issues that arise while a contract
subsists.
When an agreement is amended, some provisions are changed.
Certain parts or provisions may be added, removed, or corrected.
These changes may cause effects that are inconsistent with the
wordings of the contract before the changes were applied. In that
case, the old provisions shall be deemed to have lost their force and
effect, while the changes shall be deemed to have taken effect.
Provisions that are not affected by the changes usually remain
effective.
When a contract is supplemented, new provisions that are not
inconsistent with the old provisions are added. The nature, scope,
and terms and conditions are expanded. In that case, the old and the
new provisions form part of the contract.
A reading of all the documents of agreement shows that they were
Million executed by the same parties. Initially, the Joint Venture Agreement
Million was executed only by BCD A, PNR, and the foreign corporations.
Million When the Joint Venture Agreement was amended to include D.M.
Consunji, Inc. and/or its nominee, D.M. Consunji, Inc. and/or its
nominee were deemed to have been also a party to the original Joint
Venture Agreement executed by BCDA, PNR, and the foreign
corporations. D.M. Consunji, Inc. and/or its nominee became bound
to the terms of both the Joint Venture Agreement and its amendment.
Moreover, each document was executed to achieve the single
purpose of implementing the railroad project, such that documents of
agreement succeeding the original Joint Venture Agreement merely
amended or supplemented the provisions of the original Joint
Venture Agreement.
The first agreement — the Joint Venture Agreement — defined the
project, its purposes, the parties, the parties' equity participation, and
their responsibilities. The second agreement — the amended Joint
Venture Agreement —- only changed the equity participation of the
parties and included D.M. Consunji, Inc. and/or its nominee as party
to the railroad project. The third agreement — the Memorandum of
Agreement — raised the seed capitalization of Northrail from P100
million as indicated in the first agreement to P600 million, in order to
accelerate the implementation of the same project defined in the first
agreement.
The Memorandum of Agreement is an implementation of the Joint
Venture Agreement and the amended Joint Venture Agreement. It
could not exist without referring to the provisions of the original and
amended Joint Venture Agreements. It assumes a prior knowledge of
its terms. Thus, it referred to "North Luzon railway network as
defined by the JVA of 10 June 1995[.]" 99
In other words, each document of agreement represents a step toward
the implementation of the project, such that the three agreements
must be read together for a complete understanding of the parties'
whole agreement. The Joint Venture Agreement, the amended Joint
Venture Agreement, and the Memorandum of Agreement should be
treated as one contract because they all form part of a whole
agreement.
Hence, the arbitration clause in the Joint Venture Agreement should
not be interpreted as applicable only to the Joint Venture
Agreement's original parties. The succeeding agreements are deemed
part of or a continuation of the Joint Venture Agreement. The
arbitration clause should extend to all the agreements and its parties
since it is still consistent with all the terms and conditions of the
amendments and supplements.
II
BCDA and Northrail argued that they did not consent to D.M.
Consunji, Inc.'s assignment of rights to DMCI-PDI. Therefore,
DMCI-PDI did not validly become a party to any of the agreement.
Section 17.1 of the Joint Venture Agreement provides that rights
under the agreement may not be assigned, transferred, or conveyed
without the consent of the other party.100 Thus:
17.1 No party to this Agreement may assign, transfer or convey this
Agreement, create or incur any encumbrance of its rights or any part
of its rights and obligations hereunder or any shares of stocks of
NORTHRAIL to any person, firm or corporation without the prior
written consent of the other parties or except as provided in the
Articles of Incorporation and By-Laws of NORTHRAIL and the
Agreement.101
However, Section 17.2 of the Joint Venture Agreement provides that
the agreement shall be binding on nominees:
17.2 This Agreement shall inure to the benefit of and be binding
upon the parties . . . and their respective successors and permitted
assignees and designees or nominees whenever
applicable.102 (Emphasis supplied)
The principal parties to the agreement after its amendment include
D.M. Consunji, Inc. and/or its nominee:
AMENDMENT TO THE JOINT VENTURE AGREEMENT
This Amendment to the Joint Venture Agreement dated 10 th of June
1995 (the Agreement) made and executed at _____________ , Metro
Manila, on this 8th day of February 1996 by and among:
BASES CONVERSION DEVELOPMENT AUTHORITY . . .
with
PHILIPPINE NATIONAL RAILWAYS . . .
and
. . . .
D.M. CONSUNJI, INC. and/or its nominee, a domestic corporation
duly organized and created pursuant to the laws of the Republic of
the Philippines . . .103 (Emphasis supplied)
MEMORANDUM OF AGREEMENT
This Agreement made and executed at Pasig, Metro Manila,
Philippines on this 8[th] day of February 1996 by and among:

BASES CONVERSION DEVELOPMENT AUTHORITY . . .
with
PHILIPPINE NATIONAL RAILWAYS ...
and
D.M. CONSUNJI, INC. and/or its nominee, a domestic corporation
duly organized and created pursuant to the laws of the Republic of
the Philippines . . .104 (Emphasis supplied)
Based on DMCI-PDFs letter to BCDA and Northrail dated April 4,
1997, D.M. Consunji, Inc. designated DMCI-PDI as its nominee for
the agreements it entered into in relation to the project:
[I]n order to formalize the inclusion of [DMCI Project Developers,
Inc.] as a party to the JVA and MOA, DMCI would like to notify all
the parties that it is designating PDI as its nominee in both
agreements and such other agreements that may be signed by the
parties in furtherance of or in connection with the PROJECT. By
this nomination, all the rights, obligations, warranties and
commitments of DMCI under the JVA and MOA shall henceforth be
assumed performed and delivered by PDI.105 (Emphasis supplied)
Thus, lack of consent to the assignment is irrelevant because there
was no assignment or transfer of rights to DMCI-PDI. DMCI-PDI
was D.M. Consunji, Inc.'s nominee.
Section 17.2 of the Joint Venture Agreement clearly shows an intent
to treat assignment and nomination differently.
17.2 This Agreement shall inure to the benefit of and be binding
upon the parties . . . and their respective successors and
permitted assignees and designees or nominees whenever
applicable.106 (Emphasis supplied)
Assignment involves the transfer of rights after the perfection of a
contract. Nomination pertains to the act of naming the party with
whom it has a relationship of trust or agency.
In Philippine Coconut Producers Federation, Inc. (COCOFED) v.
Republic,107 this court defined "nominee" as follows:
In its most common signification, the term "nominee'' refers to one
who is designated to act for another usually in a limited way; a
person in whose name a stock or bond certificate is registered but
who is not the actual owner thereof is considered a
nominee." Corpus Juris Secundum describes a nominee as one:
". . . designated to act for another as his representative in a rather
limited sense. It has no connotation, however, other than that of
acting for another, in representation of another or as the grantee of
another. In its commonly accepted meaning the term connoted the
delegation of authority to the nominee in a representative or nominal
capacity only, and does not connote the transfer or assignment to the
nominee of any property in, or ownership of, the rights of the person
nominating him."108 (Citations omitted)
Contrary to BCDA and Northrail's position, therefore, the
agreement's prohibition against transfers, conveyance, and
assignment of rights without the consent of the other party does not
apply to nomination.
DMCI-PDI is a party to all the agreements, including the arbitration
agreement. It may, thus, invoke the arbitration clause against all the
parties.
III
Northrail, although not a signatory to the contracts, is also bound by
the arbitration agreement.
In Lanuza v. BF Corporation,109 we recognized that there are
instances when non-signatories to a contract may be compelled to
submit to arbitration.110 Among those instances is when a non-
signatory is allowed to invoke rights or obligations based on the
contract.111
The subject of BCDA and D.M. Consunji, Inc.'s agreement was the
construction and operation of a railroad system. Northrail was
established pursuant to this agreement and its terms, and for the same
purpose, thus:
ARTICLE III
PURPOSE OF NORTHRAIL
A. PRIMARY PURPOSE
3.1. To construct, operate and manage a railroad system to serve
Northern and Central Luzon; and to develop, construct, manage,
own, lease, sublease and operate establishments and facilities of all
kinds related to the railroad system[.]112
Northrail's capitalization and the composition of its subscribers are
also subject to the provisions of the original and amended Joint
Venture Agreements, and the subsequent Memorandum of
Agreement. It was pursuant to the terms of these agreements that
Northrail demanded from D.M. Consunji, Inc. the infusion of its
share in subscription.
Therefore, Northrail cannot deny understanding that its existence,
purpose, rights, and obligations are tied to the agreements. When
Northrail demanded for the amount of D.M. Consunji, Inc.'s
subscription based on the agreements and later accepted the latter's
funds, it proved that it was bound by the agreements' terms. It is also
deemed to have accepted the term that such funds shall be used for
its privatization. It cannot choose to demand the enforcement of
some of its provisions if it is in its favor, and then later by whim,
deny being bound by its terms.
Hence, when BCDA and Northrail decided not to proceed with
Northrail's privatization and the transfer of subscriptions to D.M.
Consunji, Inc., any obligation to return its supposed subscription
attached not only to BCDA as party to the agreement but primarily to
Northrail as beneficiary that impliedly accepted the terms of the
agreement and received D.M. Consunji, Inc.'s funds.
There is, therefore, merit to DMCI-PDI's argument that if the Civil
Code113 gives third party beneficiaries to a contract the right to
demand the contract's fulfillment in its favor, the reverse should also
be true.114 A beneficiary who communicated his or her acceptance to
the terms of the agreement before its revocation may be compelled to
abide by the terms of an agreement, including the arbitration clause.
In this case, Northrail is deemed to have communicated its
acceptance of the terms of the agreements when it accepted D.M.
Consunji, Inc.'s funds.
Finally, judicial efficiency and economy require a policy to avoid
multiplicity of suits. As we said in Lanuza:
Moreover, in Heirs ofAugusto Salas, this court affirmed its policy
against multiplicity of suits and unnecessary delay. This court said
that "to split the proceeding into arbitration for some parties and trial
for other parties would "result in multiplicity of suits, duplicitous
procedure and unnecessary delay." This court also intimated that the
interest of justice would be best observed if it adjudicated rights in a
single proceeding. While the facts of that case prompted this court to
direct the trial court to proceed to determine the issues of that case, it
did not prohibit courts from allowing the case to proceed to
arbitration, when circumstances warrant. 115

WHEREFORE, the petitions are DENIED. The February 9, 2006

Regional Trial Court Decision and the June 9, 2006 Regional Trial
Court Order are AFFIRMED.

SO ORDERED.

G.R. No. 204197, November 23, 2016

FRUEHAUF ELECTRONICS PHILIPPINES Management Pacific Corp. (TEAM).
CORPORATION, Petitioner, v. TECHNOLOGY
ELECTRONICS ASSEMBLY AND MANAGEMENT PACIFIC In March 1987, Fruehauf filed an unlawful detainer case against
CORPORATION, Respondent. TEAM. In an effort to amicably settle the dispute, both parties
executed a Memorandum of Agreement (MOA) on June 9,
DECISION 1988.3 Under the MOA, TEAM undertook to pay Fruehauf 14.7
million pesos as unpaid rent (for the period of December 1986 to
BRION, J.: June 1988).

The fundamental importance of this case lies in its delineation of the
extent of permissible judicial review over arbitral awards. We make
this determination from the prism of our existing laws on the subject
and the prevailing state policy to uphold the autonomy of arbitration
proceedings.
This is a petition for review on certiorari of the Court of Appeals'
(CA) decision in CA-G.R. SP. No. 112384 that reversed an arbitral
award and dismissed the arbitral complaint for lack of merit. 1 The
CA breached the bounds of its jurisdiction when it reviewed the
substance of the arbitral award outside of the permitted grounds
under the Arbitration Law.2
Brief Factual Antecedents
In 1978, Fruehauf Electronics Philippines Corp. (Fruehauf) leased
several parcels of land in Pasig City to Signetics Filipinas
Corporation (Signetics) for a period of 25 years (until May 28,
2003). Signetics constructed a semiconductor assembly factory on
the land on its own account.
They also entered a 15-year lease contract 4 (expiring on June 9,
2003) that was renewable for another 25 years upon mutual
agreement. The contract included an arbitration agreement: 5
17. ARBITRATION
In the event of any dispute or disagreement between the parties
hereto involving the interpretation or implementation of any
provision of this Contract of Lease, the dispute or disagreement shall
be referred to arbitration by a three (3) member arbitration
committee, one member to be appointed by the LESSOR, another
member to be appointed by the LESSEE, and the third member to be
appointed by these two members. The arbitration shall be conducted
in accordance with the Arbitration Law (R.A. No.
876).ChanRoblesVirtualawlibrary
The contract also authorized TEAM to sublease the property. TEAM
subleased the property to Capitol Publishing House (Capitol) on
December 2, 1996 after notifying Fruehauf.
On May 2003, TEAM informed Fruehauf that it would not be
renewing the lease.6

In 1983, Signetics ceased its operations after the Board of On May 31, 2003, the sublease between TEAM and Capitol expired.
Investments (BOI) withdrew the investment incentives granted to However, Capitol only vacated the premises on March 5, 2005. In
electronic industries based in Metro Manila. the meantime, the master lease between TEAM and Fruehauf expired
on June 9, 2003.
In 1986, Team Holdings Limited (THL) bought Signetics. THL later
changed its name to Technology Electronics Assembly and On March 9, 2004, Fruehauf instituted SP Proc. No. 11449 before
the Regional Trial Court (RTC) for "Submission of an Existing
Controversy for Arbitration."7 It alleged: (1) that when the lease
expired, the property suffered from damage that required extensive
renovation; (2) that when the lease expired, TEAM failed to turn
over the premises and pay rent; and (3) that TEAM did not restore
the property to its original condition as required in the contract.
Accordingly, the parties are obliged to submit the dispute to
arbitration pursuant to the stipulation in the lease contract.
The RTC granted the petition and directed the parties to comply with
the arbitration clause of the contract. 8
Pursuant to the arbitration agreement, the dispute was referred to a
three-member arbitration tribunal. TEAM and Fruehauf appointed
one member each while the Chairman was appointed by the first two
members. The tribunal was formally constituted on September 27,
2004 with retired CA Justice Hector L. Hofileña, as chairman, retired
CA Justice Mariano M. Umali and Atty. Maria Clara B. Tankeh
Asuncion as members.9
The parties initially submitted the following issues to the tribunal for
resolution:10
1. Whether or not TEAM had complied with its
obligation to return the leased premises to Fruehauf
after the expiration of the lease on June 9, 2003.
    1.1. What properties should be returned and in
what condition?
2. Is TEAM liable for payment of rentals after June 9,
2003?
    2.1. If so, how much and for what period?
3. Is TEAM liable for payment of real estate taxes,
insurance, and other expenses on the leased premises
after June 9, 2003?
4. Who is liable for payment of damages and how
much?
5. Who is liable for payment of attorney's fees and how
much?
Subsequently, the following issues were also submitted for resolution
after TEAM proposed11 their inclusion:
1. Who is liable for the expenses of arbitration, including
arbitration fees?
2. Whether or not TEAM has the obligation to return the
premises to Fruehauf as a "complete, rentable, and fully
facilitized electronic plant."
The Arbitral Award12
On December 3, 2008, the arbitral tribunal awarded Fruehauf: (1) 8.2
million pesos as (the balance of) unpaid rent from June 9, 2003 until
March 5, 2005; and (2) 46.8 million pesos as damages. 13
The tribunal found that Fruehauf made several demands for the
return of the leased premises before and after the expiration of the
lease14 and that there was no express or implied renewal of the lease
after June 9, 2003. It recognized that the sub-lessor, Capitol,
remained in possession of the lease. However, relying on the
commentaries of Arturo Tolentino on the subject, the tribunal held
that it was not enough for lessor to simply vacate the leased
property; it is necessary that he place the thing at the disposal of the
lessor, so that the latter can receive it without any obstacle.15
For failing to return the property to Fruehauf, TEAM remained liable
for the payment of rents. However, if it can prove that Fruehauf
received rentals from Capitol, TEAM can deduct these from its
liability.16 Nevertheless, the award of rent and damages was without
prejudice to TEAM's right to seek redress from its sub-lessee,
Capitol.17
With respect to the improvements on the land, the tribunal viewed
the situation from two perspectives:
First, while the Contract admitted that Fruehauf was only leasing the
land and not the buildings and improvements thereon, it nevertheless
obliged TEAM to deliver the buildings, installations and other
improvements existing at the inception of the lease upon its
expiration.18
The other view, is that the MOA and the Contract recognized that
TEAM owned the existing improvements on the property and
considered them as separate from the land for the initial 15-year term
of the lease.19 However, Fruehauf had a vested right to become the
owner of these improvements at the end of the 15-year term.
Consequently, the contract specifically obligated TEAM not to
remove, transfer, destroy, or in any way alienate or encumber these
improvements without prior written consent from Fruehauf. 20
Either way, TEAM had the obligation to deliver the existing
improvements on the land upon the expiration of the lease. However,
there was no obligation under the lease to return the premises as a
"complete, rentable, and fully facilitized electronis plant."21 Thus,
TEAM's obligation was to vacate the leased property and deliver to
Fruehauf the buildings, improvements, and installations (including
the machineries and equipment existing thereon) in the same
condition as when the lease commenced, save for what had been lost
or impaired by the lapse of time, ordinary wear and tear, or any other
inevitable cause.22
The tribunal found TEAM negligent in the maintenance of the
premises, machineries, and equipment it was obliged to deliver to
Fruehauf.23 For this failure to conduct the necessary repairs or to
notify Fruehauf of their necessity, the tribunal held TEAM
accountable for damages representing the value of the repairs
necessary to restore the premises to a condition "suitable for the use
to which it has been devoted" less their depreciation expense. 24
On the other issues, the tribunal held that TEAM had no obligation to
pay real estate taxes, insurance, and other expenses on the leased
premises considering these obligations can only arise from a renewal
of the contract.25cralawred Further, the tribunal refused to award
attorney's fees, finding no evidence that either party acted in bad
faith.26 For the same reason, it held both parties equally liable for the
expenses of litigation, including the arbitrators' fees. 27
TEAM moved for reconsideration28 which the tribunal
denied.29 Thus, TEAM petitioned the RTC to partially vacate or
modify the arbitral award.30 It argued that the tribunal failed to
properly appreciate the facts and the terms of the lease contract.
The RTC Ruling
On April 29, 2009, the RTC31 found insufficient legal grounds under
Sections 24 and 25 of the Arbitration Law to modify or vacate the
award.32 It denied the petition and CONFIRMED, the arbitral
award.33 TEAM filed a Notice of Appeal.
On July 3, 2009,34 the RTC refused to give due course to the Notice
of Appeal because according to Section 29 35 of the Arbitration Law,
an ordinary appeal under Rule 41 is not the proper mode of appeal
against an order confirming an arbitral award. 36
TEAM moved for reconsideration but the RTC denied the motion on
November 15, 2009.37 Thus, TEAM led a petition
38
for certiorari  before the CA arguing that the RTC gravely abused
its discretion in: (1) denying due course to its notice of appeal; and
(2) denying the motion to partially vacate and/or modify the arbitral
award.39
TEAM argued that an ordinary appeal under Rule 41 was the proper
remedy against the RTC's order confirming, modifying, correcting,
or vacating an arbitral award. 40 It argued that Rule 42 was not
available because the order denying its motion to vacate was not
rendered in the exercise of the RTC's appellate jurisdiction. Further,
Rule 43 only applies to decisions of quasi-judicial bodies. Finally, an
appeal under Rule 45 to the Supreme Court would preclude it from
raising questions of fact or mixed questions of fact and law. 41
TEAM maintained that it was appealing the RTC's order denying its
petition to partially vacate/modify the award, not the arbitral
award itself.42 Citing Rule 41, Section 13 of the Rules of Court, the
RTC's authority to dismiss the appeal is limited to instances when it
was filed out of time or when the appellant fails to pay the docket
fees within the reglementary period. 43
TEAM further maintained that the RTC gravely abused its discretion
by confirming the Arbitral Tribunal's award when it evidently had
legal and factual errors, miscalculations, and ambiguities. 44
The petition was docketed as CA-G.R. SP. No. 112384.
The CA decision45
The CA initially dismissed the petition. 46 As the RTC did, it cited
Section 29 of the Arbitration Law:
Section 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 appeal,
including the judgment thereon shall be governed by the Rules of
Court in so far as they are applicable.ChanRoblesVirtualawlibrary
It concluded that the appeal contemplated under the law is an appeal
by certiorari limited only to questions flaw.47
The CA continued that TEAM failed to substantiate its claim as to
the "evident miscalculation of figures." It further held that
disagreement with the arbitrators' factual determinations and legal
conclusions does not empower courts to amend or overrule arbitral
judgments.48
However, the CA amended its decision on October 25, 2012 upon a
motion for reconsideration.49
The CA held that Section 29 of the Arbitration Law does not
preclude the aggrieved party from resorting to other judicial
remedies.50 Citing Asset Privatization Trust v. Court of Appeals,51 the
CA held that the aggrieved party may resort to a petition
for certiorari when the RTC to which the award was submitted for
confirmation has acted without jurisdiction, or with grave abuse of
discretion and there is no appeal, nor any plain, speedy remedy in the
course of law.52
The CA further held that the mere filing of a notice of appeal is
sufficient as the issues raised in the appeal were not purely questions
of law.53 It further cited Section 46 of the Alternative Dispute
Resolution (ADR) Law:54
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 be required by the appellant 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.55ChanRoblesVirtualawlibrary
However, the CA made no further reference to A.M. No. 07-11-08-
SC, the Special Rules of Court on Alternative Dispute Resolution
(Special ADR Rules) which govern the appeal procedure.
The CA further revisited the merits of the arbitral award and found
several errors in law and in fact. It held: (1) that TEAM was not
obliged to pay rent because it was Capitol, not TEAM, that remained
in possession of the property upon the expiration of the lease; 56 and
(2) that Fruehauf was not entitled to compensation for the repairs on
the buildings because it did not become the owner of the building
until after the expiration of the lease.57
Also citing Tolentino, the CA opined: (1) that a statement by the
lessee that he has abandoned the premises should, as a general rule,
constitute sufficient compliance with his duty to return the leased
premises; and (2) that any new arrangement made by the lessor with
another person, such as the sub-lessor, operates as a resumption of
his possession.58
On the issue of damages, the CA held that TEAM can never be liable
for the damages for the repairs of the improvements on the premises
because they were owned by TEAM itself (through its predecessor,
Signetics) when the lease commenced. 59
The CA REVERSED AND SET ASIDE the arbitral award
and DISMISSED the arbitral complaint for lack of merit. 60
This CA action prompted Fruehauf to file the present petition for
review.
The Arguments
Fruehauf argues that courts do not have the power to substitute their
judgment for that of the arbitrators. 61 It also insists that an ordinary
appeal is not the proper remedy against an RTC's order confirming,
vacating, correcting or modifying an arbitral ward but a petition for
review on certiorari under Rule 45.62
Furthermore, TEAM's petition before the CA went beyond the
permissible scope of certiorari the existence of grave abuse of
discretion or errors jurisdiction - by including questions of fact and
law that challenged the merits of the arbitral award. 63
However, Fruehauf inconsistently argues that the remedies against an
arbitral award are (1) a petition to vacate the award, (2) a petition for
review under Rule 43 raising questions of fact, of law, or mixed
questions of fact and law, or (3) a petition for certiorari under Rule
65.64 Fruehauf cites an article from the Philippine Dispute Resolution
Center65 and Insular Savings Bank v. Far East Bank and Trust, Co. 66
TEAM counters that the CA correctly resolved the substantive issues
of the case and that the arbitral tribunal's errors were sufficient
grounds to vacate or modify the award.67 It insists that the RTC's
misappreciation of the facts from a patently erroneous award
warranted an appeal under Rule 41.68
TEAM reiterates that it "disagreed with the arbitral award mainly
on questions of fact and not only on questions of law,"
specifically, "on factual matters relating to specific provisions in
the contract on ownership of structures and improvements
thereon, and the improper award of rentals and
penalties."69 Even assuming that it availed of the wrong mode of
appeal, TEAM posits that its appeal should still have been given due
course in the interest of substantial justice. 70
TEAM assails the inconsistencies of Fruehauf's position as to the
available legal remedies against an arbitral award. 71 However, it
maintains that Section 29 of the Arbitration Law does not foreclose
other legal remedies (aside from an appeal by certiorari) against the
RTC's order confirming or vacating an arbitral award pursuant
to Insular Savings Bank and ABS-CBN Broadcasting Corporation v.
World Interactive Network Systems (WINS) Japan Co., Ltd. 72
The Issues
This case raises the following questions:
1. What are the remedies or the modes of appeal against an
unfavorable arbitral award?
2. What are the available remedies from an RTC decision
confirming, vacating, modifying, or correcting an arbitral
award?
3. Did the arbitral tribunal err in awarding Fruehauf damages
for the repairs of the building and rental fees from the
expiration of the lease?
Our Ruling
The petition is meritorious.
Arbitration is an alternative mode of dispute resolution outside of
the regular court system. Although adversarial in character,
arbitration is technically not litigation. It is a voluntary process in
which one or more arbitrators - appointed according to the parties'
agreement or according to the applicable rules of the Alternative
Dispute Resolution (ADR) Law - resolve a dispute by rendering an
award.73 While arbitration carries many advantages over court
litigation, in many ways these advantages also translate into its
disadvantages.
Resort to arbitration is voluntary. It requires consent from both
parties in the form of an arbitration clause that pre-existed the
dispute or a subsequent submission agreement. This written
arbitration agreement is an independent and legally enforceable
contract that must be complied with in good faith. By entering into
an arbitration agreement, the parties agree to submit their dispute to
an arbitrator (or tribunal) of their own choosing and be bound by the
latter's resolution.
However, this contractual and consensual character means that the
parties cannot implead a third-party the proceedings even if the
latter's participation is necessary for a complete settlement of the
dispute. The tribunal does not have the power to compel a person to
participate in the arbitration proceedings without that person's
consent. It also has no authority to decide on issues that the parties
did not submit (or agree to submit) for its resolution.
As a purely private mode of dispute resolution, arbitration
proceedings, including the records, the evidence, and the arbitral
award, are confidential74 unlike court proceedings which are
generally public. This allows the parties to avoid negative publicity
and protect their privacy. Our law highly regards the confidentiality
of arbitration proceedings that it devised a judicial remedy to prevent
or prohibit the unauthorized disclosure of confidential information
obtained therefrom.75
The contractual nature of arbitral proceedings affords the parties
substantial autonomy over the proceedings. The parties are free to
agree on the procedure to be observed during the proceedings.76 This
lends considerable flexibility to arbitration proceedings as compared
to court litigation governed by the Rules of Court.
The parties likewise appoint the arbitrators based on agreement.
There are no other legal requirements as to the competence or
technical qualifications of an arbitrator. Their only legal
qualifications are: (1) being of legal age; (2) full-enjoyment of their
civil rights; and (3) the ability to read and write. 77 The parties can
tailor-fit the tribunal's composition to the nature of their dispute.
Thus, a specialized dispute can be resolved by experts on the subject.
However, because arbitrators do not necessarily have a background
in law, they cannot be expected to have the legal mastery of a
magistrate. There is a greater risk that an arbitrator might misapply
the law or misappreciate the facts en route to an erroneous decision.
This risk of error is compounded by the absence of an effective
appeal mechanism. The errors of an arbitral tribunal are not subject
to correction by the judiciary. As a private alternative to court
proceedings, arbitration is meant to be an end, not the beginning,
of litigation.78 Thus, the arbitral award is final and binding on the
parties by reason of their contract the arbitration agreement. 79
An Arbitral Tribunal does not exercise quasi-judicial powers
Quasi-judicial or administrative adjudicatory power is the power: (1)
to hear and determine questions of fact to which legislative policy is
to apply, and (2) to decide in accordance with the standards laid
down by the law itself in enforcing and administering the same
law.80 Quasi-judicial power is only exercised by administrative
agencies - legal organs of the government.
Quasi-judicial bodies can only exercise such powers and jurisdiction
as are expressly or by necessary implication conferred upon them by
their enabling statutes.81 Like courts, a quasi-judicial body's
jurisdiction over a subject matter is conferred by law and exists
independently from the will of the parties. As government organs
necessary for an effective legal system, a quasi-judicial tribunal's
legal existence. continues beyond the resolution of a specific dispute.
In other words, quasi-judicial bodies are creatures of law.
As a contractual and consensual body, the arbitral tribunal does not
have any inherent powers over the parties. It has no power to issue
coercive writs or compulsory processes. Thus, there is a need to
resort to the regular courts for interim measures of protection 82 and
for the recognition or enforcement of the arbitral award. 83
The arbitral tribunal acquires jurisdiction over the parties and the
subject matter through stipulation. Upon the rendition of the final
award, the tribunal becomes functus officio and - save for a few
exceptions84 - ceases to have any further jurisdiction over the
dispute.85 The tribunal's powers (or in the case of ad hoc tribunals,
their very existence) stem from the obligatory force of the arbitration
agreement and its ancillary stipulations. 86 Simply put, an arbitral
tribunal is a creature of contract.
Deconstructing the view that arbitral tribunals are quasi-judicial
agencies
We are aware of the contrary view expressed by the late Chief
Justice Renato Corona in ABS-CBN Broadcasting Corporation v.
World Interactive Network Systems (WINS) Japan Co., Ltd..87
The ABS-CBN Case opined that a voluntary arbitrator is a "quasi-
judicial instrumentality" of the government88 pursuant to Luzon
Development Bank v. Association of Luzon Development Bank
Employees,89Sevilla Trading Company v. Semana,90Manila Midtown
Hotel v. Borromeo,91 and Nippon Paint Employees Union-Olalia v.
Court of Appeals.92 Hence, voluntary arbitrators are included in the
Rule 43 jurisdiction of the Court of Appeals:
SECTION 1. Scope. - This Rule shall apply to appeals from
judgments or final orders of the Court of Tax Appeals and from
awards, judgments, final orders or resolutions of or authorized by
any quasi-judicial agency in the exercise of its quasi-judicial
functions. Among these agencies are the Civil Service Commission,
Central Board of Assessment Appeals, Securities and Exchange
Commission, Office of the President, Land Registration Authority,
Social Security Commission, Civil Aeronautics Board, Bureau of
Patents, Trademarks and Technology Transfer, National
Electrification Administration, Energy Regulatory Board, National
Telecommunications Commission, Department of Agrarian Reform
under Republic Act No. 6657, Government Service Insurance
System, Employees Compensation Commission, Agricultural not by mere agreement of the parties.
Inventions Board, Insurance Commission, Philippine Atomic Energy
Commission, Board of Investments, Construction Industry In both cases, the pronouncements as to the remedies against an
Arbitration Commission, and voluntary arbitrators authorized by arbitral award were unnecessary for their resolution. Therefore, these
law.93 (emphasis supplied)ChanRoblesVirtualawlibrary are obiter dicta - judicial comments made in passing which are not
Citing Insular Savings Bank v. Far East Bank and Trust essential to the resolution of the case and cannot therefore serve as
Co.,94 the ABS-CBN Case pronounced that the losing party in an precedents.99
arbitration proceeding may avail of three alternative remedies: (1) a
petition to vacate the arbitral award before the RTC; (2) a petition for Second, even if we disregard the obiter dicta character of both
review with the CA under Rule 43 of the Rules of Court raising pronouncements, a more careful scrutiny deconstructs their legal
questions, of fact, of law, or of both; and (3) a petition authority.
for certiorari under Rule 65 should the arbitrator act beyond its
jurisdiction or with grave abuse of discretion. 95 The ABS-CBN Case committed the classic fallacy of equivocation.
It equated the term "voluntary arbitrator" used in Rule 43, Section 1
At first glance, the logic of this position appears to be sound. and in the cases of Luzon Development Bank v. Association of Luzon
However, a critical examination of the supporting authorities would Development Bank Employees, Sevilla Trading Company v. Semana,
show that the conclusion is wrong. Manila Midtown Hotel v. Borromeo, and Nippon Paint Employees
Union-Olalia v. Court of Appeals with the term
First, the pronouncements mad in the ABS-CBN Case and in "arbitrator/arbitration tribunal."
the Insular Savings Bank Case (which served as the authority for the
ABS-CBN Case) were both obiter dicta. The first rule of legal construction, verba legis, requires that,
wherever possible, the words used in the Constitution or in the
In the ABS-CBN Case, we sustained the CA's dismissal of the statute must be given their ordinary meaning except where technical
petition because it was filed as an "alternative petition for review terms are employed.100 Notably, all of the cases cited in the ABS-
under Rule 43 or petition for certiorari under Rule 65."96 We held CBN Case involved labor disputes.
that it was an inappropriate mode of appeal because, a petition for
review and a petition for certiorari are mutually exclusive and not The term "Voluntary Arbitrator" does not refer to an ordinary
alternative or successive. "arbitrator" who voluntarily agreed to resolve a dispute. It is a
technical term with a specific definition under the Labor Code:
In the Insular Savings Bank case, the lis mota of the case was the
RTC's jurisdiction over an appeal from an arbitral award. The parties Art. 212 Definitions. xxx
to the arbitration agreement agreed that the rules of the arbitration
provider97 - which stipulated that the RTC shall have jurisdiction to 14. "Voluntary Arbitrator" means any person accredited by the Board
review arbitral awards - will govern the proceedings. 98 The Court as such or any person named or designated in the Collective
ultimately held that the RTC does not have jurisdiction to review the Bargaining Agreement by the parties to act as their Voluntary
merits of the award because legal jurisdiction is conferred by law, Arbitrator, or one chosen with or without the assistance of the
National Conciliation and Mediation Board, pursuant to a selection
procedure agreed upon in the Collective Bargaining Agreement, or
any official that may be authorized by the Secretary of Labor and
Employment to act as Voluntary Arbitrator upon the written request
and agreement of the parties to a labor dispute. 101
Voluntary Arbitrators resolve labor disputes and grievances arising
from the interpretation of Collective Bargaining
Agreements.102 These disputes were specifically excluded from the
coverage of both the Arbitration Law 103 and the ADR Law.104
Unlike purely commercial relationships, the relationship between
capital and labor are heavily impressed with public
interest.105 Because of this, Voluntary Arbitrators authorized to
resolve labor disputes have been clothed with quasi-judicial
authority.
On the other hand, commercial relationships covered by our
commercial arbitration laws are purely private and contractual in
nature. Unlike labor relationships, they do not possess the same
compelling state interest that would justify state interference into the
autonomy of contracts. Hence, commercial arbitration is a purely
private system of adjudication facilitated by private citizens instead
of government instrumentalities wielding quasi-judicial powers.
Moreover, judicial or quasi-judicial jurisdiction cannot be conferred
upon a tribunal by the parties alone. The Labor Code itself confers
subject-matter jurisdiction to Voluntary Arbitrators. 106
Notably, the other arbitration, body listed in Rule 43 the
Construction Industry Arbitration Commission (CIAC) - is also a
government agency107 attached to the Department of Trade and
Industry.108 Its jurisdiction is likewise conferred by statute. 109 By
contrast, the subject-matter jurisdiction of commercial arbitrators is
stipulated by the parties.
These account for the legal differences between "ordinary" or
"commercial" arbitrators under the Arbitration Law and the ADR
Law, and "voluntary arbitrators" under the Labor Code. The two
terms are not synonymous with each other. Interchanging them with
one another results in the logical fallacy of equivocation - using the
same word with different meanings.
Further, Rule 43, Section 1 enumerates quasi-judicial tribunals
whose decisions are appealable to the CA instead of the RTC. But
where legislation provides for an appeal from decisions of
certain administrative bodies to the CA, it means that such bodies
are co-equal with the RTC in terms of rank and stature, logically
placing them beyond the control of the latter.110
However, arbitral tribunals and the RTC are not co-equal bodies
because the RTC is authorized to confirm or to vacate (but not
reverse) arbitral awards. 111 If we were to deem arbitrators as included
in the scope of Rule 43, we would effectively place it on equal
footing with the RTC and remove arbitral awards from the scope of
RTC review.
All things considered, there is no legal authority supporting the
position that commercial arbitrators are quasi-judicial bodies.
What are remedies from a final domestic arbitral award?
The right to an appeal is neither a natural right nor an indispensable
component of due process; it is a mere statutory privilege that cannot
be invoked in the absence of an enabling statute. Neither the
Arbitration Law nor the ADR Law allows a losing party to appeal
from the arbitral award. The statutory absence of an appeal
mechanism reflects the State's policy of upholding the autonomy of
arbitration proceedings and their corresponding arbitral awards.
This Court recognized this when we enacted the Special Rules of
Court on Alternative Dispute Resolution in 2009:112
Rule 2.1. General policies. - It is the policy of the State to actively
promote the use of various modes of ADR and to respect party
autonomy or the freedom of the parties to make their own
arrangements in the resolution of disputes with the greatest
cooperation of and the least intervention from the courts. xxx
The Court shall exercise the power of judicial review as provided by
these Special ADR Rules. Courts shall intervene only in the cases
allowed by law or these Special ADR Rules.113
xxxx
Rule 19.7. No appeal or certiorari on the merits of an arbitral
award. - An agreement to refer a dispute to arbitration shall mean
that the arbitral award shall be final and binding. Consequently, a
party to an arbitration is precluded from filing an appeal or a
petition for certiorari questioning the merits of an arbitral
award.114(emphasis supplied)
More than a decade earlier in Asset Privatization Trust v. Court of
Appeals, we likewise defended the autonomy of arbitral awards
through our policy of non-intervention on their substantive merits:
As a rule, the award of an arbitrator cannot be set aside for mere
errors of judgment either as to the law or as to the facts. Courts
are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the
arbitrators. They will not review the findings of law and fact
contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would
make an award the commencement, not the end, of litigation. Errors
of law and fact, or an erroneous decision of matters submitted to the
judgment of the arbitrators, are insufficient to invalidate an award
fairly and honestly made. Judicial review of an arbitration is, thus,
more limited than judicial review of a trial. 115
Nonetheless, an arbitral award is not absolute. Rule 19.10 of the
Special ADR Rules - by referring to Section 24 of the Arbitration
Law and Article 34 of the 1985 United Nations Commission on
International Trade Law (UNCITRAL) Model Law - recognizes the
very limited exceptions to the autonomy of arbitral awards:
Rule 19.10. Rule on judicial review on arbitration in the
Philippines. - As a general rule, the court can only vacate or set aside
the decision of an arbitral tribunal upon a clear showing that the
award suffers from any of the infirmities or grounds for vacating an
arbitral award under Section 24 of Republic Act No. 876 or
under Rule 34 of the Model Law in a domestic arbitration, or for
setting aside an award in an international arbitration under Article 34
of the Model Law, or for such other grounds provided under these
Special Rules.
If the Regional Trial Court is asked to set aside an arbitral award in a
domestic or international arbitration on any ground other than
those provided in the Special ADR Rules, the court shall entertain
such ground for the setting aside or non-recognition of the arbitral
award only if the same amounts to a violation of public policy.
The court shall not set aside or vacate the award of the arbitral
tribunal merely on the ground that the arbitral tribunal
committed errors of fact, or of law, or of fact and law, as the
court cannot substitute its judgment for that of the arbitral
tribunal.116
The grounds for vacating a domestic arbitral award under Section 24
of the Arbitration Law contemplate the following scenarios:
(a) when the award is procured by corruption, fraud, or other
undue means; or
(b) there was evident partiality or corruption in the arbitrators or
any of them; or
(c) the arbitrators were guilty of misconduct that materially
prejudiced the rights of any party; or
(d) the arbitrators exceeded their powers, or so imperfectly
executed them, that a mutual, final and definite award upon
the subject matter submitted to them was not made. 117
The award may also be vacated if an arbitrator who was disqualified
to act willfully refrained from disclosing his disqualification to the
parties.118 Notably, none of these grounds pertain to the correctness
of the award but relate to the misconduct of arbitrators.
The RTC may also set aside the arbitral award based on Article 34 of
the UNCITRAL Model Law. These grounds are reproduced in
Chapter 4 of the Implementing Rules and Regulations (IRR) of the
2004 ADR Act:
(i) the party making the application furnishes proof that:
(aa) a party to the arbitration agreement was under some
incapacity; or the said agreement is not valid under the
law to which the parties have subjected it or, failing
any indication thereon, under the law of the
Philippines; or
(bb) the party making the application was not given proper
notice of the appointment of an arbitrator or of the
arbitral proceedings or was otherwise unable to
present his case; or
(cc) the award deals with a dispute not contemplated by or
not falling within the terms of the submission to
arbitration, or contains decisions on matters beyond
the scope of the submission to arbitration, provided
that, if the decisions on matters submitted to
arbitration can be separated from those not so
submitted, only the part of the award which contains
decisions on matters not submitted to arbitration may
be set aside; or
(dd) the composition of the arbitral tribunal or the arbitral
procedure was not in accordance with the agreement
of the parties, unless such agreement was in conflict
with a provision of ADR Act from which the parties
cannot derogate, or, failing such agreement, was not in
accordance with ADR Act; or
(ii) The Court finds that:
(aa) the subject-matter of the dispute is not capable of
settlement by arbitration under the law of the
Philippines; or
(bb) the award is in conflict with the public policy of the
Philippines.119
Chapter 4 of the IRR of the, ADR Act applies particularly to
International Commercial Arbitration. However, the abovementioned
grounds taken from the UNCITRAL. Model Law are specifically
made applicable to domestic arbitration by the Special ADR Rules. 120
Notably, these grounds are not concerned with the correctness of the
award; they go into the validity of the arbitration agreement or the
regularity of the arbitration proceedings.
These grounds for vacating an arbitral award are exclusive. Under
the ADR Law, courts are obliged to disregard any other grounds
invoked to set aside an award:
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.121
Consequently, the winning party can generally expect the
enforcement of the award. This is a stricter rule that makes Article
2044122 of the Civil Code regarding the finality of an arbitral award
redundant.
As established earlier, an arbitral award is not appealable via Rule 43
because: (1) there is no statutory basis for an appeal from the final
award of arbitrators; (2) arbitrators are not quasi-judicial bodies; and
(3) the Special ADR Rules specifically prohibit the filing of an
appeal to question the merits of an arbitral award.
The Special ADR Rules allow the RTC to correct or modify an
arbitral award pursuant to Section 25 of the Arbitration Law.
However, this authority cannot be interpreted as jurisdiction to
review the merits of the award. The RTC can modify or correct the
award only in the following cases:
a. Where there was an evident miscalculation of figures or an
evident mistake in the description of any person, thing or
property referred to in the award;chanrobleslaw
b. Where the arbitrators have awarded upon a matter not
submitted to them, not affecting the merits of the decision
upon the matter submitted;chanrobleslaw
c. Where the arbitrators have omitted to resolve an issue
submitted to them for resolution; or
d. Where the award is imperfect in a matter of form not
affecting the merits of the controversy, and if it had been a
commissioner's report, the defect could have been amended
or disregarded by the Court.123
A losing party is likewiselrecluded from resorting to certiorari under
Rule 65 of the Rules of Court. 124Certiorari is a prerogative writ
designed to correct errors of jurisdiction committed by a judicial or
quasi-judicial body.125 Because an arbitral tribunal is not a
government organ exercising judicial or quasi-judicial powers, it is
removed from the ambit of Rule 65.
Not even the Court's expanded certiorari jurisdiction under the
Constitution126 can justify judicial intrusion into the merits of arbitral
awards. While the Constitution expanded the scope
of certiorari proceedings, this power remains limited to a review of
the acts of "any branch or instrumentality of the Government." As a
purely private creature of contract, an arbitral tribunal remains
outside the scope of certiorari.
Lastly, the Special ADR Rules are a self-contained body of rules.
The parties cannot invoke remedies and other provisions from the
Rules of Court unless they were incorporated in the Special ADR
Rules:
Rule 22.1. Applicability of Rules of Court. - The provisions of the
Rules of Court that are applicable to the proceedings enumerated in
Rule 1.1 of these Special ADR Rules have either been included
and incorporated in these Special ADR Rules or specifically
referred to herein.
In Connection with the above proceedings, the Rules of Evidence
shall be liberally construed to achieve the objectives of the Special
ADR Rules.127
Contrary to TEAM's position, the Special ADR Rules actually
forecloses against other remedies outside of itself. Thus, a losing
party cannot assail an arbitral award through, a petition for review
under Rule 43 or a petition for certiorari under Rule 65 because
these remedies are not specifically permitted in the Special ADR
Rules.
In sum, the only remedy against a final domestic arbitral award is to
file petition to vacate or to modify/correct the award not later than
thirty (30) days from the receipt of the award. 128 Unless a ground to
vacate has been established, the RTC must confirm the arbitral award
as a matter of course.
 on November 15, 2009. In the interim, the Special ADR Rules
The remedies against an order confirming, vacating, correcting, or became effective. Notably, the Special ADR Rules apply
modifying an arbitral award retroactively in light of its procedural character. 133 TEAM filed its
petition for certiorari soon after.
Once the RTC orders the confirmation, vacation, or
correction/modification of a domestic arbitral award, the aggrieved Nevertheless, whether we apply, Section 29 of the Arbitration Law,
party may move for reconsideration within a non-extendible period Section 46 of the ADR Law, or Rule 19.12 of the Special ADR
of fifteen (15) days from receipt of the order. 129 The losing party may Rules, there is no legal basis that an ordinary appeal (via notice of
also opt to appeal from the RTC's ruling instead. appeal) is the correct remedy from an order confirming, vacating, or
correcting an arbitral award. Thus, there is no merit in the CA's
Under the Arbitration Law, the mode of appeal was via petition for ruling that the RTC gravely abused its discretion when it refused to
review on certiorari: give due course to the notice of appeal.

Section 29. Appeals. - An appeal may be taken from an order made The correctness or incorrectness of the arbitral award
in a proceeding under this Act, or from judgment entered upon an
award through certiorari proceedings, but such appeals shall be We have deliberately refrained from passing upon the merits of the
limited to questions of law. The proceedings upon such appeal, arbitral award - not because the award was erroneous but because it
including the judgment thereon shall be governed by the Rules of would be improper. None of the grounds to vacate an arbitral award
Court in so far as they are applicable.130 are present in this case and as already established, the merits of the
award cannot be reviewed by the courts.
The Arbitration Law did not specify which Court had jurisdiction to
entertain the appeal but left the matter to be governed by the Rules of
Our refusal to review the award is not a simple matter of putting
Court. As the appeal was limited to questions of law and was
procedural technicalities over the substantive merits of a case; it goes
described as "certiorari proceedings," the mode of appeal can be
into the very legal substance of the issues. There is no law granting
interpreted as an Appeal By Certiorari to this Court under Rule 45.
the judiciary authority to review the merits of an arbitral award. If we
were to insist on reviewing the correctness of the award (or consent
When the ADR Law was enacted in 2004, it specified that the
to the CA's doing so), it would be tantamount to expanding our
appeal shall be made to the CA in accordance with the rules of
jurisdiction without the benefit of legislation. This translates to
procedure to be promulgated by this Court. 131 The Special ADR
judicial legislation - a breach of the fundamental principle of
Rules provided that the mode of appeal from the RTC's order
separation of powers.
confirming, vacating, or correcting/modifying a domestic arbitral
award was through a petition for review with the CA. 132 However,
The CA reversed the arbitral award - an action that it has no power
the Special ADR Rules only took effect on October 30, 2009.
to do - because it disagreed with the tribunal's factual findings and
application of the law. However, the alleged incorrectness of the
In the present case, the RTC disallowed TEAM's notice of appeal
award is insufficient cause to vacate the award, given the State's
from the former's decision confirming the arbitral award on July 3,
policy of upholding the autonomy of arbitral awards.
2009. TEAM moved for reconsideration which was likewise denied

The CA passed upon questions such as: (1) whether or not TEAM
effectively returned the property upon the expiration of the lease; (2)
whether or not TEAM was liable to pay rentals after the expiration of
the lease; and (3) whether or not TEAM was liable to pay Fruehauf
damages corresponding to the cost of repairs. These were the same
questions that were specifically submitted to the arbitral tribunal for
its resolution.134
The CA disagreed with the tribunal's factual determinations and legal
interpretation of TEAM's obligations under the contract -
particularly, that TEAM's obligation to turn over the improvements
on the land at the end of the lease in the same condition as when the
lease commenced translated to an obligation to make ordinary repairs
necessary for its preservation. 135
Assuming arguendo that the tribunal's interpretation of the contract
was incorrect, the errors would have been simple errors of law. It
was the tribunal - not the RTC or the CA - that had jurisdiction and
authority over the issue by virtue of the parties' submissions; the
CA's substitution of its own judgment for the arbitral award cannot
be more compelling than the overriding public policy to uphold the
autonomy of arbitral awards. Courts are precluded from disturbing
an arbitral tribunal's factual findings and interpretations of
law.136 The CA's ruling is an unjustified judicial intrusion in excess
of its jurisdiction - a judicial overreach. 137
Upholding the CA's ruling would weaken our alternative dispute
resolution mechanisms by allowing the courts to "throw their weight
around" whenever they disagree with the results. It erodes the
obligatory force of arbitration agreements by allowing the losing
parties to "forum shop" for a more favorable ruling from the
judiciary.
Whether or not the arbitral tribunal correctly passed upon the issues
is irrelevant. Regardless of the amount, of the sum involved in a
case, a simple error of law remains a simple error of law. Courts are
precluded from revising the award in a particular way, revisiting the
tribunal's findings of fact or conclusions of law, or otherwise
encroaching upon the independence of an arbitral tribunal. 138 At the
risk of redundancy, we emphasize Rule 19.10 of the Special ADR
Rules promulgated by this Court en banc:
Rule 19.10. Rule on judicial review on arbitration in the Philippines.
- As a general rule, the court can only vacate or set aside the
decision of an arbitral tribunal upon a clear showing that the
award suffers from any of the infirmities or grounds for vacating
an arbitral award under Section 24 of Republic Act No. 876 or
under Rule 34 of the Model Law in a domestic arbitration, or for
setting aside an award in an international arbitration under Article 34
of the Model Law, or for such other grounds provided under these
Special Rules.
If the Regional Trial Court is asked to set aside an arbitral award in a
domestic or international arbitration on any ground other than those
provided in the Special ADR Rules, the court shall entertain such
ground for the setting aside or non-recognition of the arbitral
award only if the same amounts to a violation of public policy.
The court shall not set aside or vacate the award of the arbitral
tribunal merely on the ground that the arbitral tribunal
committed errors of fact, or of law, or of fact and law, as the
court cannot substitute its judgment for that of the arbitral
tribunal.
In other words, simple errors of fact, of law, or of fact and law
committed by the arbitral tribunal are not justiciable errors in this
jurisdiction.139
TEAM agreed to submit their disputes to an arbitral tribunal. It
understood all the risks - including the absence of an appeal
mechanism and found that its benefits (both legal and economic)
outweighed the disadvantages. Without a showing that any of the
grounds to vacate the award exists or that the same amounts to a
violation of an overriding public policy, the award is subject to
confirmation as a matter of course. 140

WHEREFORE, we GRANT the petition. The CA's decision in

CAG.R. SP. No. 112384 is SET ASIDE and the RTC's
order CONFIRMING the arbitral award in SP. Proc. No.
11449 is REINSTATED.

SO ORDERED.

MABUHAY HOLDINGS CORPORATION, PETITIONER, VS.

SEMBCORP LOGISTICS LIMITED, RESPONDENT.

DECISION
TIJAM, J.:
This is an appeal from the Decision[1] dated November 19, 2013 and
the Resolution[2] dated June 3, 2014 of the Court of Appeals (CA) in
CA-G.R. CV No. 92296, reversing and setting aside the Decision of
the Regional Trial Court (RTC)[3] of Makati City, Branch 149, in SP
Proc. No. M-6064.
Facts of the Case Pursuant to Article 13 of the Agreement, Mabuhay and IDHI
voluntarily agreed to jointly guarantee that Sembcorp would receive
Petitioner Mabuhay Holdings Corporation (Mabuhay) and a minimum accounting return of US$929,875.50 (Guaranteed
Infrastructure Development & Holdings, Inc. (IDHI) are corporations Return) at the end of the 24th month following the full disbursement
duly organized and existing under the Philippine Laws. [4] of the Sembcorp's equity investment in WJNA and WJSC. They
further agreed that the Guaranteed Return shall be paid three (3)
Respondent Sembcorp Logistics Limited (Sembcorp), formerly months from the completion of the special audits of WJSC and
known as Sembawang Maritime Limited, is a company incorporated WJNA as per Article 13.3 of the Agreement. [10]
in the Republic of Singapore.[5]
The Agreement included an arbitration clause, viz:
On January 23, 1996, Mabuhay and IDHI incorporated Water Jet Article XIX. APPLICABLE LAW; ARBITRATION
Shipping Corporation (WJSC) in the Philippines to engage in the
venture of carrying passengers on a common carriage by inter-island 19.1 This Agreement and the validity and performance thereof shall
fast ferry. On February 5, 1996, they also incorporated Water Jet be governed by the laws of the Republic of the Philippines.
Netherlands Antilles, N.Y. (WJNA) in Curasao, Netherlands. [6] Their
respective shareholding percentage are as follows: [7] 19.2 Any dispute, controversy or claim arising out of or relating to
  WJSC WJNA   this Agreement, or a breach thereof, other than intra-corporate
controversies, shall be finally settled by arbitration in accordance
Mabuhay 70% 70%   with the rules of conciliation and arbitration of the International
Chamber of Commerce by one arbitrator with expertise in the matter
IDHI 30% 30%   at issue appointed in accordance with said rules. The arbitration
On September 16, 1996, Mabuhay, IDHI, and Sembcorp entered into proceeding including the rendering of the award shall take place in
a Shareholders' Agreement [8] (Agreement) setting out the terms and Singapore and shall be conducted in the English Language. This
conditions governing their relationship in connection with a planned arbitration shall survive termination of this Agreement. Judgment
business expansion of WJSC and WJNA. Sembcorp decided to upon the award rendered may be entered in any court having
invest in the said corporations. As a result of Sembcorp's acquisition jurisdiction or application may be made to such court for a judicial
of shares, Mabuhay and IDHI's shareholding percentage in the said acceptance of the award and an order of enforcement, as the case
corporations were reduced, as follows:[9] may be.[11]
On December 6, 1996, Sembcorp effected full payment of its equity
  WJSC WJNA   investment. Special audits of WJNA and WJSC were then carried out
and completed on January 8, 1999. Said audits revealed that WJSC
Mabuhay 45.5% 45.5%  
and WJNA both incurred losses. [12]
IDHI 19.5% 19.5%  
On November 26, 1999, Sembcorp requested for the payment of its
Sembcorp 35.0% 35.0%   Guaranteed Return from Mabuhay and IDID. Mabuhay admitted its
liability but asserted that since the obligation is joint, it is only liable
for fifty percent (50%) of the claim or US$464,937.75. [13] [Mabuhay] to [Sembcorp]; and

On February 24, 2000, Sembcorp sent a Final Demand to Mabuhay 3. A reimbursement of half of the costs of arbitration fixed by the
to pay the Guaranteed Return. Mabuhay requested for three (3) ICC Court at US$57,000 or the aggregate half of which amount to
months to raise the necessary funds but still failed to pay any amount US$28,500 together with an interest at the rate of 12% per annum
after the lapse of the said period.[14] calculated from the date of this Final Award until the said amount is
actually and completely paid by [Mabuhay] to [Sembcorp]. [17]
On December 4, 2000, Sembcorp filed a Request for Arbitration Consequently, on April 14, 2005, Sembcorp filed a Petition for
before the International Court of Arbitration of the International Recognition and Enforcement of a Foreign Arbitral Award [18] before
Chamber of Commerce (ICC) in accordance with the Agreement and the RTC ofMakati City, Branch 149. [19]
sought the following reliefs:
(1) payment of the sum of US$929,875.50; Mabuhay filed an Opposition citing the following grounds for non--
enforcement under Article V of the 1958 Convention on the
(2) alternatively, damages; Recognition and Enforcement of Foreign Arbitral Awards (New
York Convention): (1) the award deals with a conflict not falling
(3) interest on the above sum at such rate as the Arbitral Tribunal within the terms of the submission to arbitration; (2) the composition
deems fit and just; of the arbitral authority was not in accordance with the agreement of
the parties; and (3) recognition or enforcement of the award would
(4) cost of the arbitration; and be contrary to the public policy of the Philippines. [20]

(5) Such further and/or other relief as the Arbitral Tribunal deems fit Mabuhay argued that the dispute is an intra-corporate controversy,
and just.[15] hence, excluded from the scope of the arbitration clause in the
On April 20, 2004, a Final Award [16] was rendered by Dr. Anan Agreement. It alleged that on March 13, 1997, Sembcorp became the
Chantara-Opakom (Dr. Chantara-Opakorn), the Sole Arbitrator controlling stockholder of IDHI by acquiring substantial shares of
appointed by the ICC. The dispositive portion of the award reads: stocks through its nominee, Mr. Pablo N. Sare (Sare). Mabuhay thus
The Sole Arbitrator hereby decides that the Sole Arbitrator has claimed that it has already been released from the joint obligation
jurisdiction over the parties' dispute and directs [Mabuhay] to make with IDHI as Sembcorp assumed the risk of loss when it acquired
the following payments to [Sembcorp]: absolute ownership over the aforesaid shares. Moreover, Mabuhay
argued that the appointment of Dr. Chantara-Opakorn was not in
1. Half of the Guaranteed Return or an amount of US$464,937.75 accordance with the arbitral clause as he did not have the expertise in
(Four Hundred Sixty Four Thousand Nine Hundred Thirty Seven and the matter at issue, which involved application of Philippine law.
Point Seventy Five US Dollars); Finally, Mabuhay argued that the imposition of twelve percent (12%)
interest from the date of the Final Award was contrary to the
2. Interest at the rate of 12% per annum on the said amount of Philippine law and jurisprudence.[21]
US$464,937.75 calculated from the date of this Final Award until the
said amount of US$464,937.75 is actually and completely paid by Ruling of the RTC

In a Decision[22] dated May 23, 2008, the RTC dismissed the petition
and ruled that the Final Award could not be enforced.
The RTC ruled that the "simple contractual payment obligation" of
Mabuhay and IDHI to Sembcorp had been rescinded and modified
by the merger or confusion of the person of IDHI into the person of
Sembcorp. As a result, said obligation was converted into an intra-
corporate matter.[23]
The RTC also ruled on the issue of the lack of expertise of the Sole
Arbitrator. Thus, the dispositive portion of its Decision reads:
WHEREFORE, premises considered, this court finds in favor of the
defendant Mabuhay Holdings Corporation, hence it hereby
DISMISSED the petition for the recognition and enforcement of the
subject Arbitral Award for the simple reason that it was issued in
violation of the agreement. Moreover, this court cannot recognize the
Arbitral Award because it was not the work of an expert as required
under the agreement. Finally, the payment obligation in interest of
12% per annum on the US Dollar Amounts ($464,937.75 and
$28,500) as ordered by the Sole Arbitrator is contrary to law and
existing jurisprudence, hence void. Thus, it cannot be enforced by
this Court.
Cost de oficio.
SO ORDERED.[24]
Aggrieved, Sembcorp appealed to the CA via a Notice of Appeal
under Rule 41 of the Rules of Court.[25]
Ruling of the CA
On November 19, 2013, the CA promulgated its
Decision[26] reversing and setting aside the RTC Decision.
The CA noted that the Final Award already settled the factual issue
on whether Sembcorp acquired the adverted shares of stock in IDHI.
Thus, RTC's contrary findings constituted an attack on the merits of
the Final Award. In sum, the CA held that the court shall not disturb
the arbitral tribunal's determination of facts and/or interpretation of
the law. It recognized the Final Award and remanded the case to the
RTC for proper execution.[27]
Undaunted, Mabuhay moved for the reconsideration of the CA
Decision but the same was denied in a Resolution [28] dated June 3,
2014.
Hence, this petition.
Issue
The core issue for resolution is whether the RTC correctly refused to
enforce the Final Award. Stated differently, was Mabuhay able to
establish a ground for refusing the enforcement of the Final Award
under our applicable laws and jurisprudence on arbitration?
Our Ruling
We deny the petition.
I. Governing Laws
An assiduous analysis of the present case requires a prefatory
determination of the rules and other legal authorities that would
govern the subject arbitration proceedings and award.
The arbitration proceedings between the parties herein were
conducted in Singapore and the resulting Final Award was also
rendered therein. As such, the Final Award is a "foreign arbitral
award" or an award made in a country other than the Philippines. [29]
The Philippines is among the first signatories of the 1958
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (New York Convention) and acceded to the same as early as
1967.[30] Singapore, on the other hand, became a Contracting State in
1986.[31] The New York Convention aims to provide common
legislative standards for the recognition of arbitration agreements
and court recognition and enforcement of foreign and non-domestic
arbitral awards. Thus, the New York Convention primarily governs
the recognition and enforcement of foreign arbitral awards by our
courts.[32]
In addition, as a member of the United Nations Commission in
International Trade Law (UNCITRAL), the Philippines also adopted
the UNCITRAL Model Law[33] (Model Law) as the governing law on
international commercial arbitrations. Hence, when the Congress
enacted Republic Act No. 9285 or the Alternative Dispute
Resolution Act of 2004[34] (ADR Act), it incorporated the Model Law
in its entirety.
Sections 19 and 42 of the ADR Act expressly provided for the
applicability of the New York Convention and the Model Law in our
jurisdiction, viz:
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 "N'.
x x x x
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 (sic) 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.
x x x x (Emphasis ours)
Five years after the enactment of the ADR Act, the Department of
Justice issued the ADR Act's Implementing Rules and Regulations
(IRR)[35], and the Supreme Court issued the Special Rules of Court
on Alternative Dispute Resolution[36] (Special ADR Rules). These
two rules, in addition to the ADR Act incorporating the New York
Convention and the Model Law, are our arbitration laws.
In addition to our arbitration laws, our courts, in recognizing or
enforcing a foreign arbitral award, shall also take into consideration
the laws applied by the arbitral tribunal. These may comprise the
substantive law of the contract and the procedural rules or the rules
governing the conduct of arbitration proceedings.
As agreed upon by the parties herein under the arbitral clause in their
Agreement, the substantive law of the contract is the Philippine law
and the procedural rules are the ICC Rules. During the filing of the
request for Arbitration, the ICC Rules in effect was the ICC Rules of
Arbitration 1998[37] Considering that the essence of arbitration is
party autonomy, the Court shall refer to the said Rules for purposes
of examining the procedural infirmities raised by the parties to the
arbitration.
II. Jurisdiction
Mabuhay argues that the CA seriously erred in not dismissing
outright the appeal of Sembcorp as it had no jurisdiction to act on the
appeal. Mabuhay's argument hinges on Rule 19.12 of the Special
ADR Rules, as follows:
Rule 19.12. Appeal to the Court of Appeals. - An appeal to the Court
of Appeals through a petition for review under this Special Rule
shall only be allowed from the following final orders of the Regional
Trial Court:
x x x x
k. Refusing recognition and/or enforcement of a foreign arbitral
award; (Emphasis supplied)
xxxx
Mabuhay thus contends that filing a petition for review and not a
notice of appeal is the proper remedy to contest the RTC's refusal to
enforce the Final Award.
The Court notes, however, that the Special ADR Rules took effect in
2009. Sembcorp's notice of appeal was filed only in 2008. The ADR
Act, which was already in effect at that time, did not specify the
proper remedy of appeal from the RTC to the CA. It merely provides
that "a decision of the regional trial court confirming, vacating,
setting aside, modifying or correcting an arbitral award may be
appealed to the CA in accordance with the rules of procedure to be
promulgated by the Supreme Court."[38]
The Special ADR Rules shall retroactively apply to all pending cases
provided that no vested rights are impaired or prejudiced. [39] In this
case, Sembcorp filed a notice of appeal in accordance with Section 2
of Rule 41[40] as it is the only applicable rule existing at that time.
Sembcorp had a vested right to due process in relying on the said
rule. Consequently, the CA had jurisdiction to act on Sembcorp's
appeal.
We now discuss the Court's jurisdiction to entertain the instant
petition. The Court's review of a CA Decision is discretionary and
limited to specific grounds provided under the Special ADR Rules.
Thus:
Rule 19.36. Review discretionary. - A review by the Supreme Court
is not a matter of right, but of sound judicial discretion, which will be
granted only for serious and compelling reasons resulting in
grave prejudice to the aggrieved party. The following, while
neither controlling nor fully measuring the court's discretion, indicate
the serious and compelling, and necessarily, restrictive nature of the
grounds that will warrant the exercise of the Supreme Court's
discretionary powers, when the Court of Appeals:
a. Failed to apply the applicable standard or test for judicial
review prescribed in these Special ADR Rules in arriving at its
decision resulting in substantial prejudice to the aggrieved party;
b. Erred in upholding a final order or decision despite the lack of
jurisdiction of the court that rendered such final order or decision;
c. Failed to apply any provision, principle, policy or rule contained in
these Special ADR Rules resulting in substantial prejudice to the
aggrieved party; and
d. Committed an error so egregious and harmful to a party as to
amount to an undeniable excess of jurisdiction.
The mere fact that the petitioner disagrees with the Court of Appeals'
determination of questions of fact, of law or both questions of fact
and law, shall not warrant the exercise of the Supreme Court's
discretionary power. The error imputed to the Court of Appeals must
be grounded upon any of the above prescribed grounds for review or
be closely analogous thereto.
A mere general allegation that the Court of Appeals has committed
serious and substantial error or that it has acted with grave abuse of
discretion resulting in substantial prejudice to the petitioner without
indicating with specificity the nature of such error or abuse of
discretion and the serious prejudice suffered by the petitioner on
account thereof, shall constitute sufficient ground for the Supreme
Court to dismiss outright the petition. (Emphasis ours) III. Grounds for Refusing Enforcement or Recognition
In relation to the applicable standard or test for judicial review by the
CA in arriving at its decision, the Special ADR Rules further We now delve into the core of the issue - whether there is a ground
provide: for the RTC to refuse recognition and enforcement of the Final
Rule 19.20. Due course. - If upon the filing of a comment or such Award in favor of Sembcorp.
other pleading or documents as may be required or allowed by the
Court of Appeals or upon the expiration of the period for the filing Our jurisdiction adopts a policy in favor of arbitration. [41] The ADR
thereof, and on the basis of the petition or the records, the Court of Act and the Special ADR Rules both declare as a policy that the
Appeals finds prima facie that the Regional Trial Court has State shall encourage and actively promote the use of alternative
committed an error that would warrant reversal or dispute resolution, such as arbitration, as an important means to
modification of the judgment, final order, or resolution sought to be achieve speedy and impartial justice and declog court dockets.
[42]
reviewed, it may give due course to the petition; otherwise, it shall  This pro-arbitration policy is further evidenced by the rule on
dismiss the same. presumption in favor of enforcement of a foreign arbitral award
under the Special ADR Rules, viz:
x x x x Rule 13.11. Court action. - It is presumed that a foreign arbitral
award was made and released in due course of arbitration and is
Rule 19.24. Subject of appeal restricted in certain instance. - If the subject to enforcement by the court.
decision of the Regional Trial Court refusing to recognize and/or
enforce, vacating and/or setting aside an arbitral award is premised The court shall recognize and enforce a foreign arbitral award unless
on a finding of fact, the Court of Appeals may inquire only into a ground to refuse recognition or enforcement of the foreign arbitral
such fact to determine the existence or non-existence of the award under this rule is fully established.
specific ground under the arbitration laws of the Philippines
relied upon by the Regional Trial Court to refuse to recognize The decision of the court recognizing and enforcing a foreign arbitral
and/or enforce, vacate and/or set aside an award. Any such inquiry award is immediately executory.
into a question of fact shall not be resorted to for the purpose of
substituting the court's judgment for that of the arbitral tribunal as In resolving the petition for recognition and enforcement of a foreign
regards the latter's ruling on the merits of the controversy. (Emphasis arbitral award in accordance with these Special ADR Rules, the court
ours) shall either [a] recognize and/or enforce or [b] refuse to recognize
Here, Mabuhay did not specifically raise any of the grounds under and enforce the arbitral award. The court shall not disturb the
Rule 19.36 above in its petition before this Court. Nonetheless, arbitral tribunal's determination of facts and/or interpretation of
considering the dearth of jurisprudence on enforcement of foreign law. (Emphasis ours)
arbitral awards and the fact that the CA reversed the RTC decision, Under Article V of the New York Convention, the grounds for
the Court exercises its discretion to review the CA decision solely for refusing enforcement and recognition of a foreign arbitral award are:
purposes of determining whether the CA applied the aforecited 1. Recognition and enforcement of the award may be refused, at the
standard of judicial review. request of the party against whom it is invoked, only if that party
furnishes to the competent authority where the recognition and
enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under
the law applicable to them, under some incapacity, or the said
agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law of the
country where the award was made; or
(b) The party against whom the award is invoked was not given
proper notice of the appointment of the arbitrator or of the arbitration
proceedings or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not
falling within the terms of the submission to arbitration, or it
contains decisions on matters beyond the scope of the submission to
arbitration, provided that, if the decisions on matters submitted to
arbitration can be separated from those not so submitted, that part of
the award which contains decisions on matters submitted to
arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral
procedure was not in accordance with the agreement of the
parties, or, failing such agreement, was not in accordance with the
law of the country where the arbitration took place; or
(e) The award has not yet become binding on the parties, or has been
set aside or suspended by a competent authority of the country in
which, or under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be
refused if the competent authority in the country where recognition
and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement
by arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be
contrary to the public policy of that country. (Emphasis ours)
The aforecited grounds are essentially the same grounds enumerated
under Section 36[43] of the Model Law. The list is exclusive. Thus,
Section 45 of the ADR Act provides:
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. (Emphasis ours)
In Our jurisdiction, We have incorporated the grounds enumerated
under the New York Convention in our arbitration laws. Article 4.36,
Rule 6[44] of the IRR and Rule 13.4 [45] of the Special ADR Rules
reiterated the exact same exclusive list of grounds.
After a careful review of the case, We find that Mabuhay failed to
establish any of the grounds for refusing enforcement and
recognition of a foreign arbitral award. We discuss the grounds
raised by Mabuhay in seriatim:
A. The arbitral authority, composed of Dr. Chatara-Opakorn as the
sole arbitrator, was constituted in accordance with the arbitration
agreement.
The first ground raised by Mabuhay is Article V(l)(d) of the New
York Convention, i.e., that the composition of the arbitral authority
was not in accordance with the agreement of the parties. Mabuhay
and Sembcorp stipulated in their Agreement that the sole arbitrator
must have "expertise in the matter at issue". Since they also agreed
that the validity and the performance of the Agreement shall be
governed by the Philippine law, Mabuhay argues that the phrase
"expertise in the matter at issue" necessarily means expertise in the
Philippine law. Dr. Chatara-Opakom, a Thai national, does not
possess any educational degree or training in Philippine law.
The Agreement provides, however, that the arbitrator with expertise
in the matter at issue shall be appointed in accordance with the ICC
Rules. The ICC, thus, is the appointing authority agreed upon by the
parties. The "appointing authority" is the person or institution named
in the arbitration agreement as the appointing authority; or the
regular arbitration institution under whose rule the arbitration is
agreed to be conducted.[46] 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.[47]
The pertinent rules in the ICC Arbitration Rules of 1998 provide:
Article 9 - Appointment and Confirmation of the Arbitrators
x x x x
3. Where the Court is to appoint a sole arbitrator or the chairman of
an Arbitral Tribunal, it shall make the appointment upon a proposal
of a National Committee of the ICC that it considers to be
appropriate. If the Court does not accept the proposal made, or if the
National Committee fails to make the proposal requested within the
time limit fixed by the Court, the Court may repeat its request or may
request a proposal from another National Committee that it considers
to be appropriate.
x x x x
5. The sole arbitrator or the chairman of the Arbitral Tribunal shall
be of a nationality other than those of the parties. However, in
suitable circumstances and provided that neither of the parties
objects within the time limit fixed by the Court, the sole arbitrator or
the chairman of the Arbitral Tribunal may be chosen from a country
of which any of the parties is a national. (Emphasis ours)
In accordance with the aforecited rules, Dr. Chantara-Opakom was
appointed upon the proposal of the Thai National Committee.
It bears stressing that the pro-arbitration policy of the State includes
its policy to respect party autonomy. Thus, Rule 2.3 of the Special
ADR Rules provides that "the parties are free to agree on the
procedure to be followed in the conduct of arbitral proceedings." The
procedure to be followed on the appointment of arbitrator are among
the procedural rules that may be agreed upon by the parties.
Moreover, under Rule 7.2 of the Special ADR Rules, a challenge to
the appointment of an arbitrator may be raised in court only when the
appointing authority fails or refuses to act on the challenge within
such period as may be allowed under the applicable rule or in the
absence thereof, within thirty (30) days from receipt of the request,
that the aggrieved party may renew the challenge in court. This is
clearly not the case for Mabuhay as it was able to challenge the
appointment of Dr. Chantara-Opakom in accordance with Article 11
of the ICC Rules, but the ICC Court rejected the same. [48] As such,
the Court shall not entertain any challenge to the appointment of
arbitrator disguised as a ground for refusing enforcement of an
award.
At any rate, Mabuhay's contention that the sole arbitrator must have
the expertise on Philippine law fails to persuade. If the intent of the
parties is to exclude foreign arbitrators due to the substantive law of
the contract, they could have specified the same considering that the
ICC Rules provide for appointment of a sole arbitrator whose
nationality is other than those of the parties.
B. The dispute is not an intra corporate controversy, hence, included
in the scope of disputes submitted to arbitration.
Under Article V(l)(c) of the New York Convention, the court may
refuse enforcement of a foreign arbitral award when the award deals
with a difference not contemplated by or not falling within the terms
of the submission to arbitration. Mabuhay argues that the dispute is
an intracorporate controversy which is expressly excluded from the
scope of disputes submitted to arbitration under the Agreement. In
essence, Mabuhay attacks the jurisdiction of the arbitral tribunal to
hear the dispute as it did not fall within the terms of submission to
arbitration.
The CA correctly applied the Kompetenz-Kompetenz principle
expressly recognized under Rule 2.2 of the Special ADR Rules, viz:
The Special ADR Rules recognize the principle of competence
competence, which means that the arbitral tribunal may initially rule
on its own jurisdiction, including any objections with respect to the
existence or validity of the arbitration agreement or any condition
precedent to the filing of a request for arbitration.
The Special ADR Rules expounded on the implementation of the
said principle:
Rule 2.4. Policy implementing competence-competence principle.
The arbitral tribunal shall be accorded the first opportunity or
competence to rule on the issue of whether or not it has the
competence or jurisdiction to decide a dispute submitted to it for
decision, including any objection with respect to the existence or
validity of the arbitration agreement. When a court is asked to rule
upon issue/s affecting the competence or jurisdiction of an arbitral
tribunal in a dispute brought before it, either before or after the
arbitral tribunal is constituted, the court must exercise judicial
restraint and defer to the competence or jurisdiction of the
arbitral tribunal by allowing the arbitral tribunal the first
opportunity to rule upon such issues. (Emphasis ours)
To recall, the Agreement provides that "(a)ny dispute, controversy or
claim arising out of or relating to this Agreement, or breach
thereof, other than intra-corporate controversies, shall be finally
settled by arbitration..."
Among the issues settled in the Final Award is whether the dispute is
an intra-corporate controversy. Dr. Chantara-Opakom ruled in the
negative. The pertinent portion of the Final Award is reproduced as
follows:
x x x Indeed, during the cross-examination of Mr. Chay, he admitted
that there was no transfer of shares from IDHI to the Claimant [p.
130 of Transcript of Proceedings]:
x x x x
During the re-examination of Mr. Chay by the Respondent's counsel,
he again admitted that the transfer of the shares from IDHI to the
Claimant has not taken effect [p. 155 of Transcript of Proceedings]:
x x x x
It is clear that the Claimant's claim is neither premised on allegations
of mismanagement of WJNA and WJSC, nor on who manages or
controls or who has the right to manage or control WJNA and WJSC,
nor is it a claim to effect the transfer of the share, nor an action for
registration of the shares transfer [sic] already transferred from IDHI
to the Claimant in the books of WJNA and WJSC. The nature of the
Claimant's claim is not intrinsically connected with the regulation of
the corporation. The Claimant's claim in this arbitration is
straightforward: that the Respondent agreed, under a contract, to
make payment of certain amount of money to the Claimant upon the
occurrence of a specified event; that the said event occurred but the
Respondent refused to pay such amount of money to the Claimant;
that the Claimant filed the Request in order to enforce the payment.
Accordingly, the Sole Arbitrator is of the opinion that the dispute in
this arbitration is not an intra-corporate controversy, and,
hence, it is not excluded from arbitration under Article 19.2 of the
Shareholders' Agreement.[49] (Emphasis ours)
Again, the Special ADR Rules specifically provides that in resolving
the petition for recognition and enforcement of a foreign arbitral
award, the court shall not disturb the arbitral tribunal's determination
of facts and/or interpretation of law. [50]
Yet, the RTC, in its decision dismissing the petition of Sembcorp,
declared that "it is undisputed that the shares of stocks of IDHI in
WJNA and WJSC were actually owned by [Sembcorp] before the
filing of the request for arbitration" [51] without providing any factual
basis for such conclusion which directly contradicts the arbitral
tribunal's findings.
Even granting that the court may rule on the issue of whether the
dispute is an intra-corporate controversy, Mabuhay's argument is
premised on the factual issue of whether Sembcorp indeed acquired
the shares of IDHI. Mabuhay failed to establish such fact before the
arbitral tribunal. The RTC, on the other hand, concluded that
Sembcorp acquired the subject shares but failed to explain the basis
for such conclusion. In the absence of sufficient evidence that
Sembcorp acquired the shares of IDHI, the Court finds no cogent
reason to disturb the arbitral tribunal's ruling in favor of the latter's
jurisdiction over the dispute.
C. Enforcement of the award would not be contrary to public policy
of the Philippines.
Under Article V(2)(b) of the New York Convention, a court may
refuse to enforce an award if doing so would be contrary to the
public policy of the State in which enforcement is sought. Neither
the New York Convention nor the mirroring provisions on public
policy in the Model Law and Our arbitration laws provide a
definition of "public policy" or a standard for determining what is
contrary to public policy. Due to divergent approaches in defining
public policy in the realm of international arbitration, public policy
has become one of the most controversial bases for refusing
enforcement of foreign arbitral awards. [52]
Most arbitral jurisdictions adopt a narrow and restrictive approach in
defining public policy pursuant to the pro-enforcement policy of the
New York Convention. The public policy exception, thus, is "a
safety valve to be used in those exceptional circumstances when it
would be impossible for a legal system to recognize an award and
enforce it without abandoning the very fundaments on which it is
based."[53] An example of a narrow approach adopted by several
jurisdictions[54] is that the public policy defense may only be invoked
"where enforcement [of the award] would violate the forum state's
most basic notions of morality and justice." [55] Thus, in Hong Kong,
an award obtained by fraud was denied enforcement by the court on
the ground that fraud is contrary to Hong Kong's "fundamental
notions of morality and justice." [56] In Singapore, also a Model Law
country, the public policy ground is entertained by courts only in
instances where upholding the award is "clearly injurious to the
public good or... wholly offensive to the ordinary reasonable and
fully informed member of the public." [57]
In Our jurisdiction, the Court has yet to define public policy and
what is deemed contrary to public policy in an arbitration case.
However, in an old case, the Court, through Justice Laurel,
elucidated on the term "public policy" for purposes of declaring a
contract void:
x x x At any rate, courts should not rashly extend the rule which
holds that a contract is void as against public policy. The term
"public policy" is vague and uncertain in meaning, floating and
changeable in connotation. It may be said, however, that, in
general, a contract which is neither prohibited by law nor condemned
by judicial decision, nor contrary to public morals, contravenes no
public policy. In the absence of express legislation or constitutional
prohibition, a court, in order to declare a contract void as against
public policy, must find that the contract as to the consideration or
thing to be done, has a tendency to injure the public, is against the
public good, or contravenes some established interests of society,
or is inconsistent with sound policy and good morals, or tends
clearly to undermine the security of individual rights, whether of
personal liability or of private property.[58] (Emphasis ours)
An older case, Ferrazzini v. Gsell[59], defined public policy for
purposes of determining whether that part of the contract under
consideration is against public policy:
By "public policy," as defined by the courts in the United States and
England, is intended that principle of the law which holds that no
subject or citizen can lawfully do that which has a tendency to be
injurious to the public or against the public good, which may be
termed the "policy of the law," or "public policy in relation to the
administration of the law." Public policy is the principle under which At any rate, Mabuhay's contention is bereft of merit. The joint
freedom of contract or private dealing is restricted by law for the venture between Mabuhay, IDHI, and Sembcorp was pursued under
good of the public. In determining whether a contract is contrary to the Joint Venture Corporations, WJSC and WJNA. By choosing to
public policy the nature of the subject matter determines the source adopt a corporate entity as the medium to pursue the joint venture
from which such question is to be solved. (Emphasis ours and enterprise, the parties to the joint venture are bound by corporate law
citation omitted) principles under which the entity must operate. [62] Among these
In light of the foregoing and pursuant to the State's policy in favor of principles is the limited liability doctrine. The use of a joint venture
arbitration and enforcement of arbitral awards, the Court adopts the corporation allows the co-venturers to take full advantage of the
majority and narrow approach in determining whether enforcement limited liability feature of the corporate vehicle which is not present
of an award is contrary to Our public policy. Mere errors in the in a formal partnership arrangement. [63] In fine, Mabuhay's
interpretation of the law or factual findings would not suffice to application of Article 1799 is erroneous.
warrant refusal of enforcement under the public policy ground. The
illegality or immorality of the award must reach a certain threshold ii. Imposition of interest
such that, enforcement of the same would be against Our State's
fundamental tenets of justice and morality, or would blatantly be Mabuhay argues that the twelve percent (12%) annual interest from
injurious to the public, or the interests of the society. the date of the Final Award is also contrary to the Philippine law and
jurisprudence. To reiterate, the only ground for refusing enforcement
We now discuss the pertinent claims of Mabuhay in relation to of a foreign arbitral award is when enforcement of the same would
public policy. be contrary to public policy.

i. Violation of partnership law Mere incompatibility of a foreign arbitral award with domestic
mandatory rules on interest rates does not amount to a breach of
Mabuhay contends that it entered into a joint venture, which is akin public policy. However, some jurisdictions refused to recognize and
to a particular partnership, with Sembcorp. Applying the laws on enforce awards, or the part of the award which was considered to be
partnership, the payment of the Guaranteed Return to Sembcorp is a contrary to public policy, where they considered that the awarded
violation of Article 1799[60] of the Civil Code, as it shields the latter interest was unreasonably high. [64] In this case, the twelve percent
from sharing in the losses of the partnership. Ergo, enforcement of (12%) interest rate imposed under the Final Award is not
the Final Award would be contrary to public policy as it upholds a unreasonably high or unconscionable such that it violates our
void stipulation. fundamental notions of justice.

The restrictive approach to public policy necessarily implies that not IV. Attorney's Fees
all violations of the law may be deemed contrary to public policy. It
is not uncommon for the courts in Contracting States of the New Mabuhay avers that the dispositive portion of the CA Decision failed
York Convention to enforce awards which does not conform to their to include its finding that Mabuhay is not liable for attorney's fees
domestic laws.[61]
and exemplary damages. The pertinent portion of the CA Decision is
reproduced as follows:
Turning now to Sembcorp's prayer for the award of attorney's fees
and exemplary damages, We find the same bereft of legal and factual
bases. Article 2208 of the Civil Code allows attorney's fees to be
awarded if the claimant is compelled to litigate with third persons or
to incur expenses to protect his interest by reason of an unjustified
act or omission of the party from whom it is sought, there must be a
showing that the losing party acted willfully or in bad faith and
practically compelled the claimant to litigate and incur litigation
expenses. Meanwhile, in order to obtain exemplary damages under
Article 2232 of the Civil Code, the claimant must prove that the
assailed actions of the defendant are not just wrongful, but also
wanton, fraudulent, reckless, oppressive or malevolent.
for foreign companies, would also attract foreign investors to do
business in the country that would ultimately boost Our economy. In
this light, We uphold the policies of the State favoring arbitration
and enforcement of arbitral awards, and have due regard to the said
policies in the interpretation of Our arbitration laws.
WHEREFORE, the Petition is hereby DENIED. The November 19,
2013 Decision and the June 3, 2014 Resolution of the Court of
Appeals in CA-G.R. CV No. 92296 are AFFIRMED.
SO ORDERED.

Indeed, Sembcorp was compelled to file the instant appeal. However,

such fact alone is insufficient to justify an award of attorney's fees
and exemplary damages when there is no sufficient showing of
MHC's [Mabuhay] bad faith in refusing to abide by the provisions of
the Final Award. To Us, MHC's [Mabuhay] persistent acts in
rejecting Sembcorp's claim proceed from an erroneous conviction in
the righteousness of its cause.[65]
We affirm the aforecited findings of the CA. However, We find no
conflict between the fallo and the ratio decidendi of the CA
Decision. The fallo of the CA Decision includes "[n]o
pronouncement as to cost." The CA also reversed and set aside the
RTC Decision in its entirety. As such, even the pronouncement of
the RTC as to costs is set aside. Accordingly, We find no merit in
Mabuhay's prayer for a statement in the dispositive portion expressly
stating that it is not liable for attorney's fees and exemplary damages.

On a final note, We implore the lower courts to apply the ADR Act .R. No. 216600, November 21, 2016
and the Special ADR Rules accordingly. Arbitration, as a mode of
alternative dispute resolution, is undeniably one of the viable FEDERAL EXPRESS CORPORATION AND RHICKE S.
solutions to the longstanding problem of clogged court dockets. JENNINGS, Petitioners, v. AIRFREIGHT 2100, INC. AND
International arbitration, as the preferred mode of dispute resolution ALBERTO D. LINA, Respondents.
DECISION
MENDOZA, J.:
Before the Court is a Petition for Review on Certiorari1 under Rule
45 of the Rules of Court filed by Federal Express Corporation
(FedEx) and Rhicke S. Jennings (Jennings), assailing the January 20,
2015 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No.
135835, which affirmed the May 7, 2014 Order3 of the Regional
Trial Court, Branch 70, Pasig City (RTC), dismissing its petition for
the issuance of a confidentiality/protective order.
FedEx is a foreign corporation doing business in the Philippines
primarily engaged in international air carriage, logistics and freight
forwarding, while Jennings serves as its Managing Director for the
Philippines and Indonesia. Respondent Airfreight 2100 (Air21) is a
domestic corporation likewise involved in the freight forwarding
business, while Alberto Lina (Lina) is the Chairman of its Board of
Directors.
The Antecedents
FedEx, having lost its International Freight Forwarder's (IFF) license
to engage in international freight forwarding in the Philippines,
executed various Global Service Program (GSP) contracts with
Air21, an independent contractor, to primarily undertake its delivery
and pick-up services within the country. 4
Under the GSP arrangement, the packages sent by FedEx customers
from abroad would be picked up at a Philippine airport and delivered
by Air21 to its respective consignees. Conversely, packages from
Philippine clients would be delivered by Air21 to the airport and
turned over to FedEx for shipment to consignees abroad. As
stipulated in the GSP contracts, Air21 guaranteed that all shipments
would be cleared through customs in accordance with Philippine
law. In the implementation of these contracts, however, several
issues relating to money remittance, value-added taxes, dynamic fuel
charge, trucking costs, interests, and penalties ensued between the
parties.
On May 11, 2011, in an effort to settle their commercial dispute,
FedEx and Air21 agreed to submit themselves to arbitration before
the Philippine Dispute Resolution Center (PDRC). Thus, on June 24,
2011, FedEx filed its Notice of Arbitration. On October 3, 2011, the
Arbitral Tribunal was constituted.
As part of the arbitration proceedings, Jennings, John Lumley
Holmes (Holmes), the Managing Director of SPAC Legal of FedEx;
and David John Ross (Ross), Senior Vice President of Operations,
Middle East, India and Africa, executed their respective
statements5 as witnesses for FedEx. Ross and Holmes deposed that
Federal Express Pacific, Inc., a subsidiary of FedEx, used to have an
IFF license to engage in the business of freight forwarding in the
Philippines. This license, however, was suspended pending a case in
court filed by Merit International, Inc. (Merit) and Ace Logistics,
Inc. (Ace), both freight forwarding companies, which questioned the
issuance of the IFF to FedEx. Absent the said license, FedEx
executed the GSP contracts with Air21 to be able to conduct its
business in the Philippines. Ross and Holmes, in their individual
statements, averred that Merit and Ace were either owned or
controlled by Air21 employees or persons connected with the Lina
Group of Companies, which included Air21.
Jennings, in his cross-examination, was identified as the source of
the information that Merit and Ace were Air21's proxies and was
asked if he had any written proof of such proxy relationship. 6 He
answered in the negative. In his re-direct examination, he was made
to expound on the supposed proxy relationship between Merit, Ace
and Air21.7 He responded that Merit and Ace were just very small
companies with meager resources, yet they were able to finance and
file a case to oppose the grant of IFF license to FedEx. Jennings also
disclosed that one of the directors of Ace was a friend of Lina and
that Lorna Orbe, the President of Merit, was the former "boss" of cannot be protected by the confidentiality rules under ADR. The said
Lito Alvarez, who was also associated with Air21. rules should not be used as a shield in the commission of any crime."
Thus, it disposed:
Feeling aggrieved by those statements, Lina for himself and on chanRoblesvirtualLawlibrary
behalf of Air21, filed a complaint for grave slander against Jennings
before the Office of the City Prosecutor in Taguig City. 8 Lina WHEREFORE, in view of the foregoing, the Petition for Issuance
claimed that the defamatory imputation of Jennings that Merit and of a Confidentiality/Protective Order is hereby DENIED for lack of
Ace were Air21's proxies brought dishonor, discredit and contempt merit.
to his name and that of Air21. Lina quoted certain portions of the
written statements of Holmes and Ross and the Transcript of The case is hereby DISMISSED.
Stenographic Notes (TSN) of the April 25, 2013 arbitration hearing
reflecting Jennings' testimony to support his complaint. SO ORDERED.10ChanRoblesVirtualawlibrary
Dissatisfied, petitioners challenged the RTC order before the
Consequently, FedEx and Jennings (petitioners) filed their Petition
CA via a petition for review.
for Issuance of a Confidentiality/Protective Order with Application
for Temporary Order of Protection and/or Preliminary Injunction
On January 20, 2015, the CA denied the petition. In its assailed
before the RTC alleging that all information and documents obtained
decision, the CA explained that the declarations by Jennings were
in, or related to, the arbitration proceedings were
not confidential as they were not at all related to the subject of
confidential.9 FedEx asserted that the testimony of Jennings, a
mediation as the arbitration proceedings revolved around the parties'
witness in the arbitration proceedings, should not be divulged and
claims for sum of money.11 Thus, the CA ruled that "statements made
used to bolster the complaint-affidavit for grave slander as this was
without any bearing on the subject proceedings are not confidential
inadmissible in evidence.
in nature." It must be emphasized that other declarations given
therein, if relative to the subject of mediation or arbitration, are
On January 16, 2014, the RTC granted petitioners' application for the
certainly confidential.12
Temporary Order of Protection.
Hence, this present petition before the Court.
Meanwhile, on February 3, 2014, the arbitral tribunal rendered an
GROUNDS IN SUPPORT OF THE PETITION
award in favor of FedEx.
A.
Subsequently, in the assailed Order, dated May 7, 2014, the RTC
denied FedEx's petition for lack of merit, stating that the statements
THE COURT OF APPEALS FAILED TO APPLY, OR
and arbitration documents were not confidential information. It went
OTHERWISE MISAPPLIED, SECTIONS 3(H) AND 23 OF
on to state that "[t]he statement and 'Arbitration Documents' which
THE ADR ACT.
purportedly consists the crime of Grave Slander under Articles 353
and 358 of the Revised Penal Code are not in any way related to the
B.
subject under Arbitration." The RTC further wrote that "a crime

THE COURT OF APPEALS FAILED TO APPLY RULE 10.5
OF THE SPECIAL ADR RULES.
C.
THE TEST APPLIED BY THE COURT OF APPEALS FOR
DETERMINING CONFIDENTIALITY OF INFORMATION IS
NOT SANCTIONED BY AND IS INCONSISTENT WITH THE
ADR ACT AND THE SPECIAL ADR RULES.
D.
THE ASSAILED DECISION RESULTS TO SUBSTANTIAL
PREJUDICE TO PETITIONERS.
E.
THE ASSAILED DECISION DEFEATS PUBLIC POLICY ON
CONFIDENTIALITY OF THE RECORDS OF AND
COMMUNICATIONS MADE IN THE COURSE OF
ARBITRATION.13
FedEx argues that the Jennings' statements were part of the (a)
records and evidence of Arbitration (Section 23); (b) witness
statements made therein (Section 3[h][3]); and (c) communication
made in a dispute resolution proceedings (Section 3 [h][1]). 14 They,
thus, averred that Jennings' oral statements made during the April 25,
2013 arbitration hearing and the TSN of the hearings, conducted on
April 22 and 25, 2013, form part of the records of arbitration and
must, therefore, be considered confidential information.
For said reason, petitioners assert that Rule 10.5 of the Special
Alternative Dispute Resolution (ADR) Rules, allowing for the
issuance of a confidentiality/protective order, was completely
disregarded by the CA when it denied the petition filed by FedEx as
a result of Lina divulging what were supposed to be confidential
information from ADR proceedings.
Petitioners also claim that in ruling that Jennings' statements were
not confidential information, by applying the test of relevance that
"statements made without any bearing on the subject proceedings are
not confidential in nature," the CAused a "test" that had no basis in
law and whose application in its petition amounted to
judiciallegislation.15
Respondent Air21 and Lina (respondents), in their
Comment,16 essentially countered that:
chanRoblesvirtualLawlibrary
While the Alternative Dispute Resolution Act of 2004 (the "ADR
Law") confers communications made during arbitration the privilege
against disclosure, otherwise known as the confidentiality principle,
to assist the parties in having a speedy, efficient and impartial
resolution of their disputes, said privilege cannot be invoked to
shield any party from criminal responsibility. The privilege is not
absolute. The ADR Law does not exist in a viacuum without regard
to other existing jurisprudence and laws, particularly the Revised
Penal Code. Otherwise, we will permit a dangerous situation where
arbitration proceedings will be used by an unscrupulous disputant as
a venue for the commission of crime, which cannot be punished by
the simple invocation of the privilege. Such an absurd interpretation
of our laws cannot be deemed to be the underlying will of our
Congress in framing and enacting our law on arbitration. To be sure,
a crime cannot be protected or extinguished through a bare
invocation of the confidentiality rule.17ChanRoblesVirtualawlibrary
The Court's Ruling
The crucial issue in this case is whether the testimony of Jennings
given during the arbitration proceedings falls within the ambit of
confidential information and, therefore, covered by the mantle of a
confidentiality/protection order.
The Court finds the petition meritorious.

Section 3(h) of Republic Act (R.A.) No. 9285 or the Alternative
Dispute Resolution of 2004 (ADR Act) defines confidential
information as follows:
chanRoblesvirtualLawlibrary
"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. [Emphases
Supplied]ChanRoblesVirtualawlibrary
The said list is not exclusive and may include other information as
long as they satisfy the requirements of express confidentiality or
implied confidentiality.18
Plainly, Rule 10.1 of A.M. No. 07-11-08-SC or the Special Rules of
Court on Alternative Dispute Resolution (Special ADR Rules) allows
"[a] party, counsel or witness who disclosed or who was compelled
to disclose information relative to the subject of ADR under
circumstances that would create a reasonable expectation, on behalf
of the source, that the information shall be kept confidential x x x the
right to prevent such information from being further disclosed
without the express written consent of the source or the party who
made the disclosure." Thus, the rules on confidentiality and
protective orders apply when:
chanRoblesvirtualLawlibrary
1. An ADR proceeding is pending;chanrobleslaw
2. A party, counsel or witness disclosed information or
was otherwise compelled to disclose
information;chanrobleslaw
3. The disclosure was made under circumstances that
would create a reasonable expectation, on behalf of
the source, that the information shall be kept
confidential;chanrobleslaw
4. The source of the information or the party who made
the disclosure has the right to prevent such
information from being disclosed;chanrobleslaw
5. The source of the information or the party who made
the disclosure has not given his express consent to
any disclosure; and
6. The applicant would be materially prejudiced by an
unauthorized disclosure of the information obtained,
or to be obtained, during the ADR proceeding.
Gauged by the said parameters, the written statements of witnesses
Ross, Holmes and Jennings, as well as the latter's oral testimony in
the April 25, 2013 arbitration hearing, both fall under Section 3 (h)
[1] and [3] of the ADR Act which states that "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; and (3) pleadings, motions,
manifestations, witness statements, reports filed or submitted in an
arbitration or for expert valuation," constitutes confidential
information.
Notably, both the parties and the Arbitral Tribunal had agreed to the
Terms of Reference (TOR) that "the arbitration proceedings should
be kept strictly confidential as provided in Section 23 of the ADR
Act and Article 25-A19 of the PDRCI Arbitration Rules (Arbitration
Rules) and that they should all be bound by such confidentiality
requirements."
The provisions of the ADR Act and the Arbitration Rules repeatedly
employ the word "shall" which, in statutory construction, is one of
mandatory character in common parlance and in ordinary
signification.20 Thus, the general rule is that information disclosed by
a party or witness in an ADR proceeding is considered privileged
and confidential.
In evaluating the merits of the petition, Rule 10.8 of the Special
ADR Rules mandates that courts should be guided by the principle
that confidential information shall not be subject to discovery and
shall be inadmissible in any adversarial proceeding, to wit:
chanRoblesvirtualLawlibrary
Rule 10.8. Court action. - If the court finds the petition or motion
meritorious, it shall issue an order enjoining a person or persons
from divulging confidential information.
In resolving the petition or motion, the courts shall be guided by the
following principles applicable to all ADR proceedings: Confidential
information shall not be subject to discovery and shall be
inadmissible in 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
therein.ChanRoblesVirtualawlibrary
Article 5.42 of the Implementing Rules and Regulations (IRR)21 of
the ADR Act likewise echoes that arbitration proceedings, records,
evidence and the arbitral award and other confidential information
are privileged and confidential and shall not be published except [i]
with the consent of the parties; or [ii] for the limited purpose of
disclosing to the court relevant documents where resort to the court
is allowed. Given that the witness statements of Ross, Holmes and
Jennings, and the latter's arbitration testimony, fall within the ambit
of confidential information, they must, as a general rule, remain
confidential. Although there is no unbridled shroud of confidentiality
on information obtained or disclosed in an arbitration proceeding, the
presence of the above criteria must be apparent; otherwise, the
general rule should be applied. Here in this case, only a perceived
imputation of a wrongdoing was alleged by the respondents.
In denying the said application for confidentiality/protection order,
the RTC and the CA did not consider the declarations contained in
the said witness statements and arbitration testimony to be related to
the subject of arbitration and, accordingly, ruled that they could not
be covered by a confidentiality order.
The Court does not agree. Suffice it to say that the phrase "relative to
the subject of mediation or arbitration" need not be strictly confined
to the discussion of the core issues in the arbitral dispute. By
definition, "relative" simply means "connected to," which means that
parties in arbitration proceedings are encouraged to discuss openly
their grievances and explore the circumstances which might have any
connection in identifying the source of the conflict in the hope of
finding a better alternative to resolve the parties' dispute. An ADR
proceeding is aimed at resolving the parties' conflict without court
intervention. It was not designed to be strictly technical or legally
confined at all times. By mutual agreement or consent of the parties
to a controversy or dispute, they acquiesce to submit their differences
to arbitrators for an informal hearing and extra-judicial determination
and resolution. Usually, an ADR hearing is held in private and the
decision of the persons selected to comprise the tribunal will take the
place of a court judgment. This avoids the formalities, delays and
expenses of an ordinary litigation. Arbitration, as envisioned by the
ADR Act, must be taken in this perspective.
Verily, it is imperative that legislative intent or sp1nt be the
controlling factor, the leading star and guiding light in the
application and interpretation of a statute. 22 If a statute needs
construction, the influence most dominant in that process is the intent
or spirit of the act.23 A thing which is within the intent of the
lawmaker is as much within the statute as if within the letter; and a
thing which is within the letter of the statute is not within the statute
unless within the intent of the lawmakers. 24 In other words, a statute
must be read according to its spirit or intent and legislative intent is
part and parcel of the statute. It is the controlling factor in
interpreting a statute. Any interpretation that contradicts the
legislative intent is unacceptable.
In the case at bench, the supposed questionable statements surfaced
when FedEx's suspended IFF license was discussed during the
arbitration hearing. In fact, when Jennings was asked by Arbitrator
Panga to expound on how the opposition of Ace and Merit could be
related to the ongoing arbitration, Jennings replied that, to his mind,
it was indicative of the leverage that Air21 had over FedEx as it was
able to withhold large sums of money and siphon their joint plans
from being properly established. Whether the information disclosed
in the arbitration proceeding would be given weight by the tribunal
in the resolution of their dispute is a separate matter. Likewise, the
relevance or materiality of the said statements should be best left to
the arbitrators' sound appreciation and judgment. Even granting that
the weight of the said statements was not fundamental to the issues
in the arbitration process, nevertheless, they were still connected to,
and propounded by, a witness who relied upon the confidentiality of
the proceedings and expect that his responses be reflected.
Arbitration, being an ADR proceeding, was primarily designed to be
a prompt, economical and amicable forum for the resolution of
disputes. It guarantees confidentiality in its processes to encourage
parties to ventilate their claims or disputes in a less formal, but
spontaneous manner. It should be emphasized that the law favors
settlement of controversies out of court. Thus, a person who
participates in an arbitration proceeding is entitled to speak his or her
piece without fear of being prejudiced should the process become
unsuccessful. Hence, any communication made towards that end
should be regarded as confidential and privileged.
To restate, the confidential nature of the arbitration proceeding is
well-entrenched in Section 23 of the ADR Act:
chanRoblesvirtualLawlibrary
SEC. 23. Confidentiality 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.ChanRoblesVirtualawlibrary
If Lina had legal grounds to suspect that Jennings committed
slanderous remarks even before the arbitration proceeding
commenced, then he must present evidence independent and apart
from some quoted portions of the arbitration documents.
It must be stressed that the very soul of an arbitration proceeding
would be rendered useless if it would be simply used as an avenue
for evidence gathering or an entrapment mechanism to lure the other
unsuspecting party into conveying information that could be
potentially used against him in another forum or in court.
Ultimately, the RTC and the CA failed to consider the fact that an
arbitration proceeding is essentially a unique proceeding that is non-
litigious in character where the parties are bound by a different set of
rules as clearly encapsulated under the Special ADR Rules.
Inevitably, when Lina cited portions of the said arbitration
documents, he violated their covenant in the TOR to resolve their
dispute through the arbitration process and to honor the
confidentiality of the said proceeding. To disregard this commitment
would impair the very essence of the ADR proceeding. By itself, this
would have served as a valid justification for the grant of the
confidentiality/protection order in favor of FedEx and Jennings.
Thus, the claimed slanderous statements by Jennings during the
arbitration hearing are deemed confidential information and the veil
of confidentiality over them must remain.

WHEREFORE, the petition is GRANTED. The January 20, 2015

Decision of the Court of Appeals (CA), in CA-G.R. SP No. 135835,
is REVERSED and SET ASIDE.

The Petition for the Issuance of a Confidentiality/Protective Order

filed by Federal Express Corporation and Rhicke S. Jennings is
hereby GRANTED.

SO ORDERED.
G.R. No. 211504
FEDERAL BUILDERS, INC., Petitioner
vs
POWER FACTORS, INC., Respondent
DECISION
BERSAMIN, J.:
An agreement to submit to voluntary arbitration for purposes of
vesting jurisdiction over a construction dispute in the Construction
Industry Arbitration Commission (CIAC) need not be contained in
the construction contract, or be signed by the parties. It is enough
that the agreement be in writing.
The Case
Federal Builders Inc. (Federal) appeals to reverse the decision
promulgated on August 12, 2013,1 whereby the Court of Appeals
(CA) affirmed the adverse decision rendered on May 12, 2010 by the
Construction Industry Arbitration Commission (CIAC) with
modification of the total amount awarded.2
Antecedents
Federal was the general contractor of the Bullion Mall under a
construction agreement with Bullion Investment and Development
Corporation (BIDC). In 2004, Federal engaged respondent Power
Factors Inc. (Power) as its subcontractor for the electric works at the
Bullion Mall and the Precinct Building for ₱l8,000,000.00.3
On February 19, 2008, Power sent a demand letter to Federal
claiming the unpaid amount of ₱ll,444,658.97 for work done by
Power for the Bullion Mall and the Precinct Building. Federal replied
that its outstanding balance under the original contract only
amounted to ₱1,641,513.94, and that the demand for payment for
work done by Power after June 21, 2005 should be addressed
directly to BIDC.4 Nonetheless, Power made several demands on
Federal to no avail.
On October 29, 2009, Power filed a request for arbitration in the
CIAC invoking the arbitration clause of the Contract of Service
reading as follows:
15. ARBITRATION COMMITTEE - All disputes, controversies or
differences, which may arise between the parties herein, out of or in
relation to or in connection with this Agreement, or for breach
thereof shall be settled by the Construction Industry Arbitration
Commission (CIAC) which shall have original and exclusive
jurisdiction over the aforementioned disputes.5
On November 20, 2009, Atty. Vivencio Albano, the counsel of
Federal, submitted a letter to the CIAC manifesting that Federal
agreed to arbitration and sought an extension of 15 days to file its
answer, which request the CIAC granted.
On December 16, 2009, Atty. Albano filed his withdrawal of
appearance stating that Federal had meanwhile engaged another
counsel.6
Federal, represented by new counsel (Domingo, Dizon, Leonardo
and Rodillas Law Office), moved to dismiss the case on the ground
that CIAC had no jurisdiction over the case inasmuch as the Contract
of Service between Federal and Power had been a mere draft that
was never finalized or signed by the parties. Federal contended that
in the absence of the agreement for arbitration, the CIAC had no
jurisdiction to hear and decide the case.7
On February 8, 2010, the CIAC issued an order setting the case for
hearing, and directing that Federal's motion to dismiss be resolved
after the reception of evidence of the parties. 8
Federal did not thereafter participate in the proceedings until the
CIAC rendered the Final Award dated May 12, 2010,9 disposing:
In summary: Respondent Federal Builders, Inc. is hereby ordered to
pay claimant Power Factors, Inc. the following sums:
1. Unpaid balance on the original contract ₱4,276,614.75;
2. Unpaid balance on change order nos. 1, 2, 3,
4, 5, 6, 7, 8, & 9 3,006,970.32;
3. Interest to May 13, 2010 1,686,149.94;
4. Attorney's Fees 250,000.00;
5. Cost of Arbitration 149,503.86;
  ₱9 ,369 , annum computed from the time this judgment becomes final and
238.87
The foregoing amount shall earn legal interest at the rate of 6% per
annum from the date of this Final Award until this award becomes
final and executory, Claimant shall then be entitled to 12% per
annum until the entire amount is fully satisfied by Respondent.
Federal appealed the award to the CA insisting that the CIAC had no
jurisdiction to hear and decide the case; and that the amounts thereby
awarded to Power lacked legal and factual bases.
On August 12, 2013, the CA affirmed the CIAC's decision with
modification as to the amounts due to Power,10 viz.:
WHEREFORE, the CIAC Final Award dated 12 May 20l0 in CIAC
Case No. 31-2009 is hereby AFFIRMED with MODIFICATION. As
modified, FEDERAL BUILDERS, INC. is ordered to pay POWER
FACTORS, INC. the following:
1. Unpaid balance on the
₱4,276,614.75;
original contract
2. Unpaid balance on change
2,864,113.32;
orders
3. Attorney's Fees 250,000.00;
4. Cost of Arbitration 149,503.86;
The interest to be imposed on the net award (unpaid balance on the
original contract and change order) amounting to P.7, 140,728.07
awarded to POWER FACTORS INC. shall be six (6%) per annum,
reckoned from 4 July 2006 until this Decision becomes final and
executory. Further, the total award due to POWER FACTORS INC.
shall be subjected to an interest of twelve percent (12%) per
executory, until full satisfaction.
SO ORDERED.11
Anent jurisdiction, the CA explained that the CIAC Revised Rules of
Procedure stated that the agreement to arbitrate need not be signed
by the parties; that the consent to submit to voluntary arbitration was
not necessary in view of the arbitration clause contained in the
Contract of Service; and that Federal's contention that its former
counsel's act of manifesting its consent to the arbitration stipulated in
the draft Contract of Service did not bind it was inconsequential on
the issue of jurisdiction.12
Concerning the amounts awarded, the CA opined that the CIAC
should not have allowed the increase based on labor-cost escalation
because of the absence of the agreement between the parties on such
escalation and because there was no authorization in writing
allowing the adjustment or increase in the cost of materials and
labor.13
After the CA denied Federal's motion for reconsideration on
February 19, 2004,14 Federal has come to the Court on appeal.
Issue
The issues to be resolved are: (a) whether the CA erred in upholding
CIAC's jurisdiction over the present case; and (b) whether the CA
erred in holding that Federal was liable to pay Power the amount of
₱7,140,728.07.
Ruling of the Court
The appeal is bereft of merit.
1.
The parties had an effective agreement to submit to voluntary
arbitration; hence, the CIAC had jurisdiction
The need to establish a proper arbitral machinery to settle disputes
expeditiously was recognized by the Government in order to promote
and maintain the development of the country's construction industry.
With such recognition came the creation of the CIAC through
Executive Order No. 1008 (E.O. No. 1008), also known as The
Construction Industry Arbitration Law. Section 4 of E.O. No. 1008
provides:
Sec. 4. Jurisdiction. - The CIAC shall have original and exclusive
jurisdiction over disputes arising from, or connected with, contracts
entered into by parties involved in construction in the Philippines,
whether the dispute arises before or after the completion of the
contract, or after the abandonment or breach thereof. These disputes
may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the
same to voluntary arbitration. x x x
Under the CIAC Revised Rules of Procedure Governing
Construction Arbitration (CIAC Revised Rules), all that is required
for the CIAC to acquire jurisdiction is for the parties of any
construction contract to agree to submit their dispute to
arbitration.15 Also, Section 2.3 of the CIAC Revised
Rules states that the agreement may be reflected in an arbitration
clause in their contract or by subsequently agreeing to submit their
dispute to voluntary arbitration. The CIAC Revised Rules clarifies,
however, that the agreement of the parties to submit their dispute to
arbitration need not be signed or be formally agreed upon in the
contract because it can also be in the form of other modes of
communication in writing, viz.:
RULE 4 - EFFECT OF AGREEMENT TO ARBITRATE
SECTION 4.1. Submission to CIAC jurisdiction - An arbitration
clause in a construction contract or a submission to arbitration of a
construction dispute shall be deemed an agreement to submit an
existing or future controversy to CIAC jurisdiction, notwithstanding
the reference to a different arbitration institution or arbitral body in
such contract or submission.
4.1.1 When a contract contains a clause for the submission of a
future controversy to arbitration, it is not necessary for the parties to
enter into a submission agreement before the Claimant may invoke
the jurisdiction of CIAC.
4.1.2 An arbitration agreement or a submission to arbitration shall be
in writing, but it need not be signed by the parties, as long as the
intent is clear that the parties agree to submit a present or future
controversy arising from a construction contract to arbitration. It may
be in the form of exchange of letters sent by post or by telefax,
telexes, telegrams, electronic mail or any other mode of
communication.
The liberal application of procedural rules as to the form by which
the agreement is embodied is the objective of the CIAC Revised
Rules. Such liberality conforms to the letter and spirit of E.O. No.
1008 itself which emphasizes that the modes of voluntary dispute
resolution like arbitration are always preferred because they settle
disputes in a speedy and amicable manner. They likewise help in
alleviating or unclogging the judicial dockets. Verily, E.O. No. 1008
recognizes that the expeditious resolution of construction disputes
will promote a healthy partnership between the Government and the
private sector as well as aid in the continuous growth of the country
considering that the construction industry provides employment to a
large segment of the national labor force aside from its being a
leading contributor to the gross national product.16
Worthy to note is that the jurisdiction of the CIAC is over the
dispute, not over the contract between the parties. 17 Section 2.1, Rule
2 of the CIAC Revised Rules particularly specifies that the CIAC has
original and exclusive jurisdiction over construction
disputes, whether such disputes arise from or are merely connected
with the construction contracts entered into by parties, and whether
such disputes arise before or after the completion of the contracts.
Accordingly, the execution of the contracts and the effect of the
agreement to submit to arbitration are different matters, and the
signing or non-signing of one does not necessarily affect the other. In
other words, the formalities of the contract have nothing to do with
the jurisdiction of the CIAC.
Federal contends that there was no mutual consent and no meeting of
the minds between it and Power as to the operation and binding
effect of the arbitration clause because they had rejected the draft
service contract.
The contention of Federal deserves no consideration.
Under Article 1318 of the Civil Code, a valid contract should have
the following essential elements, namely: (a) consent of the
contracting parties;
(b) object certain that is the subject matter of the contract; and (c)
cause or consideration. Moreover, a contract does not need to be in
writing in order to be obligatory and effective unless the law
specifically requires so.
Pursuant to Article 135618 and Article 135719 of the Civil
Code, contracts shall be obligatory in whatever form they may have
been entered into, provided that all the essential requisites for their
validity are present. Indeed, there was a contract between Federal
and Power even if the Contract of Service was unsigned. Such
contract was obligatory and binding between them by virtue of all
the essential elements for a valid contract being present.
It clearly appears that the works promised to be done by Power were
already executed albeit still incomplete; that Federal paid Power ₱l ,
000,000.00 representing the originally proposed downpayment, and
the latter accepted the payment; and that the subject of their dispute
concerned only the amounts still due to Power. The records further
show that Federal admitted having drafted the Contract of Services
containing the following clause on submission to arbitration, to wit:
15. ARBITRATION COMMITTEE -All disputes, controversies or
differences, which may arise between the Parties herein, out of or in
relation to or in connection with this Agreement, or for breach
thereof shall be settled by the Construction Industry Arbitration
Commission (CIAC) which shall have original and exclusive
jurisdiction over the aforementioned disputes.20
With the parties having no issues on the provisions or parts of the
Contract of Service other than that pertaining to the downpayment
that Federal was supposed to pay, Federal could not validly insist on
the lack of a contract in order to defeat the jurisdiction of the CIAC.
As earlier pointed out, the CIAC Revised Rules specifically allows
any written mode of communication to show the parties' intent or
agreement to submit to arbitration their present or future disputes
arising from or connected with their contract.
The CIAC and the CA both found that the parties had disagreed on
the amount of the downpayment.1âwphi1 On its part, Power
indicated after receiving and reviewing the draft of the Contract of
Service that it wanted 30% as the downpayment. Even so, Power did
not modify anything else in the draft, and returned the draft to
Federal after signing it. It was Federal that did not sign the draft
because it was not amenable to the amount as modified by Power. It
is notable that the arbitration clause written in the draft of Federal
was unchallenged by the parties until their dispute arose.
Moreover, Federal asserted the original contract to support its claim
against Power. If Federal would insist that the remaining amount due
to Power was only ₱l,641,513.94 based on the original contract, 21 it
was really inconsistent for Federal to rely on the draft when it is
beneficial to its side, and to reject its efficacy and existence just to
relieve itself from the CIAC's unfavorable decision.
The agreement contemplated in the CIAC Revised Rules to vest
jurisdiction of the CIAC over the parties' dispute is not necessarily
an arbitration clause to be contained only in a signed and finalized
construction contract. The agreement could also be in a separate
agreement, or any other form of written communication, as long as
their intent to submit their dispute to arbitration is clear. The fact that
a contract was signed by both parties has nothing to do with the
jurisdiction of the CIAC, and this is the explanation why the
CIAC Revised Rules itself expressly provides that the written
communication or agreement need not be signed by the parties.
Although the agreement to submit to arbitration has been expressly
required to be in writing and signed by the parties therein by Section
422 of Republic Act No. 876 (Arbitration Law),23 the requirement is
conspicuously absent from the CIAC Revised Rules, which even
expressly allows such agreement not to be signed by the parties
therein.24 Brushing aside the obvious contractual agreement in this
case warranting the submission to arbitration is surely a step
backward.25 Consistent with the policy of encouraging alternative
dispute resolution methods, therefore, any doubt should be resolved
in favor of arbitration.26 In this connection, the CA correctly
observed that the act of Atty. Albano in manifesting that Federal had
agreed to the form of arbitration was unnecessary and
inconsequential considering the recognition of the value of the
Contract of Service despite its being an unsigned draft.
2.
Amounts as modified by the CA are correct
We find no reversible error regarding the amounts as modified by the
CA. Power did not sufficiently establish that the change or increase
of the cost of materials and labor was to be separately determined
and approved by both parties as provided under Article 1724 of
the Civil Code. As such, Federal should not be held liable for the
labor cost escalation.
WHEREFORE, the Court AFFIRMS the decision promulgated on
August 12, 2013; and ORDERS the petitioner to pay the costs of
suit.
SO ORDERED.

G.R. No. 198849, August 07, 2019
CAMP JOHN HAY DEVELOPMENT CORPORATION,
PETITIONER, v. CHARTER CHEMICAL AND COATING
CORPORATION, RESPONDENT.
DECISION
LEONEN, J.:
Rescission under Article 1191 of the Civil Code is the proper remedy
when a party breaches a reciprocal obligation. Because each case has
its own distinct circumstances, this Court's power to fix a period of
an obligation under Article 1197 is discretionary and should be
exercised only if there is just cause.
This resolves a Petition for Review on Certiorari 1 assailing the May
13, 2011 Decision2 and September 30, 2011 Resolution3 of the Court
of Appeals in CA-G.R. SP No. 108335. The Court of Appeals
affirmed the March 30, 2009 Final Award 4 in CIAC Case No. 19-
2008 issued by the Construction Industry Arbitration Commission,
which found that Charter Chemical and Coating Corporation
(Charter Chemical) is entitled to the payment of the monetary
equivalent of two (2) units in Camp John Hay Suites in the total
amount of P5,900,000.00 and attorney's fees in the amount of
P590,000.00.5
Camp John Hay Development Corporation (Camp John Hay
Development) is the investment arm of a consortium engaged in the
construction of the Camp John Hay Manor in Baguio City. 6
In January 2001, Camp John Hay Development entered into a
Contractor's Agreement7 with Charter Chemical, the company
awarded to complete the interior and exterior painting works of unit
2E of the Camp John Hay Manor for the contract price of
P15,500,000.00. This was inclusive of the price of two (2)-studio
type units at Camp John Hay Suites, the total amount of which would
be based on the units chosen by Charter Chemical. 8
Although the Contractor's Agreement contained no date of the units'
turnover, it allowed Charter Chemical to choose the units for
offsetting under an offsetting scheme:
1. Compensation:
. . . .
b. Off-setting against Two (2) Units - Studio Type at Suite 2A. Total
amount shall be based on the final unit[s] chosen by the Contractor. 9
Charter Chemical chose Units 102 and 104 studio type in the second
phase of Camp John Hay Suites. 10
At the time the Contractor's Agreement was signed in 2001, the
actual construction of the Camp John Hay Suites had not yet
commenced.11
Later on, the contract price was reduced to P13,239,734.16, for
which Camp John Hay Development paid P7,339,734.16. The
balance of P5,900,000.00 was ought to be settled by offsetting the
price of the two (2) studio units. 12
In 2003, Charter Chemical completed the painting works, after which
Camp John Hay Development issued a Final Inspection and
Acceptance Certificate belatedly on May 30, 2005. Charter Chemical
demanded the execution of the deed of sale and delivery of the titles
of the two (2) units in September 2004, with a follow-up in April
2005.13 In June 2005, Camp John Hay Development and Charter
Chemical executed contracts to sell. The uniform contracts state in
part:
[P]ossession of the Unit shall be delivered by Seller to Buyer within
a reasonable period of time from the date of completion of the Unit
either by (a) serving written Notice of Completion to the Buyer or
(b) by delivering to the Buyer the Limited Warranty Deed covering
the Unit. The delivery of the Notice of Completion or the Limited
Warranty Deed shall constitute constructive delivery of the Unit and
immediately thereafter the risk of loss to the Unit and all obligations
and assessments provided in this Contract, the Project Plan and
Declaration of Restrictions, the Articles of Incorporation and By-
Laws of the Association, and the House Rules, shall pertain to
Buyer.14
In August 2005, Camp John Hay Development issued certifications
to Charter Chemical that the two (2) units were fully paid under their
offsetting scheme. However, the units were not delivered because the
construction of Camp John Hay Suites was not yet complete. 15
Camp John Hay Development had initially estimated that the
construction would be completed by 2006. In a Lease
Agreement16 executed on October 19, 1996, Camp John Hay
Development and Bases Conversion and Development Authority
provided for a period of three and a half (3.5) years from the
execution of the Lease Agreement to complete the various physical
components in Camp John Hay. When this timetable was not
followed due to alleged mutual delays and force majeure, they
entered into at least four (4) more amendments to the Lease
Agreement. Two (2) of these, the July 18, 2003 and July 1, 2008
Memoranda of Agreement, covered the revision of the Project
Implementation Plan providing the targeted completion dates of the
various facilities in Camp John Hay. 17
Under the July 18, 2003 revision, Camp John Hay Development and
Bases Conversion and Development Authority estimated that the
second phase of the Camp John Hay Suites would be completed by
the end of the second quarter of 2006. 18 Admitting various
unforeseen events, Camp John Hay Development again failed to
complete its construction. Under the July 1, 2008 revision, the Camp
John Hay Suites was estimated to be completed by 2012. 19
Due to the subsisting construction delay, Charter Chemical, through
counsel, wrote Camp John Hay Development, demanding that it
transfer the units or pay the value of these units in the sum of
P6,996,517.48.20
When it felt that further demands would be futile, Charter Chemical,
on June 12, 2008, filed before the Construction Industry Arbitration
Commission a Request for Arbitration 21 under the arbitration clause
in the Contractor's Agreement.
In its March 30, 2009 Final Award, 22 the Construction Industry
Arbitration Commission ordered Camp John Hay Development to
pay the amounts of P5,900,000.00, the monetary value of the two (2)
units in Camp John Hay Suites, and P590,000.00 as attorney's fees. 23
The arbitral tribunal ruled that Charter Chemical was entitled to its
claim for the value of the two (2) units because Camp John Hay
Development failed to deliver the units within the targeted
completion date.24
The Final Award read:
On the basis of the evidence the Arbitration Tribunal finds and so
holds that:
1. Claimant is entitled to its claim for the monetary equivalent of the
two (2) units CJH Suites in the total sum of Php5,900,000.00.
2. Claimant is not entitled to its claim for exemplary damages.
3. Claimant is entitled to its claim for attorney's fees for the sum of
Php590,000.00 which is 10% of the total monetary value for the two
(2) units CJH Suites of Php5,900,000.00 which had not been
delivered by respondent.
4. The Court should not fix the period for the delivery of the subject
units as provided for in Article 1197 of the Civil Code because the
reciprocal nature of the contract itself provides for the period of their
delivery. Moreover, CIAC can fix the period if necessary. 25
Camp John Hay Development filed before the Court of Appeals a
Petition for Review26 under Rule 43 of the Rules of Court. It argued
that the arbitral tribunal did not have jurisdiction over the dispute
because the arbitration clause had been superseded by a subsequent
dispute resolution clause contained in the contracts to sell. 27 It further
asserted that it had neither agreed on the completion date of the two
(2) units nor admitted that the units were to be completed within
three (3) years from 2003 or 2005.28 Instead, it asked for a fixing of
the term or period when the units would be completed. 29
In its May 13, 2011 Decision,30 the Court of Appeals affirmed the
arbitral tribunal's award. It held that the arbitration clause in the
Contractor's Agreement was neither modified nor superseded by the
contracts to sell, which were merely devices by which to transfer
possession and title over the units to Charter Chemical. The
Contractor's Agreement, it noted, remained the principal covenant. 31
The Court of Appeals also ruled that Camp John Hay Development
was already in delay when Charter Chemical demanded the transfer
of units on August 3, 2007. When Charter Chemical finished the
work in 2003, a timetable based on the 2003 Memorandum of
Agreement between Camp John Hay Development and Bases
Conversion and Development Authority stated that the units would
be completed by 2006. This showed that there was a definite time for
the completion of the units. Although Charter Chemical was an
outsider to this agreement, it was "equivalent to an announcement to
all concerned that the units would be completed at such and such a
date."32
On June 3, 2011, Camp John Hay Development filed a Motion for
Reconsideration, but it was denied by the Court of Appeals in its
September 30, 2011 Resolution. 33
Camp John Hay Development received the September 30, 2011
Resolution on October 7, 2011.34 Before the lapse of the original 15-
day period, it filed on October 21, 2011 a Motion for Extension of
Time to File Petition for Review under Rule 45, asking for a period
of 30 days from October 22, 2011, or until November 21, 2011,
within which to file the Petition.35 This Motion for Extension was
granted by this Court.36
On November 23, 2011, Camp John Hay Development filed a
Petition for Review on Certiorari. 37 Charter Chemical filed its
Comment38 on February 6, 2012 and, in turn, Camp John Hay
Development filed its Reply39 on May 16, 2012.
Petitioner contends that there is no specific date determined for the
completion or delivery of the two (2) units in any of its contracts
with respondent. It argues that the action filed should have been for
the fixing of a period under Articles 1191 40 and 119741 of the Civil
Code, and not an action for the rescission of the contract. 42
According to petitioner, both the arbitral tribunal and the Court of
Appeals erred in ruling that the Contractor's Agreement between
petitioner and respondent had a definite timetable based on the
Memorandum of Agreement between petitioner and the Bases
Conversion and Development Authority. Moreover, petitioner argues
that the determination of whether there is an agreed completion date
must be based on the agreement between petitioner and respondent
in their contract. Thus, when the Court of Appeals resorted to a
separate agreement different from the Contractor's Agreement, it
recognized that the parties had never actually agreed on a specific
completion date.43
Petitioner relies on Article 131144 of the Civil Code, which states that
"contracts take effect only between the parties who execute
them."45 It also points out that respondent did not rely on the Master
Development Plan in the Memorandum of Agreement, maintaining
that its representative admitted having never seen the Master
Development Plan when he signed the agreement. 46 Petitioner also
notes that at the time of the execution of the Contractor's Agreement,
respondent had not yet selected the two (2) units as part of its
compensation for its painting works. Petitioner argues that the date
of delivery was not specified in the contracts to sell, which merely
indicated that the delivery would be "within a reasonable time from
the date of completion of the subject units." 47
Additionally, petitioner claims that the arbitral tribunal had no
jurisdiction over the Complaint. It asserts that the contracts to sell
executed following the Contractor's Agreement contain a different
mode of dispute resolution.48 The contracts to sell provide the
following clause:
ARTICLE XIV
MISCELLANEOUS PROVISION
. . . .
4. Venue - All actions involving this Contract shall be instituted only
in the proper courts of Pasig City, Metro Manila to the exclusion of
all other courts.49
From the dispute resolution clause, petitioner points out that disputes
must be adjudicated by the proper courts of Pasig City, to the
exclusion of all other courts. The contracts to sell also effectively
removed the parties' dispute outside the ambit of a construction
dispute since they are not the construction contracts contemplated by
Executive Order No. 1008, or the Construction Industry Arbitration
Law.50
Petitioner further contests the award of attorney's fees to respondent,
maintaining that neither the Court of Appeals nor the arbitral tribunal
has specified the factual basis for it. It argues that the award of
attorney's fees is not justified when both tribunals denied
respondent's claim for exemplary damages and when petitioner has
not been found to have acted in bad faith. Respondent, it points out,
also failed to present any official receipt to support its claim for
attorney's fees.51
On the other hand, respondent argues that the Court of Appeals' and
the arbitral tribunal's decisions, entitling respondent to the monetary
equivalent of the units for offsetting, should be respected and
accorded great weight and finality. Respondent points out that it only
agreed to bid for the painting works because Interpro, Inc.,
petitioner's project manager, assured that under the Master
Development Plan, the units would be available for occupancy two
(2) to three (3) years from negotiations, or sometime in 2003. 52
Respondent further argues that since petitioner was already delayed
in delivering the units in 2007, the arbitral tribunal and the Court of
Appeals correctly applied Article 1191 of the Civil Code, awarding
indemnity for damages to respondent. 53
Moreover, respondent claims that the arbitral tribunal correctly
acquired jurisdiction over the dispute because the relationship of the
parties was born out of the Contractor's Agreement. 54 The
Contractor's Agreement provided the arbitration clause in case of any
dispute. The contracts to sell "cannot be considered to have
superseded the Contractor's Agreement" 55 because they are merely
preparatory contracts required for the processing of the titles of the
units.56
Lastly, respondent claims that the award of attorney's fees was
justified, as petitioner's unwarranted delay and unjustified refusal to
settle the matter brought about its filing of the Complaint before the
arbitral tribunal.57
For this Court's resolution are the following issues:
First, whether or not the Court of Appeals erred in ruling that the
Construction Industry Arbitration Commission has jurisdiction over
the dispute despite the existence of a dispute resolution clause;
Second, whether or not the Court of Appeals correctly rescinded the
obligation under Article 1191 of the Civil Code and whether or not a
period should be fixed under Article 1197 of the Civil Code; and
Finally, whether or not the Court of Appeals erred in affirming the
award of attorney's fees to respondent Charter Chemical and Coating
Corporation.
The Petition is denied.
I jurisdiction, the law merely requires that the parties agree to submit
The Construction Industry Arbitration Commission was created
under Executive Order No. 1008 to establish an arbitral machinery
that will "settle expeditiously problems arising from, or connected
with, contracts in the construction industry."58 It has jurisdiction over
"construction disputes between or among parties to an arbitration
agreement, or those who are otherwise bound by the latter, directly
or by reference."59 Its purpose is to encourage the early and
expeditious settlement of disputes in the construction industry,
recognizing that it is necessary to avert delays in the resolution of
construction industry disputes, which is important to attain the
national development goals.60
Section 4 of the Construction Industry Arbitration Law lays down
the jurisdiction of the Construction Industry Arbitration
Commission:
SECTION 4. Jurisdiction. - The CIAC shall have original and
exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion
of the contract, or after the abandonment or breach thereof. These
disputes may involve government or private contracts. For the Board
to acquire jurisdiction, the parties to a dispute must agree to submit
the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to
violation of specifications for materials and workmanship; violation
of the terms of agreement; interpretation and/or application of
contractual time and delays; maintenance and defects; payment,
default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes arising from
employer-employee relationships which shall continue to be covered
by the Labor Code of the Philippines.
For the Construction Industry Arbitration Commission to acquire
to voluntary arbitration any dispute arising from construction
contracts.
In HUTAMA-RSEA Joint Operations, Inc. v. Citra Metro Manila
Tollways Corporation:61
Under Section I, Article III of the CIAC Rules, an arbitration clause
in a construction contract shall be deemed as an agreement to submit
an existing or future controversy to CIAC jurisdiction,
"notwithstanding the reference to a different arbitration institution or
arbitral body in such contract. . . ." . . .
. . . The arbitration clause in the construction contract ipso facto
vested the CIAC with jurisdiction. This rule applies, regardless of
whether the parties specifically choose another forum or make
reference to another arbitral body. Since the jurisdiction of CIAC is
conferred by law, it cannot be subjected to any condition; nor can it
be waived or diminished by the stipulation, act or omission of the
parties, as long as the parties agreed to submit their construction
contract dispute to arbitration, or if there is an arbitration clause in
the construction contract. The parties will not be precluded from
electing to submit their dispute to CIAC, because this right has been
vested in each party by law.
. . . .
It bears to emphasize that the mere existence of an arbitration clause
in the construction contract is considered by law as an agreement by
the parties to submit existing or future controversies between them to
CIAC jurisdiction, without any qualification or condition precedent.
To affirm a condition precedent in the construction contract, which
would effectively suspend the jurisdiction of the CIAC until
compliance therewith, would be in conflict with the recognized
intention of the law and rules to automatically vest CIAC with
jurisdiction over a dispute should the construction contract contain
an arbitration clause.62 (Citations omitted)
Arbitration of construction disputes through the Construction
Industry Arbitration Commission was incorporated into the general
statutory framework on alternative dispute resolution through
Republic Act No. 9285, or the Alternative Dispute Resolution Act of
2004.63 Chapter 6, Section 34 of this law explicitly referenced the
Construction Industry Arbitration Law, while Section 35 affirmed
the Construction Industry Arbitration Commission's jurisdiction:
CHAPTER 6 should be granted. Any doubt should be resolved in favor of
Arbitration of Construction Disputes
SECTION 34. Arbitration of Construction Disputes: Governing Law.
- The arbitration of construction disputes shall be governed by
Executive Order No. 1008, otherwise known as the Construction
Industry Arbitration Law.
SECTION 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, fabricator,
project manager, design professional, consultant, 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.
Arbitration, "[b]eing an inexpensive, speedy[,] and amicable method
of settling disputes . . . is encouraged by the Supreme Court." 64 If any
doubt will arise, it "should be resolved in favor of arbitration." 65
In LM Power Engineering Corp. v. Capitol Industrial Construction
Groups, Inc.,66 this Court explained the rationale behind this policy:
Aside from unclogging judicial dockets, arbitration also hastens the
resolution of disputes, especially of the commercial kind. It is thus
regarded as the "wave of the future" in international civil and
commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
arbitration.67(Citations omitted)
Here, petitioner and respondent agreed to submit to arbitration any
dispute arising from the construction contract, as clearly stipulated in
their Contractor's Agreement. The arbitration clause should, thus, be
given primacy in accordance with the State's policy to favor
arbitration. It follows that if there is any doubt as to what provision
should be given effect, this Court will rule in favor of the arbitration
clause.
Moreover, the contracts to sell, containing a contrary dispute
resolution clause, did not supersede the arbitration clause. The case
records show that the contracts to sell are not inconsistent with the
Contractor's Agreement. They are merely devices to facilitate the
transfer of ownership of the two (2) units to respondent-an offshoot
of the offsetting scheme provision in the Contractor's Agreement.
While the contracts to sell and the Contractor's Agreement both refer
to the transfer of the two (2) units to respondent, the contracts to sell
are pro-forma contracts provided by petitioner in selling the Camp
John Hay Suites units. There is no intent to supersede the
Contractor's Agreement, which remains the principal contract
between petitioner and respondent.
Petitioner erred in claiming that because the contracts to sell are not
construction contracts, they effectively removed the parties' dispute
outside the ambit of a construction dispute. On the contrary, the
subject of the contracts to sell still falls within the jurisdiction of the
Construction Industry Arbitration Commission. Section 4 of the
Construction Industry Arbitration Law states that its jurisdiction
includes "payment [and] default of employer or contractor[.]" Here,
the main dispute concerning the contracts to sell all boils down to the
issue of payment of the two (2) units for the services rendered by
respondent. Hence, the units' transfer as payment to respondent still
falls under the jurisdiction of the arbitral tribunal.
This dispute is better left to the expertise of the Construction
Industry Arbitration Commission, a quasi-judicial body with the
technical expertise to resolve disputes outside the expertise of regular
courts.68 Aptly, it should adjudicate and determine the claims and
rights of petitioner and respondent with respect to the construction
contract and all its incidents.
It is worth noting that this dispute has been ongoing for over a
decade now. Despite numerous meetings and negotiations prior to
respondent's filing of a Complaint before the arbitral tribunal, no
amicable settlement had been reached. Disregarding the proceedings
that took place before the lower tribunals and requiring the parties to
submit the dispute before the trial court would be merely dilatory at
this point. It would only entail additional expenses and unnecessary
delays for both parties.
II
Rescission on account of breach of reciprocal obligations is provided
under Article 1191 of the Civil Code:
ARTICLE 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1385 and 1388 and the Mortgage Law.
This provision refers to rescission applicable to reciprocal
obligations. It is invoked when there is noncompliance by one (1) of
the contracting parties in case of reciprocal obligations. "Reciprocal
obligations are those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously such that the performance of one
is conditioned upon the simultaneous fulfillment of the other." 69
Rescission under Article 1191 will be ordered when a party to a
contract fails to comply with his or her obligation. Rescission "is a
principal action that is immediately available to the party at the time
that the reciprocal [obligation] was breached." 70 In Spouses Velarde
v. Court of Appeals:71
The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other party
who violates the reciprocity between them. The breach contemplated
in the said provision is the obligor's failure to comply with an
existing obligation. When the obligor cannot comply with what is
incumbent upon [him or her], the obligee may seek rescission and, in
the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. 72 (Citations
omitted)
"Resolution grants the injured party the option to pursue, as principal
actions, either a rescission or specific performance of the obligation,
with payment of damages in either case." 73
Rescission of the contract is sanctioned here. Under the contract,
petitioner and respondent have reciprocal obligations. Respondent,
for its part, was bound to render painting services for petitioner's
property. This was completed by respondent in 2003, after which it
was belatedly issued a clearance in 2005. Meanwhile, in accordance
with the Contractor's Agreement, petitioner paid part of the contract
price with the remaining balance to be paid through offsetting of two
(2) Camp John Hay Suites units. However, despite incessant
demands from respondent, petitioner failed to deliver these units
because their construction had yet to be completed. The law, then,
gives respondent the right to seek rescission because petitioner could
not comply with what is incumbent upon it. Petitioner, however,
claims that the fixing of the period under Article 1197 is the proper
remedy, not rescission under Article 1191.
Article 1197 is part and parcel of all obligations contemplated
therein. Hence, whenever a period is fixed pursuant to said Article,
the court merely enforces or carries out an implied stipulation in the
contract in question. In fact, insofar as contracts not fixing a period
are concerned, said legal provision applies only if, from the nature
and circumstances surrounding the contract involved, "it can be
inferred that a period was intended" by the parties thereto. For this
reason, the last paragraph of Article 1197, ordains that "in every
case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties." In
other words, in fixing said period, the Court merely ascertains the
will of the parties and gives effect thereto. 77
As stipulated in Article 1197, this Court must determine that the
obligation does not fix a period or that the period is made to depend
upon the will of the debtor, but it can be inferred from its nature and
the circumstances that a period was intended. Then, it must be
determined what period was probably contemplated by the parties. 78
The power of this Court to fix a period is discretionary. The
surrounding facts of each case must be taken into consideration in
deciding whether the fixing of a period is sanctioned. The discretion
to fix an obligation's period is addressed to this Court's judgment and
is tempered by equitable considerations.

This Court disagrees. We cannot cure the deficiency here by fixing In Central Philippine University v. Court of Appeals,79 this Court
the period of the obligation. There is no just cause for this Court to refused to fix a period because of the years that had already been
fix the period for the benefit of petitioner. allowed for the party to comply with the condition of the obligation.
Doing so, it held, would be a mere technicality and formality, and
Article 1197 applies "when the obligation does not fix a period but would only cause further delay. This Court ruled:
from its nature and circumstances it can be inferred that a period was This general rule however cannot be applied considering the
intended[.]"74 This provision allows the courts to fix the duration different set of circumstances existing in the instant case. More than
"because the fulfillment of the obligation itself cannot be demanded a reasonable period of fifty (50) years has already been allowed
until after the court has fixed the period for compliance therewith petitioner to avail of the opportunity to comply with the condition
and such period has arrived."75 even if it be burdensome, to make the donation in its favor forever
valid. But, unfortunately, it failed to do so. Hence, there is no more
In Deudor v. J.M. Tuason & Company, Inc.:76 need to fix the duration of a term of the obligation when such
procedure would be a mere technicality and formality and would
serve no purpose that to delay or lead to an unnecessary and
expensive multiplication of suits. Moreover, under Art. 1191 of the
Civil Code, when one of the obligors cannot comply with what is
incumbent upon him, the obligee may seek rescission and the court
shall decree the same unless there is just cause authorizing the fixing
of a period. In the absence of any just cause for the court to
determine the period of the compliance, there is no more obstacle for
the court to decree the rescission claimed. 80 (Citation omitted)
In Gregorio Araneta, Inc. v. Philippine Sugar Estates Development
Company, Ltd.,81 this Court held that if a reasonable period was
agreed upon in a contract, all that the court should have done was
determine if that reasonable time had already elapsed:
If the contract so provided, then there was a period fixed, a
"reasonable time"; and all that the court should have done was to
determine if that reasonable time had already elapsed when suit was
filed. If it had passed, then the court should declare that petitioner
had breached the contract, as averred in the complaint, and fix the
resulting damages. On the other hand, if the reasonable time had not
yet elapsed, the court perforce was bound to dismiss the action for
being premature. But in no case can it be logically held that under
the plea above quoted, the intervention of the court to fix the period
for performance was warranted, for Article 1197 is precisely
predicated on the absence of any period fixed by the parties. 82
There is no just cause for this Court to determine the period of
compliance. As can be gleaned from the records of this case, the
obligation of petitioner to build the Camp John Hay Suites had been
dragging for years even before it entered into the Contractor's
Agreement with respondent.
The Memorandum of Agreement that petitioner executed with the
Bases Conversion and Development Authority shows that the
construction of the Camp John Hay Suites began in 1996. When
respondent demanded the units' transfer in 2007, more than 10 years
had lapsed; yet, within those years, petitioner was still not able to
complete the construction of the Camp John Hay Suites.
To tolerate petitioner's excuses would only cause more delay and
burden to respondent. Petitioner failed to forward any just cause to
convince this Court to set a period. It merely reasoned force
majeure and mutual delays with Bases Conversion and Development
Authority without offering any explanation for its alleged difficulty
in building the units.
To belatedly fix the period for petitioner's compliance would mean
refusing immediate payment to respondent. Petitioner's
noncompliance with its obligation to deliver the two (2) units as
payment to respondent can no longer be excused.
The law and jurisprudence are clear. When the obligor cannot
comply with its obligation, the obligee may exercise its right to
rescind the obligation, and this Court will order the rescission in the
absence of any just cause to fix the period. 83 Here, lacking any
reasonable explanation and just cause for the fixing of the period for
petitioner's noncompliance, the rescission of the obligation is
justified.
III
Rescission of the obligation under Article 1191 is a declaration that a
contract is void at its inception. Its effect is to restore the parties to
their original position, insofar as practicable. Fang v. Dueñas84 is
illustrative:
Rescission has the effect of "unmaking a contract, or its undoing
from the beginning, and not merely its termination." Hence,
rescission creates the obligation to return the object of the contract It
can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare
a contract void at its inception and to put an end to it as though it
never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the
beginning and restore the parties to their relative positions as if no
contract has been made.85
Mutual restitution is required in cases involving rescission under
Article 1191. "Where a contract is rescinded, it is the duty of the
court to require both parties to surrender that which they have
respectively received and to place each other as far as practicable in
his original situation[;] the rescission has the effect of abrogating the
contract in all parts."86
In Spouses Serrano v. Court of Appeals:87
Generally, the rule is that to rescind a contract is not merely to
terminate it, but to abrogate and undo it from the beginning; that is,
not merely to release the parties from further obligations to each
other in respect to the subject of the contract, but to annul the
contract and restore the parties to the relative positions which they
would have occupied if no such contract had ever been made.
Rescission necessarily involves a repudiation of the contract and a
refusal of the moving party to be further bound by it. 88 (Citation
omitted)
This Court has explained that restitution under Article 1385 of the
Civil Code equally applies for rescission under Article 1191.
In Laperal v. Solid Homes, Inc.:89
Despite the fact that Article 1124 of the old Civil Code from whence
Article 1191 was taken, used the term "resolution", the amendment
thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert
back to the term "resolution", this Court has no alternative but to
apply the law, as it is written.
Again, since Article 1385 of the Civil Code expressly and clearly
states that "rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and
the price with its interest," the Court finds no justification to sustain
petitioners' position that said Article 1385 does not apply to
rescission under Article 1191.90
Article 1385 of the Civil Code provides:
ARTICLE 1385. Rescission creates the obligation to return the
things which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he
may be obliged to restore.
Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss. (Emphasis supplied)
Although rescission repeals the contract from its inception, it does
not disregard all the consequences that the contract has created. What
mutual rescission entails is "the return of the benefits that each party
may have received as a result of the contract." 91
Here, it is clear that only petitioner benefited from the contract.
Respondent has already performed the painting works in 2003, and it
was accepted by petitioner as satisfactory. Since this service cannot
be undone and petitioner has already enjoyed the value of the
painting services over the years, respondent is entitled to the
payment of the painting services with interest in accordance with
Articles 1191 and 2210 of the Civil Code.92 The interest shall be
computed from the date of extrajudicial demand by respondent on
August 3, 2007 in accordance with Article 1169 93 of the Civil Code
and this Court's ruling in Nacar v. Gallery Frames.94
Generally, the parties may stipulate the recovery of attorney's fees,
but in the absence of such, Article 2208 of the Civil Code
enumerates instances when these fees may still be recovered: 95
ARTICLE 2208. In the absence of stipulation, attorney's fees and
expenses of litigation, other than judicial costs, cannot be recovered,
except:
(1) When exemplary damages are awarded; [Attorney's fees] are not to be awarded every time a party wins a suit.
The power of the court to award attorney's fees under Article 2208
(2) When the defendant's act or omission has compelled the plaintiff demands factual, legal, and equitable justification. Even when a
to litigate with third persons or to incur expenses to protect his claimant is compelled to litigate with third persons or to incur
interest; expenses to protect his rights, still attorney's fees may not be
awarded where no sufficient showing of bad faith could be reflected
(3) In criminal cases of malicious prosecution against the plaintiff; in a party's persistence in a case other than an erroneous conviction
(4) In case of a clearly unfounded civil action or proceeding against of the righteousness of his cause.97 (Citations omitted)
the plaintiff;
The grant of attorney's fees depends on the evaluation of each case
(5) Where the defendant acted in gross and evident bad faith in and is within this Court's discretion. Attorney's fees may be awarded
refusing to satisfy the plaintiff's plainly valid, just and demandable if a party was forced to litigate and incur expenses to protect its right
claim; and interest due to another party's unjustified act or omission. 98

(6) In actions for legal support; Here, we agree with the findings of the Construction Industry
Arbitration Commission and the Court of Appeals. Respondent is
(7) In actions for the recovery of wages of household helpers, entitled to the award of attorney's fees.
laborers and skilled workers;
In awarding attorney's fees, the arbitral tribunal explained that
(8) In actions for indemnity under workmen's compensation and respondent was compelled to engage the services of a lawyer to
employer's liability laws;
recover the two (2) Camp John Hay Suites units or their monetary
(9) In a separate civil action to recover civil liability arising from a value; thus, it incurred expenses to protect its interest after petitioner
crime; had breached their contract.99 In affirming this Final Award, the
Court of Appeals found that respondent undeniably needed adequate
(10) When at least double judicial costs are awarded; legal representation to recover on a clearly demandable claim,
making the additional expense inevitable. 100
(11) In any other case where the court deems it just and equitable
that attorney's fees and expenses of litigation should be recovered. Unmistakably, there was breach of faith. Petitioner violated the
reciprocity of its contract with respondent. This case dragged on for
In all cases, the attorney's fees and expenses of litigation must be years because petitioner unjustifiably refused to pay respondent's
reasonable. (Emphasis supplied) valid claim. In the proceedings before the arbitral tribunal, petitioner
Generally, attorney's fees cannot be recovered as part of damages, as even rejected respondent's offer to settle the dispute by paying the
no premium should be placed on the right to litigate. In ABS-CBN balance of the contract price. While petitioner enjoyed the benefit of
Broadcasting Corporation v. Court of Appeals:96 the painting services, respondent is forced to await payment,
foregoing the use and value of money that have compounded over
the years.
Clearly, petitioner's refusal to pay compelled respondent to file the
Complaint and incur expenses in the process. Considering the years
that had lapsed, during which respondent incessantly demanded
payment, it is only equitable to award attorney's fees.
WHEREFORE, the Petition for Review on Certiorari is DENIED.
The Court of Appeals May 13, 2011 Decision and September 30,
2011 Resolution in CA-G.R. SP No. 108335 are AFFIRMED
WITH MODIFICATION.
Petitioner Camp John Hay Development Corporation is ordered to
pay respondent Charter Chemical and Coating Corporation: (1) the
balance of the contract price in the amount of Five Million Nine
Hundred Thousand Pesos (P5,900,000.00) with interest at the rate of
twelve percent (12%) per annum from August 3, 2007 until June 30,
2013, and six percent (6%) per annum from July 1, 2013 until its full
satisfaction; and (2) attorney's fees in the amount of Five Hundred
Ninety Thousand Pesos (P590,000.00).
[G.R. No. 135362. December 13, 1999.]
HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D.
SALAS for herself and as legal guardian of the minor FABRICE
CYRILL D. SALAS, MA. CRISTINA S. LESACA, and
KARINA TERESA D. SALAS, Petitioners, v. LAPERAL
REALTY CORPORATION, ROCKWAY REAL ESTATE
CORPORATION, SOUTH RIDGE VILLAGE, INC.,
MAHARAMI DEVELOPMENT CORPORATION, Spouses
THELMA D. ABRAJANO and GREGORIO ABRAJANO,
OSCAR DACILLO, Spouses VIRGINIA D. LAVA and RODEL
LAVA, EDUARDO A. VACUNA, FLORANTE DE LA CRUZ,
JESUS VICENTE B. CAPELLAN, and the REGISTER OF
DEEDS FOR LIPA CITY, Respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Order 1 of
Branch 85 of the Regional Trial Court of Lipa City 2 dismissing
petitioners’ complaint 3 for rescission of several sale transactions
involving land owned by Augusto L. Salas, Jr., their predecessor-in-
interest, on the ground that they failed to first resort to
arbitration.cralawnad
Salas, Jr. was the registered owner of a vast tract of land in Lipa
City, Batangas spanning 1,484,354 square meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement 4
(hereinafter referred to as the Agreement) with respondent Laperal
Realty Corporation (hereinafter referred to as Laperal Realty) to
render and provide complete (horizontal) construction services on his
land.
On September 23, 1988, Salas, Jr. executed a Special Power of
Attorney in favor of respondent Laperal Realty to exercise general
control, supervision and management of the sale of his land, for cash
or on installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a
business trip to Nueva Ecija. He never returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial
Court of Makati City a verified petition for the declaration of
presumptive death of her husband, Salas, Jr., who had then been
missing for more than seven (7) years. It was granted on December
12, 1996. 5
 same reason.
Meantime, respondent Laperal Realty subdivided the land of Salas,
Jr. and sold subdivided portions thereof to respondents Rockway On August 9, 1998, the trial court issued the herein assailed Order
Real Estate Corporation and South Ridge Village, Inc. on February dismissing petitioners’ Complaint for non-compliance with the
22, 1990; to respondent spouses Abrajano and Lava and Oscar foregoing arbitration clause.
Dacillo on June 27, 1991; and to respondents Eduardo Vacuna,
Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all Hence this petition.
of whom are hereinafter referred to as respondent lot buyers).
Petitioners argue, thus:jgc:
On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the
Regional Trial Court of Lipa City a Complaint 6 for declaration of "The petitioners’ causes of action did not emanate from the Owner-
nullity of sale, reconveyance, cancellation of contract, accounting Contractor Agreement."cralaw virtua1aw library
and damages against herein respondents which was docketed as Civil
Case No. 98-0047.chanrobles law library : red "The petitioners’ causes of action for cancellation of contract and
accounting are covered by the exception under the Arbitration
On April 24, 1998, respondent Laperal Realty filed a Motion to Law."cralaw virtua1aw library
Dismiss 7 on the ground that petitioners failed to submit their
grievance to arbitration as required under Article VI of the "Failure to arbitrate is not a ground for dismissal." 10
Agreement which provides:jgc:
In a catena of cases 11 inspired by Justice Malcolm’s provocative
"ARTICLE VI. ARBITRATION. dissent in Vega v. San Carlos Milling Co. 12 , this Court has
recognized arbitration agreements as valid, binding, enforceable and
All cases of dispute between CONTRACTOR and OWNER’S not contrary to public policy so much so that when there obtains a
representative shall be referred to the committee represented written provision for arbitration which is not complied with, the trial
by:chanrob1es virtual 1aw library court should suspend the proceedings and order the parties to
proceed to arbitration in accordance with the terms of their
a. One representative of the OWNER; agreement. 13 Arbitration is the "wave of the future" in dispute
resolution. 14 To brush aside a contractual agreement calling for
b. One representative of the CONTRACTOR; arbitration in case of disagreement between parties would be a step
backward. 15
c. One representative acceptable to both OWNER and
CONTRACTOR." 8 Nonetheless, we grant the petition.cralawnad

On May 5, 1998, respondent spouses Abrajano and Lava and A submission to arbitration is a contract. 16 As such, the Agreement,
respondent Dacillo filed a Joint Answer with Counterclaim and containing the stipulation on arbitration, binds the parties thereto, as
Crossclaim 9 praying for dismissal of petitioners’ Complaint for the well as their assigns and heirs. 17 But only they. Petitioners, as heirs
of Salas, Jr., and respondent Laperal Realty are certainly bound by
the Agreement. If respondent Laperal Realty had assigned its rights
under the Agreement to a third party, making the former, the
assignor, and the latter, the assignee, such assignee would also be
bound by the arbitration provision since assignment involves such
transfer of rights as to vest in the assignee the power to enforce them
to the same extent as the assignor could have enforced them against
the debtor 18 or in this case, against the heirs of the original party to
the Agreement. However, respondents Rockway Real Estate
Corporation, South Ridge Village, Inc., Maharami Development
Corporation, spouses Abrajano, spouses Lava, Oscar Dacillo,
Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capellan are
not assignees of the rights of respondent Laperal Realty under the
Agreement to develop Salas, Jr.’s land and sell the same. They are,
rather, buyers of the land that respondent Laperal Realty was given
the authority to develop and sell under the Agreement. As such, they
are not "assigns" contemplated in Art. 1311 of the New Civil Code
which provides that "contracts take effect only between the parties,
their assigns and heirs"
to arbitrate as provided in Article VI of the Agreement was never
vested in respondent lot buyers.
Respondent Laperal Realty, as a contracting party to the Agreement,
has the right to compel petitioners to first arbitrate before seeking
judicial relief. However, to split the proceedings into arbitration for
respondent Laperal Realty and trial for the respondent lot buyers, or
to hold trial in abeyance pending arbitration between petitioners and
respondent Laperal Realty, would in effect result in multiplicity of
suits, duplicitous procedure and unnecessary delay. On the other
hand, it would be in the interest of justice if the trial court hears the
complaint against all herein respondents and adjudicates petitioners’
rights as against theirs in a single and complete proceeding.
WHEREFORE, the instant petition is hereby GRANTED. The Order
dated August 19, 1998 of Branch 85 of the Regional Trial Court of
Lipa City is hereby NULLIFIED and SET ASIDE. Said court is
hereby ordered to proceed with the hearing of Civil Case No. 98-
. 0047.

Petitioners claim that they suffered lesion of more than one-fourth Costs against private respondents.:
(1/4) of the value of Salas, Jr.’s land when respondent Laperal Realty
subdivided it and sold portions thereof to respondent lot buyers. SO ORDERED.
Thus, they instituted action 19 against both respondent Laperal
Realty and respondent lot buyers for rescission of the sale
transactions and reconveyance to them of the subdivided lots. They
argue that rescission, being their cause of action, falls under the
exception clause in Sec. 2 of Republic Act No. 876 which provides
that "such submission [to] or contract [of arbitration] shall be valid,
enforceable and irrevocable, save, upon such grounds as exist at law
for the revocation of any contract" .

The petitioners’ contention is without merit. For while rescission, as

a general rule, is an arbitrable issue, 20 they impleaded in the suit for
rescission the respondent lot buyers who are neither parties to the
Agreement nor the latter’s assigns or heirs. Consequently, the right

G.R. No. 136154        February 7, 2001
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR.,
DANIEL COLLINS and LUIS HIDALGO, petitioners,
vs.
COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in
his capacity as Presiding Judge, RTC-Br. 74, Malabon, Metro
Manila, MONTEBUENO MARKETING, INC., LIONG LIONG
C. SY and SABROSA FOODS, INC., respondents.
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July
1998 Decision1 of the Court of Appeals affirming the 11 November
1997 Order2 of the Regional Trial Court which denied
petitioners' Motion to Suspend Proceedings in Civil Case No. 2637-
MN. It also questions the appellate court's Resolution3 of 30 October
1998 which denied petitioners' Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del
Monte Corporation-USA (DMC-USA) appointed private respondent
Montebueno Marketing, Inc. (MMI) as the sole and exclusive
distributor of its Del Monte products in the Philippines for a period
of five (5) years, renewable for two (2) consecutive five (5) year
periods with the consent of the parties. The agreement provided,
among others, for an arbitration clause which states –
12. GOVERNING LAW AND ARBITRATION4
This Agreement shall be governed by the laws of the State of
California and/or, if applicable, the United States of
America. All disputes arising out of or relating to this
Agreement or the parties' relationship, including the
termination thereof, shall be resolved by arbitration in the
City of San Francisco, State of California, under the Rules
of the American Arbitration Association. The arbitration
panel shall consist of three members, one of whom shall be
selected by DMC-USA, one of whom shall be selected by
MMI, and third of whom shall be selected by the other two
members and shall have relevant experience in the industry
xxxx
In October 1994 the appointment of private respondent MMI as the
sole and exclusive distributor of Del Monte products in the
Philippines was published in several newspapers in the country.
Immediately after its appointment, private respondent MMI
appointed Sabrosa Foods, Inc. (SFI), with the approval of petitioner
DMC-USA, as MMI's marketing arm to concentrate on its marketing
and selling function as well as to manage its critical relationship with
the trade.
On 3 October 1996 private respondents MMI, SFI and MMI's
Managing Director Liong Liong C. Sy (LILY SY) filed a
Complaint5 against petitioners DMC-USA, Paul E. Derby,
Jr.,6 Daniel Collins7 and Luis Hidalgo,8 and Dewey Ltd.9 before the
Regional Trial Court of Malabon, Metro Manila. Private respondents
predicated their complaint on the alleged violations by petitioners of
Arts. 20,10 2111 and 2312 of the Civil Code. According to private
respondents, DMC-USA products continued to be brought into the
country by parallel importers despite the appointment of private
respondent MMI as the sole and exclusive distributor of Del Monte
products thereby causing them great embarrassment and substantial
damage. They alleged that the products brought into the country by
these importers were aged, damaged, fake or counterfeit, so that in
March 1995 they had to cause, after prior consultation with Antonio
Ongpin, Market Director for Special Markets of Del Monte
Philippines, Inc., the publication of a "warning to the trade" paid
advertisement in leading newspapers. Petitioners DMC-USA and
Paul E. Derby, Jr., apparently upset with the publication, instructed
private respondent MMI to stop coordinating with Antonio Ongpin
and to communicate directly instead with petitioner DMC-USA
through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and
surreptitiously continued to deal with the former in bad faith by
involving disinterested third parties and by proposing solutions
which were entirely out of their control. Private respondents claimed
that they had exhausted all possible avenues for an amicable
resolution and settlement of their grievances; that as a result of the
fraud, bad faith, malice and wanton attitude of petitioners, they
should be held responsible for all the actual expenses incurred by
private respondents in the delayed shipment of orders which resulted
in the extra handling thereof, the actual expenses and cost of money
for the unused Letters of Credit (LCs) and the substantial opportunity
losses due to created out-of-stock situations and unauthorized
shipments of Del Monte-USA products to the Philippine Duty Free
Area and Economic zone; that the bad faith, fraudulent acts and
willful negligence of petitioners, motivated by their determination to
squeeze private respondents out of the outstanding and ongoing
Distributorship Agreement in favor of another party, had placed
private respondent LILY SY on tenterhooks since then; and, that the
shrewd and subtle manner with which petitioners concocted
imaginary violations by private respondent MMI of the
Distributorship Agreement in order to justify the untimely
termination thereof was a subterfuge. For the foregoing, private
respondents claimed, among other reliefs, the payment of actual
damages, exemplary damages, attorney's fees and litigation
expenses.
On 21 October 1996 petitioners filed a Motion to Suspend
Proceedings13 invoking the arbitration clause in their Agreement
with private respondents.
In a Resolution14 dated 23 December 1996 the trial court deferred
consideration of petitioners' Motion to Suspend Proceedings as the
grounds alleged therein did not constitute the suspension of the
proceedings considering that the action was for damages with prayer
for the issuance of Writ of Preliminary Attachment and not on the
Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to
which respondents filed their Comment/Opposition. On 31 January
1997 petitioners filed their Reply. Subsequently, private respondents
filed an Urgent Motion for Leave to Admit Supplemental
Pleading dated 2 April 1997. This Motion was admitted, over
petitioners' opposition, in an Order of the trial court dated 27 June
1997.
As a result of the admission of the Supplemental
Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17
October 1996 and Motion for Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was
denied by the trial court on the ground that it "will not serve the ends
of justice and to allow said suspension will only delay the
determination of the issues, frustrate the quest of the parties for a
judicious determination of their respective claims, and/or deprive
and delay their rights to seek redress."15
On appeal, the Court of appeals affirmed the decision of the trial
court. It held that the alleged damaging acts recited in the Complaint,
constituting petitioners' causes of action, required the interpretation
of Art. 21 of the Civil Code16 and that in determining whether
petitioners had violated it "would require a full blown trial" making
arbitration "out of the question." 17 Petitioners' Motion for
Reconsideration of the affirmation was denied. Hence, this Petition
for Review.
The crux of the controversy boils down to whether the dispute
between the parties warrants an order compelling them to submit to
arbitration.
Petitioners contend that the subject matter of private respondents'
causes of action arises out of or relates to the Agreement between
petitioners and private respondents. Thus, considering that the
arbitration clause of the Agreement provides that all disputes arising
out of or relating to the Agreement or the parties' relationship,
including the termination thereof, shall be resolved by arbitration,
they insist on the suspension of the proceedings in Civil Case No.
2637-MN as mandated by Sec. 7 of RA 87618 –
Sec. 7. Stay of Civil Action. If any suit or proceeding be
brought upon an issue arising out of an agreement providing
for arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue
involved in such suit or proceeding is referable to
arbitration, shall stay the action or proceeding until an
arbitration has been had in accordance with the terms of the
agreement. Provided, That the applicant for the stay is not
in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of
action are rooted in Arts. 20, 21 and 23 of the Civil Code, 19 the
determination of which demands a full blown trial, as correctly held
by the Court of Appeals. Moreover, they claim that the issues before
the trial court were not joined so that the Honorable Judge was not
given the opportunity to satisfy himself that the issue involved in the
case was referable to arbitration. They submit that, apparently,
petitioners filed a motion to suspend proceedings instead of sending
a written demand to private respondents to arbitrate because
petitioners were not sure whether the case could be a subject of
arbitration. They maintain that had petitioners done so and private
respondents failed to answer the demand, petitioners could have filed
with the trial court their demand for arbitration that would warrant a
determination by the judge whether to refer the case to arbitration.
Accordingly, private respondents assert that arbitration is out of the
question.
Private respondents further contend that the arbitration clause centers
more on venue rather than on arbitration. They finally allege that
petitioners filed their motion for extension of time to file this petition
on the same date20 petitioner DMC-USA filed a petition to compel
private respondent MMI to arbitrate before the United States District
Court in Northern California, docketed as Case No. C-98-4446. They
insist that the filing of the petition to compel arbitration in the United
States made the petition filed before this Court an alternative remedy
and, in a way, an abandonment of the cause they are fighting for her
in the Philippines, thus warranting the dismissal of the present
petition before this Court.
There is no doubt that arbitration is valid and constitutional in our
jurisdiction.21 Even before the enactment of RA 876, this Court has
countenanced the settlement of disputes through arbitration. Unless
the agreement is such as absolutely to close the doors of the courts
against the parties, which agreement would be void, the courts will
look with favor upon such amicable arrangement and will only
interfere with great reluctance to anticipate or nullify the action of
the arbitrator.22 Moreover, as RA 876 expressly authorizes arbitration
of domestic disputes, foreign arbitration as a system of settling
commercial disputes 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.23
A careful examination of the instant case shows that the arbitration
clause in the Distributorship Agreement between petitioner DMC-
USA and private respondent MMI is valid and the dispute between
the parties is arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private
respondent MMI is a contract. The 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. 24 Clearly, only parties
to the Agreement, i.e., petitioners DMC-USA and its Managing
Director for Export Sales Paul E. Derby, Jr., and private respondents
MMI and its Managing Director LILY SY are bound by the
Agreement and its arbitration clause as they are the only signatories
thereto. Petitioners Daniel Collins and Luis Hidalgo, and private
respondent SFI, not parties to the Agreement and cannot even be
considered assigns or heirs of the parties, are not bound by the
Agreement and the arbitration clause therein. Consequently, referral
to arbitration in the State of California pursuant to the arbitration
clause and the suspension of the proceedings in Civil Case No. 2637-
MN pending the return of the arbitral award could be called for 25 but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and private
respondents MMI and LILY SY, and not as to the other parties in
this case. This is consistent with the recent case of Heirs of Augusto
L. Salas, Jr. v. Laperal Realty Corporation,26 which superseded that
of Toyota Motor Philippines Corp. v. Court of Appeals.27
In Toyota, the Court ruled that "[t]he contention that the arbitration
clause has become dysfunctional because of the presence of third
parties is untenable" ratiocinating that "[c]ontracts are respected as
the law between the contracting parties" 28 and that "[a]s such, the
parties are thereby expected to abide with good faith in their
contractual commitments."29 However, in Salas, Jr., only parties to
the Agreement, their assigns or heirs have the right to arbitrate or
could be compelled to arbitrate. The Court went further by declaring
that in recognizing the right of the contracting parties to arbitrate or
to compel arbitration, the splitting of the proceedings to arbitration as
to some of the parties on one hand and trial for the others on the
other hand, or the suspension of trial pending arbitration between
some of the parties, should not be allowed as it would, in effect,
result in multiplicity of suits, duplicitous procedure and unnecessary
delay.30
The object of arbitration is to allow the expeditious determination of
a dispute.31 Clearly, the issue before us could not be speedily and
efficiently resolved in its entirety if we allow simultaneous
arbitration proceedings and trial, or suspension of trial pending
arbitration. Accordingly, the interest of justice would only be served
if the trial court hears and adjudicates the case in a single and
complete proceeding.32
WHEREFORE, the petition is DENIED. The Decision of the Court
of Appeals affirming the Order of the Regional Trial Court of
Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied
petitioners' Motion to Suspend Proceedings, is AFFIRMED. The BRANCH 2, ILIGAN CITY and E. WILLKOM
Regional Trial Court concerned is directed to proceed with the ENTERPRISES, INC., respondents.
hearing of Civil Case No. 2637-MN with dispatch. No costs.
 
SO ORDERED.
PURISIMA, J.:

Before the Court is a Petition for Certiorari with Prayer for

Preliminary Injunction & Temporary Restraining Order under Rule
65 of the Revised Rules of Court assailing the decision of the
Regional Trial Court of Lanao del Norte, Branch 2, Iligan City, on
the following consolidated cases:

(a) Special Proceeding Case No. 2206 entitled National Steel

Corporation vs. E. Willkom Enterprise Inc. to Vacate Arbitrators
Award; and;

(b) Civil Case No. 2198 entitled to E. Willkom Enterprises

Inc. vs. National Steel Corporation for Sum of Money with
application for Confirmation of Arbitrators Award.

The facts as found below are, as follows:

. . . On Nov. 18, 1992, petitioner-defendant Edward

Willkom Enterprises Inc. (EWEI for brevity)
together with one Ramiro Construction and
respondent-petitioner National Steel Corporation
(NSC for short) executed a contract whereby the
former jointly undertook the Contract for Site
Development (Exhs. "3" & "D")for the latter's
Integrated Iron and Steel Mills Complex to be
G.R. No. 127004 March 11, 1999 established at Iligan City.

NATIONAL STEEL CORPORATION, petitioner, Sometime in the year 1983, the services of Ramiro
vs. Construction was terminated and on March 7, 1983,
THE REGIONAL TRIAL COURT OF LANAO DEL NORTE, petitioner-defendant EWEI took over Ramiro's
contractual obligation. Due to this and to other
causes deemed sufficient by EWEI, extensions of
time for the termination of the project, initially
agreed to be finished on July 17, 1983, were granted
by NSC.
Differences later arose, Plaintiff-defendant EWEI
filed Civil Case No. 1615 before the Regional Trial
Court of Lanao del Norte, Branch 06, (Exhs. "A"
and "1") praying essentially for the payments of
P458,381.001 with interest from the time of delay;
the price adjustment as provided by PD 1594; and
exemplary damages in the amount of P50,000.00
and attorney's fees.
Defendant-petitioner NSC filed an answer with
counterclaim to plaintiffs complaints on May 18,
1990.
On August 21, 1990, the Honorable Court through
Presiding Judge Valario M. Salazar upon joint
motion of both parties had issued an order (Exhs.
"C" and "3") dismissing the said complaint and
counterclaim . . . in view of the desire of both parties
to implement Sec. 19 of the contract, providing for a
resolution of any conflict by arbitration . . .
(emphasis supplied).
In accordance with the aforesaid order, and pursuant
to Sec. 19 of the Contract for Site Development (id)
the herein parties constituted an Arbitration Board
composed of the following:
(a) Engr. Pafnucio M. Mejia as Chairman,
who was nominated by the two arbitrators
earlier nominated by EWEI and NSC with
an Oath of Office (Exh. "E");
(b) Engr. Eutaquio O. Lagapa, Jr., member,
who was nominated by EWEI with an oath
office (Exh. "F");
(c) Engr. Gil A. Aberilla, a member who
was nominated by NSC, with an Oath of
Office (Exh. "G").
After series of hearings, the Arbitrators rendered the
decision (Exh. "H" & "4") which is the subject
matter of these present causes of action, both
initiated separately by the herein contending parties,
substantial portion of which directs NSC to pay
EWEI, as follows:
(a) P458,381.00 representing EWEI's last
billing No. 16 with interest thereon at the
rate of 1-1/4% per month from January 1,
1985 to actual date of payment;
(b) P1,335,514.20 representing price
escalation adjustment under PD No. 1594,
with interest thereon at the rate of 1-1/4%
per month from January 1, 1985 to actual
date of payment;
(c) P50,000 as and for exemplary damages;
(d) P350,000 as and for attorney's fees; and
(e) P35,000.00 as and for cost of
arbitration. 1
The Regional Trial Court of Lanao del Norte Branch 2, Iligan After deliberating on the petition as well as the comment and reply
through Judge Maximo B. Ratunil, rendered judgment as follows: thereon, the court gave due course to the petition and considered the
case ripe for decision.
(1) In Civil Case
No. II-2198, The pivot of inquiry here is whether or not the lower court acted with
declaring the award grave abuse of discretion in not vacating the arbitrator's award.
of the Board of
Arbitrators, dated A stipulation to refer all future disputes or to submit an ongoing
April 21, 1992 to be dispute to an arbitrator is valid. Republic Act 876, otherwise known
duly AFFIRMED as the Arbitration Law, was enacted by Congress since there was a
and CONFIRMED growing need for a law regulating arbitration in general.
"en toto"; that an
entry of judgment The parties in the present case, upon entering into a Contract for Site
be entered therewith Development, mutually agreed that any dispute arising from the said
pursuant to contract shall be submitted for arbitration. Explicit is Paragraph 19 of
Republic Act No. subject contract, which reads:
876 (the Arbitration
Law); and costs Paragraph 19. ARBITRATION. All disputes,
against respondent questions or differences which may at any time arise
National Steel between the parties hereto in connection with or
Corporation. relating to this Agreement or the subject matter
hereof, including questions of interpretation or
(2) In Special construction, shall be referred to an Arbitration
Proceeding No. II- Board composed of three (3) arbitrators, one to be
2206, ordering the appointed by each party, and the third, to be
petition to vacate appointed by the two (2) arbitrators. The
the aforesaid award appointment of arbitrators and procedure for
be DISMISSED. arbitration shall be governed by. the provisions of
the Arbitration Law (Republic Act No. 876). The
SO ORDERED. 2 Board shall apply Philippine Law in adjudicating the
dispute. The decision of a majority of the members
With the denial on October 18, 1996 of its Motion for of the Arbitration Board shall be valid, binding, final
Reconsideration, the National Steel Corporation (NSC) has come to and conclusive upon the parties, and from which
this court via the present petition. there will be no appeal, subject to the provisions on
vacating, modifying; or correcting an award under
the said Republic Act No. 876. 3
Thereunder, if a dispute should arise from the contract, the (a) The award was
Arbitration Board shall assume jurisdiction and conduct hearings. procured by
After the Board comes up with a decision, the parties may corruption, fraud or
immediately implement the same by treating it as an amicable other undue means;
settlement. However, if one of the parties refuses to comply or is
dissatisfied with the decision, he may file a Petition to Vacate the (b) That there was
Arbitrator's decision before the trial court. On the other hand, the evident partiality or
winning party may ask the trial court's confirmation to have such corruption in the
decision enforced. arbitrators of any of
them; or
It should be stressed that voluntary arbitrators, by the nature of their
functions, act in a quasi-judicial capacity. 4 As a rule, findings of (c) That the
facts by quasi-judicial bodies, which have acquired expertise because arbitrators were
their jurisdiction is confined to specific matters, are accorded not guilty of
only respect but even finality if they are supported by substantial misconduct in
evidence, 5 even if not overwhelming or preponderant. 6 As the refusing to postpone
petitioner has availed of Rule 65, the Court will not review the facts the hearing upon
found nor even of the law as interpreted or applied by the arbitrator sufficient cause
unless the supposed errors of facts or of law are so patent and gross shown, or in
and prejudicial as to amount to a grave abuse of discretion or refusing to hear
an excess de pouvoir on the part of the arbitrators. 7 evidence pertinent
and material to the
Thus, in a Petition to Vacate Arbitrator's Decision before the trial controversy; that
court, regularity in the performance of official functions is presumed one or more of the
and the complaining party has the burden of proving the existence of arbitrators was
any of the grounds for vacating the award, as provided for by disqualified to act
Sections 24 of the Arbitration Law, to wit: as such under
section nine hereof,
Sec. 24 GROUNDS FOR VACATING THE and wilfully
AWARD — In any one of the following cases, the refrained from
court must make an order vacating the award upon disclosing such
the petition of any party to the controversy when disqualification or
such party proves affirmatively that in the arbitration of any other
proceedings: misbehavior by
which the rights of
any party have been
 materially Thirdly, this Court cannot find its way to support
prejudiced; or NSC's contention that there was evident partiality in
the assailed Award of the Arbitrator in favor of the
(d) That the respondent because the conclusion of the Board,
arbitrators exceeded which the Court found to be well-founded, is fully
their powers, or so supported by substantial evidence, as follows:
imperfectly
executed them, that . . . The testimonies of witnesses
a mutual, final and from both parties were heard to
definite award upon clarify facts and to threash (sic) out
the subject matter the dispute in the hearings. Upon
submitted to them motion by NSC counsel, the hearing
was not made. . . . of testimony from witnesses was
terminated on 22 January 1992. To
The grounds relied upon by the petitioner were the following (a) end the testimonies in the hearing
That there was evident partiality in the assailed decision of the both litigant parties upon query by
Arbitrators in favor of the respondent; and (b) That there was Arbitrator-Chairman freely
mistaken appreciation of the facts and application of the law by the declared that there has been no
Arbitrators. These were the very same grounds alleged by NSC partiality in the manner the
before the trial court in their Petition to Vacate the Arbitration Arbitrators conducted the hearing,
Award and which petitioner is reiterating in this petition under that there has been no instance,
scrutiny. where Arbitrators refused to
postpone requested or to hear/accept
Petitioner's allegation that there was evident partiality is untenable. It evidence pertinent and material to
is anemic of evidentiary support. the dispute. . . . (emphasis supplied)

In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in
upholding the decision of the Board of Arbitrators, this Court ruled
that the fact that a party was disadvantaged by the decision of the
Arbitration. Committee does not prove evident partiality. Proofs
other than mere inference are needed to establish evident partiality.
Here, petitioner merely averred evident partiality without any proof
to back it up. Petitioner was never deprived of the right to present
evidence nor was there any showing that the Board showed signs of
any bias in favor of EWEI. As correctly found by the trial court:
Parentethically, and in the light of the record above-
mentioned, this Court hereby holds that the Board of
Arbitrators did not commit any "evident partiality"
imputed by petitioner NSC. Above all, this Court
must sustain the said decision for it is a well-settled
rule that the actual findings of an administrative
body should be affirmed if there is substantial
evidence to support them and the conclusions stated
in the decision are not clearly against the law and
jurisprudence, similar to the instant case,
 Henceforth, every reasonable intendment. will be
indulged to give effect such proceedings and in
favor of the regulatory and integrity of the
arbitrators act. (Corpus Juris, Vol. 5, p. 20) 8
Indeed, the allegation of evident partiality is not well-taken because
the petitioner failed to substantiate the same.
Anent the issue of mistaken appreciation of facts and law of the case,
the petitioner theorizes that the awards made by the Board were
unsubstantiated and the same were a plain misapplication of the law
and even contrary to jurisprudence. To have a clearer understanding
of the petition, this Court will try to discuss individually the awards
made by the Board, and determine if there was grave abuse of
discretion on the part of the trial court when it adopted such
awards in toto.
I. P458,381.00 representing
EWEI's last billing No. 16 with
interest thereon at the rate of 1-1/4%
per month from January 1, 1985
to actual date of payment;
Petitioner seeks to bar payment of the said amount to EWEI. Since
the latter failed to complete the works as agreed upon, NSC had the
right to withhold such amount. The same will be used to cover the
cost differential paid to another contractor who finished the work
allegedly left uncompleted by EWEI. Said work cost NSC
P1,225,000, and should be made chargeable to EWEI's receivables
on Final Billing No. 16 issued to NSC.
The query here therefore is whether there was failure on the part of
EWEI to complete the work agreed upon. This will determine
whether Final Billing No. 16 can be made chargeable to the cost
differential paid by NSC to another contractor.
After a series of hearings, the Board of Arbitrators concluded that the
work was completed by EWEI. As correctly stated:
To authenticate the extent of unfinished work,
quantity, unit cost differential and amount, NSC was
required to submit copies of payment vouchers
and/or job awards extended to the other contractor
engaged to complete the works. The best efforts by
NSC despite the multiplicity of
accounting/auditing/engineering records required in
a corporate complex failed to produce documentary
proofs from their Iligan or Makati office despite
repeated requests. NSC failed to substantiate such
allusion of completion by another contractor three
unfinished items of works, actual quantities
accomplished and unit cost differential paid
chargeable against EWEI.
xxx xxx xxx
The latest evaluation on record of the items of work
completed by EWEI under the contract is drawn
from the NSC report (Exhibit "II-d") dated 12
November 1985 submitted with the EWEI Billing
No. 16-Final in the course of processing claim on
items of work accomplished. There is no such report
or mention of unfinished work of 90,000 MT of
dumped riprap, 100,000 cu m of site grading and
300,000 cu m of spreading common excavated
materials in the EWEI contract alluded to by the
NSC as unfinished work otherwise EWEI Billing
No. 16-Final would not have passed processing for
payment unless there is really no such unfinished
work NSC evaluation report with no adverse
findings of unfinished work consider the contract as
completed.
To affirm the work items, quantity, unit cost
differential and amount of unfinished work left
behind by EWEI, NSC in serving notice of contract
termination to EWEI should have instead
specifically cited these obligations in detail for
EWEI to perform/comply within 30 days, such
failure to perform/comply should have constituted as
an event in default that would have justified
termination of contract of NSC with EWEI. If at all,
this unfinished work may be additional/extra work
awarded in 1984 to another contractor at prices
higher than the unit price tendered by EWEI in 1982
and/or the discrepancy between actual quantities of
work accomplished per plans versus estimated
quantities of work covered by separate contract as
expansion of the original project.
xxx xxx xxx
IN VIEW OF THE FOREGOING, THE SO-
CALLED UNFINISHED WORKS IN THE
CONTRACT BY EWEI ALLUDED TO BY NSC
IS NOT CONSIDERED AN OBLIGATION TO
PERFORM/COMPLY THUS ABSOLVING EWEI
OF ANY FAILURE TO PERFORM/COMPLY
AND THEREFORE CANNOT BE AVAILED Of
AS A RIGHT OR REMEDY BY NSC TO
RECOVER UNIT DIFFERENTIAL COST FROM
EWEI FOR THE SAME UNSUBSTANTIATED
WORK DONE BY ANOTHER CONTRACTOR.
(ANNEX "C" ARBITRATION, page 86-88
of Rollo.)
Furthermore, under the contract sued upon, it is clear that should the
Owner feel that the work agreed upon was not completed by the
contractor, it is incumbent upon the OWNER to send to
CONTRACTOR a letter within seven (7) days after completion of
the inspection to specify the objections thereto. 9 NSC failed to
comply with such requirement, and therefore it would be unfair to
refuse payment to EWEI, considering that the latter had faithfully
submitted Final Billing No. 16 believing that its work had been
completed because NSC did not call its attention to any
objectionable aspect of their project.
But, what cannot be upheld is the Board's imposition of a 1-1/4%
interest per month from January 1, 1985 to actual date of payment.
There is nothing in the said contract to justify or authorize such an
award. The trial court should have therefore disregarded the same
and instead, applied the legal rate of 6% per annum, from Jan. 1,
1985 until this decision becomes final and executory. This is so
because the legal rate of interest on monetary obligations not arising
from loans or forebearance of credits or goods is 6% 10 per annum in
the absence of any stipulation to the contrary.
(II) Price escalation with the
interest rate of 1-1/4% per
month from 1 January 1985 to
actual date of payment.
Petitioner contends that EWEI is not entitled to price escalation
absent any stipulation to that effect in the contract under which, the
contract price is fixed, citing Paragraph 2 thereof, which stipulates:
 2. CONTRACT PRICE —
xxx xxx xxx
The applicable unit prices above fixed are based on
the assumption that the disposal areas for cleared,
grubbed materials, debris, excess filling materials
and other matters that are to be disposed of or are
within the boundary limits of the site, as designated
in Annex A hereof. In the event that disposal areas
fixed and designated in Annex A are diverted and
transferred to such other areas as would be outside
the limits of the site as would require additional
costs to the contractor, then Owner shall be liable for
such additional hauling costs of P1.45/km/m3."
(Annex "A", Contract for Site Development, page 55
of Rollo).
The phrase "prices above fixed" means that the contract price of the
work shall be that agreed upon by the parties at the time of the
execution of the contract, which is the law between them provided it
is not contrary to law, morals, good customs, public order, or public
policy. (Article 1306, New Civil Code). It cannot be inferred
therefrom, however, that the parties are prohibited from imposing
future increases or price escalation. It is a cardinal rule in the
interpretation of contracts that "if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control. 11
But price escalation is expressly allowed under Presidential Decree
1594, which law allows price escalation in all contracts involving
government projects including contracts entered into by government
entities and instrumentalities and Government Owned or Controlled
Corporations (GOCCs). It is a basic rule in contracts that law is
deemed written into the contract between the parties. And when there
is no prohibitory clause on price escalation, the Court will allow
payment therefor. Thus, petitioner cannot rely on the case of Llama
Development Corporation vs. Court of Appeals and National Steel
Corporation, GR 88093, Resolution, Third Division, 20 Sept 1989.
It is not applicable here since in that case, the contract explicitly
provided that the contract price stipulated was fixed, inclusive of all
costs and not subject to escalation, (emphasis supplied). This, in
effect, waived the provisions of PD 1594. The case under scrutiny is
different as the disputed contract does not contain a similar
provision.
In a vain attempt to evade said law's application, they would like the
Court to believe that it is an acquired asset corporation and not a
government owned or controlled corporation so that they are not
within the coverage of PD 1594. Whether NSC is an asset-acquired
corporation or a government owned or controlled corporation is of
no moment. It is not determinative of the pivot of inquiry. It bears
emphasizing that during the hearings conducted by the Board of
Arbitrators, there was presented documentary evidence to show that
NSC, despite its being allegedly an asset acquired corporation,
allowed price escalation to another contractor, Geo Transport and
Construction, Inc. (GTCI). As said in the decision of a Board of
Arbitrators:
On the other hand, there was documentary evidence
presented that NSC granted Geo Transport and
Construction, Inc. (GTCI), the other favored
contractor working side by side with EWEI on the
site development project during the same period the
GTCE was granted upon request and paid by NSC
an actual sum of P6.9 million as price adjustment
compensation even without the benefit of escalation
provision in the contract but allowed in accordance
with PD NO. 1594 enforceable among government
controlled or owned corporation. The statement is
embodied in an affidavit (Exhibit "111-h") submitted
by affiant Jose M. Mesina, Asst. to the President and
 Legal Counsel of GTCI, submitted to the Arbitrators
upon solicitation of EWEI, copy to NSC, on 3
October 1991. NSC did not assail the affidavit upon
receipt of such document as evidence until the
hearing of 19 December 1991 when the affidavit
was branded by NSC counsel as incorrect and
hearsay. Within 7 days reglamentary period after
receipt of affidavit in 3 October 1991, the NSC had
the recourse to contest the affidavit even preferably
charge the affiant for slander if NSC could disprove
the statements as untrue. 12
If Petitioner seeks to refute such evidence, it should have done so
before the Board of Arbitrators, during the hearings. To raise the
issue now is futile.
However, the same line of reasoning with respect to the first award
should be used in disregarding the interest rate of 1-1/4%. The legal
rate of 6% per annum should be similarly applied to the price
escalation to be computed from Jan. 1, 1985 until this decision
becomes final and executory.
(III) The award of P50,000 as
exemplary damages and
P350,000 as attorney's fees;
The exemplary damages and attorneys fees awarded by the Board of
Arbitrators should be deleted in light of the circumstances
surrounding the case.
The requirements for an award of exemplary damages, are: (1) they
may be imposed by way of example in addition to compensatory
damages, and only after the claimants right to them has been
established; (2) that they cannot be recovered as a matter of right,
their determination depending upon the amount of compensatory
damages that may be awarded to the claimant; (3) the act must be
accompanied by bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner. 13
EWEI cannot claim that NSC acted in bad faith or in a wanton
manner when it refused payment of the Final Billing No. 16. The
belief that the work was never completed by EWEI and that it (NSC)
had the right to make it chargeable to the cost differential paid by the
latter to another contractor was neither wanton nor done in evident
bad faith. The payment of legal rate of interest will suffice to
compensate EWEI of whatever prejudice it suffered by reason of the
delay caused by NSC.
As regards the award of attorney's fees, award for attorney's fees
without justification is a "conclusion without a premise, its basis
being improperly left to speculation and conjencture." 14 The "fixed
counsel's fee" of P350,000 should be disallowed. The trial court
acted with grave abuse of discretion when it adopted the same in
toto.
WHEREFORE, the awards made by the Board of Arbitrators which
the trial court adopted in its decision of July 31, 1996, are modified,
thus:
(1) The award of P474,780.23 for Billing No. 16-Final and
P1,335,514.20 for price adjustment shall be paid with legal interest
of six (6%) percent per annum, from January 1, 1985 until this
decision shall have become final and executory;
(2) The award of P50,000 for exemplary damages and attorney's fees
of P350,000 are deleted; and
(3) The cost of arbitration of P35,000 to supplement arbitration
agreement has to be paid.
No pronouncement as to costs.

SO ORDERED.

G.R. No. 121171 December 29, 1998

ASSET PRIVATIZATION TRUST, petitioner,

vs.
COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S.
CABARRUS, JR., JAIME T. CABARRUS, JOSE MIGUEL
CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U.
MIRANDA, and MIGUEL M. ANTONIO, as Minority Stock-
Holders of Marinduque Mining and Industrial
Corporation, respondents.

KAPUNAN, J.:

The petition for review on certiorari before us seeks to reverse and

set aside the decision of the Court of Appeals which denied due
course to the petition for certiorari filed by the Asset Privatization
Trust (APT) assailing the order of the Regional Trial Court (RTC)
Branch 62, Makati City. The Makati RTC's order upheld and
confirmed the award made by the Arbitration Committee in favor of
Marinduque Mining and Industrial Corporation (MMIC) and against
the Government, represented by herein petitioner APT for damages
in the amount of P2.5 BILLION (or approximately P4.5 BILLION,
including interest).
Ironically, the staggering amount of damages was imposed on the
Government for exercising its legitimate right of foreclosure as
creditor against the debtor MMIC as a consequence of the latter's
failure to pay its overdue and unpaid obligation of P22 billion to the
Philippine National Bank (PNB) and the Development Bank of the
Philippines (DBP).
The antecedent facts
of the case.
The development, exploration and utilization of the mineral deposits
in the Surigao Mineral Reservation have been authorized by
Republic Act No. 1528, as amended by Republic Acts Nos. 2077 and
4167, by virtue of which laws, a Memorandum of Agreement was
drawn on July 3, 1968, whereby the Republic of the Philippines thru
the Surigao Mineral Reservation Board, granted MMIC the exclusive
right to explore, develop and exploit nickel, cobalt and other
minerals in the Surigao mineral reservation. 1 MMIC is a domestic
corporation engaged in mining with respondent Jesus S.
Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing
of MMIC by purchase of MMIC debenture bonds and extension
of guarantees. Further, the Philippine Government obtained a
firm commitment form the DBP and/or other government
financing institutions to subscribe in MMIC and issue
guarantee/s for foreign loans or deferred payment arrangements
secured from the US Eximbank, Asian Development Bank, Kobe
Steel, of amount not exceeding US$100 Million.2
DBP approved guarantees in favor of MMIC and subsequent
requests for guarantees were based on the unutilized portion of
the Government commitment. Thereafter, the Government
extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage
Trust Agreement3 whereby MMIC, as mortgagor, agreed to
constitute a mortgage in favor or PNB and DBP as mortgagees,
over all MMIC's assets; subject of real estate and chattel
mortgage executed by the mortgagor, and additional assets
described and identified, including assets of whatever kind,
nature or description, which the mortgagor may acquire whether
in substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events
of Default, which expressly includes the event that the
MORTGAGOR shall fail to pay any amount secured by this
Mortgage Trust Agreement when due. 4
Article V of the Mortgage Trust Agreement prescribes in detail,
and in addition to the enumerated events of defaults,
circumstances by which the mortgagor may be declared in
default, the procedure therefor, waiver of period to foreclose,
authority of Trustee before, during and after foreclosure,
including taking possession of the mortgaged properties. 5
In various requests for advances/remittances of loans if huge
amounts, Deeds of Undertaking, Promissory Notes, Loan
Documents, Deeds of Real Estate Mortgages, MMIC invariably
committed to pay either on demand or under certain terms the
loans and accommodations secured from or guaranteed by both
DBP and PNB.
By 1984, DBP and PNB's financial both in loans and in equity in
MMIC had reached tremendous proportions, and MMIC was
having a difficult time meeting its financial obligations. MMIC
had an outstanding loan with DBP in the amount of
P13,792,607,565.92 as of August 31, 1984 and with PNB in the
amount of P8,789,028,249.38 as July 15, 1984 or a total
Government expose of Twenty Two Billion Six Hundred Sixty-
Eight Million Five Hundred Thirty-Seven Hundred Seventy and
05/100 (P22, 668,537,770.05), Philippine Currency. 6 Thus, a
financial restructuring plan (FRP) designed to reduce MMIC's
interest expense through debt conversion to equity was drafted
by the Sycip Gorres Velayo accounting firm. 7 On April 30, 1984,
the FRP was approved by the Board of Directors of the
MMIC.8 However, the proposed FRP had never been formally
adopted, approved or ratified by either PNB or DBP.9
In August and September 1984, as the various loans and
advances made by DBP and PNB to MMIC had become overdue
and since any restructuring program relative to the loans was no
longer feasible, and in compliance with the directive of
Presidential Decree No. 385, DBP and PNB as mortgagees of
MMIC assets, decided to exercise their right to extrajudicially
foreclose the mortgages in accordance with the Mortgage Trust
Agreement. 10
The foreclosed assets were sold to PNB as the lone bidder and
were assigned to three newly formed corporations, namely,
Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these
assets were transferred to the Asset Privatization Trust (APT). 11
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the
other stockholders of MMIC, filed a derivative suit against DBP
and PNB before the RTC of Makati, Branch 62, for Annulment
of Foreclosures, Specific Performance and Damages. 12 The suit,
docketed as Civil Case No. 9900, prayed that the court: (1) annul
the foreclosures, restore the foreclosed assets to MMIC, and
require the banks to account for their use and operation in
the interim; (2) direct the banks to honor and perform their
commitments under the alleged FRP; and (3) pay moral and
exemplary damages, attorney's fees, litigation expenses and
costs.
In the course of the trial, private respondents and petitioner
APT, as successor of the DBP and the PNB's interest in MMIC,
mutually agreed to submit the case to arbitration by entering
into a "Compromise and Arbitration Agreement,"
stipulating, inter alia:
NOW THEREFORE, for and in consideration of
the foregoing premises and the mutual covenants
contained herein the parties agree as follows:
1. Withdrawal and Compromise. The parties have
agreed to withdraw their respective claims from
the Trial Court and to resolve their dispute
through arbitration by praying to the Trial Court
to issue a Compromise Judgment based on this
Compromise and Arbitration Agreement.
In withdrawing their dispute from the court and
in choosing to resolve it through arbitration, the
parties have agreed that:
(a) their respective money claims shall be reduced
to purely money claims; and
(b) as successor and assignee of the PNB and DBP
interests in MMIC and the MMIC accounts, APT
shall likewise succeed to the rights and
obligations of PNB and DBP in respect of the
controversy subject of Civil Case No. 9900 to be
transferred to arbitration and any arbitral
award/order against either PNB and/or DBP
shall be the responsibility be discharged by and
be enforceable against APT, the parties having
agreed to drop PNB and DBP from the
arbitration.
 2. Submission. The parties hereby agree that (a)
the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876
and (b) the reliefs prayed for in Civil Case No.
9900 shall, with the approval of the Trial Court
of this Compromise and Arbitration Agreement,
be transferred and reduced to pure
pecuniary/money claims with the parties waiving
and foregoing all other forms of reliefs which
they prayed for or should have prayed for in
Civil Case No. 9900. 13
The Compromise and Arbitration Agreement limited the issues
to the following:
5. Issues The issues to be submitted for the
Committee's resolution shall be (a) Whether
PLAINTIFFS have the capacity or the
personality to institute this derivative suit in
behalf of the MMIC or its directors, (b) Whether
or not the actions leading to, and including,. the
PNB-DBP foreclosure of the MMIC assets were
proper, valid and in good
faith. 14
This agreement was presented for approval to the trial court. On
October 14, 1992, the Makati RTC, Branch 61, issued an order,
to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with
the Asset Privatization Trust as
party defendant.
2. Approving the Compromise
and Arbitration Agreement dated
October 6, 1997, attached as
Annex "C" of the Omnibus
Motion.
3. Approving the Transformation
of the reliefs prayed for [by] the
plaintiffs in this case into pure
money claims; and
4. The Complaint is hereby
DISMISSED. 15
The Arbitration Committee was composed of retired Supreme
Court Justice Abraham Sarmiento as Chairman, Atty. Jose C.
Sison and former Court of Appeals Justice Magdangal Elma as
Members. On November 24, 1993, after conducting several
hearings, the Arbitration Committee rendered a majority
decision in favor of MMIC, the pertinent portions of which read
as follows:
Since, as this Committee finds, there is no
foreclosure at all as it was not legally and validly
done, the Committee holds and so declares that
the loans of PNB and DBP to MMIC. for the
payment and recovery of which the void
foreclosure sales were undertaken, continue to
remain outstanding and unpaid. Defendant APT
as the successor-in-interest of PNB and DBP to
the said loans is therefore entitled and retains the
right, to collect the same from MMIC pursuant
to, and based on the loan documents signed by
MMIC, subject to the legal and valid defenses
that the latter may duly and seasonably
interpose. Such loans shall, however, be reduced
by the amount which APT may have realized
from the sale of the seized assets of MMIC which
by agreement should no longer be returned even
if the foreclosures were found to be null and void.
The documentary evidence submitted and
adopted by the parties (Exhibits "3", "3-B";
Exhibit "100"; and also Exhibit "ZZZ") as their
exhibits would show that the total outstanding
obligation due to DBP and PNB as of the date of
foreclosure is P22,668,537,770.05, more or less.
Therefore defendant APT can, and is still entitled
to, collect the outstanding obligations of MMIC
to PNB and DBP amounting to
P22,668,537,770.05, more or less, with interest
thereon as stipulated in the loan documents from
the date of foreclosure up to the time they are
fully paid less the proportionate liability of DBP
as owner of 87% of the total capitalization of
MMIC under the FRP. Simply put, DBP shall
share in the award of damages to, and in the
obligations of, MMIC in proportion to its 87%
equity in tile total capital stock of MMIC.
x x x           x x x          x x x
As this Committee holds that the FRP is valid,
DBP's equity in MMIC is raised to 87%. So
pursuant to the above provision of the
Compromise and Arbitration Agreement, the
87% equity of DBP is hereby deducted from the
actual damages of P19,486,118,654.00 resulting in
the net actual damages of P2,531,635,425.02 plus
interest.
DISPOSITION
WHEREFORE, premises considered, judgment
is hereby rendered:
1. Ordering the defendant to pay to the
Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P2,531,635,425.02
with interest thereon at the legal rate of six per
cent (6%) per annum reckoned from August 3, 9,
and 24, 1984, pari passu, as and for actual
damages. Payment of these actual damages shall
be offset by APT from the outstanding and
unpaid loans of MMIC with DBP and PNB,
which have not been converted into equity.
Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the
funds representing the purchase price of the sale
of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April
22, 1988 or to such subsequent escrow agreement
that would supercede [sic] it pursuant to
paragraph (9) of the Compromise and
Arbitration Agreement;
2. Ordering the defendant to pay to the
Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P13,000.000.00, as
and for moral and exemplary damages. Payment
of these moral and exemplary damages shall be
offset by APT from the outstanding and unpaid
loans of MMIC with DBP and PNB, which have
not been converted into equity. Should there be
any balance due to MMIC after the offsetting, the
same shall be satisfied from the funds
 representing the purchase price of the sale of the
shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April
22, 1988 or to such subsequent escrow agreement
that would supercede [sic] it pursuant to
paragraph (9) of the Compromise and
Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff,
Jesus S. Cabarrus, Sr., the sum of P10,000,000.00,
to be satisfied likewise from the funds held under
escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to
paragraph (9) of the Compromise and
Arbitration Agreement, as and for moral
damages; and
4. Ordering the defendant to pay arbitration
costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED. 16
Motions for reconsideration were filed by both parties, but the
same were denied.
On October 17, 1993, private respondents filed in the same Civil
Case No. 9900 an "Application/Motion for Confirmation of
Arbitration Award." Petitioner countered with an "Opposition
and Motion to Vacate Judgment" raising the following grounds.
1. The plaintiffs Application/Motion is
improperly filed with this branch of the Court,
considering that the said motion is neither a part
nor the continuation of the proceedings in Civil
Case No. 9900 which was dismissed upon motion
of the parties. In fact, the defendants in the said
Civil Case No. 9900 were the Development Bank
of the Philippines and the Philippine National
Bank (PNB);
2. Under Section 71 of Rep. Act 876, an
arbitration under a contract or submission shall
be deemed a special proceedings and a party to
the controversy which was arbitrated may apply
to the court having jurisdiction, (not necessarily
with this Honorable Court) for an order
confirming the award;
3. The issues submitted for arbitration have been
limited to two: (1) propriety of the plaintiffs filing
the derivative suit and (2) the regularity of the
foreclosure proceedings. The arbitration award
sought to be confirmed herein, far exceeded the
issues submitted and even granted moral
damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court
must make an order vacating the award where
the arbitrators exceeded their powers, or so
imperfectly executed them, that a mutual, final
and definite award upon the subject matter
submitted to them was not made. 17
Private respondents filed a "REPLY AND OPPOSITION" dated
November 10, 1984, arguing that a dismissal of Civil Case No.
9900 was merely a "qualified dismissal" to pave the way for the
submission of the controversy to arbitration and operated simply
as "a mere suspension of the proceedings" They denied that the
Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1993, the trial court confirmed
the award of the Arbitration Committee. The dispositive portion
of said order reads:
WHEREFORE, premises considered, and in the
light of the parties [sic] Compromise and
Arbitration Agreement dated October 6, 1992,
the Decision of the Arbitration Committee
promulgated on November 24, 1993, as affirmed
in a Resolution dated July 26, 1994, and finally
settled and clarified in the Separate Opinion
dated September 2, 1994 of Committee Member
Elma, and the pertinent provisions of RA 876,
also known as the Arbitration Law, this Court
GRANTS PLAINTIFFS' APPLICATION AND
THUS CONFIRMS THE ARBITRATION
AWARD, AND JUDGMENT IS HEREBY
RENDERED:
(a) Ordering the defendant APT to the
Marinduque Mining and Industrial Corporation
(MMIC), except the DBP, the sum of
P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds
held under escrow in the amount of
P503,000,000.00 pursuant to the Escrow
Agreement dated April 22, 1988. The balance of
the award, after the escrow funds are fully
applied, shall be executed against the APT;
(b) Ordering the defendant to pay to the MMIC,
except the DBP, the sum of P13,000,000.00 as and
for moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S.
Cabarrus, Sr., the sum of P10,000,000.00 as and
for moral damages; and
(d) Ordering the defendant to pay the herein
plaintiffs/applicants/movants the sum of
P1,705,410.23 as arbitration costs.
In reiteration of the mandates of Stipulation No.
10 and Stipulation No. 8 paragraph 2 of the
Compromise and Arbitration Agreement, and the
final edict of the Arbitration Committee's
decision, and with this Court's Confirmation, the
issuance of the Arbitration Committee's Award
shall henceforth be final and executory.
SO ORDERED. 18
On December 27, 1994, petitioner filed its motion for
reconsideration of the Order dated November 28, 1994. Private
respondents, in turn, submitted their reply and opposition
thereto.
On January 18, 1995, the trial court handed down its order
denying APT's motion for reconsideration for lack of merit and
for having been filed out of time. The trial court declared that
"considering that the defendant APT, through counsel, officially
and actually received a copy of the Order of this Court dated
November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on
December 27, 1994, or after the lapse of 21 days, was clearly filed
beyond the 15-day reglementary period prescribed
or provided for by law for the filing of an appeal from final
orders, resolutions, awards, judgments or decisions of any court
in all cases, and by necessary implication for the filing of a
motion for reconsideration thereof."
On February 7, 1995, petitioner received private respondents' THE RESPONDENT JUDGE GROSSLY
Motion for Execution and Appointment of Custodian of ABUSED HIS DISCRETION AND ACTED
Proceeds of Execution dated February 6, 1995. WITHOUT OR IN EXCESS OF AND
WITHOUT JURISDICTION IN RECKONING
Petitioner thereafter filed with the Court of Appeals a special THE COUNTING OF THE PERIOD TO FILE
civil action for certiorari with temporary restraining order MOTION FOR RECONSIDERATION, NOT
and/or preliminary injunction dated February 13, 1996 to annul FROM THE DATE OF SERVICE OF THE
and declare as void the Orders of the RTC-Makati dated COURT'S COPY CONFIRMING THE
November 28, 1994 and January 18, 1995 for having been issued AWARD, BUT FROM RECEIPT OF A XEROX
without or in excess of jurisdiction and/or with grave abuse of COPY OF WHAT PRESUMABLY IS THE
discretion. 19 As ground therefor, petitioner alleged that: OPPOSING COUNSEL'S COPY THEREOF. 20

I On July 12, 1995, he Court of Appeals, through its Fifth-

Division, denied due course and dismissed the petition
THE RESPONDENT JUDGE HAS NOT for certiorari.
VALIDLY ACQUIRED JURISDICTION MUCH
LESS, HAS THE COURT AUTHORITY, TO Hence, the instant petition for review on certiorari imputing to
CONFIRM THE ARBITRAL AWARD the Court of Appeals the following errors:
CONSIDERING THAT THE ORIGINAL CASE,
CIVIL CASE NO. 9900, HAD PREVIOUSLY ASSIGNMENT OF ERRORS
BEEN DISMISSED.
I
II
THE COURT OF APPEALS ERRED IN NOT
THE RESPONDENT JUDGE COMMITTED HOLDING THAT THE MAKATI REGIONAL
GRAVE ABUSE OF DISCRETION AND TRIAL COURT, BRANCH 62 WHICH HAS
ACTED WITHOUT OR IN EXCESS OF PREVIOUSLY DISMISSED CIVIL CASE NO.
JURISDICTION, IN ISSUING THE 9900 HAD LOST JURISDICTION TO
QUESTIONED ORDERS CONFIRMING THE CONFIRM THE ARBITRAL AWARD UNDER
ARBITRAL AWARD AND DENYING THE THE SAME CIVIL CASE AND NOT RULING
MOTION FOR RECONSIDERATION OF THAT THE APPLICATION FOR
ORDER OF AWARD. CONFIRMATION SHOULD HAVE BEEN
FILED AS A NEW CASE TO BE RAFFLED
III OFF AMONG THE DIFFERENT BRANCHES
OF THE RTC.
II TO RECKON THE COUNTING OF THE
PERIOD TO FILE A MOTION FOR
THE COURT OF APPEALS LIKEWISE RECONSIDERATION. 21
ERRED IN HOLDING THAT PETITIONER
WAS ESTOPPED FROM QUESTIONING THE The petition is impressed with merit.
ARBITRATION AWARD, WHEN
PETITIONER QUESTIONED THE I
JURISDICTION OF THE RTC-MAKATI,
BRANCH 62 AND AT THE SAME TIME The RTC of Makati, Branch 62,
MOVED TO VACATE THE ARBITRAL
AWARD. did not have jurisdiction to confirm

III the arbitral award.

THE COURT OF APPEALS ERRED IN NOT The use of the term "dismissed" is not "a mere semantic
HOLDING THAT THE RESPONDENT TRIAL imperfection". The dispositive portion of the Order of the trial
COURT SHOULD HAVE EITHER court dated October 14, 1992 stated in no uncertain terms:
DISMISSED/DENIED PRIVATE
RESPONDENTS' MOTION/PETITION FOR 4. The Complaint is hereby DISMISSED. 22
CONFIRMATION OF ARBITRATION
AWARD AND/OR SHOULD HAVE
The term "dismiss" has a precise definition in law. "To
CONSIDERED THE MERITS OF THE
dispose of an action, suit, or motion without trial on the
MOTION TO VACATE ARBITRAL AWARD.
issues involved. Conclude, discontinue, terminate,
quash." 23
IV
Admittedly, the correct procedure was for the parties to go back
THE COURT OF APPEALS ERRED IN NOT to the court where the case was pending to have the award
TREATING PETITIONER APT'S PETITION confirmed by said court. However, Branch 62 made
FOR CERTIORARI AS AN APPEAL TAKEN the fatal mistake of issuing a final order dismissing the case.
FROM THE ORDER CONFIRMING THE While Branch 62 should have merely suspended the case and not
AWARD. dismissed it,24 neither of the parties questioned said dismissal.
Thus, both parties as well as said court are bound by such error.
V
It is erroneous then to argue, as private respondents do, that
THE COURT OF APPEALS ERRED IN NOT petitioner APT was charged with the knowledge that the "case
RULING ON THE LEGAL ISSUE OF WHEN
was merely stayed until arbitration finished," as again, the order
of Branch 62 in very clear terms stated that the "complaint was
dismissed." By its own action, Branch 62 had lost jurisdiction
over the case. It could not have validly reacquired jurisdiction
over the said case on mere motion of one of the parties. The
Rules of Court is specific on how a new case may be initiated and
such is not done by mere motion in a particular branch of the
RTC. Consequently, as there was no "pending action" to speak
of, the petition to confirm the arbitral award should have been
filed as a new case and raffled accordingly to one of the branches
of the Regional Trial Court.
II
Petitioner was not estopped from
questioning the jurisdiction of
Branch 62 of the RTC of Makati.
The Court of Appeals ruled that APT was already estopped to
question the jurisdiction of the RTC to confirm the arbitral
award because it sought affirmative relief in said court by asking
that the arbitral award be vacated.
The rule is that "Where the court itself clearly has no
jurisdiction over the subject matter or the nature of the action,
the invocation of this defense may be done at any time. It is
neither for the courts nor for the parties to violate or disregard
that rule, let alone to confer that jurisdiction this matter being
legislative in character." 25 As a rule then, neither waiver nor
estoppel shall apply to confer jurisdiction upon a court barring
highly meritorious and exceptional circumstances. 26 One such
exception was enunciated in Tijam vs. Sibonghanoy, 27 where it
was held that "after voluntarily submitting a cause and
encountering an adverse decision on the merits, it is too late for
the loser to question the jurisdiction or power of the court."
Petitioner's situation is different because from the outset, it has
consistently held the position that the RTC, Branch 62 had no
jurisdiction to confirm the arbitral award; consequently, it
cannot be said that it was estopped from questioning the RTC's
jurisdiction. Petitioner's prayer for the setting aside of the
arbitral award was not inconsistent with its disavowal of the
court's jurisdiction.
III
Appeal of petitioner to the
Court of Appeals thru certiorari
under Rule 65 was proper.
The Court of Appeals in dismissing APT's petition
for certiorari upheld the trial court's denial of APT's motion for
reconsideration of the trial court's order confirming the arbitral
award, on the ground that said motion was filed beyond the 15-
day reglementary period; consequently, the petition
for certiorari could not be resorted to as substitute to the lost
right of appeal.
We do not agree.
Section 99 of Republic Act No. 876, 28 provides that:
. . . 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 aforequoted provision, however, does not preclude a party
aggrieved by the arbitral award from resorting to the
extraordinary remedy of certiorari under Rule 65 of the Rules of
Court where, as in this case, the Regional Trial Court to which
the award was submitted for confirmation has acted without
jurisdiction or with grave abuse of discretion and there is no
appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
Sec 1. Petition for Certiorari: — When any
tribunal, board or officer exercising judicial
functions, has acted without or in excess of its or
his jurisdiction, or with grave abuse of discretion
and there is no appeal, nor any plain, speed, and
adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified
petition in the proper court alleging the facts with
certainty and praying that judgment be rendered
annulling or modifying the proceedings, as the
law requires, of such tribunal, board or officer.
In the instant case, the respondent court erred in dismissing the
special civil action for certiorari, it being clear from the
pleadings and the evidence that the trial court lacked jurisdiction
and/or committed grave abuse of discretion in taking cognizance
of private respondents' motion to confirm the arbitral award
and, worse, in confirming said award which is grossly and
patently not in accord with the arbitration agreement, as will be
hereinafter demonstrated.
IV
The nature and limits of the
Arbitrators' power.
As a rule, the award of an arbitrator cannot be set aside for mere
errors of judgment either as to the law or as to the
facts. 29 Courts are without power to amend or overrule merely
because of disagreement with matters of law or facts determined
by the arbitrators. 30 They will not review the findings of law and
fact contained in an award, and will not undertake to substitute
their judgment for that of the arbitrators, since any other rule
would make an award the commencement, not the end, of
litigation. 31 Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are
insufficient to invalidate an award fairly and honestly
made. 32 Judicial review of an arbitration is thus, more limited
than judicial review of a trial. 33
Nonetheless, the arbitrators' award is not absolute and without
exceptions. The arbitrators cannot resolve issues beyond the
scope of the submission agreement. 34 The parties to such an
agreement are bound by the arbitrators' award only to the
extent and in the manner prescribed by the contract and only if
the award is rendered in conformity thereto. 35 Thus, Sections 24
and 25 of the Arbitration Law provide grounds for vacating,
rescinding or modifying an arbitration award. Where the
conditions described in Articles 2038, 36
37 38
2039,   and 1040   of the Civil Code applicable to compromises
and arbitration are attendant, the arbitration award may also be
annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals, 39 we held:
. . . . It is stated explicitly under Art. 2044 of the
Civil Code that the finality of the arbitrators'
award is not absolute and without exceptions.
Where the conditions described in Articles 2038,
2039 and 2040 applicable to both compromises
and arbitrations are obtaining, the arbitrator's
award may be annulled or rescended.
 Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award.
Thus, if and when the factual circumstances
referred to the above-cited provisions are
present, judicial review of the award is properly
warranted.
According, Section 20 of R.A. 876 provides:
Sec. 20. Form and contents of award. — The
award must be made in writing and signed and
acknowledge by a majority of the arbitrators, if
more than one; and by the sole arbitrator, if
there is only only. Each party shall be furnished
with a copy of the award. The arbitrators in their
award may grant any remedy or relief which they
deem just and equitable and within the scope of
the agreement of the parties, which shall include,
but not be limited to, the specific performance of
a contract.
x x x           x x x          x x x
The arbitrators shall have the power to decide only
those matters which have been submitted to them.
The terms of the award shall be confined to such
disputes. (Emphasis ours).
x x x           x x x          x x x
Sec. 24 of the same law enumerating the grounds for vacating an
award states:
Sec. 24. Grounds for vacating award. — In any
one of the following cases, the court must make
an order vacating the award upon the petition of
any party to the controversy when such party
proves affirmatively that in the arbitration
proceeding:
(a) The award was procured by corruption,
fraud, or other undue means; or
(b) That there was evident partiality or
corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct
in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear
evidence pertinent and material to the
controversy; that one or more of the arbitrators
was disqualified to act as such under section nine
hereof, and willfully refrained from disclosing
such disqualifications or any other misbehavior
by which the rights of any party have been
materially prejudiced; or
(d) That the arbitrators exceeded their powers, or
so imperfectly executed them, that a mutual, final
and definite award upon the subject matter
submitted to them was not made. (Emphasis ours)
xxx xxx xxx.
Section 25 which enumerates the grounds for modifying the
award provides:
Sec. 25. Grounds for modifying or correcting
award — In anyone of the following cases, the
court must make an order modifying or
 correcting the award, upon the application of any
party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of
figures, or an evident mistake in the description
of any person, thing or property referred to in
the award; or
(b) Where the arbitrators have awarded upon a
matter not submitted to them, not affecting the
merits of the decision upon the matter submitted;
or
(c) Where the award is imperfect in a matter of
form not affecting the merits of the controversy,
and if it had been a commissioner's report, the
defect could have been amended or disregarded
by the court.
x x x           x x x          x x x
Finally, it should be stressed that while a court is precluded from
overturning an award for errors in the determination of factual
issues, nevertheless, if an examination of the record reveals no
support whatever for the arbitrators determinations, their
award must be vacated. 40 in the same manner, an award must be
vacated if it was made in "manifest disregard of the law." 41
Against the backdrop of the foregoing provisions and principles,
we find that the arbitrators came out with an award in excess of
their powers and palpably devoid of factual and legal basis.
V 3. At that stage, MMIC also knew that PNB-DBP
There was no financial
structuring program:
foreclosure of mortgage
was fully justified.
The point need not be belabored that PNB and DBP had the
legitimate right to foreclose of the mortgages of MMIC whose
obligations were past due. The foreclosure was not a wrongful
act of the banks and, therefore, could not be the basis of any
award of damages. There was no financial restructuring
agreement to speak of that could have constituted an impediment
to the exercise of the banks' right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the
Arbitration Committee who wrote a separate opinion:
1. The various loans and advances made by DBP
and PNB to MMIC have become overdue and
remain unpaid. The fact that a FRP was drawn
up is enough to establish that MMIC has not been
complying with the terms of the loan agreement.
Restructuring simply connotes that the
obligations are past due that is why it is
"restructurable";
2. When MMIC thru its board and the
stockholders agreed and adopted the FRP, it only
means that MMIC had been informed or notified
that its obligations were past due and that
foreclosure is forthcoming;
had the option of either approving the FRP or
proceeding with the foreclosure. Cabarrus, who
filed this case supposedly in behalf of MMIC
should have insisted on the FRP. Yet Cabarrus
himself opposed the FRP;
4. So when PNB-DBP proceeded with the
foreclosure, it was done without bad faith but
with the honest and sincere belief that foreclosure
was the only alternative; a decision further
explained by Dr. Placido Mapa who testified that
foreclosure was, in the judgment of PNB, the best
move to save MMIC itself.
Q : Now in this portion of Exh. "L" which was
marked as Exh. "L-1", and we adopted as Exh.
37-A for the respondent, may I know from you,
Dr. Mapa what you meant by "that the decision
to foreclose was neither precipitate nor
arbitrary"?
A : Well, it is not a whimsical decision but rather
decision arrived at after weighty consideration of
the information that we have received, and
listening to the prospects which reported to us
that what we had assumed would be the premises
of the financial rehabilitation plan was not
materialized nor expected to materialize.
Q : And this statement that "it was premised
upon the known fact" that means, it was
referring to the decision to foreclose, was
premised upon the known fact that the
rehabilitation plan earlier approved by the
stockholders was no longer feasible, just what is
meant "by no longer feasible"?
A : Because the revenue that they were counting
on to make the rehabilitation plan possible, was
not anymore expected to be forthcoming because
it will result in a short fall compared to the prices
that were actually taking place in the market.
Q : And I suppose that was what you were
referring to when you stated that the production
targets and assumed prices of MMIC's products,
among other projections, used in the financial
reorganization program that will make it viable
were not met nor expected to be met?
A : Yes.
x x x           x x x          x x x
Which brings me to my last point in this separate
opinion. Was PNB and DBP absolutely
unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it
cannot quite be denied that MMIC accounts in
PNB-DBP were past due. The drawing up of the
FRP is the best proof of this. When MMIC
adopted a restructuring program for its loan, it
only meant that these loans were already due and
unpaid. If these loans were restructurable
because they were already due and unpaid, they
are likewise "forecloseable". The option is with
the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does
not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is
legally binding and implementable. It must be
pointed that said FRP will, in effect, supersede
the existing and past due loans of MMIC with
 PNB-DBP. It will become the new loan agreement
between the lenders and the borrowers. As in all
other contracts, there must therefore be a
meeting of minds of the parties; the PNB and
DBP must have to validly adopt and ratify such
FRP before they can be bound by it; before it can
be implemented. In this case, not an iota of proof
has been presented by the PLAINTIFFS showing
that PNB and DBP ratified and adopted the FRP.
PLAINTIFFS simply relied on a legal doctrine of
promissory estoppel to support its allegations in
this regard. 42
Moreover, PNB and DBP had to initiate foreclosure proceedings
as mandated by P.D. No. 385, which took effect on January 31,
1974. The decree requires government financial institutions to
foreclose collaterals for loans where the arrearages amount to
20% of the total outstanding obligations. The pertinent
provisions of said decree read as follow:
Sec. 1. It shall be mandatory for government
financial institutions, after the lapse of sixty (60)
days from the issuance of this Decree, to foreclose
the collaterals and/or securities for any loan,
credit, accommodation, and/or guarantees
granted by them whenever the arrearages on
such account, including accrued interest and
other charges, amount to at least twenty percent
(20%) of the total outstanding obligations,
including interest and other charges, as
appearing in the books of account and/or related
records of the financial institutions concerned.
This shall be without prejudice to the exercise by
the government financial institutions of such
rights and/or remedies available to them under
their respective contracts with their debtors,
including the right to foreclosure on loans,
credits, accommodations and/or guarantees on
which the arrearages are less than twenty percent
(20%).
Sec. 2. No restraining order temporary or
permanent injunction shall be issued by the court
against any government financial institution in
any action taken by such institution in
compliance with the mandatory foreclosure
provided in Section 1 hereof, whether such
restraining order, temporary or permanent
injunction is sought by the borrower(s) or any
third party or parties, except after due hearing in
which it is established by the borrower and
admitted by the government financial institution
concerned that twenty percent (20%) of the
outstanding arrearages has been paid after the
filing of foreclosure proceedings. (Emphasis
supplied.)
Private respondents' thesis that the foreclosure proceedings were
null and void because of lack of publication in the newspaper is
nothing more than a mere unsubstantiated aliegation not borne
out by the evidence. In any case, a disputable presumption exists
in favor of petitioner that official duty has been regularly
performed and ordinary course of business has been followed. 43
VI
Not only was the foreclosure rightfully exercised by the PNB and
DBP, but also, from the facts of the case, the arbitrators in
making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent
Cabarrus, et al. prayed for judgment in their favor:
1. Declaring the foreclosures effected by the
defendants DBP and PNB on the assets of MMIC
null and void and directing said defendants to
restore the foreclosed assets to the possession of
MMIC, to render an accounting of their use
and/or operation of said assets and to indemnify
MMIC for the loss occasioned by its dispossession
or the deterioration thereof;
2. Directing the defendants DBP and PNB to
honor and perform their commitments under the
financial reorganization plan which was
approved at the annual stockholders' meeting of
MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB,
jointly and severally to pay the plaintiffs actual
damages consisting of the loss of value of their
investments amounting to not less than
P80,000,000, the damnum emergens and lucrum
cessans in such amount as may be established
during the trial, moral damages in such amount
as this Honorable Court may deem just and
equitable in the premises, exemplary damages in
such amount as this Honorable Court may
consider appropriate for the purpose of setting an
example for the public good, attorney's fees and
litigation expenses in such amounts as may be
proven during the trial, and the costs legally
taxable in this litigation.
Further, plaintiffs pray for such other reliefs as
may be just and equitable in the premises. 44
Upon submission for arbitration, the Compromise and
Arbitration Agreement of the parties clearly and explicitly
defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or
the personality to institute this derivative suit in
behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and
including, the PNB-DBP foreclosure of the
MMIC assets were proper, valid and in good
faith. 45
Item No. 8 of the Agreement provides for the period by which
the Committee was to render its decision, as well as the nature
thereof:
8. Decision. The committee shall issue a decision
on the controversy not later than six (6) months
from the date of its constitution.
In the event the committee finds that
PLAINTIFFS have the personality to file this suit
and the extra-judicial foreclosure of the MMIC
assets wrongful, it shall make an award in favor
of the PLAINTIFFS (excluding DBP), in an
amount as may be established or warranted by the
evidence which shall be payable in Philippine
Pesos at the time of the award. Such award shall
be paid by the APT or its successor-in-interest
within sixty (60) days from the date of the award
in accordance with the provisions of par. 9
hereunder. . . . . The PLAINTIFFS' remedies
under this Section shall be in addition to other
remedies that may be available to the
 PLAINTIFFS, all such remedies being
cumulative and not exclusive of each other.
On the other hand, in case the arbitration
committee finds that PLAINTIFFS have no
capacity to sue and/or that the extra-judicial
foreclosure is valid and legal, it shall also make
an award in favor of APT based on the
counterclaims of DBP and PNB in an amount as
may be established or warranted by the evidence.
This decision of the arbitration committee in
favor of APT shall likewise finally settle all issues
regarding the foreclosure of the MMIC assets so
that the funds held in escrow mentioned in par. 9
hereunder will thus be released in full in favor of
APT. 46
The clear and explicit terms of the submission notwithstanding,
the Arbitration Committee clearly exceeded its powers or so
imperfectly executed them: (a) in ruling on and declaring valid
the FRP; (b) in awarding damages to MMIC which was not a
party to the derivative suit; and (c) in awarding moral damages
to Jesus S. Cabarrus, Sr.
The arbiters overstepped
their powers by declaring as
valid the proposed Financial
Restructuring Program.
The Arbitration Committee went beyond its mandate and thus
acted in excess of its powers when it ruled on the validity of, and
gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually
agreed to limit the issue to the "validity of the foreclosure" and
to transform the relief prayed for therein into pure money
claims.
There is absolutely no evidence that the DBP and PNB agreed,
expressly or impliedly, to the proposed FRP. It cannot be
overemphasized that a FRP, as a contract, requires the consent
of the parties thereto. 47 The contract must bind both contracting
parties. 48 Private respondents even by their own admission
recognized that the FRP had yet not been carried out and that
the loans of MMIC had not yet been converted into equity. 49
However, the Arbitration Committee not only declared the FRP
valid and effective, but also converted the loans of MMIC into
equity raising the equity of DBP to 87%. 50
The Arbitration Committee ruled that there was "a commitment
to carry out the FRP" 51 on the ground of promissory estoppel.
Similarly, the principle of promissory estoppel
applies in the present case considering as we
observed, the fact that the government (that is,
Alfredo Velayo) was the FRP's proponent.
Although the plaintiffs are agreed that the
government executed no formal agreement, the
fact remains that the DBP itself which made
representations that the FRP constituted a "way
out" for MMIC. The Committee believes that
although the DBP did not formally agree
(assuming that the board and stockholders'
approvals were not formal enough), it is bound
nonetheless if only for its conspicuous
representations.
 Although the DBP sat in the board in a dual
capacity — as holder of 36% of MMIC's equity
(at that time) and as MMIC's creditor — the
DBP can not validly renege on its commitments
simply because at the same time, it held interests
against the MMIC.
The fact, of course, is that as APT itself asserted,
the FRP was being "carried out" although
apparently, it would supposedly fall short of its
targets. Assuming that the FRP would fail to
meet its targets, the DBP — and so this
Committee holds — can not, in any event, brook
any denial that it was bound to begin with, and
the fact is that adequate or not (the FRP), the
government is still bound by virtue of its acts.
The FRP, of course, did not itself promise a
resounding success, although it raised DBP's
equity in MMIC to 87%. It is not an excuse,
however, for the government to deny its
commitments. 52
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can
hardly find application here. The nearest that
there can be said of any estoppel being present in
this case is the fact that the board of MMIC was,
at the time the FRP was adopted, mostly
composed of PNB and DBP representatives. But
those representatives, singly or collectively, are
not themselves PNB or DBP. They are individuals
with personalities separate and distinct from the
banks they represent. PNB and DBP have
different boards with different members who
may have different decisions. It is unfair to
impose upon them the decision of the board of
another company and thus pin them down on the
equitable principle of estoppel. Estoppel is a
principle based on equity and it is certainly not
equitable to apply it in this particular situation.
Otherwise the rights of entirely separate distinct
and autonomous legal entities like PNB and DBP
with thousands of stockholders will be suppressed
and rendered nugatory. 53
As a rule, a corporation exercises its powers, including the power
to enter into contracts, through its board of directors. While a
corporation may appoint agents to enter into a contract in its
behalf, the agent should not exceed his authority. 54 In the case at
bar, there was no showing that the representatives of PNB and
DBP in MMIC even had the requisite authority to enter into a
debt-for-equity swap. And if they had such authority, there was
no showing that the banks, through their board of directors, had
ratified the FRP.
Further, how could the MMIC be entitled to a big amount of
moral damages when its credit reputation was not exactly
something to be considered sound and wholesome. Under Article
2217 of the Civil Code, moral damages include besmirched
reputation which a corporation may possibly suffer. A
corporation whose overdue and unpaid debts to the Government
alone reached a tremendous amount of P22 Billion Pesos cannot
certainly have a solid business reputation to brag about. As Atty.
Sison in his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence
that corporations are entitled to moral damages.
While the Supreme Court may have awarded
moral damages to a corporation for besmirched
reputation in Mambulao vs. PNB, 22 SCRA 359,
 such ruling cannot find application in this case. It
must be pointed out that when the supposed
wrongful act of foreclosure was done, MMIC's
credit reputation was no longer a desirable one.
The company then was already suffering from
serious financial crisis which definitely projects
an image not compatible with good and
wholesome reputation. So it could not be said that
there was a "reputation" besmirched by the act
of foreclosure. 55
The arbiters exceeded their
authority in awarding damages
to MMIC, which is not impleaded
as a party to the derivative suit.
Civil Case No. 9900 filed before the RTC being a derivative suit,
MMIC should have been impleaded as a party. It was not joined
as a party plaintiff or party defendant at any stage of the
proceedings. As it is, the award of damages to MMIC, which was
not a party before the Arbitration Committee, is a complete
nullity.
Settled is the doctrine that in a derivative suit, the corporation is
the real party in interest while the stockholder filing suit for the
corporation's behalf is only a nominal party. The corporation
should be included as a party in the suit.
An individual stockholder is permitted to
institute a derivative suit on behalf of the
corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the
corporation. In such actions, the suing
stockholder is regarded as a nominal party, with
the corporation as the real party in
interest. . . . . 56
It is a condition sine qua non that the corporation be impleaded
as a party because —
. . . Not only is the corporation an indispensable
party, but it is also the present rule that it must
be served with process. The reason given is that
the judgment must be made binding upon the
corporation in order that the corporation may get
the benefit of the suit and may not bring a
subsequent suit against the same defendants for
the same cause of action. In other words the
corporation must be joined as party because it is
its cause of action that is being litigated and
because judgment must be a res ajudicata against
it. 57
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a
stockholder in a corporation has no title legal or
equitable to the corporate property; that both of
these are in the corporation itself for the benefit
of the stockholders." In other words, to allow
shareholders to sue separately would conflict
with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may
be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that "the
stockholders may not directly claim those
 damages for themselves for that would result in
the appropriation by, and the distribution among
them of part of the corporate assets before the
dissolution of the corporation and the liquidation
of its debts and liabilities, something which
cannot be legally done in view of section 16 of the
Corporation Law . . .;
(3) the filing of such suits would conflict with the
duty of the management to sue for the protection
of all concerned;
(4) it would produce wasteful multiplicity of suits;
and
(5) it would involve confusion in a ascertaining
the effect of partial recovery by an individual on
the damages recoverable by the corporation for
the same act. 58
If at all an award was due MMIC, which it was not, the same
should have been given sans deduction, regardless of whether or
not the party liable had equity in the corporation, in view of the
doctrine that a corporation has a personality separate and
distinct from its individual stockholders or members. DBP's
alleged equity, even if it were indeed 87%, did not give it
ownership over any corporate property, including the monetary
award, its right over said corporate property being a mere
expectancy or inchoate right. 59 Notably, the stipulation even had
the effect of prejudicing the other creditors of MMIC.
The arbiters, likewise,
exceeded their authority
in awarding moral damages
to Jesus Cabarrus, Sr.
It is perplexing how the Arbitration Committee can in one
breath rule that the case before it is a derivative suit, in which
the aggrieved party or the real party in interest is supposedly the
MMIC, and at the same time award moral damages to an
individual stockholder, to wit:
WHEREFORE, premises considered, judgment
is hereby rendered:
x x x           x x x          x x x
3. Ordering the defendant to pay to the plaintiff,
Jesus S. Cabarrus, Sr., the sum of P10,000,000.00,
to be satisfied likewise from the funds held under
escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to
paragraph (9), Compromise and Arbitration
Agreement, as and for moral damages; . . . 60
The majority decision of the Arbitration Committee sought to
justify its award of moral damages to Jesus S. Cabarrus, Sr. by
pointing to the fact that among the assets seized by the
government were assets belonging to Industrial Enterprise Inc.
(IEI), of which Cabarrus is the majority stockholder. It then
acknowledged that Cabarrus had already recovered said assets
in the RTC, but that "he won no more than actual damages.
While the Committee cannot possibly speak for the RTC, there is
no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on
account of that specific foreclosure, damages the Committee
believes and so holds, he, Jesus S. Cabarrus, Sr., may be
awarded in this proceeding." 61
Cabarrus cause of action for the seizure of the assets belonging
to IEI, of which he is the majority stockholder, having been
ventilated in a complaint he previously filed with the RTC, from
which he obtained actual damages, he was barred by res
judicata from filing a similar case in another court, this time
asking for moral damages which he failed to get from the earlier
case. 62 Worse, private respondents violated the rule against non-
forum shopping.
It is a basic postulate that a corporation has a personality
separate and distinct from its stockholders. 63 The properties
foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the
corporation. Another reason is that Jesus S. Cabarrus, Sr.
cannot directly claim those damages for himself that would
result in the appropriation by, and the distribution to, him part
of the corporation's assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. The
Arbitration Committee, therefore, passed upon matters nor
submitted to it. Moreover, said cause of action had already been
decided in a separate case. It is thus quite patent that the
arbitration committee exceeded the authority granted to it by the
parties' Compromise and Arbitration Agreement by awarding
moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed
befuddlement to the award of moral damages to Jesus S.
Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that
based on these stipulated issues,
the parties themselves have agreed that the basic
ingredient of the causes of action in this case is the
wrong committed on the corporation (MMIC) for
the alleged illegal foreclosure of its assets. By
agreeing to this
stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action
pertains only to the corporation (MMIC) and that
they are filing this for and in behalf of MMIC.
Perforce this has to be so because it is the basic
rule in Corporation Law that "the shareholders
have no title, legal or equitable to the property
which is owned by the corporation (13 Am. Jur.
165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon
& Sons vs. Register of Deeds, 6 SCRA 373, the
rule has been reiterated that "a stockholder is not
the co-owner of corporate property." Since the
property or assets foreclosed belongs [sic] to
MMIC, the wrong committed, if any, is done
against the corporation. There is therefore no
direct injury or direct violation of the rights of
Cabarrus et al. There is no way, legal or equitable,
by which Cabarrus et al. could recover damages in
their personal capacities even assuming or just
because the foreclosure is improper or invalid. The
Compromise and Arbitration Agreement itself
and the elementary principles of Corporation
Law say so. Therefore, I am constrained to
dissent from the award of moral damages to
Cabarrus. 64
From the foregoing discussions, it is evident that, not only did the
arbitration committee exceed its powers or so imperfectly
execute them, but also, its findings and conclusions are palpably
devoid of any factual basis, and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for
appropriate action. The pleadings and memoranda filed with this
Court, as well as in the Court of Appeals, raised and extensively
discussed the issues on the merits. Such being the case, there is
sufficient basis for us to resolve the controversy between the
parties anchored on the records and the pleadings before us. 65
WHEREFORE, the Decision of the Court of Appeals dated July
17, 1995, as well as the Orders of the Regional Trial Court of
Makati, Branch 62, dated November 28, 1994 and January 19,
1995, is hereby REVERSED and SET ASIDE, and the decision
of the Arbitration Committee is hereby VACATED.
SO ORDERED.
Romero, J., Please see dissenting opinion.
Purisima, J., Concur and also with the separate concurring
opinion of Justice Pardo.
Pardo, J., With separate concurring opinion.
 
Separate Opinions
ROMERO, J., dissenting opinion;
In the instant petition for review on certiorari, petitioner. Asset
Privatization Trust (APT) is impugning the decision of
respondent Court of Appeals in CA-GR SP No. 36484 dated July
17, 1995, grounded upon the following assigned errors which it
had allegedly committed:
1) The Court of Appeals erred in not holding that
the Makati Regional Trial Court, Branch 62,
which had previously dismissed Civil Case No.
9900, had lost jurisdiction to confirm the arbitral
award under the same civil case and in not ruling
that the application for confirmation should have
been filed as a new case to be raffled among the
different branches of the RTC;
2) The Court of Appeals likewise erred in holding
that petitioner was estopped from questioning the
arbitration award, when petitioner questioned
the jurisdiction of the RTC-Makati, Branch 62,
and at the same time moved to vacate the arbitral
award;
3) The Court of Appeals erred in not holding that
the respondent Trial Court should have either
dismissed/denied private respondents'
motion/petition for confirmation of arbitration
award and/or should have considered the merits
of the motion to vacate (the) arbitral award;
4) The Court of Appeals erred in not treating
petitioner APT's petition for certiorari as an
appeal taken from the order confirming the
award; and
5) The Court of Appeals erred in not ruling on
the legal issue of when to reckon the counting of
the period to file a motion for reconsideration.1
The resolution of these issues will ultimately test the process of
arbitration, how effective or ineffective it is as an alternative
mode of settling disputes, and how it is affected by judicial
review. My esteemed colleagues have taken the view that the
petition is impressed with merit and that the assailed decision of
the Court of Appeals should be reversed. In doing so, I believe
they have dealt arbitration a terrible blow and wasted years,
even decades, of development in this field. I beg to differ and,
therefore, dissent.
The controversy is actually simpler than it appears. The
Marinduque Mining and Industrial Corporation (MMIC)
obtained several loans from the Philippine National Bank (PNB)
and the Development Bank of the Philippines (DBP) secured by
mortgages over practically all of its assets. As of July 15, 1984,
MMIC's obligation had ballooned to P22,668,537,770.05, 2 and it
had no way of making the required payments. MMIC and its two
creditor banks thus ironed out a complex financial restructuring
plan (FRP) designed to drastically reduce MMIC's liability
through a "debt-to-equity" scheme. 3 This notwithstanding, the
creditors opted to sell MMIC's mortgaged properties through
extrajudicial foreclosure proceedings, where PNB turned out to
be the lone bidder.4
Aggrieved by this apparent bad faith on the part of the creditor
banks, private respondents Jesus S. Cabarrus, Sr., and other
minority stockholders of MMIC filed a derivative suit 5 against
PNB and DBP before the Makati Regional Trial Court. They
prayed for the annulment of the foreclosure and for the
restoration of the company's assets, the recognition by the
creditor banks of their commitments under the FRP, and the
payment of damages, as well as attorney's fees and costs of
litigation. The case was raffled to Branch 62 and docketed as
Civil Case No. 9900.
In the meantime, the rights and interests of PNB and DBP,
including MMIC's indebtedness, were transferred to petitioner,
created by virtue of Proclamation No. 50, in relation to
Administrative Order No. 14. Hence, petitioner was substituted
as party defendant in Civil Case No. 9900.
On October 6, 1992, the parties entered into a Compromise and
Arbitration Agreement 6 providing, inter alia, that they were
withdrawing their respective claims, which would be reduced to
pure money claims, and that they were submitting the
controversy to arbitration under Republic Act No. 876. 7 The
issues for arbitration were thus limited to a determination of the
plaintiffs' capacity or right to institute the derivative suit in
behalf of the MMIC or its directors, and of the propriety of the
foreclosure. Of notable import was the provision on the nature of
the judgment that the arbitration committee might render, viz.:
10. Binding Effect and Enforcement. The award of
the arbitration committee shall be final and
executory upon its issuance upon the parties to the
arbitration and their assigns and successors-in-
interest. In the event the award is not voluntarily
satisfied by the losing party, the party in whose
favor the award has been made may, pursuant to
Republic Act No. 876, apply to the proper
Regional Trial Court for its enforcement.
(Emphasis supplied)
Upon motion of the parties, this agreement was presented to the
court a quo for its approval.8 On October 14, 1992, said court
issued an order (a) dismissing the complaint; (b) substituting the
creditor banks with the APT as party defendant; (c) "approving
the Compromise and Arbitration Agreement dated October 6,
1992"; and (d) "approving the transformation of the reliefs
prayed for by the plaintiffs in this case into pure money claims." 9
On November 24, 1993, after more than six months of hearing,
the arbitration committee 10 concluded that the assailed
foreclosure was not valid and accordingly decided the case in
favor of MMIC. Hence, petitioner was ordered to pay MMIC
actual damages in the amount of P2,531,635,425.02, with legal
interest, and moral and exemplary damages amounting to
P13,000,000.00, and to pay Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00 by way of moral damages, such awards to be
offset from the outstanding and unpaid obligations of MMIC
with the creditor banks, which have not been converted into
equity. The committee likewise decreed its decision to be "final
and executory." 11
Nearly a year later, MMIC filed in Civil Case No. 9900, a
verified "Application/Motion for Confirmation of Arbitration
Award." 12 This was opposed by petitioner on two grounds,
namely, that Branch 62 no longer had jurisdiction to act on said
motion after it "dismissed" the complaint in its order of October
14, 1992, and that the award "far exceeded the issues submitted"
for arbitration by the parties. 13 Not wanting to be outdone,
MMIC filed a "Reply and Opposition," arguing that the
"qualified dismissal" of Civil Case No. 9900 was merely intended
to expedite the submission of the controversy to arbitration and
was, therefore, "a mere suspension of the proceedings," and that
the arbitration committee did not exceed its authority in making
the award.
On November 28, 1994, the trial court issued an
order 14 confirming the award of the committee in all respects
except as to the award of actual damages to MMIC, which was
increased to P3,811,757,425.00. The order closed with the
following declaration:
In reiteration of the mandates of Stipulation No.
10 and Stipulation No. 8 paragraph 2 of the
Compromise and Arbitration Agreement, and the
final edict of the Arbitration Committee's
decision, and with this Court's Confirmation, the
issuance of the Arbitration Committee's Award
shall henceforth be final and executory.
Petitioner filed a "Motion for Reconsideration" of said order on
December 27, 1994; but this was denied by the court a quo in its
order dated January 18, 1995 for lack of merit and for having
been filed beyond the reglementary period. Thus, it said:
. . . (C)onsidering that the defendant APT,
through counsel, officially and actually received a
copy of the Order of this Court dated November
28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant
APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day
reglementary period prescribed or provided
for . . . (by law) for the filing of an appeal from
final orders, resolutions, awards, judgments or
decisions of any court in all cases, and by
necessary implication, for the filing of a motion
for reconsideration thereof.
Instead of appealing such denial, petitioner filed on February 15,
1995, an "Appeal by Certiorari . . . . under Sections 1 and 2 of
Rule 65 of the Revised Rules of Court" before the Court of
Appeals, praying for the nullification of the trial court's orders
dated November 28, 1994 and January 18, 1995. It argued that
the trial court had no jurisdiction or authority to confirm the
arbitral award, "considering that the original case, Civil Case
No. 9900, had previously been dismissed," and that the trial
judge "acted with grave abuse of discretion in issuing the
questioned orders confirming the award and denying the motion
for reconsideration thereof." 15
On July 17, 1995, the Court of Appeals dismissed the petition for
lack of merit. 16 From this dismissal, petitioner elevated its cause
to this Tribunal for a review, raising the issues stated at the
outset.
I find it distressing that, in reaching the outcome of this
controversy, the majority has emasculated the process of
arbitration itself. This should not be the case for after all, the
decision of the arbitration committee is no longer the one being
attacked in these proceedings, but the judgment of the Court of
Appeals which herein petitioner found to be erroneous. The
Court has had occasion to trace the history of arbitration and to
discuss its significance in the case of Chung Fu Industries
(Phils.), Inc. v. Court of Appeals, 17 viz.:
Allow us to take a leaf from history and briefly
trace the evolution of arbitration as a mode of
dispute settlement.
Because conflict is inherent in human society,
much effort has been expended by men and
institutions in devising ways of resolving the
same. With the progress of civilization, physical
combat has been ruled out and instead, more
specific means have been evolved, such as
recourse to the good offices of a disinterested
third party, whether this be a court or a private
individual or individuals.
Legal history discloses that "early judges called
upon to solve private conflicts were primarily the
arbiters, persons not specially trained but in
whose morality, probity and good sense the
parties in conflict reposed full trust. Thus, in
Republican Rome, arbiter and judge (judex)
were synonymous. The magistrate of praetor,
after noting down the conflicting claims of
litigants, and clarifying the issues, referred them
for decision to a private person designated by the
parties, by common agreement, or selected by
them from an apposite listing (the album
judicium) or else by having the arbiter chosen by
lot. The judges proper, as specially trained state
officials endowed with (their) own power and
jurisdiction, and taking cognizance of litigations
from beginning to end, only appeared under the
Empire, by the so-called cognitio extra ordinem."
Such means of referring a dispute to a third party
has also long been an accepted alternative to
litigation at common law.
Sparse though the law and jurisprudence may be
on the subject of arbitration in the Philippines, it
was nonetheless recognized in the Spanish Civil
Code; specifically, the provisions on compromises
made applicable to arbitrations under Articles
1820 and 1821. Although said provisions were
repealed by implication with the repeal of the
Spanish Law of Civil Procedure, these and
additional ones were reinstated in the present
Civil Code.
Arbitration found a fertile field in the resolution
of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103
(1936) provided for compulsory arbitration as the
state policy to be administered by the Court of
Industrial Relations, in time such a modality gave
way to voluntary arbitration. While not
completely supplanting compulsory arbitration
which until today is practiced by government
officials, the Industrial Peace Act which was
passed in 1953 as Republic Act No. 875, favored
the policy of free collective bargaining, in general,
and resort to grievance procedure, in particular,
as the preferred mode of settling disputes in
industry. It was accepted and enunciated more
explicitly in the Labor Code, which was passed on
November 1, 1974 as Presidential Decree No. 442,
with the amendments later introduced by
Republic Act No. 6715 (1989).
Whether utilized in business transactions or in
employer-employee relations, arbitration was
gaining wide acceptance. A consensual process, it
was preferred to orders imposed by government
upon the disputants. Moreover, court litigations
tended to be time-consuming, costly, and
inflexible due to their scrupulous observance of
the due process of law doctrine and their strict
adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the
attitude of the court towards
arbitration agreements is slowly
crystallizing into definite and
workable form . . . The rule now is
that unless the agreement is such
as absolutely to close the doors of
the courts against the parties,
which agreement would be void,
the courts will look with favor
upon such amicable arrangements
and will only with great
reluctance interfere to anticipate
or nullify the action of the
arbitrator.
That there was a growing need for a law
regulating arbitration in general was
acknowledged when Republic Act No. 876 (1953),
otherwise known as the Arbitration Law, was
passed. "Said Act was obviously adopted to
supplement — not to supplant — the New Civil
Code on arbitration. It expressly declares that
"the provisions of chapters one and two, Title
XIV, Book IV of the Civil Code shall remain in
force."
x x x           x x x          x x x
In practice nowadays, absent an agreement of the
parties to resolve their disputes via a particular
mode, it is the regular courts that remain the fora
to resolve such matters. However, the parties may
opt for recourse to third parties, exercising their
basic freedom to "establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to
law, morals, good customs, public order or public
policy." In such a case, resort to the arbitration
process may be spelled out by them in a contract
in anticipation of disputes that may arise between
them. Or this may be stipulated in a submission
agreement when they are actually confronted by
a dispute. Whatever be the case, such recourse to
an extrajudicial means of settlement is not
intended to completely deprive the courts of
jurisdiction. In fact, the early cases on arbitration
carefully spelled out the prevailing doctrine at the
time, thus: ". . . a clause in a contract providing
that all matters in dispute between the parties
shall be referred to arbitrators and to them alone
is contrary to public policy and cannot oust the
courts of jurisdiction."
But certainly, the stipulation to refer all future
disputes to an arbitrator or to submit an ongoing
dispute to one is valid. Being part of a contract
between the parties, it is binding and enforceable
in court in case one of them neglects, fails or
refuses to arbitrate. Going a step further, in the
event that they declare their intention to refer
their differences to arbitration first before taking
court action, this constitutes a condition
precedent, such that where a suit has been
instituted prematurely, the court shall suspend
the same and the parties shall be directed
forthwith to proceed to arbitration.
A court action may likewise be proper where the
arbitrator has not been selected by the parties.
x x x           x x x          x x x
. . . It is stated explicitly under Art. 2044 of the
Civil Code that the finality of the arbitrator's
award is not absolute and without exceptions.
Where the conditions described in Articles 2038,
2039 and 2040 18 applicable to both compromises
and arbitrations are obtaining, the arbitrators'
award may be annulled or rescinded.
Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award.
Thus, if and when the factual circumstances
referred to in the above-cited provisions are
present, judicial review of the award is properly
warranted.
What if courts refuse or neglect to inquire into
the factual milieu of an arbitrator's award to
determine whether it is in accordance with law or
within the scope of his authority? How may the
power of judicial review be invoked?
This is where the proper remedy
is certiorari under Rule 65 of the Revised Rules
of Court. It is to be borne in mind, however, that
this action will lie only where a grave abuse of
discretion or an act without or in excess of
jurisdiction on the part of the voluntary
arbitrator is clearly shown. For "the writ
of certiorari is an extraordinary remedy and
that certiorari jurisdiction is not to be equated
with appellate jurisdiction. In a special civil
action of certiorari, the Court will not engage in a
review of the facts found nor even of the law as
interpreted or applied by the arbitrator unless
the supposed errors of fact or of law are so patent
and gross and prejudicial as to amount to a grave
abuse of discretion or an exces de pouvoir on the
part of the arbitrator." 19
So, what are the issues that need to be addressed in this action?
Certainly not the capacity of the plaintiffs below to file the
derivative suit in behalf of MMIC nor the validity of the
extrajudicial foreclosure conducted by PNB and DBP. These
were the issues submitted for arbitration by the parties
and resolved with finality by the arbitration committee upon
agreement of the parties themselves. The issues, therefore, all
stemming from the judgment of the Court of Appeals, may be
narrowed down to three: (1) Was it right in upholding the trial
court's authority to confirm the arbitration award considering
that said court had earlier dismissed the complaint? (2) Was it
correct in finding that herein petitioner was estopped from
questioning such award? (3) Was it justified in not treating
petitioner's petition for certiorari as an appeal from the trial
court's order confirming said award?
(1) Petitioner overly stresses the fact that in the trial court's
order of October 14, 1992; the complaint was "dismissed" upon
approval of the Compromise and Arbitration Agreement
between the parties. Such dismissal, however, far from finally
disposing of the controversy as the term denotes, simply
"suspended" it during the period of arbitration. It is, as a
colleague pointed out during the deliberation of this action, a
mere "semantic imperfection." Here is a situation where the
intent of the tribunal was obviously not to end the case with
finality, but to place the proceedings in abeyance while the
parties breathed life into an alternative mode of settling their
differences in the most expeditious manner. Arbitration is not a
self-enforcing process. It focuses the direction of the hearing and
the reception and appreciation of evidence by assigning these
tasks to a group of persons chosen by the parties, themselves. By
this, a circuitous and time-consuming court trial is avoided,
leaving the court with the singular duty of confirming the
arbitrators' decision, and allowing it to devote more of its time to
resolving other cases. As the appellate court correctly pointed
out:
. . . (T)he dismissal of the Complaint in Civil Case
No. 9900 was not intended by the parties and by
the court a quo, despite the phraseology in Item
No. 4 or the dispositive portion of the Order of
October 14, 1992, as a dismissal that would put
an end to the case. Rather it was simply a
pronouncement for the cessation of the
proceedings in the court and the commencement
of the arbitration proceedings. It was for all
intents and purposes a stay of the civil action
until an arbitration has been had or pending the
return of the arbitral award. This is evident since
the parties submitted to the court below not only
an agreement to arbitrate but also a compromise
which is always submitted to the court for
approval and as a basis for a judgment. . . . 20
Regarding the trial court's authority to confirm the decision of
the arbitration committee, suffice it to say that such was not
merely its right but its duty as well. Under Section 22 of R.A. No.
876, upon application or motion of any party to arbitration, the
court has the obligation of confirming the arbitrators' award
absent any specific ground to vacate, modify or correct the same.
Herein private respondents did apply for such confirmation on
February 7, 1995. This was even opposed by petitioner on the
ground that the judgment had not yet become final and
executory, in complete disregard of paragraph 10 of the
Compromise and Arbitration Agreement and the very decision
of the arbitration committee.
The award itself was properly made since it was not vacated,
modified or corrected upon any of the grounds enumerated
under Sections 24 and 25 of R.A. No. 876, to wit:
Sec. 24. Grounds for vacating award. — In any
one of the following cases, the court must make
an order vacating the award upon the petition of
any party to the controversy when such party
proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption,
fraud, or other undue means; or
(b) That there was evident partiality or
corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct
in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear
evidence pertinent and material to the
controversy; that one or more of the arbitrators
was disqualified to act as such under section nine
hereof, and willfully refrained from disclosing
such disqualifications or of any other
misbehavior by which the rights of any party
have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or
so imperfectly executed them, that a mutual, final
and definite award upon the subject matter
submitted to them was not made.
Where an award is vacated, the court, in its
discretion, may direct a new hearing either
before the same arbitrators or before a new
arbitrator or arbitrators chosen in the manner
provided in the submission or contract for the
selection of the original arbitrator or arbitrators,
and any provision limiting the time in which the
arbitrators may make a decision shall be deemed
applicable to the new arbitration and to
commence from the date of the court's order.
Where the court vacates, an award, costs, not
exceeding fifty pesos, and disbursements may be
awarded to the prevailing party and the payment
thereof may be enforced in like manner as the
payment of costs upon the motion in an action
Sec. 25. Grounds for modifying or correcting
award. — In any one of the following cases, the
court must make an order modifying or
correcting the award, upon the application of any
party to the controversy which was arbitrated:
(a) Where there was an evident
miscalculation of figures, or an
evident mistake in the description
of any person, thing or property
referred to in the award; or
(b) Where the arbitrators have
awarded upon a matter not
submitted to them, not affecting
the merits of the decision upon the
matter submitted; or
(c) Where the award is imperfect
in a matter of form not affecting
the merits of the controversy, and if
it had been a commissioner's
report, the defect could have been
amended or disregarded by the
court.
The order may modify and correct the award so as to effect the
intent thereof and promote justice between the parties.
(Emphasis supplied)
Petitioner utterly failed to prove the existence of any of these
grounds. Its strongest argument, that the arbitration award "far
exceeded the issue submitted for arbitration," apart from being
unsubstantiated, does not go into the merits of the award, which
is the only way its modification or correction could be justified
under the terms of Section 25, aforequoted.
Furthermore, petitioner violated several covenants by asking the
court a quo to vacate the arbitration award. First, in paragraph
10 of the Compromise and Arbitration Agreement, it agreed to
abide by the arbitration committee's decision which "shall be
final and executory upon its issuance upon the parties to the
arbitration and their assigns and successors-in-interest." Next,
the decision that the arbitrators did render on November 24,
1993 specifically declared the same to be "final and executory."
Finally, in the court's confirmation order of November 28, 1994,
the finality of the award was reiterated by the court. Arbitration,
as an alternative mode of settlement, is gaining adherents in legal
and judicial circles here and abroad. If its tested mechanism can
simply be ignored by an aggrieved party, one who, it must be
stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very
essence of mutuality inherent in consensual contracts.
2) Petitioner claims that it is not estopped from
questioning the arbitration award probably because,
notwithstanding its tenacious quest for affirmative relief,
it did not translate this pursuit into positive action. The
Court of Appeals succinctly puts it in this wise:
. . . The record shows that on its motion,
petitioner APT was able to postpone the hearing
on therein plaintiffs' application/motion for
confirmation of arbitral award to a date and time
that it chose. However, when said matter was
called for hearing, only counsel for therein
plaintiffs showed up. Nonetheless, respondent
Judge gave APT a period of seven (7) days from
notice within which to comment on the
application/motion for confirmation. At no time
did petitioner APT ask for a hearing to present
its evidence. While petitioner APT repeatedly
sought to vacate the arbitral award, it made no
concrete move to pursue its cause. In fact, at the
hearing on its motion for reconsideration, both
parties through their respective counsels gave
oral arguments and thereafter agreed to submit
the motion for reconsideration for resolution. If
petitioner APT honestly believed that the
respondent Judge erroneously took cognizance of
plaintiffs Application/Motion for Confirmation of
Arbitration Award, then it should have limited
itself to challenging the jurisdiction of said court.
The fact remains that petitioner APT repeatedly
sought affirmative relief from the respondent
Judge in the same Civil Case No. 9900. Under the
circumstances, petitioner APT may not be heard
now to complain that it was deprived of its right
to question the award made by the Arbitration
Committtee. 21 (Emphasis supplied)
3) The final issue which, to my mind, has particular
relevance to the case at bar, pertains to the alleged error
of the Court of Appeals in not treating APT's petition
for certiorari as an appeal from the trial court's
confirmation order.
Petitioner's counsel received a copy of the confirmation order
dated November 28, 1994, on December 12, 1994. 22 Said order
was, for review purposes, a "final order" because it finally
disposed of the case. Other than executing the confirmation
order, there was nothing else that the court was duty-bound to
perform. Petitioner's remedy, therefore, was to question the
order, by appeal on certiorari, not before the Court of Appeals,
but before the Supreme Court 23 within the reglementary period
of fifteen days which expired on December 27, 1994. Instead of
appealing, however, petitioner filed a motion for reconsideration
of the order on said deadline. Unfortunately, this was denied by
the court a quo in its order dated January 18, 1995, a copy of
which was received by petitioner's counsel on February 1, 1995.
Under prevailing procedural laws, it had just one day to perfect
its appeal. On February 15, 1995, petitioner opted to file with the
Court of Appeals an "Appeal by Certiorari . . . under Sections 1
and 2 of Rule 65 of the Revised Rules of Court." The reason is
obvious: It could no longer file a regular appeal from the assailed
order because the period for doing so has lapsed. The Court of
Appeals thus made the following pertinent observation.
. . . Assuming arguendo that petitioner APT's
counsel received a copy (of the November 28,
1994, order), as claimed by them, on December
12, 1994, then the petitioner had fifteen (15) days
therefrom or until December 27, 1994, within
which to appeal. The petitioner's motion for
reconsideration was admittedly filed on
December 27, 1994, the last day of the
reglementary 15-day period, and the order dated
January 18, 1995, denying the same was received
by petitioner's counsel on February 1, 1995.
Petitioner APT had only the following day to
perfect his appeal. Instead, it chose to file the
instant special civil action of certiorari on
February 15, 1995.
From the start, petitioner seemed unsure of its position on
appeal. While initially questioning the "order confirming the
award" of the arbitration committee, it later stated that it was
raising the issue of "filing by (herein private respondents) of a
Motion for Execution and Appointment of Custodian of proceeds
of Execution dated February 6, 1995." The latter recourse is
obviously erroneous, for no appeal under either Rule 45 or Rule
65 may be taken from a "motion" or the "filing" of one. Under
Rule 45, only judgments or final orders of a court or tribunal
may be appealed to a higher court, while Rule 65 allows a special
civil action where the acts of a tribunal, board or officer are
under attack for being performed with grave abuse of discretion.
The applicable law, of course, is R.A. No. 876, which provides for
appeals from arbitration awards under Section 29 thereof, viz.:
. . . (A)n appeal may be taken 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.
The term "certiorari" in the aforequoted provision refers to an
ordinary appeal under Rule 45, not the special action
of certiorari under Rule 65. It is an "appeal," as Section 29
proclaims. The proper forum for this action is, under the old and
the new rules of procedure, the Supreme Court. Thus, Section
2(c) of Rule 41 of the 1997 Rules of Civil Procedure states that,
"In all cases where only questions of law are raised or involved,
the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45." Moreover, Section 29
limits the appeal to "questions of law," another indication that it
is referring to an appeal by certiorari under Rule 45 which,
indeed, is the customary manner of reviewing such issues. On the
other hand, the extraordinary remedy of certiorari under Rule
65 may be availed of by a party where there is "no appeal, nor
any plain, speedy, and adequate remedy in the course of law,"
and under circumstances where "a tribunal, board or officer
exercising judicial functions, has acted without or in excess of its
or his jurisdiction, or with grave abuse of discretion." 24
Based on the foregoing, it is clear that petitioner had run out of
options after its motion for reconsideration was denied by the
trial court in its order dated January 18, 1995. To compound its
negligence, it filed the wrong action with the wrong forum.
These, to my mind, are serious procedural flaws. To rule
otherwise, as the majority did, would constitute a grave injustice (a) Ordering the
to private respondents. defendant APT to
the Marinduque
I vote to DISMISS the petition. Mining and
Industrial
Corporation
(MMIC), except
PARDO, J., separate concurring opinion; the DBP, the sum
of
I concur. However, I wish to add a few points not particularly P3,811,757,425.00,
emphasized in the majority opinion. as and for actual
damages under
escrow in the
The petition before the Court is one for review via
amount of
certiorari under Rule 45 of the Revised Rules of Court seeking to
P503,000,000.00
set aside the resolution of the Court of Appeals that denied due
pursuant to the
course and dismissed APT's petition for certiorari to annul the
Escrow Agreement
proceedings had before the Regional Trial Court, Makati,
dated April 22,
Branch 62, in Civil Case No. 9900, particularly the order
1988. The balance
confirming the arbitration award, reading as follows:
of the award, after
the escrow funds
WHEREFORE, premises considered, and in the are fully applied,
light of the parties Compromise and Arbitration shall be executed
Agreement dated October 6, 1992, the Decision of against the APT;
the Arbitration Committee promulgated on
November 24, 1993, as affirmed in a Resolution
(b) Ordering the
dated July 26, 1994, and finally settled and
defendants to pay
clarified in the Separate Opinion dated
to the MMIC,
September 2, 1994 of Committee Member Elma,
except the DBP,
and the pertinent provisions of R.A. 876, also
the sum of
known as the Arbitration Law, this Court
P13,000.00 as and
GRANTS PLAINTIFFS' APPLICATION AND
for moral and
THUS CONFIRMS THE ARBITRATION
exemplary
AWARD AND JUDGMENT IS HEREBY
damages;
RENDERED:
 (c) Ordering the 13, 1995, for annulment of foreclosure, specific performance and
defendant to pay damages against the Philippine National Bank (PNB) and the
to Jesus S. Development Bank of the Philippines (DBP) alleging that in
Caburrus, Sr., the 1984, the PNB and DBP effected illegally the extra-judicial
sum of foreclosure of real estate and chattel mortgages constituted in
P10,000,000.00 as their favor by the MMIC by the latter's assets of real estate and
and for moral chattels, to satisfy an obligation amounting to
damages; and P22,668,537,770.05, and that prior to the extra-judicial
foreclosure, PNB and DBP had agreed to a financial
(d) Ordering the reorganization plan of MMIC to reduce the latter's indebtedness
defendant to pay to P3 billion and to convert the balance of its obligation into
the herein equity.
plaintiff/applicants
/movants the sum In their joint answer to the amended complaint, defendants PNB
of P1,705,410.00 as and DBP denied the material allegations of the amended
arbitration costs. complaint but admitted that in August and September, 1984,
they foreclosed extra-judicially the mortgages on MMIC's assets,
In reiteration of the mandates of with the qualification that the correct amount of obligation owed
Stipulation No. 10 and Stipulation by MMIC as of July 15, 1984, was P22,083,313,168.29; that the
No. 8 paragraph 2 of the foreclosure of the mortgages was legal and valid as mandated by
Compromise and Arbitration Presidential Decree No. 385 and by the provisions of the
Agreement, and the final edict of mortgage trust agreements between PNB, DBP and MMIC; and,
the Arbitration Committee's that the plaintiff's therein, herein respondents Cabarrus, et al.,
decision, and with this Court's were not entitled to actual and moral damages.
Confirmation, the issuance of the
Arbitration Committee's Award In the course of the trial of Civil Case No. 9900, plaintiffs Jesus
shall henceforth be final and S. Cabarrus, et al. and the Asset Privatization Trust (APT), as
executory. successor-in-interest of the DBP and PNB's interest in MMIC
accounts, entered into a compromise and arbitration agreement
SO ORDERED. dated October 6, 1992, whereby they "agreed to move for the
dismissal of the case, to transform the reliefs prayed for therein
Originally instituted on February 8, 1985, in the Regional Trial into pure money claims and to submit the controversy to
Court, Makati, Metro Manila, private respondents, Jesus S. arbitration under Republic Act (RA) 876 before a committee
Cabarrus, Sr., et al., a few of the numerous minority composed of three members" limiting the issues to two, namely:
stockholders of Marinduque Mining and Industrial Corp.
(hereafter MMIC), filed a complaint, later amended on March
 (a) whether plaintiffs have the P2,531,635,425,02 with interest
capacity or the personality to thereon at the legal rate of six
institute this derivative suit in (6%) per cent per annum
behalf of the MMIC or its reckoned from August 3, 9 and 24,
directors, and 1984, pari passu, as and for actual
damages. Payment of these actual
(b) whether or not the actions damages shall be offset by APT
leading to, and including, the from the outstanding and unpaid
PNB-DBP foreclosure of the loans of MMIC with DBP and
MMIC assets were proper, valid PNB, which have not been
and in good faith. converted into equity. Should
there be any balance due to
Thus, the parties created an Arbitration Committee composed of MMIC after the offsetting, the
three (3) members, one (1) representative of the plaintiff; one (1) same shall be satisfied from the
representative of APT; and the Chairman to be agreed upon by funds representing the purchase
both parties. Consequently, APT nominated Atty. Jose C. Sison, price of the sale of the shares of
a trustee of APT and its counsel; MMIC nominated former Island Cement Corporation in the
Justice of the Court of Appeals Magtanggol Elma; and they amount of P503,000,000.00 held
selected retired Supreme Court Justice Abraham F. Sarmiento under escrow pursuant to the
as Chairman. Escrow Agreement dated April
22, 1988 or to such subsequent
After conducting hearings and receiving voluminous evidence, escrow agreement that would
on November 24, 1993, the Arbitration Committee released what supersede it pursuant to
purports to be its decision penned by the Chairman, the paragraph (9) of the Compromise
dispositive portion of which reads as follows: and Arbitration Agreement;

DISPOSITION 2. Ordering the defendant to pay

to the Marinduque Mining and
WHEREFORE, premises Industrial Corporation, except the
considered judgment is hereby DBP, the sum of P13,000,000.00,
rendered: as and for moral and exemplary
damages. Payment of these moral
and exemplary damages shall be
1. Ordering the defendant to pay
offset by APT from the
the Marinduque Mining and
outstanding and unpaid loans of
Industrial Corporation, except the
MMIC with DBP and PNB, which
DBP, the sum of
have not been converted into
equity. Should there be any
balance due to MMIC after the
offsetting, the same shall be
satisfied from the funds
representing the purchase price of
the sale of the shares of island
Cement Corporation in the
amount of P503,000,000.00 held
under escrow pursuant to the
Escrow Agreement dated April
22, 1988 or to such subsequent
escrow agreement that would
supersede it pursuant to
paragraph (9) of the Compromise
and Arbitration Agreement;
3. Ordering the defendant to pay
to the plaintiff, Jesus S. Cabarrus,
Sr., the sum of P10,000,000.00, to
be satisfied likewise from the
funds held under escrow pursuant
to the Escrow Agreement dated
April 22, 1988 or to such
subsequent escrow agreement that
would supersede it, pursuant to
paragraph (9), Compromise and
Arbitration Agreement, as and for
moral damages; and
4. Ordering the defendant to pay
arbitration costs.
This Decision is
FINAL and
EXECUTORY.
IT IS SO
ORDERED.
Member Elma submitted a separate concurring and dissenting
opinion reading as follows:
ELMA, concurring and dissenting:
I am in complete agreement with the findings of
the Decision on the principal issues submitted for
the Committee's resolution, viz: that plaintiffs
Cabarrus, et al., have the capacity or the
personality to institute this derivative suit in
behalf of Marinduque Milling and Industrial
Corporation (MMIC) and that the actions
leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were improper,
invalid and/or not done in good faith.
Consequently, there is concurrence on my part to
the award of actual, moral and exemplary
damages to MMIC, and moral damages to
plaintiff Jesus S. Cabarrus, Sr.
However, I am unable to agree with and,
therefore, regretfully dissent as to the manner or
method of computation and amount of actual
damages awarded to MMIC, particularly set
forth in paragraph 1 of the dispositive potion of
the Decision.
x x x           x x x          x x x
Considering that under the "Compromise and
Arbitration Agreement", the parties agreed that
their respective claims be reduced to purely
pecuniary/money claims, then MMIC and/or
 plaintiffs on behalf of all the other stockholders
of MMIC are entitled to actual or compensatory
damages equivalent to the present value of their
equity over the MMIC assets, i.e. the total
stockholders' equity of P20,826,700,952.00 as of
December 31, 1992. Further, since as held in the
Decision that the DBP would have an 87% equity
in MMIC as a consequence of the finding that the
Financial Rehabilitation Plan (FRP), is valid (p.
64 of the Decision), then the amount of
P18,119,229,828.24 (equivalent to DBP's 87%
equity) should be deducted from the total
stockholders' equity of P20,826,700,952.00
leaving a net amount of P2,707,471,123.76 to be
awarded to MMIC (excluding DBP's share) as
actual or compensatory damages.
It is to be noted that defendant APT did not
present any evidence rebutting the figures and
computations made by witness Pastor. Since the
Decision finds the FRP valid, then the
stockholders of MMIC (excluding DBP) should
be placed in the same position that they would
have been where not for the fact that the FRP
was improperly and illegally aborted by
PNB/DBP. Accordingly, it is my submission that
defendant APT should be ordered to pay MMIC
(excluding DBP) the sum of P2,707,471,123.76
with legal interest thereon per annum from
August 3, 1984 as and for actual damages.
x x x           x x x          x x x
Member Sison submitted a separate opinion reading as follows:
SEPARATE OPINION
x x x           x x x          x x x
It is clear and it cannot be
disputed therefore that based on
these stipulated issues, the parties
themselves have agreed that the
basic ingredient of the causes of
action in this case is the wrong
committed on the corporation
(MMIC) for the alleged illegal
foreclosure of its assets. By
agreeing to this stipulation,
PLAINTIFFS themselves
(Cabarrus, et al.) admit that the
cause of action pertains only to
the corporation (MMIC) and that
they are filing this for and in
behalf of MMIC.
Perforce this has to be so because
it is the basic rule in Corporation
Law that "the shareholders have
no title, legal or equitable to the
property which is owned by the
corporation (13 Am. Jur. 165;
Pascual vs. Oresco, 14 Phil. 83).
In Ganzon & Sons vs. Register of
Deeds, 6 SCRA 373, the rule has
been reiterated that "a
stockholder is not the co-owner of
the corporate property." Since the
property or assets foreclosed
belongs to MMIC, the wrong
committed, if any, is done against
the corporation. There is therefore
no direct injury or direct violation
of the rights of Cabarrus et
al. There is no way, legal or
equitable by which Cabarrus et al,
could recover damages in their
personal capacities even assuming
or just because the foreclosure is
improper or invalid. The
Compromise and Arbitration
Agreement itself and the
elementary principles of
Corporation Law say so.
Therefore, I am constrained to
dissent from the award of moral
damages to Cabarrus.
Neither could I agree to the award
of moral damages to MMIC. The
acts complained of here in which
the Committee based its award of
moral damages to MMIC is the
foreclosure of the various real
estate and chattel mortgages. The
majority of the Committee
believes that these foreclosure
constitute a violation on an
agreement forged between PNB-
DBP, on one hand, and MMIC, on
the other, regarding the
restructuring of the various past
due loans of MMIC to what had
been termed as the Financial
Restructuring Program (FRP).
x x x           x x x          x x x
In this connection, it can readily
be seen and it cannot quite be
denied that MMIC accounts in
PNB-DBP were past due. The
drawing up of the FRP is the best
proof of this. When MMIC
adopted a restructuring program
for its loan, it only meant that
these loans were already due and
unpaid. If these loans were
restructurable because they were
already due and unpaid, they are
likewise "forecloseable". The
option is with the PNB-DBP on
what steps to take.
The mere fact that MMIC
adopted the FRP does not mean
that DBP-PNB lost the option to
foreclose. Neither does it mean
that the FRP is legally binding
and implementable. It must be
pointed that said FRP will, in
effect, supersede the existing and
past due loans of MMIC with
PNB-DBP. It will become the new
loan agreement between the
lenders and the borrowers. As in
all other contracts, there must
therefore be a meeting of the
minds of the parties; the PNB and
DBP must have to validly adopt
and ratify such FRP before they
can be bound by it; before it can
be implemented. In this case, not
an iota of proof has been
presented by the PLAINTIFFS
showing that PNB and DBP
ratified and adopted the FRP.
PLAINTIFFS simply relied on a
legal doctrine of promissory
estoppel to support its allegations
in this regard.
x x x           x x x          x x x
All told, PNB and DBP had the
right to foreclose and were
justified in doing so. But were the
foreclosure legally done or carried
out? Were the requirements of
notice, posting and publication
required by Acts 3135 and 1508
substantially complied with?
x x x           x x x          x x x
I cannot, however, concur with
the for holding that such minor
taint of illegality in the foreclosure
is enough to justify the award of
damages, amounting to
P19,486,118,654.00. "Rules of law
respecting the recovery of
damages are framed with
reference to just rights or both
parties, not merely what may be
right for an injured person to
receive, but also what is just to
compel the other party to pay, to
accord just compensation for the
injury" (Kennings vs. Kline Ind.
602). Following this universally
accepted rule on damage, I do not
believe it is just to compel APT to
pay such huge amount for such
minor technical infraction.
But while I do not agree with this
pronouncement of the Committee,
I nevertheless concur with the
result as far as the disposition of
the award for actual damages is
concerned. I agree that
DEFENDANT APT can, and is
still entitled to, collect the
outstanding obligations of MMIC
to PNB and DBP amounting to
P22,668,537,770.05 with interest
thereon as stipulated in the loan
documents from the date of
foreclosure until the time they are
fully paid. The resultant effect of
such a disposition is that APT can
offset the said obligation due from
MMIC such that ultimately no
damages will be due and payable
to MMIC. As there may be
damage without injury, there can
be injury without damage (15 Am.
Jur., p. 388). This case is a case
of "injury without damage".
Both parties moved for reconsideration of the "decision" of the
Arbitration Committee. In addition, respondents Cabarrus et al.
filed a motion for clarification and to re-open the case to receive
evidence. In a resolution dated July 26, 1984, with one member
dissenting, the Arbitration Committee denied the motions for
reconsideration of both parties as well as all other pending
motions.
On October 17, 1984, respondents Cabarrus et al. filed directly
with the Regional Trial Court, Makati, Branch 62, in the same
Civil Case No. 9900, a pleading entitled application/motion for
confirmation of arbitral award.
On November 4, 1994, petitioner APT filed an opposition and
motion to vacate judgment, contending that respondents' motion
was improperly filed with the same branch of the court in Civil
Case No. 9900, which was previously dismissed, and that the
motion should have been filed as a separate special proceedings
in the Regional Trial Court to be docketed by the Clerk of Court.
Nonetheless, acting on the application/motion, Judge Roberto C.
Diokno, presiding judge, Regional Trial Court, Makati, Branch
62, on November 28, 1994, issued an order granting plaintiffs'
application confirming the arbitration award, and rendering
judgment as set out in the opening paragraph of this opinion.
On December 12, 1994, petitioner APT received notice of the
lower court's order. On December 27, 1994, petitioner APT filed
a motion for reconsideration. By order dated January 18, 1995,
the trial court denied the motion. On February 7, 1995,
respondents Cabarrus, et al. filed a motion for execution and
appointment of custodian of proceeds of execution. Petitioner
opposed the motion. It is apparently still unresolved.
On February 15, 1995, petitioner APT filed with the Court of
Appeals an original special civil action for certiorari with prayer
for temporary restraining order or preliminary injunction 1 to
annul the two (2) orders of the respondent Regional Trial Court
above-mentioned confirming the arbitral award and denying its
reconsideration.
The issue presented in said petition was whether respondent
Judge Roberto C. Diokno, Regional Trial Court, Makati, Branch
62, had jurisdiction to act on private respondents'
application/motion for confirmation of arbitral award in the
same Civil Case No. 9900, which had been dismissed earlier on
motion of the parties, and thus the court gravely abused its
discretion in confirming the arbitral award.
In its decision promulgated on July 17, 1995, the Court of
Appeals denied due course and dismissed the petition
for certiorari for lack of merit.
Hence, this petition for review filed on September 07, 1995. 2
The petition is impressed with merit.
First, the Regional Trial Court, Makati, Branch 62, did not
validly acquire jurisdiction over the case by respondents' filing
of a mere motion in the same Civil Case No. 9900 because the
case had been dismissed earlier and such dismissal had become
final and unappealable. As heretofore stated, on October 6, 1992,
the parties entered into a compromise and arbitration agreement
expressly providing that they "have agreed to withdraw their
respective claims from the Trial Court and to resolve their
dispute through arbitration by praying to the Trial Court to
issue a compromise judgment based on this Compromise and
Arbitration agreement.
Clearly, the parties had withdrawn the action then pending with
the Regional Trial Court, Makati, Branch 62, in Civil Case No.
9900, and agreed that they would submit their dispute to
arbitration and reduce their respective claims to "purely money
claims", "waiving and foregoing all other forms of reliefs which
they prayed for or could have prayed for in Civil Case No.
9900." The parties "agreed to move for the dismissal of the case,
to transform the reliefs prayed for therein to pure money claims
and submit the controversy to arbitration under Republic Act
(RA) 876 before a committee composed of three members."
In its order dated October 12, 1992, in Civil Case No. 9900, the
trial court presided over by respondent Judge categorically
decreed that "The complaint is hereby dismissed". Such
disposition terminated the case finally and irretrievably disposed
of the same.3 The term "dismissed" has a definite meaning in
law. "A judgment of 'dismissed', without qualifying words
indicating a right to take further proceedings, is presumed to be
dismissed on the merits". 4 The dismissal could not have been a
suspension of action provided for in the arbitration law,
Republic Act No. 876.
Upon the finality of such order of dismissal, the case could no
longer be revived by mere motion. The trial court had lost its
authority over the case. 5 We cite as squarely applicable the
decision where this Court emphatically said "But after the
dismissal has become final through the lapse of the fifteen-day
reglementary period, the only way by which the action may be
resuscitated or 'revived,' is by the institution of a subsequent
action through the filing of another complaint and the payment
of the fees prescribed by law. This is so because upon attainment
of finality of a dismissal through the lapse of said reglementary
period, the Court loses jurisdiction and control over it and can
no longer make any disposition in respect thereof inconsistent
with such dismissal"6 It is true that the confirmation of an
arbitral award is within the jurisdiction over the subject matter
of a regional trial court. Such jurisdiction must be invoked by
proper motion as a special proceedings with notice to the parties
filed in the proper court with the clerk of court (and upon
payment of the prescribed fees). 7
Second, the Arbitration Committee did not actually reach a valid
decision on the subject controversy.
In the purported decision dated November 24, 1994, penned by
Chairman Sarmiento, the Committee ordered petitioner APT to
pay to MMIC the sum of P2,531,635,425.02, with interest
thereon at the legal rate at 6% per annum from August 3, 9 and
24, 1984, pari passu as actual damages; to pay MMIC P13
million, as moral and exemplary damages, and to pay Jesus S.
Cabarrus, Sr. P10 million, as moral damages.
In the concurring and dissenting opinion of Member Elma, he
agreed with the finding on the principal issue submitted for
resolution. However, he dissented as to the manner or method of
computation and amount of actual damages awarded to MMIC.
He submitted that APT should be ordered to pay MMIC the sum
of P2,707,471,123.76, with legal interest thereon per annum from
August 3, 1984, as actual damages.
In his separate opinion, Member Sison stated that he concurred
with the result as far as the disposition of the award of actual
damage is concerned. He agreed that APT is entitled to collect
the outstanding obligations of MMIC to PNB and DBP
amounting to P22,668,537,770.05, with interest as stipulated in
the loan documents from the date of foreclosure until fully paid.
The resultant effect is that APT can offset said obligation due
from MMIC such that ultimately no damages shall be due and
payable to MMIC. He was against the award of moral and
exemplary damages to MMIC and Jesus S. Cabarrus, Sr.
It is obvious that the disposition in Chairman Sarmiento's award
and the concurring and dissenting opinion of Member Elma do
not tally and, hence, because of the dissent of Member Sison, the
Arbitration Committee did not reach a majority decision
constituting a valid judgment or fallo of the Committee.
The powers and duties of boards
and commissions may not be
exercised by the individual
 members separately. Their acts
are official only when done by the
members convened in session
upon a concurrence of at least a
majority and with at least a
quorum present.8
Respondents Cabarrus, et al. considered the disposition as
confusing and incomplete as to the award of damages and
thereby requiring the reception of further evidence as to
necessitate the re-opening of hearings on the case. On May 20,
1994, they filed a motion for clarification seeking answer from
the arbitration committee as to the final amount of actual
damages the MMIC is entitled to, and, on June 9, 1994, they filed
a motion to reopen the case and to receive evidence.
Even the Arbitration Committee's resolution of the various
motions for reconsideration and other reliefs was conflicting. For
Chairman Sarmiento, respondents' motion for reconsideration,
dated December 15, 1993, and petitioner's motion for
reconsideration, dated January 3, 1994, respondents' motion for
clarification dated June 8, 1994, and respondents' urgent motion
to re-open the case and to receive evidence were all DENIED for
lack of merit.
Member Elma dissented from the denial of the parties' motion
for reconsideration, reiterating that MMIC is entitled to actual
damages in the sum of P2,707,471,123.76, with legal interest
thereon from August 3, 1984.
Member Azura (substituting Sison) concurred with the
Chairman in denying respondents' motion for reconsideration,
motion for clarification and motion to re-open the case but
favored granting petitioner's (APT) motion for reconsideration.
WHEREFORE, I vote to GRANT the petition at bench, reverse
the decision of the Court of Appeals9 as well as the orders of the
Regional Trial Court, Makati, Branch 62, in Civil Case No. 9900,
vacate the "decision" of the Arbitration Committee dated
November 24, 1993, and, finally, ENJOIN the trial court from
further acting on the case.
Separate Opinions
ROMERO, J., dissenting opinion;
In the instant petition for review on certiorari, petitioner. Asset
Privatization Trust (APT) is impugning the decision of
respondent Court of Appeals in CA-GR SP No. 36484 dated July
17, 1995, grounded upon the following assigned errors which it
had allegedly committed:
1) The Court of Appeals erred in not holding that
the Makati Regional Trial Court, Branch 62,
which had previously dismissed Civil Case No.
9900, had lost jurisdiction to confirm the arbitral
award under the same civil case and in not ruling
that the application for confirmation should have
been filed as a new case to be raffled among the
different branches of the RTC;
2) The Court of Appeals likewise erred in holding
that petitioner was estopped from questioning the
arbitration award, when petitioner questioned
the jurisdiction of the RTC-Makati, Branch 62,
and at the same time moved to vacate the arbitral
award;
3) The Court of Appeals erred in not holding that
the respondent Trial Court should have either
dismissed/denied private respondents'
 motion/petition for confirmation of arbitration
award and/or should have considered the merits
of the motion to vacate (the) arbitral award;
4) The Court of Appeals erred in not treating
petitioner APT's petition for certiorari as an
appeal taken from the order confirming the
award; and
5) The Court of Appeals erred in not ruling on
the legal issue of when to reckon the counting of
the period to file a motion for reconsideration.1
The resolution of these issues will ultimately test the process of
arbitration, how effective or ineffective it is as an alternative
mode of settling disputes, and how it is affected by judicial
review. My esteemed colleagues have taken the view that the
petition is impressed with merit and that the assailed decision of
the Court of Appeals should be reversed. In doing so, I believe
they have dealt arbitration a terrible blow and wasted years,
even decades, of development in this field. I beg to differ and,
therefore, dissent.
The controversy is actually simpler than it appears. The
Marinduque Mining and Industrial Corporation (MMIC)
obtained several loans from the Philippine National Bank (PNB)
and the Development Bank of the Philippines (DBP) secured by
mortgages over practically all of its assets. As of July 15, 1984,
MMIC's obligation had ballooned to P22,668,537,770.05, 2 and it
had no way of making the required payments. MMIC and its two
creditor banks thus ironed out a complex financial restructuring
plan (FRP) designed to drastically reduce MMIC's liability
through a "debt-to-equity" scheme. 3 This notwithstanding, the
creditors opted to sell MMIC's mortgaged properties through
extrajudicial foreclosure proceedings, where PNB turned out to
be the lone bidder.4
Aggrieved by this apparent bad faith on the part of the creditor
banks, private respondents Jesus S. Cabarrus, Sr., and other
minority stockholders of MMIC filed a derivative suit 5 against
PNB and DBP before the Makati Regional Trial Court. They
prayed for the annulment of the foreclosure and for the
restoration of the company's assets, the recognition by the
creditor banks of their commitments under the FRP, and the
payment of damages, as well as attorney's fees and costs of
litigation. The case was raffled to Branch 62 and docketed as
Civil Case No. 9900.
In the meantime, the rights and interests of PNB and DBP,
including MMIC's indebtedness, were transferred to petitioner,
created by virtue of Proclamation No. 50, in relation to
Administrative Order No. 14. Hence, petitioner was substituted
as party defendant in Civil Case No. 9900.
On October 6, 1992, the parties entered into a Compromise and
Arbitration Agreement 6 providing, inter alia, that they were
withdrawing their respective claims, which would be reduced to
pure money claims, and that they were submitting the
controversy to arbitration under Republic Act No. 876. 7 The
issues for arbitration were thus limited to a determination of the
plaintiffs' capacity or right to institute the derivative suit in
behalf of the MMIC or its directors, and of the propriety of the
foreclosure. Of notable import was the provision on the nature of
the judgment that the arbitration committee might render, viz.:
10. Binding Effect and Enforcement. The award of
the arbitration committee shall be final and
executory upon its issuance upon the parties to the
arbitration and their assigns and successors-in-
interest. In the event the award is not voluntarily
satisfied by the losing party, the party in whose
favor the award has been made may, pursuant to
Republic Act No. 876, apply to the proper
 Regional Trial Court for its enforcement.
(Emphasis supplied)
Upon motion of the parties, this agreement was presented to the
court a quo for its approval.8 On October 14, 1992, said court
issued an order (a) dismissing the complaint; (b) substituting the
creditor banks with the APT as party defendant; (c) "approving
the Compromise and Arbitration Agreement dated October 6,
1992"; and (d) "approving the transformation of the reliefs
prayed for by the plaintiffs in this case into pure money claims." 9
On November 24, 1993, after more than six months of hearing,
the arbitration committee 10 concluded that the assailed
foreclosure was not valid and accordingly decided the case in
favor of MMIC. Hence, petitioner was ordered to pay MMIC
actual damages in the amount of P2,531,635,425.02, with legal
interest, and moral and exemplary damages amounting to
P13,000,000.00, and to pay Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00 by way of moral damages, such awards to be
offset from the outstanding and unpaid obligations of MMIC
with the creditor banks, which have not been converted into
equity. The committee likewise decreed its decision to be "final
and executory." 11
Nearly a year later, MMIC filed in Civil Case No. 9900, a
verified "Application/Motion for Confirmation of Arbitration
Award." 12 This was opposed by petitioner on two grounds,
namely, that Branch 62 no longer had jurisdiction to act on said
motion after it "dismissed" the complaint in its order of October
14, 1992, and that the award "far exceeded the issues submitted"
for arbitration by the parties. 13 Not wanting to be outdone,
MMIC filed a "Reply and Opposition," arguing that the
"qualified dismissal" of Civil Case No. 9900 was merely intended
to expedite the submission of the controversy to arbitration and
was, therefore, "a mere suspension of the proceedings," and that
the arbitration committee did not exceed its authority in making
the award.
On November 28, 1994, the trial court issued an
order 14 confirming the award of the committee in all respects
except as to the award of actual damages to MMIC, which was
increased to P3,811,757,425.00. The order closed with the
following declaration:
In reiteration of the mandates of Stipulation No.
10 and Stipulation No. 8 paragraph 2 of the
Compromise and Arbitration Agreement, and the
final edict of the Arbitration Committee's
decision, and with this Court's Confirmation, the
issuance of the Arbitration Committee's Award
shall henceforth be final and executory.
Petitioner filed a "Motion for Reconsideration" of said order on
December 27, 1994; but this was denied by the court a quo in its
order dated January 18, 1995 for lack of merit and for having
been filed beyond the reglementary period. Thus, it said:
. . . (C)onsidering that the defendant APT,
through counsel, officially and actually received a
copy of the Order of this Court dated November
28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant
APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day
reglementary period prescribed or provided
for . . . (by law) for the filing of an appeal from
final orders, resolutions, awards, judgments or
decisions of any court in all cases, and by
necessary implication, for the filing of a motion
for reconsideration thereof.
Instead of appealing such denial, petitioner filed on February 15,
1995, an "Appeal by Certiorari . . . . under Sections 1 and 2 of
Rule 65 of the Revised Rules of Court" before the Court of
Appeals, praying for the nullification of the trial court's orders
dated November 28, 1994 and January 18, 1995. It argued that
the trial court had no jurisdiction or authority to confirm the
arbitral award, "considering that the original case, Civil Case
No. 9900, had previously been dismissed," and that the trial
judge "acted with grave abuse of discretion in issuing the
questioned orders confirming the award and denying the motion
for reconsideration thereof." 15
On July 17, 1995, the Court of Appeals dismissed the petition for
lack of merit. 16 From this dismissal, petitioner elevated its cause
to this Tribunal for a review, raising the issues stated at the
outset.
I find it distressing that, in reaching the outcome of this
controversy, the majority has emasculated the process of
arbitration itself. This should not be the case for after all, the
decision of the arbitration committee is no longer the one being
attacked in these proceedings, but the judgment of the Court of
Appeals which herein petitioner found to be erroneous. The
Court has had occasion to trace the history of arbitration and to
discuss its significance in the case of Chung Fu Industries
(Phils.), Inc. v. Court of Appeals, 17 viz.:
Allow us to take a leaf from history and briefly
trace the evolution of arbitration as a mode of
dispute settlement.
Because conflict is inherent in human society,
much effort has been expended by men and
institutions in devising ways of resolving the
same. With the progress of civilization, physical
combat has been ruled out and instead, more
specific means have been evolved, such as
recourse to the good offices of a disinterested
third party, whether this be a court or a private
individual or individuals.
Legal history discloses that "early judges called
upon to solve private conflicts were primarily the
arbiters, persons not specially trained but in
whose morality, probity and good sense the
parties in conflict reposed full trust. Thus, in
Republican Rome, arbiter and judge (judex)
were synonymous. The magistrate of praetor,
after noting down the conflicting claims of
litigants, and clarifying the issues, referred them
for decision to a private person designated by the
parties, by common agreement, or selected by
them from an apposite listing (the album
judicium) or else by having the arbiter chosen by
lot. The judges proper, as specially trained state
officials endowed with (their) own power and
jurisdiction, and taking cognizance of litigations
from beginning to end, only appeared under the
Empire, by the so-called cognitio extra ordinem."
Such means of referring a dispute to a third party
has also long been an accepted alternative to
litigation at common law.
Sparse though the law and jurisprudence may be
on the subject of arbitration in the Philippines, it
was nonetheless recognized in the Spanish Civil
Code; specifically, the provisions on compromises
made applicable to arbitrations under Articles
1820 and 1821. Although said provisions were
repealed by implication with the repeal of the
Spanish Law of Civil Procedure, these and
additional ones were reinstated in the present
Civil Code.
Arbitration found a fertile field in the resolution
of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103
(1936) provided for compulsory arbitration as the
state policy to be administered by the Court of
Industrial Relations, in time such a modality gave
way to voluntary arbitration. While not
completely supplanting compulsory arbitration
which until today is practiced by government
officials, the Industrial Peace Act which was
passed in 1953 as Republic Act No. 875, favored
the policy of free collective bargaining, in general,
and resort to grievance procedure, in particular,
as the preferred mode of settling disputes in
industry. It was accepted and enunciated more
explicitly in the Labor Code, which was passed on
November 1, 1974 as Presidential Decree No. 442,
with the amendments later introduced by
Republic Act No. 6715 (1989).
Whether utilized in business transactions or in
employer-employee relations, arbitration was
gaining wide acceptance. A consensual process, it
was preferred to orders imposed by government
upon the disputants. Moreover, court litigations
tended to be time-consuming, costly, and
inflexible due to their scrupulous observance of
the due process of law doctrine and their strict
adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the
attitude of the court towards
arbitration agreements is slowly
crystallizing into definite and
workable form . . . The rule now is
that unless the agreement is such
as absolutely to close the doors of
the courts against the parties,
which agreement would be void,
the courts will look with favor
upon such amicable arrangements
and will only with great
reluctance interfere to anticipate
or nullify the action of the
arbitrator.
That there was a growing need for a law
regulating arbitration in general was
acknowledged when Republic Act No. 876 (1953),
otherwise known as the Arbitration Law, was
passed. "Said Act was obviously adopted to
supplement — not to supplant — the New Civil
Code on arbitration. It expressly declares that
"the provisions of chapters one and two, Title
XIV, Book IV of the Civil Code shall remain in
force."
x x x           x x x          x x x
In practice nowadays, absent an agreement of the
parties to resolve their disputes via a particular
mode, it is the regular courts that remain the fora
to resolve such matters. However, the parties may
opt for recourse to third parties, exercising their
basic freedom to "establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to
law, morals, good customs, public order or public
policy." In such a case, resort to the arbitration
process may be spelled out by them in a contract
in anticipation of disputes that may arise between
them. Or this may be stipulated in a submission
agreement when they are actually confronted by
a dispute. Whatever be the case, such recourse to
an extrajudicial means of settlement is not
intended to completely deprive the courts of
jurisdiction. In fact, the early cases on arbitration
carefully spelled out the prevailing doctrine at the
time, thus: ". . . a clause in a contract providing
that all matters in dispute between the parties
shall be referred to arbitrators and to them alone
is contrary to public policy and cannot oust the
courts of jurisdiction."
But certainly, the stipulation to refer all future
disputes to an arbitrator or to submit an ongoing
dispute to one is valid. Being part of a contract
between the parties, it is binding and enforceable
in court in case one of them neglects, fails or
refuses to arbitrate. Going a step further, in the
event that they declare their intention to refer
their differences to arbitration first before taking
court action, this constitutes a condition
precedent, such that where a suit has been
instituted prematurely, the court shall suspend
the same and the parties shall be directed
forthwith to proceed to arbitration.
A court action may likewise be proper where the
arbitrator has not been selected by the parties.
x x x           x x x          x x x
. . . It is stated explicitly under Art. 2044 of the
Civil Code that the finality of the arbitrator's
award is not absolute and without exceptions.
Where the conditions described in Articles 2038,
2039 and 2040 18 applicable to both compromises
and arbitrations are obtaining, the arbitrators'
award may be annulled or rescinded.
Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award.
Thus, if and when the factual circumstances
referred to in the above-cited provisions are
present, judicial review of the award is properly
warranted.
What if courts refuse or neglect to inquire into
the factual milieu of an arbitrator's award to
determine whether it is in accordance with law or
within the scope of his authority? How may the
power of judicial review be invoked?
This is where the proper remedy
is certiorari under Rule 65 of the Revised Rules
of Court. It is to be borne in mind, however, that
this action will lie only where a grave abuse of
discretion or an act without or in excess of
jurisdiction on the part of the voluntary
arbitrator is clearly shown. For "the writ
of certiorari is an extraordinary remedy and
that certiorari jurisdiction is not to be equated
with appellate jurisdiction. In a special civil
action of certiorari, the Court will not engage in a
review of the facts found nor even of the law as
interpreted or applied by the arbitrator unless
the supposed errors of fact or of law are so patent
and gross and prejudicial as to amount to a grave
 abuse of discretion or an exces de pouvoir on the
part of the arbitrator." 19
So, what are the issues that need to be addressed in this action?
Certainly not the capacity of the plaintiffs below to file the
derivative suit in behalf of MMIC nor the validity of the
extrajudicial foreclosure conducted by PNB and DBP. These
were the issues submitted for arbitration by the parties
and resolved with finality by the arbitration committee upon
agreement of the parties themselves. The issues, therefore, all
stemming from the judgment of the Court of Appeals, may be
narrowed down to three: (1) Was it right in upholding the trial
court's authority to confirm the arbitration award considering
that said court had earlier dismissed the complaint? (2) Was it
correct in finding that herein petitioner was estopped from
questioning such award? (3) Was it justified in not treating
petitioner's petition for certiorari as an appeal from the trial
court's order confirming said award?
(1) Petitioner overly stresses the fact that in the trial court's
order of October 14, 1992; the complaint was "dismissed" upon
approval of the Compromise and Arbitration Agreement
between the parties. Such dismissal, however, far from finally
disposing of the controversy as the term denotes, simply
"suspended" it during the period of arbitration. It is, as a
colleague pointed out during the deliberation of this action, a
mere "semantic imperfection." Here is a situation where the
intent of the tribunal was obviously not to end the case with
finality, but to place the proceedings in abeyance while the
parties breathed life into an alternative mode of settling their
differences in the most expeditious manner. Arbitration is not a
self-enforcing process. It focuses the direction of the hearing and
the reception and appreciation of evidence by assigning these
tasks to a group of persons chosen by the parties, themselves. By
this, a circuitous and time-consuming court trial is avoided,
leaving the court with the singular duty of confirming the
arbitrators' decision, and allowing it to devote more of its time to
resolving other cases. As the appellate court correctly pointed
out:
. . . (T)he dismissal of the Complaint in Civil Case
No. 9900 was not intended by the parties and by
the court a quo, despite the phraseology in Item
No. 4 or the dispositive portion of the Order of
October 14, 1992, as a dismissal that would put
an end to the case. Rather it was simply a
pronouncement for the cessation of the
proceedings in the court and the commencement
of the arbitration proceedings. It was for all
intents and purposes a stay of the civil action
until an arbitration has been had or pending the
return of the arbitral award. This is evident since
the parties submitted to the court below not only
an agreement to arbitrate but also a compromise
which is always submitted to the court for
approval and as a basis for a judgment. . . . 20
Regarding the trial court's authority to confirm the decision of
the arbitration committee, suffice it to say that such was not
merely its right but its duty as well. Under Section 22 of R.A. No.
876, upon application or motion of any party to arbitration, the
court has the obligation of confirming the arbitrators' award
absent any specific ground to vacate, modify or correct the same.
Herein private respondents did apply for such confirmation on
February 7, 1995. This was even opposed by petitioner on the
ground that the judgment had not yet become final and
executory, in complete disregard of paragraph 10 of the
Compromise and Arbitration Agreement and the very decision
of the arbitration committee.
The award itself was properly made since it was not vacated,
modified or corrected upon any of the grounds enumerated
under Sections 24 and 25 of R.A. No. 876, to wit:
Sec. 24. Grounds for vacating award. — In any
one of the following cases, the court must make
an order vacating the award upon the petition of
any party to the controversy when such party
proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption,
fraud, or other undue means; or
(b) That there was evident partiality or
corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct
in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear
evidence pertinent and material to the
controversy; that one or more of the arbitrators
was disqualified to act as such under section nine
hereof, and willfully refrained from disclosing
such disqualifications or of any other
misbehavior by which the rights of any party
have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or
so imperfectly executed them, that a mutual, final
and definite award upon the subject matter
submitted to them was not made.
Where an award is vacated, the court, in its
discretion, may direct a new hearing either
before the same arbitrators or before a new
arbitrator or arbitrators chosen in the manner
provided in the submission or contract for the
selection of the original arbitrator or arbitrators,
and any provision limiting the time in which the
arbitrators may make a decision shall be deemed
applicable to the new arbitration and to
commence from the date of the court's order.
Where the court vacates, an award, costs, not
exceeding fifty pesos, and disbursements may be
awarded to the prevailing party and the payment
thereof may be enforced in like manner as the
payment of costs upon the motion in an action
Sec. 25. Grounds for modifying or correcting
award. — In any one of the following cases, the
court must make an order modifying or
correcting the award, upon the application of any
party to the controversy which was arbitrated:
(a) Where there was an evident
miscalculation of figures, or an
evident mistake in the description
of any person, thing or property
referred to in the award; or
(b) Where the arbitrators have
awarded upon a matter not
submitted to them, not affecting
the merits of the decision upon the
matter submitted; or
(c) Where the award is imperfect
in a matter of form not affecting
the merits of the controversy, and if
it had been a commissioner's
 report, the defect could have been
amended or disregarded by the
court.
The order may modify and correct the award so as to effect the
intent thereof and promote justice between the parties.
(Emphasis supplied)
Petitioner utterly failed to prove the existence of any of these
grounds. Its strongest argument, that the arbitration award "far
exceeded the issue submitted for arbitration," apart from being
unsubstantiated, does not go into the merits of the award, which
is the only way its modification or correction could be justified
under the terms of Section 25, aforequoted.
Furthermore, petitioner violated several covenants by asking the
court a quo to vacate the arbitration award. First, in paragraph
10 of the Compromise and Arbitration Agreement, it agreed to
abide by the arbitration committee's decision which "shall be
final and executory upon its issuance upon the parties to the
arbitration and their assigns and successors-in-interest." Next,
the decision that the arbitrators did render on November 24,
1993 specifically declared the same to be "final and executory."
Finally, in the court's confirmation order of November 28, 1994,
the finality of the award was reiterated by the court. Arbitration,
as an alternative mode of settlement, is gaining adherents in legal
and judicial circles here and abroad. If its tested mechanism can
simply be ignored by an aggrieved party, one who, it must be
stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very
essence of mutuality inherent in consensual contracts.
2) Petitioner claims that it is not estopped from
questioning the arbitration award probably because,
notwithstanding its tenacious quest for affirmative relief,
it did not translate this pursuit into positive action. The
Court of Appeals succinctly puts it in this wise:
. . . The record shows that on its motion,
petitioner APT was able to postpone the hearing
on therein plaintiffs' application/motion for
confirmation of arbitral award to a date and time
that it chose. However, when said matter was
called for hearing, only counsel for therein
plaintiffs showed up. Nonetheless, respondent
Judge gave APT a period of seven (7) days from
notice within which to comment on the
application/motion for confirmation. At no time
did petitioner APT ask for a hearing to present
its evidence. While petitioner APT repeatedly
sought to vacate the arbitral award, it made no
concrete move to pursue its cause. In fact, at the
hearing on its motion for reconsideration, both
parties through their respective counsels gave
oral arguments and thereafter agreed to submit
the motion for reconsideration for resolution. If
petitioner APT honestly believed that the
respondent Judge erroneously took cognizance of
plaintiffs Application/Motion for Confirmation of
Arbitration Award, then it should have limited
itself to challenging the jurisdiction of said court.
The fact remains that petitioner APT repeatedly
sought affirmative relief from the respondent
Judge in the same Civil Case No. 9900. Under the
circumstances, petitioner APT may not be heard
now to complain that it was deprived of its right
to question the award made by the Arbitration
Committtee. 21 (Emphasis supplied)
3) The final issue which, to my mind, has particular
relevance to the case at bar, pertains to the alleged error
 of the Court of Appeals in not treating APT's petition
for certiorari as an appeal from the trial court's
confirmation order.
Petitioner's counsel received a copy of the confirmation order
dated November 28, 1994, on December 12, 1994. 22 Said order
was, for review purposes, a "final order" because it finally
disposed of the case. Other than executing the confirmation
order, there was nothing else that the court was duty-bound to
perform. Petitioner's remedy, therefore, was to question the
order, by appeal on certiorari, not before the Court of Appeals,
but before the Supreme Court 23 within the reglementary period
of fifteen days which expired on December 27, 1994. Instead of
appealing, however, petitioner filed a motion for reconsideration
of the order on said deadline. Unfortunately, this was denied by
the court a quo in its order dated January 18, 1995, a copy of
which was received by petitioner's counsel on February 1, 1995.
Under prevailing procedural laws, it had just one day to perfect
its appeal. On February 15, 1995, petitioner opted to file with the
Court of Appeals an "Appeal by Certiorari . . . under Sections 1
and 2 of Rule 65 of the Revised Rules of Court." The reason is
obvious: It could no longer file a regular appeal from the assailed
order because the period for doing so has lapsed. The Court of
Appeals thus made the following pertinent observation.
. . . Assuming arguendo that petitioner APT's
counsel received a copy (of the November 28,
1994, order), as claimed by them, on December
12, 1994, then the petitioner had fifteen (15) days
therefrom or until December 27, 1994, within
which to appeal. The petitioner's motion for
reconsideration was admittedly filed on
December 27, 1994, the last day of the
reglementary 15-day period, and the order dated
January 18, 1995, denying the same was received
by petitioner's counsel on February 1, 1995.
Petitioner APT had only the following day to
perfect his appeal. Instead, it chose to file the
instant special civil action of certiorari on
February 15, 1995.
From the start, petitioner seemed unsure of its position on
appeal. While initially questioning the "order confirming the
award" of the arbitration committee, it later stated that it was
raising the issue of "filing by (herein private respondents) of a
Motion for Execution and Appointment of Custodian of proceeds
of Execution dated February 6, 1995." The latter recourse is
obviously erroneous, for no appeal under either Rule 45 or Rule
65 may be taken from a "motion" or the "filing" of one. Under
Rule 45, only judgments or final orders of a court or tribunal
may be appealed to a higher court, while Rule 65 allows a special
civil action where the acts of a tribunal, board or officer are
under attack for being performed with grave abuse of discretion.
The applicable law, of course, is R.A. No. 876, which provides for
appeals from arbitration awards under Section 29 thereof, viz.:
. . . (A)n appeal may be taken 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.
The term "certiorari" in the aforequoted provision refers to an
ordinary appeal under Rule 45, not the special action
of certiorari under Rule 65. It is an "appeal," as Section 29
proclaims. The proper forum for this action is, under the old and
the new rules of procedure, the Supreme Court. Thus, Section
2(c) of Rule 41 of the 1997 Rules of Civil Procedure states that,
"In all cases where only questions of law are raised or involved,
the appeal shall be to the Supreme Court by petition for review WHEREFORE, premises considered, and in the
on certiorari in accordance with Rule 45." Moreover, Section 29 light of the parties Compromise and Arbitration
limits the appeal to "questions of law," another indication that it Agreement dated October 6, 1992, the Decision of
is referring to an appeal by certiorari under Rule 45 which, the Arbitration Committee promulgated on
indeed, is the customary manner of reviewing such issues. On the November 24, 1993, as affirmed in a Resolution
other hand, the extraordinary remedy of certiorari under Rule dated July 26, 1994, and finally settled and
65 may be availed of by a party where there is "no appeal, nor clarified in the Separate Opinion dated
any plain, speedy, and adequate remedy in the course of law," September 2, 1994 of Committee Member Elma,
and under circumstances where "a tribunal, board or officer and the pertinent provisions of R.A. 876, also
exercising judicial functions, has acted without or in excess of its known as the Arbitration Law, this Court
or his jurisdiction, or with grave abuse of discretion." 24 GRANTS PLAINTIFFS' APPLICATION AND
THUS CONFIRMS THE ARBITRATION
Based on the foregoing, it is clear that petitioner had run out of AWARD AND JUDGMENT IS HEREBY
options after its motion for reconsideration was denied by the RENDERED:
trial court in its order dated January 18, 1995. To compound its
negligence, it filed the wrong action with the wrong forum. (a) Ordering the
These, to my mind, are serious procedural flaws. To rule defendant APT to
otherwise, as the majority did, would constitute a grave injustice the Marinduque
to private respondents. Mining and
Industrial
I vote to DISMISS the petition. Corporation
(MMIC), except
the DBP, the sum
of
PARDO, J., separate concurring opinion; P3,811,757,425.00,
as and for actual
I concur. However, I wish to add a few points not particularly damages under
emphasized in the majority opinion. escrow in the
amount of
P503,000,000.00
The petition before the Court is one for review via
pursuant to the
certiorari under Rule 45 of the Revised Rules of Court seeking to
Escrow Agreement
set aside the resolution of the Court of Appeals that denied due
dated April 22,
course and dismissed APT's petition for certiorari to annul the
1988. The balance
proceedings had before the Regional Trial Court, Makati,
of the award, after
Branch 62, in Civil Case No. 9900, particularly the order
the escrow funds
confirming the arbitration award, reading as follows:
 are fully applied, the Arbitration Committee's
shall be executed decision, and with this Court's
against the APT; Confirmation, the issuance of the
Arbitration Committee's Award
(b) Ordering the shall henceforth be final and
defendants to pay executory.
to the MMIC,
except the DBP, SO ORDERED.
the sum of
P13,000.00 as and Originally instituted on February 8, 1985, in the Regional Trial
for moral and Court, Makati, Metro Manila, private respondents, Jesus S.
exemplary Cabarrus, Sr., et al., a few of the numerous minority
damages; stockholders of Marinduque Mining and Industrial Corp.
(hereafter MMIC), filed a complaint, later amended on March
(c) Ordering the 13, 1995, for annulment of foreclosure, specific performance and
defendant to pay damages against the Philippine National Bank (PNB) and the
to Jesus S. Development Bank of the Philippines (DBP) alleging that in
Caburrus, Sr., the 1984, the PNB and DBP effected illegally the extra-judicial
sum of foreclosure of real estate and chattel mortgages constituted in
P10,000,000.00 as their favor by the MMIC by the latter's assets of real estate and
and for moral chattels, to satisfy an obligation amounting to
damages; and P22,668,537,770.05, and that prior to the extra-judicial
foreclosure, PNB and DBP had agreed to a financial
(d) Ordering the reorganization plan of MMIC to reduce the latter's indebtedness
defendant to pay to P3 billion and to convert the balance of its obligation into
the herein equity.
plaintiff/applicants
/movants the sum In their joint answer to the amended complaint, defendants PNB
of P1,705,410.00 as and DBP denied the material allegations of the amended
arbitration costs. complaint but admitted that in August and September, 1984,
they foreclosed extra-judicially the mortgages on MMIC's assets,
In reiteration of the mandates of with the qualification that the correct amount of obligation owed
Stipulation No. 10 and Stipulation by MMIC as of July 15, 1984, was P22,083,313,168.29; that the
No. 8 paragraph 2 of the foreclosure of the mortgages was legal and valid as mandated by
Compromise and Arbitration Presidential Decree No. 385 and by the provisions of the
Agreement, and the final edict of mortgage trust agreements between PNB, DBP and MMIC; and,
that the plaintiff's therein, herein respondents Cabarrus, et al., purports to be its decision penned by the Chairman, the
were not entitled to actual and moral damages. dispositive portion of which reads as follows:

In the course of the trial of Civil Case No. 9900, plaintiffs Jesus DISPOSITION
S. Cabarrus, et al. and the Asset Privatization Trust (APT), as
successor-in-interest of the DBP and PNB's interest in MMIC WHEREFORE, premises
accounts, entered into a compromise and arbitration agreement considered judgment is hereby
dated October 6, 1992, whereby they "agreed to move for the rendered:
dismissal of the case, to transform the reliefs prayed for therein
into pure money claims and to submit the controversy to 1. Ordering the defendant to pay
arbitration under Republic Act (RA) 876 before a committee the Marinduque Mining and
composed of three members" limiting the issues to two, namely: Industrial Corporation, except the
DBP, the sum of
(a) whether plaintiffs have the P2,531,635,425,02 with interest
capacity or the personality to thereon at the legal rate of six
institute this derivative suit in (6%) per cent per annum
behalf of the MMIC or its reckoned from August 3, 9 and 24,
directors, and 1984, pari passu, as and for actual
damages. Payment of these actual
(b) whether or not the actions damages shall be offset by APT
leading to, and including, the from the outstanding and unpaid
PNB-DBP foreclosure of the loans of MMIC with DBP and
MMIC assets were proper, valid PNB, which have not been
and in good faith. converted into equity. Should
there be any balance due to
Thus, the parties created an Arbitration Committee composed of MMIC after the offsetting, the
three (3) members, one (1) representative of the plaintiff; one (1) same shall be satisfied from the
representative of APT; and the Chairman to be agreed upon by funds representing the purchase
both parties. Consequently, APT nominated Atty. Jose C. Sison, price of the sale of the shares of
a trustee of APT and its counsel; MMIC nominated former Island Cement Corporation in the
Justice of the Court of Appeals Magtanggol Elma; and they amount of P503,000,000.00 held
selected retired Supreme Court Justice Abraham F. Sarmiento under escrow pursuant to the
as Chairman. Escrow Agreement dated April
22, 1988 or to such subsequent
After conducting hearings and receiving voluminous evidence, escrow agreement that would
on November 24, 1993, the Arbitration Committee released what supersede it pursuant to
paragraph (9) of the Compromise
and Arbitration Agreement;
2. Ordering the defendant to pay
to the Marinduque Mining and
Industrial Corporation, except the
DBP, the sum of P13,000,000.00,
as and for moral and exemplary
damages. Payment of these moral
and exemplary damages shall be
offset by APT from the
outstanding and unpaid loans of
MMIC with DBP and PNB, which
have not been converted into
equity. Should there be any
balance due to MMIC after the
offsetting, the same shall be
satisfied from the funds
representing the purchase price of
the sale of the shares of island
Cement Corporation in the
amount of P503,000,000.00 held
under escrow pursuant to the
Escrow Agreement dated April
22, 1988 or to such subsequent
escrow agreement that would
supersede it pursuant to
paragraph (9) of the Compromise
and Arbitration Agreement;
3. Ordering the defendant to pay
to the plaintiff, Jesus S. Cabarrus,
Sr., the sum of P10,000,000.00, to
be satisfied likewise from the
funds held under escrow pursuant
to the Escrow Agreement dated
April 22, 1988 or to such
subsequent escrow agreement that
would supersede it, pursuant to
paragraph (9), Compromise and
Arbitration Agreement, as and for
moral damages; and
4. Ordering the defendant to pay
arbitration costs.
This Decision is
FINAL and
EXECUTORY.
IT IS SO
ORDERED.
Member Elma submitted a separate concurring and dissenting
opinion reading as follows:
ELMA, concurring and dissenting:
I am in complete agreement with the findings of
the Decision on the principal issues submitted for
the Committee's resolution, viz: that plaintiffs
Cabarrus, et al., have the capacity or the
personality to institute this derivative suit in
behalf of Marinduque Milling and Industrial
Corporation (MMIC) and that the actions
leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were improper,
invalid and/or not done in good faith.
Consequently, there is concurrence on my part to
the award of actual, moral and exemplary
damages to MMIC, and moral damages to
plaintiff Jesus S. Cabarrus, Sr.
However, I am unable to agree with and,
therefore, regretfully dissent as to the manner or
method of computation and amount of actual
damages awarded to MMIC, particularly set
forth in paragraph 1 of the dispositive potion of
the Decision.
x x x           x x x          x x x
Considering that under the "Compromise and
Arbitration Agreement", the parties agreed that
their respective claims be reduced to purely
pecuniary/money claims, then MMIC and/or
plaintiffs on behalf of all the other stockholders
of MMIC are entitled to actual or compensatory
damages equivalent to the present value of their
equity over the MMIC assets, i.e. the total
stockholders' equity of P20,826,700,952.00 as of
December 31, 1992. Further, since as held in the
Decision that the DBP would have an 87% equity
in MMIC as a consequence of the finding that the
Financial Rehabilitation Plan (FRP), is valid (p.
64 of the Decision), then the amount of
P18,119,229,828.24 (equivalent to DBP's 87%
equity) should be deducted from the total
stockholders' equity of P20,826,700,952.00
leaving a net amount of P2,707,471,123.76 to be
awarded to MMIC (excluding DBP's share) as
actual or compensatory damages.
It is to be noted that defendant APT did not
present any evidence rebutting the figures and
computations made by witness Pastor. Since the
Decision finds the FRP valid, then the
stockholders of MMIC (excluding DBP) should
be placed in the same position that they would
have been where not for the fact that the FRP
was improperly and illegally aborted by
PNB/DBP. Accordingly, it is my submission that
defendant APT should be ordered to pay MMIC
(excluding DBP) the sum of P2,707,471,123.76
with legal interest thereon per annum from
August 3, 1984 as and for actual damages.
x x x           x x x          x x x
Member Sison submitted a separate opinion reading as follows:
SEPARATE OPINION
x x x           x x x          x x x
It is clear and it cannot be
disputed therefore that based on
these stipulated issues, the parties
themselves have agreed that the
basic ingredient of the causes of
action in this case is the wrong
committed on the corporation
(MMIC) for the alleged illegal
foreclosure of its assets. By
agreeing to this stipulation,
PLAINTIFFS themselves
(Cabarrus, et al.) admit that the
cause of action pertains only to
the corporation (MMIC) and that
they are filing this for and in
behalf of MMIC.
Perforce this has to be so because
it is the basic rule in Corporation
Law that "the shareholders have
no title, legal or equitable to the
property which is owned by the
corporation (13 Am. Jur. 165;
Pascual vs. Oresco, 14 Phil. 83).
In Ganzon & Sons vs. Register of
Deeds, 6 SCRA 373, the rule has
been reiterated that "a
stockholder is not the co-owner of
the corporate property." Since the
property or assets foreclosed
belongs to MMIC, the wrong
committed, if any, is done against
the corporation. There is therefore
no direct injury or direct violation
of the rights of Cabarrus et
al. There is no way, legal or
equitable by which Cabarrus et al,
could recover damages in their
personal capacities even assuming
or just because the foreclosure is
improper or invalid. The
Compromise and Arbitration
Agreement itself and the
elementary principles of
Corporation Law say so.
Therefore, I am constrained to
dissent from the award of moral
damages to Cabarrus.
Neither could I agree to the award
of moral damages to MMIC. The
acts complained of here in which
the Committee based its award of
moral damages to MMIC is the
foreclosure of the various real
estate and chattel mortgages. The
majority of the Committee
believes that these foreclosure
constitute a violation on an
agreement forged between PNB-
DBP, on one hand, and MMIC, on
the other, regarding the
restructuring of the various past
due loans of MMIC to what had
been termed as the Financial
Restructuring Program (FRP).
x x x           x x x          x x x
In this connection, it can readily
be seen and it cannot quite be
denied that MMIC accounts in
PNB-DBP were past due. The
drawing up of the FRP is the best
proof of this. When MMIC
adopted a restructuring program
for its loan, it only meant that
these loans were already due and
unpaid. If these loans were
restructurable because they were
already due and unpaid, they are
likewise "forecloseable". The
option is with the PNB-DBP on
what steps to take.
The mere fact that MMIC
adopted the FRP does not mean
that DBP-PNB lost the option to
foreclose. Neither does it mean
that the FRP is legally binding
and implementable. It must be
pointed that said FRP will, in
effect, supersede the existing and
past due loans of MMIC with
PNB-DBP. It will become the new
loan agreement between the
lenders and the borrowers. As in
all other contracts, there must
therefore be a meeting of the
minds of the parties; the PNB and
DBP must have to validly adopt
and ratify such FRP before they
can be bound by it; before it can
be implemented. In this case, not
an iota of proof has been
presented by the PLAINTIFFS
showing that PNB and DBP
ratified and adopted the FRP.
PLAINTIFFS simply relied on a
legal doctrine of promissory
estoppel to support its allegations
in this regard.
x x x           x x x          x x x
All told, PNB and DBP had the
right to foreclose and were
justified in doing so. But were the
foreclosure legally done or carried
out? Were the requirements of
notice, posting and publication
required by Acts 3135 and 1508
substantially complied with?
x x x           x x x          x x x
I cannot, however, concur with
the for holding that such minor
taint of illegality in the foreclosure
is enough to justify the award of
damages, amounting to
P19,486,118,654.00. "Rules of law
respecting the recovery of
damages are framed with
reference to just rights or both
parties, not merely what may be
right for an injured person to
receive, but also what is just to
compel the other party to pay, to
accord just compensation for the
injury" (Kennings vs. Kline Ind.
602). Following this universally
accepted rule on damage, I do not
believe it is just to compel APT to
pay such huge amount for such
minor technical infraction.
But while I do not agree with this
pronouncement of the Committee,
I nevertheless concur with the
result as far as the disposition of
the award for actual damages is
concerned. I agree that
DEFENDANT APT can, and is
still entitled to, collect the
outstanding obligations of MMIC
to PNB and DBP amounting to
P22,668,537,770.05 with interest
thereon as stipulated in the loan
documents from the date of
foreclosure until the time they are
fully paid. The resultant effect of
such a disposition is that APT can
offset the said obligation due from
 MMIC such that ultimately no
damages will be due and payable
to MMIC. As there may be
damage without injury, there can
be injury without damage (15 Am.
Jur., p. 388). This case is a case
of "injury without damage".
Both parties moved for reconsideration of the "decision" of the
Arbitration Committee. In addition, respondents Cabarrus et al.
filed a motion for clarification and to re-open the case to receive
evidence. In a resolution dated July 26, 1984, with one member
dissenting, the Arbitration Committee denied the motions for
reconsideration of both parties as well as all other pending
motions.
On October 17, 1984, respondents Cabarrus et al. filed directly
with the Regional Trial Court, Makati, Branch 62, in the same
Civil Case No. 9900, a pleading entitled application/motion for
confirmation of arbitral award.
On November 4, 1994, petitioner APT filed an opposition and
motion to vacate judgment, contending that respondents' motion
was improperly filed with the same branch of the court in Civil
Case No. 9900, which was previously dismissed, and that the
motion should have been filed as a separate special proceedings
in the Regional Trial Court to be docketed by the Clerk of Court.
Nonetheless, acting on the application/motion, Judge Roberto C.
Diokno, presiding judge, Regional Trial Court, Makati, Branch
62, on November 28, 1994, issued an order granting plaintiffs'
application confirming the arbitration award, and rendering
judgment as set out in the opening paragraph of this opinion.
On December 12, 1994, petitioner APT received notice of the
lower court's order. On December 27, 1994, petitioner APT filed
a motion for reconsideration. By order dated January 18, 1995,
the trial court denied the motion. On February 7, 1995,
respondents Cabarrus, et al. filed a motion for execution and
appointment of custodian of proceeds of execution. Petitioner
opposed the motion. It is apparently still unresolved.
On February 15, 1995, petitioner APT filed with the Court of
Appeals an original special civil action for certiorari with prayer
for temporary restraining order or preliminary injunction 1 to
annul the two (2) orders of the respondent Regional Trial Court
above-mentioned confirming the arbitral award and denying its
reconsideration.
The issue presented in said petition was whether respondent
Judge Roberto C. Diokno, Regional Trial Court, Makati, Branch
62, had jurisdiction to act on private respondents'
application/motion for confirmation of arbitral award in the
same Civil Case No. 9900, which had been dismissed earlier on
motion of the parties, and thus the court gravely abused its
discretion in confirming the arbitral award.
In its decision promulgated on July 17, 1995, the Court of
Appeals denied due course and dismissed the petition
for certiorari for lack of merit.
Hence, this petition for review filed on September 07, 1995. 2
The petition is impressed with merit.
First, the Regional Trial Court, Makati, Branch 62, did not
validly acquire jurisdiction over the case by respondents' filing
of a mere motion in the same Civil Case No. 9900 because the
case had been dismissed earlier and such dismissal had become
final and unappealable. As heretofore stated, on October 6, 1992,
the parties entered into a compromise and arbitration agreement
expressly providing that they "have agreed to withdraw their
respective claims from the Trial Court and to resolve their
dispute through arbitration by praying to the Trial Court to
issue a compromise judgment based on this Compromise and
Arbitration agreement.
Clearly, the parties had withdrawn the action then pending with
the Regional Trial Court, Makati, Branch 62, in Civil Case No.
9900, and agreed that they would submit their dispute to
arbitration and reduce their respective claims to "purely money
claims", "waiving and foregoing all other forms of reliefs which
they prayed for or could have prayed for in Civil Case No.
9900." The parties "agreed to move for the dismissal of the case,
to transform the reliefs prayed for therein to pure money claims
and submit the controversy to arbitration under Republic Act
(RA) 876 before a committee composed of three members."
In its order dated October 12, 1992, in Civil Case No. 9900, the
trial court presided over by respondent Judge categorically
decreed that "The complaint is hereby dismissed". Such
disposition terminated the case finally and irretrievably disposed
of the same.3 The term "dismissed" has a definite meaning in
law. "A judgment of 'dismissed', without qualifying words
indicating a right to take further proceedings, is presumed to be
dismissed on the merits". 4 The dismissal could not have been a
suspension of action provided for in the arbitration law,
Republic Act No. 876.
Upon the finality of such order of dismissal, the case could no
longer be revived by mere motion. The trial court had lost its
authority over the case. 5 We cite as squarely applicable the
decision where this Court emphatically said "But after the
dismissal has become final through the lapse of the fifteen-day
reglementary period, the only way by which the action may be
resuscitated or 'revived,' is by the institution of a subsequent
action through the filing of another complaint and the payment
of the fees prescribed by law. This is so because upon attainment
of finality of a dismissal through the lapse of said reglementary
period, the Court loses jurisdiction and control over it and can
no longer make any disposition in respect thereof inconsistent
with such dismissal"6 It is true that the confirmation of an
arbitral award is within the jurisdiction over the subject matter
of a regional trial court. Such jurisdiction must be invoked by
proper motion as a special proceedings with notice to the parties
filed in the proper court with the clerk of court (and upon
payment of the prescribed fees). 7
Second, the Arbitration Committee did not actually reach a valid
decision on the subject controversy.
In the purported decision dated November 24, 1994, penned by
Chairman Sarmiento, the Committee ordered petitioner APT to
pay to MMIC the sum of P2,531,635,425.02, with interest
thereon at the legal rate at 6% per annum from August 3, 9 and
24, 1984, pari passu as actual damages; to pay MMIC P13
million, as moral and exemplary damages, and to pay Jesus S.
Cabarrus, Sr. P10 million, as moral damages.
In the concurring and dissenting opinion of Member Elma, he
agreed with the finding on the principal issue submitted for
resolution. However, he dissented as to the manner or method of
computation and amount of actual damages awarded to MMIC.
He submitted that APT should be ordered to pay MMIC the sum
of P2,707,471,123.76, with legal interest thereon per annum from
August 3, 1984, as actual damages.
In his separate opinion, Member Sison stated that he concurred
with the result as far as the disposition of the award of actual
damage is concerned. He agreed that APT is entitled to collect
the outstanding obligations of MMIC to PNB and DBP
amounting to P22,668,537,770.05, with interest as stipulated in
the loan documents from the date of foreclosure until fully paid.
The resultant effect is that APT can offset said obligation due
from MMIC such that ultimately no damages shall be due and
payable to MMIC. He was against the award of moral and
exemplary damages to MMIC and Jesus S. Cabarrus, Sr.
It is obvious that the disposition in Chairman Sarmiento's award
and the concurring and dissenting opinion of Member Elma do
not tally and, hence, because of the dissent of Member Sison, the
Arbitration Committee did not reach a majority decision
constituting a valid judgment or fallo of the Committee.
The powers and duties of boards
and commissions may not be
exercised by the individual
members separately. Their acts
are official only when done by the
members convened in session
upon a concurrence of at least a
majority and with at least a
quorum present.8
to re-open the case and to receive evidence were all DENIED for
lack of merit.
Member Elma dissented from the denial of the parties' motion
for reconsideration, reiterating that MMIC is entitled to actual
damages in the sum of P2,707,471,123.76, with legal interest
thereon from August 3, 1984.
Member Azura (substituting Sison) concurred with the
Chairman in denying respondents' motion for reconsideration,
motion for clarification and motion to re-open the case but
favored granting petitioner's (APT) motion for reconsideration.
WHEREFORE, I vote to GRANT the petition at bench, reverse
the decision of the Court of Appeals9 as well as the orders of the
Regional Trial Court, Makati, Branch 62, in Civil Case No. 9900,
vacate the "decision" of the Arbitration Committee dated
November 24, 1993, and, finally, ENJOIN the trial court from
further acting on the case.

Respondents Cabarrus, et al. considered the disposition as

confusing and incomplete as to the award of damages and
thereby requiring the reception of further evidence as to
necessitate the re-opening of hearings on the case. On May 20,
1994, they filed a motion for clarification seeking answer from
the arbitration committee as to the final amount of actual
damages the MMIC is entitled to, and, on June 9, 1994, they filed
a motion to reopen the case and to receive evidence.

Even the Arbitration Committee's resolution of the various

motions for reconsideration and other reliefs was conflicting. For
Chairman Sarmiento, respondents' motion for reconsideration,
dated December 15, 1993, and petitioner's motion for
reconsideration, dated January 3, 1994, respondents' motion for
clarification dated June 8, 1994, and respondents' urgent motion
G.R. No. 129169 November 17, 1999

NATIONAL IRRIGATION ADMINISTRATION

(NIA), petitioner,
vs.
HONORABLE COURT OF APPEALS (4th Division),
CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION, and HYDRO RESOURCES CONTRACTORS
CORPORATION, respondents.

DAVIDE, JR., C.J.:

In this special civil action for certiorari under Rule 65 of the Rules

of Court, the National Irrigation Administration (hereafter NIA),
seeks to annul and set aside the Resolutions 1 of the Court of Appeals
in CA-GR. SP No. 37180 dated 28 June 1996 and 24 February 1997,
which dismissed respectively NIA's petition for certiorari and
prohibition against the Construction Industry Arbitration
Commission (hereafter CIAC), and the motion for reconsideration
thereafter filed.

Records show that in a competitive bidding held by NIA in August

1978, Hydro Resources Contractors Corporation (hereafter HYDRO)
was awarded Contract MPI-C-2 for the construction of the main civil
works of the Magat River Multi-Purpose Project. The contract
provided that HYDRO would be paid partly in Philippine pesos and
partly in U.S. dollars. HYDRO substantially completed the works
under the contract in 1982 and final acceptance by NIA was made in
1984. HYDRO thereafter determined that it still had an account
receivable from NIA representing the dollar rate differential of the
price escalation for the contract. 2
After unsuccessfully pursuing its case with NIA, HYDRO, on 7
December 1994, filed with the CIAC a Request for Adjudication of
the aforesaid claim. HYDRO nominated six arbitrators for the
arbitration panel, from among whom CIAC appointed Engr. Lauro
M. Cruz. On 6 January 1995, NIA filed its Answer wherein it
questioned the jurisdiction of the CIAC alleging lack of cause of
action, laches and estoppel in view of HYDRO's alleged failure to
avail of its right to submit the dispute to arbitration within the
prescribed period as provided in the contract. On the same date, NIA
filed a Compliance wherein it nominated six arbitrators, from among
whom CIAC appointed Atty. Custodio O. Parlade, and made a
counterclaim for P1,000,000 as moral damages; at least P100,000 as
exemplary damages; P100,000 as attorney's fees; and the costs of the
arbitration. 3
The two designated arbitrators appointed Certified Public
Accountant Joven B. Joaquin as Chairman of the Arbitration Panel.
The parties were required to submit copies of the evidence they
intended to present during the proceedings and were provided the
draft Terms of Reference. 4
At the preliminary conference, NIA through its counsel Atty. Joy C.
Legaspi of the Office of the Government Corporate Counsel,
manifested that it could not admit the genuineness of HYDRO's
evidence since NIA's records had already been destroyed. NIA
requested an opportunity to examine the originals of the documents
which HYDRO agreed to provide. 5
After reaching an accord on the issues to be considered by the
arbitration panel, the parties scheduled the dates of hearings and of
submission of simultaneous memoranda. 6
On 13 March 1995, NIA filed a Motion to Dismiss 7 alleging lack of
jurisdiction over the disputes. NIA contended that there was no
agreement with HYDRO to submit the dispute to CIAC for
arbitration considering that the construction contract was executed in
1978 and the project completed in 1982, whereas the Construction
Industry Arbitration Law creating CIAC was signed only in 1985;
and that while they have agreed to arbitration as a mode of
settlement of disputes, they could not have contemplated submission
of their disputes to CIAC. NIA further argued that records show that
it had not voluntarily submitted itself to arbitration by CIAC
citing TESCO Services, Inc. v. Hon. Abraham Vera, et al., 8 wherein
it was ruled:
CIAC did not acquire jurisdiction over the dispute
arising from the sub-contract agreement between
petitioner TESCO and private respondent LAROSA.
The records do not show that the parties agreed to
submit the disputes to arbitration by the CIAC . . . .
While both parties in the sub-contract had agreed to
submit the matter to arbitration, this was only
between themselves, no request having been made
by both with the CIAC. Hence, as already stated, the
CIAC, has no jurisdiction over the dispute. . . . .
Nowhere in the said article (sub-contract) does it
mention the CIAC, much less, vest jurisdiction with
the CIAC.
On 11 April 1995, the arbitral body issued an order 9 which deferred
the determination of the motion to dismiss and resolved to proceed
with the hearing of the case on the merits as the grounds cited by
NIA did not seem to be "indubitable." NIA filed a motion for
reconsideration of the aforesaid Order. CIAC in denying the motion
for reconsideration ruled that it has jurisdiction over the HYDRO's AN INDORSEMENT OF THE AUDITOR
claim over NIA pursuant to E.O 1008 and that the hearing should GENERAL DECIDING A CONTROVERSY IS A
proceed as scheduled. 10 DECISION BECAUSE ALL THE ELEMENTS
FOR JUDGMENT ARE THERE; THE
On 26 May 1996, NIA filed with the Court of Appeals an original CONTROVERSY, THE AUTHORITY TO
action of certiorari and prohibition with prayer for restraining order DECIDE AND THE DECISION. IF IT IS NOT
and/or injunction, seeking to annul the Orders of the CIAC for APPEALED SEASONABLY, THE SAME
having been issued without or in excess of jurisdiction. In support of BECOMES FINAL.
its petition NIA alleged that:
E
A
NIA HAS TIMELY RAISED THE ISSUE OF
RESPONDENT CIAC HAS NO AUTHORITY OR JURISDICTION. IT DID NOT WAIVE NOR IS IT
JURIDICTION TO HEAR AND TRY THIS ESTOPPED FROM ASSAILING THE SAME.
DISPUTE BETWEEN THE HEREIN PARTIES AS
E.O. NO. 1008 HAD NO RETROACTIVE F
EFFECT.
THE LEGAL DOCTRINE THAT JURISDICTION
B IS DETERMINED BY THE STATUTE IN FORCE
AT THE TIME OF THE COMMENCEMENT OF
THE DISPUTE BETWEEN THE PARTIES THE ACTION DOES NOT ONLY APPLY TO
SHOULD BE SETTLED IN ACCORDANCE THE INSTANT CASE. 11
WITH GC NO. 25, ART. 2046 OF THE CIVIL
CODE AND R.A. NO. 876 THE GOVERNING The Court of Appeals, after finding that there was no grave abuse of
LAWS AT THE TIME CONTRACT WAS discretion on the part of the CIAC in issuing the aforesaid Orders,
EXECUTED AND TERMINATED. dismissed the petition in its Resolution dated 28 June 1996. NIA's
motion for reconsideration of the said decision was likewise denied
C by the Court of Appeals on 26 February 1997.

E.O. NO. 1008 IS A SUBSTANTIVE LAW, NOT On 2 June 1997, NIA filed before us an original action
MERELY PROCEDURAL AS RULED BY THE for certiorari and prohibition with urgent prayer for temporary
CIAC. restraining order and writ of preliminary injunction, praying for the
annulment of the Resolutions of the Court of Appeals dated 28 June
D 1996 and 24 February 1997. In the said special civil action, NIA
merely reiterates the issues it raised before the Court of Appeals. 12
We take judicial notice that on 10 June 1997, CIAC rendered a
decision in the main case in favor of HYDRO. 13 NIA assailed the
said decision with the Court of Appeals. In view of the pendency of
the present petitions before us the appellate court issued a resolution
dated 26 March 1998 holding in abeyance the resolution of the same
until after the instant petitions have been finally decided. 14
At the outset, we note that the petition suffers from a procedural
defect that warrants its outright dismissal. The questioned resolutions
of the Court of Appeals have already become final and executory by
reason of the failure of NIA to appeal therefrom. Instead of filing this
petition for certiorari under Rule 65 of the Rules of Court, NIA
should have filed a timely petition for review under Rule 45.
There is no doubt that the Court of Appeals has jurisdiction over the
special civil action for certiorari under Rule 65 filed before it by
NIA. The original jurisdiction of the Court of Appeals over special
civil actions for certiorari is vested upon it under Section 9(1) of
B.P. 129. This jurisdiction is concurrent with the Supreme
Court 15 and with the Regional Trial Court. 16
Thus, since the Court of Appeals had jurisdiction over the petition
under Rule 65, any alleged errors committed by it in the exercise of
its jurisdiction would be errors of judgment which are reviewable by
timely appeal and not by a special civil action of certiorari. 17 If the
aggrieved party fails to do so within the reglementary period, and the
decision accordingly becomes final and executory, he cannot avail
himself of the writ of certiorari, his predicament being the effect of
his deliberate inaction. 18
The appeal from a final disposition of the Court of Appeals is a
petition for review under Rule 45 and not a special civil action under
Rule 65 of the Rules of Court, now Rule 45 and Rule 65,
respectively, of the 1997 Rules of Civil Procedure. 19 Rule 45 is clear
that decisions, final orders or resolutions of the Court of Appeals in
any case, i.e., regardless of the nature of the action or proceedings
involved, may be appealed to this Court by filing a petition for
review, which would be but a continuation of the appellate process
over the original case. 20 Under Rule 45 the reglementary period to
appeal is fifteen (15) days from notice of judgment or denial of
motion for reconsideration. 21
In the instant case the Resolution of the Court of Appeals dated 24
February 1997 denying the motion for reconsideration of its
Resolution dated 28 June 1997 was received by NIA on 4 March
1997. Thus, it had until 19 March 1997 within which to perfect its
appeal. NIA did not appeal. What it did was to file an original action
for certiorari before this Court, reiterating the issues and arguments
it raised before the Court of Appeals.
For the writ of certiorari under Rule 65 of the Rules of Court to
issue, a petitioner must show that he has no plain, speedy and
adequate remedy in the ordinary course of law against its perceived
grievance. 22 A remedy is considered "plain, speedy and adequate" if
it will promptly relieve the petitioner from the injurious effects of the
judgment and the acts of the lower court or agency. 23 In this case,
appeal was not only available but also a speedy and adequate
remedy.
Obviously, NIA interposed the present special civil action
of certiorari not because it is the speedy and adequate remedy but to
make up for the loss, through omission or oversight, of the right of
ordinary appeal. It is elementary that the special civil action
of certiorari is not and cannot be a substitute for an appeal, where
the latter remedy is available, as it was in this case. A special civil
action under Rule 65 of the Rules of Court will not be a cure for
failure to timely file a petition for review on certiorari under Rule
45 of the Rules of Court. 24 Rule 65 is an independent action that
cannot be availed of as a substitute for the lost remedy of an ordinary
appeal, including that under Rule 45, 25 especially if such loss or
lapse was occasioned by one's own neglect or error in the choice of
remedies. 26
For obvious reasons the rules forbid recourse to a special civil action
for certiorari if appeal is available, as the remedies of appeal
and certiorari are mutually exclusive and not alternative or
successive. 27 Although there are exceptions to the rules, none is
present in the case at bar. NIA failed to show circumstances that will
justify a deviation from the general rule as to make available a
petition for certiorari in lieu of taking an appropriate appeal.
Based on the foregoing, the instant petition should be dismissed.
In any case, even if the issue of technicality is disregarded and
recourse under Rule 65 is allowed, the same result would be reached
since a review of the questioned resolutions of the CIAC shows that
it committed no grave abuse of discretion.
Contrary to the claim of NIA, the CIAC has jurisdiction over the
controversy. Executive Order No. 1008, otherwise known as the
"Construction Industry Arbitration Law" which was promulgated on
4 February 1985, vests upon CIAC original and exclusive
jurisdiction over disputes arising from, or connected with contracts
entered into by parties involved in construction in the Philippines,
whether the dispute arises before or after the completion of the
contract, or after the abandonment or breach thereof. The disputes
may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the
same to voluntary arbitration. 28
The complaint of HYDRO against NIA on the basis of the contract
executed between them was filed on 7 December 1994, during the
effectivity of E.O. No. 1008. Hence, it is well within the jurisdiction
of CIAC. The jurisdiction of a court is determined by the law in
force at the time of the commencement of the action. 29
NIA's argument that CIAC had no jurisdiction to arbitrate on
contract which preceded its existence is untenable. E.O. 1008 is clear
that the CIAC has jurisdiction over all disputes arising from or
connected with construction contract whether the dispute arises
before or after the completion of the contract. Thus, the date the
parties entered into a contract and the date of completion of the
same, even if these occurred before the constitution of the CIAC, did
not automatically divest the CIAC of jurisdiction as long as the
dispute submitted for arbitration arose after the constitution of the
CIAC. Stated differently, the jurisdiction of CIAC is over the
dispute, not the contract; and the instant dispute having arisen when
CIAC was already constituted, the arbitral board was actually
exercising current, not retroactive, jurisdiction. As such, there is no
need to pass upon the issue of whether E.O. No. 1008 is a
substantive or procedural statute.
NIA also contended that the CIAC did not acquire jurisdiction over
the dispute since it was only HYDRO that requested for arbitration.
It asserts that to acquire jurisdiction over a case, as provided under
E.O. 1008, the request for arbitration filed with CIAC should be
made by both parties, and hence the request by one party is not
enough.
It is undisputed that the contracts between HYDRO and NIA
contained an arbitration clause wherein they agreed to submit to
arbitration any dispute between them that may arise before or after
the termination of the agreement. Consequently, the claim of
HYDRO having arisen from the contract is arbitrable. NIA's reliance
with the ruling on the case of Tesco Services Incorporated
v. Vera, 30 is misplaced.
The 1988 CIAC Rules of Procedure which were applied by this
Court in Tesco case had been duly amended by CIAC Resolutions
No. 2-91 and 3-93, Section 1 of Article III of which read as follows:
Submission to CIAC Jurisdiction — An arbitration
clause in a construction contract or a submission to
arbitration of a construction contract or a submission
to arbitration of a construction dispute shall be
 deemed an agreement to submit an existing or future
controversy to CIAC jurisdiction, notwithstanding
the reference to a different arbitration institution or
arbitral body in such contract or submission. When a
contract contains a clause for the submission of a
future controversy to arbitration, it is not necessary
for the parties to enter into a submission agreement
before the claimant may invoke the jurisdiction of
CIAC.
Under the present Rules of Procedure, for a particular construction
contract to fall within the jurisdiction of CIAC, it is merely required
that the parties agree to submit the same to voluntary arbitration.
Unlike in the original version of Section 1, as applied in the Tesco
case, the law as it now stands does not provide that the parties should
agree to submit disputes arising from their agreement specifically to
the CIAC for the latter to acquire jurisdiction over the same. Rather,
it is plain and clear that as long as the parties agree to submit to
voluntary arbitration, regardless of what forum they may choose,
their agreement will fall within the jurisdiction of the CIAC, such
that, even if they specifically choose another forum, the parties will
not be precluded from electing to submit their dispute before the
CIAC because this right has been vested upon each party by law, i.e.,
E.O. No. 1008. 31
Moreover, it is undeniable that NIA agreed to submit the dispute for
arbitration to the CIAC. NIA through its counsel actively
participated in the arbitration proceedings by filing an answer with
counterclaim, as well as its compliance wherein it nominated
arbitrators to the proposed panel, participating in the deliberations
on, and the formulation of, the Terms of Reference of the arbitration
proceeding, and examining the documents submitted by HYDRO
after NIA asked for the originals of the said documents. 32
As to the defenses of laches and prescription, they are evidentiary in
nature which could not be established by mere allegations in the
pleadings and must not be resolved in a motion to dismiss. Those
issues must be resolved at the trial of the case on the merits wherein
both parties will be given ample opportunity to prove their respective
claims and defenses. 33 Under the rule 34 the deferment of the
resolution of the said issues was, thus, in order. An allegation of
prescription can effectively be used in a motion to dismiss only when
the complaint on its face shows that indeed the action has already
prescribed. 35 In the instant case, the issue of prescription and laches
cannot be resolved on the basis solely of the complaint. It must,
however, be pointed that under the new rules, 36 deferment of the
resolution is no longer permitted. The court may either grant the
motion to dismiss, deny it, or order the amendment of the pleading.
WHEREFORE, the instant petition is DISMISSED for lack of merit.
The Court of Appeals is hereby DIRECTED to proceed with
reasonable dispatch in the disposition of C.A. G.R. No. 44527 and
include in the resolution thereof the issue of laches and prescription.
G.R. No. 155001            May 5, 2003
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN,
JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE,
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, LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
MACROASIA-EUREST SERVICES, INC., MACROASIA- SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON
MENZIES AIRPORT SERVICES CORPORATION, and SAMAHANG MANGGAGAWA SA PALIPARAN NG
MIASCOR CATERING SERVICES CORPORATION, PILIPINAS (SMPP), petitioners,
MIASCOR AIRCRAFT MAINTENANCE CORPORATION, vs.
and MIASCOR LOGISTICS CORPORATION, petitioners-in- PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
intervention, INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
x---------------------------------------------------------x COMMUNICATIONS, SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of
G.R. No. 155547 May 5, 2003 Transportation and Communications, respondents.

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and PUNO, J.:

CONSTANTINO G. JARAULA, petitioners,
vs. Petitioners and petitioners-in-intervention filed the instant petitions
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., for prohibition under Rule 65 of the Revised Rules of Court seeking
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, to prohibit the Manila International Airport Authority (MIAA) and
DEPARTMENT OF TRANSPORTATION AND the Department of Transportation and Communications (DOTC) and
COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS its Secretary from implementing the following agreements executed
AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, by the Philippine Government through the DOTC and the MIAA and
in his capacity as Head of the Department of Transportation and the Philippine International Air Terminals Co., Inc. (PIATCO): (1)
Communications, and SECRETARY SIMEON A. the Concession Agreement signed on July 12, 1997, (2) the
DATUMANONG, in his capacity as Head of the Department of Amended and Restated Concession Agreement dated November 26,
Public Works and Highways, respondents, 1999, (3) the First Supplement to the Amended and Restated
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. Concession Agreement dated August 27, 1999, (4) the Second
ZIALCITA, WILLY BUYSON VILLARAMA, PROSPERO C. Supplement to the Amended and Restated Concession Agreement
NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST dated September 4, 2000, and (5) the Third Supplement to the
ABAYON, and BENASING O. MACARANBON, respondents- Amended and Restated Concession Agreement dated June 22, 2001
intervenors, (collectively, the PIATCO Contracts).

x---------------------------------------------------------x The facts are as follows:

G.R. No. 155661 May 5, 2003 In August 1989, the DOTC engaged the services of Aeroport
de Paris (ADP) to conduct a comprehensive study of the
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. Ninoy Aquino International Airport (NAIA) and determine
VALENCIA, MA. TERESA V. GAERLAN, LEONARDO DE 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 Asia's 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 AEDC's 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 of P50,000.00 (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 proponent's
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
proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where
certain clarifications were made. Upon the request of prospective
bidder People's 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 PBAC's 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." Paircargo's queries and the PBAC's
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 corporation's
current authorized capital stock just for prequalification
purposes.
In prequalification, the agency is interested in one's 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 they'd (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 People's 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 Paircargo's 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 AEDC's 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 Concessionaire's 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 Malacañang Palace, stated that she
will not "honor (PIATCO) contracts which the Executive Branch's
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."6 To 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 providers7 having separate concession contracts with MIAA
and continuing 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."9 Accordingly, it has been held that the
interest of a person assailing 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.11 They cite provisions of the PIATCO Contracts
which 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 Imus13 and Gonzales v.
Raquiza14 wherein this Court held that appropriation 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,15 this 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."16 Further, "insofar as taxpayers' suits are
concerned . . . (this Court) is not devoid of discretion as to whether
or not it should be entertained."17 As such ". . . even if, strictly
speaking, they [the petitioners] are not 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." 18 In view of the serious legal
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 Court's 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
country's 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,20 even after
finding 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 court's decision denying petitioner's 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, 21 held that to tolerate the
splitting of proceedings by 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.22 Thus, we ruled that 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, PIATCO's
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.24 Further, the 1994 Implementing Rules and
Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
xxx           xxx           xxx
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 proponent's
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 P9,183,650,000.00,25 the Paircargo
Consortium had to show to the 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.
Paircargo's 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.26 PAGS' Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its
equity for the project.27 Security Bank's 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.
xxx           xxx           xxx
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, 29 an amount 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 bidder's 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 bidder's 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 PIATCO's 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
proponent's 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
proponent's 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.,34 this 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."38 Thus, under the 1997 Concession
Agreement, ground handling 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.
xxx           xxx           xxx
(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, 41 as
shown 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.42 However, under the draft
Concession 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
Dollars44 while payments to the 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 latter's
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 PIATCO's 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.
xxx           xxx           xxx
(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 GRP's 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 PIATCO's 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.45 It has been held that the
three 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.46 These are the basic 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. 47 Any
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
xxx           xxx           xxx
(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
GRP's 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. 49 These
amounts include "all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related
expenses."50 This obligation of the Government to pay PIATCO's
creditors upon PIATCO's 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
PIATCO's unpaid creditors operate NAIA IPT III, the Government is
still at a risk of being liable to PIATCO's creditors should the latter
be unable to designate a qualified operator within the prescribed
period.51 In effect, whatever option the Government chooses to
take in the event of PIATCO's failure to fulfill its loan
obligations, the Government is still at a risk of assuming
PIATCO's outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCO's debts if
the unpaid creditors would be able to designate a qualified operator
within the period provided for in the contract. Thus, the
Government's 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,52 provided 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.53 This is but logical for if 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 PIATCO's 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
xxx           xxx           xxx
(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:
xxx           xxx           xxx
(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
Concessionaire's [PIATCO] rights and obligations
under this Agreement to a transferee which is
qualified under sub-clause (viii) below;
xxx           xxx           xxx
(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;
xxx           xxx           xxx
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
PIATCO's debt that the Government would have to pay as a result of
PIATCO's 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 PIATCO's loans not
only to its Senior Lenders but all other entities who provided
PIATCO funds or services upon PIATCO's default in its loan
obligation with its Senior Lenders. The fact that the Government's
obligation to pay PIATCO's lenders for the latter's 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 PIATCO's debts is triggered
by PIATCO's 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 PIATCO's 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
PIATCO's 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
government's 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
PIATCO's 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.56 The failure to 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." 57 The BOT Law clearly and
strictly prohibits direct 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. 58 To
declare the 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
59
projects"  which are necessary for national growth and
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." 60 The
duration of the emergency itself is the determining factor as to how
long the temporary takeover by the government would last. 61 The
temporary takeover by 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."63 Article XII, section 17
of the 1987 Constitution envisions 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."64 Its exercise therefore must not 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.65 Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.
V passenger terminals. This, however, does not prevent MIAA to use
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."66 The 1987 Constitution strictly regulates
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.67 Nonetheless, a
determination must first be made as to whether public 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. 68 This is with 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. 69 As such,
upon commencement of PIATCO's operation of NAIA IPT III,
Terminals 1 and 2 of NAIA would cease to function as international
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 latter's operation as an
international passenger terminal.70 The right granted to PIATCO
to exclusively operate NAIA IPT III would be for a period of
twenty-five (25) years from the In-Service Date 71 and renewable for
another twenty-five (25) years at the option of the
government.72 Both the 1997 Concession 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
Build–Operate-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. 75 While it is the declared
policy of the BOT Law to encourage private sector participation by
"providing a climate of minimum government regulations," 76 the
same does not mean that Government must 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. PIATCO's 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
xxx           xxx           xxx
(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
Concessionaire's 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 III's 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 Section 4.04(c) in relation to Section 1.06 of the ARCA, which
nugatory. PIATCO, by the mere expedient of claiming an exclusive constitute a direct government guarantee expressly prohibited by,
right to operate, cannot require the Government to break its among others, the BOT Law and its Implementing Rules and
contractual obligations to the service providers. In contrast to the Regulations are also null and void. The Supplements, being
arrastre and stevedoring service providers in the case of Anglo-Fil accessory contracts to the ARCA, are likewise null and void.
Trading Corporation v. Lazaro78 whose contracts consist of
temporary hold-over permits, the affected service providers in the WHEREFORE, the 1997 Concession Agreement, the Amended and
cases at bar, have a valid and binding contract with the Government, Restated Concession Agreement and the Supplements thereto are set
through MIAA, whose period of effectivity, as well as the other aside for being null and void.
terms and conditions thereof, cannot be violated.
SO ORDERED.
In fine, the efficient functioning of NAIA IPT III is imbued with
public interest. The provisions of the 1997 Concession Agreement Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez,
and the ARCA did not strip government, thru the MIAA, of its right Austria-Martinez, Corona, and Carpio-Morales, JJ., concur.
to supervise the operation of the whole NAIA complex, including Vitug, J., see separate (dissenting) opinion.
NAIA IPT III. As the primary government agency tasked with the Panganiban, J., please see separate opinion.
job,79 it is MIAA's responsibility to ensure that whoever by contract Quisumbing, J., no jurisdiction, please see separate opinion of J.
is given the right to operate NAIA IPT III will do so within the Vitug in which he concurs.
bounds of the law and with due regard to the rights of third parties Carpio, J., no part.
and above all, the interest of the public. Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.
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
SEPARATE OPINIONS
VITUG, J.:
This Court is bereft of jurisdiction to hear the petitions at bar. The
Constitution provides that the Supreme Court shall exercise original
jurisdiction over, among other actual controversies, petitions
for certiorari, prohibition, mandamus, quo warranto, and habeas
corpus.1 The cases in question, although denominated to be petitions
for prohibition, actually pray for the nullification of the PIATCO
contracts and to restrain respondents from implementing said
agreements for being illegal and unconstitutional.
Section 2, Rule 65 of the Rules of Court states:
"When the proceedings of any tribunal, corporation, board,
officer or person, whether exercising judicial, quasi-judicial
or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to
lack or excess of jurisdiction, and there is no appeal or any
other plain, speedy and adequate remedy in the ordinary
course of law, a person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty
and praying that judgment be rendered commanding the
respondent to desist from further proceedings in the action or
matter specified therein, or otherwise granting such
incidental reliefs as law and justice may require."
The rule is explicit. A petition for prohibition may be filed against a
tribunal, corporation, board, officer or person, exercising judicial,
quasi-judicial or ministerial functions. What the petitions seek from
respondents do not involve judicial, quasi-judicial or ministerial
functions. In prohibition, only legal issues affecting the jurisdiction
of the tribunal, board or officer involved may be resolved on the
basis of undisputed facts.2 The parties allege, respectively,
contentious evidentiary facts. It would be difficult, if not anomalous,
to decide the jurisdictional issue on the basis of the contradictory
factual submissions made by the parties. 3 As the Court has so often
exhorted, it is not a trier of facts.
The petitions, in effect, are in the nature of actions for declaratory
relief under Rule 63 of the Rules of Court. The Rules provide that
any person interested under a contract may, before breach or
violation thereof, bring an action in the appropriate Regional Trial
Court to determine any question of construction or validity arising,
and for a declaration of his rights or duties thereunder. 4 The Supreme
Court assumes no jurisdiction over petitions for declaratory relief
which are cognizable by regional trial courts. 5
As I have so expressed in Tolentino vs. Secretary of
Finance,6 reiterated in Santiago vs. Guingona, Jr.7 , the Supreme
Court should not be thought of as having been tasked with the
awesome responsibility of overseeing the entire bureaucracy.
Pervasive and limitless, such as it may seem to be under the 1987
Constitution, judicial power still succumbs to the paramount doctrine
of separation of powers. The Court may not at good liberty intrude,
in the guise of sovereign imprimatur, into every affair of
government. What significance can still then remain of the time-
honored and widely acclaimed principle of separation of powers if, at
every turn, the Court allows itself to pass upon at will the disposition
of a co-equal, independent and coordinate branch in our system of
government. I dread to think of the so varied uncertainties that such
an undue interference can lead to.
Accordingly, I vote for the dismissal of the petition.
Quisumbing, and Azcuna, JJ., concur.
PANGANIBAN, J.:
The five contracts for the construction and the operation of Ninoy
Aquino International Airport (NAIA) Terminal III, the subject of the
consolidated Petitions before the Court, are replete with outright
violations of law, public policy and the Constitution. The only proper
thing to do is declare them all null and void ab initio and let the chips
fall where they may. Fiat iustitia ruat coelum.
The facts leading to this controversy are already well presented in
the ponencia. I shall not burden the readers with a retelling thereof.
Instead, I will cut to the chase and directly address the two sets of gut
issues:
1. The first issue is procedural: Does the Supreme Court have
original jurisdiction to hear and decide the Petitions? Corollarily, do
petitioners have locus standi and should this Court decide the cases
without any mandatory referral to arbitration?
2. The second one is substantive in character: Did the subject
contracts violate the Constitution, the laws, and public policy to such
an extent as to render all of them void and inexistent?
My answer to all the above questions is a firm "Yes."
The Procedural Issue:
Jurisdiction, Standing and Arbitration
Definitely and surely, the issues involved in these Petitions are
clearly of transcendental importance and of national interest. The
subject contracts pertain to the construction and the operation of the
country's premiere international airport terminal - an ultramodern
world-class public utility that will play a major role in the country's
economic development and serve to project a positive image of our
country abroad. The five build-operate-&-transfer (BOT) contracts,
while entailing the investment of billions of pesos in capital and the
availment of several hundred millions of dollars in loans, contain
provisions that tend to establish a monopoly, require the
disbursements of public funds sans appropriations, and provide
government guarantees in violation of statutory prohibitions, as well
as other provisions equally offensive to law, public policy and the
Constitution. Public interest will inevitably be affected thereby.
Thus, objections to these Petitions, grounded upon (a) the hierarchy
of courts, (b) the need for arbitration prior to court action, and (c) the
alleged lack of sufficient personality, standing or interest, being in
the main procedural matters, must now be set aside, as they have
been in past cases. This Court must be permitted to perform its
constitutional duty of determining whether the other agencies of
government have acted within the limits of the Constitution and the
laws, or if they have gravely abused the discretion entrusted to them. 1
Hierarchy of Courts
The Court has, in the past, held that questions relating to gargantuan
government contracts ought to be settled without delay. 2 This
holding applies with greater force to the instant cases. Respondent
Piatco is partly correct in averring that petitioners can obtain relief
from the regional trial courts via an action to annul the contracts.
Nevertheless, the unavoidable consequence of having to await the
rendition and the finality of any such judgment would be a prolonged
state of uncertainty that would be prejudicial to the nation, the parties
and the general public. And, in light of the feared loss of jobs of the
petitioning workers, consequent to the inevitable pretermination of
contracts of the petitioning service providers that will follow upon
the heels of the impending opening of NAIA Terminal III, the need
for relief is patently urgent, and therefore, direct resort to this Court
through the special civil action of prohibition is thus justified. 3
Contrary to Piatco's argument that the resolution of the issues raised
in the Petitions will require delving into factual questions, 4 I submit
that their disposition ultimately turns on questions of law. 5 Further,
many of the significant and relevant factual questions can be easily
addressed by an examination of the documents submitted by the
parties. In any event, the Petitions raise some novel questions
involving the application of the amended BOT Law, which this
Court has seen fit to tackle.
Arbitration
Should the dispute be referred to arbitration prior to judicial
recourse? Respondent Piatco claims that Section 10.02 of the
Amended and Restated Concession Agreement (ARCA) provides for
arbitration under the auspices of the International Chamber of
Commerce to settle any dispute or controversy or claim arising in
connection with the Concession Agreement, its amendments and
supplements. The government disagrees, however, insisting that
there can be no arbitration based on Section 10.02 of the ARCA,
since all the Piatco contracts are void ab initio. Therefore, all
contractual provisions, including Section 10.02 of the ARCA, are
likewise void, inexistent and inoperative. To support its stand, the
government cites Chavez v. Presidential Commission on Good
Government:6 "The void agreement will not be rendered operative by
the parties' alleged performance (partial or full) of their respective
prestations. A contract that violates the Constitution and the law is
null and void ab initio and vests no rights and creates no
obligations. It produces no legal effect at all."
As will be discussed at length later, the Piatco contracts are indeed
void in their entirety; thus, a resort to the aforesaid provision on
arbitration is unavailing. Besides, petitioners and petitioners-in-
intervention have pointed out that, even granting arguendo that the
arbitration clause remained a valid provision, it still cannot bind
them inasmuch as they are not parties to the Piatco contracts. And in
the final analysis, it is unarguable that the arbitration process
provided for under Section 10.02 of the ARCA, to be undertaken by
a panel of three (3) arbitrators appointed in accordance with the
Rules of Arbitration of the International Chamber of Commerce, will
not be able to address, determine and definitively resolve the
constitutional and legal questions that have been raised in the
Petitions before us.
Locus Standi
Given this Court's previous decisions in cases of similar import, no
one will seriously doubt that, being taxpayers and members of the
House of Representatives, Petitioners Baterina et al. have locus
standi to bring the Petition in GR No. 155547. In Albano v.
Reyes,7 this Court held that the petitioner therein, suing as a citizen,
taxpayer and member of the House of Representatives, was
sufficiently clothed with standing to bring the suit questioning the
validity of the assailed contract. The Court cited the fact that public
interest was involved, in view of the important role of the Manila
International Container Terminal (MICT) in the country's economic
development and the magnitude of the financial consideration. This,
notwithstanding the fact that expenditure of public funds was not
required under the assailed contract.
In the cases presently under consideration, petitioners' personal and
substantial interest in the controversy is shown by the fact that
certain provisions in the Piatco contracts create obligations on the
part of government (through the DOTC and the MIAA) to disburse
public funds without prior congressional appropriations.
Petitioners thus correctly assert that the injury to them has a twofold
aspect: (1) they are adversely affected as taxpayers on account of the
illegal disbursement of public funds; and (2) they are
prejudiced qua legislators, since the contractual provisions requiring
the government to incur expenditures without appropriations also
operate as limitations upon the exclusive power and prerogative of
Congress over the public purse. As members of the House of
Representatives, they are actually deprived of discretion insofar as
the inclusion of those items of expenditure in the budget is
concerned. To prevent such encroachment upon the legislative
privilege and obviate injury to the institution of which they are
members, petitioners-legislators have locus standi to bring suit.
Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus
possessed of standing to challenge the illegal disbursement of public
funds. Messrs. Agan et al., in particular, are employees (or
representatives of employees) of various service providers that have
(1) existing concession agreements with the MIAA to provide airport
services necessary to the operation of the NAIA and (2) service
agreements to furnish essential support services to the international
airlines operating at the NAIA.
On the other hand, Messrs. Lopez et al. are employees of the MIAA.
These petitioners (Messrs. Agan et al. and Messrs. Lopez et al.) are
confronted with the prospect of being laid off from their jobs and
losing their means of livelihood when their employer-companies are
forced to shut down or otherwise retrench and cut back on
manpower. Such development would result from the imminent
implementation of certain provisions in the contracts that tend
toward the creation of a monopoly in favor of Piatco, its subsidiaries
and related companies.
Petitioners-in-intervention are service providers in the business of
furnishing airport-related services to international airlines and
passengers in the NAIA and are therefore competitors of Piatco as
far as that line of business is concerned. On account of provisions in
the Piatco contracts, petitioners-in-intervention have to enter into a
written contract with Piatco so as not to be shut out of NAIA
Terminal III and barred from doing business there. Since there is no
provision to ensure or safeguard free and fair competition, they are
literally at its mercy. They claim injury on account of their
deprivation of property (business) and of the liberty to contract,
without due process of law.
And even if petitioners and petitioners-in-intervention were not
sufficiently clothed with legal standing, I have at the outset already
established that, given its impact on the public and on national
interest, this controversy is laden with transcendental importance and
constitutional significance. Hence, I do not hesitate to adopt the same
position as was enunciated in Kilosbayan v. Guingona Jr.8 that "in
cases of transcendental importance, the Court may relax the
standing requirements and allow a suit to prosper even when there is
no direct injury to the party claiming the right of judicial review."9
The Substantive Issue:
Violations of the Constitution and the Laws
From the Outset, the Bidding Process Was Flawed and Tainted
After studying the documents submitted and arguments advanced by
the parties, I have no doubt that, right at the outset, Piatco was not
qualified to participate in the bidding process for the Terminal III
project, but was nevertheless permitted to do so. It even won the
bidding and was helped along by what appears to be a series of
collusive and corrosive acts.
The build-operate-and-transfer (BOT) project for the NAIA
Passenger Terminal III comes under the category of an "unsolicited
proposal," which is the subject of Section 4-A of the BOT
Law.10 The unsolicited proposal was originally submitted by the
Asia's Emerging Dragon Corporation (AEDC) to the Department of
Transportation and Communications (DOTC) and the Manila
International Airport Authority (MIAA), which reviewed and
approved the proposal.
The draft of the concession agreement as negotiated between AEDC
and DOTC/MIAA was endorsed to the National Economic
Development Authority (NEDA-ICC), which in turn reviewed it on
the basis of its scope, economic viability, financial indicators and
risks; and thereafter approved it for bidding.
The DOTC/MIAA then prepared the Bid Documents, incorporating
therein the negotiated Draft Concession Agreement, and published
invitations for public bidding, i.e., for the submission of comparative
or competitive proposals. Piatco's predecessor-in-interest, the
Paircargo Consortium, was the only company that submitted a
competitive bid or price challenge.
At this point, I must emphasize that the law requires the award of a
BOT project to the bidder that has satisfied the minimum
requirements; and met the technical, financial, organizational and
legal standards provided in the BOT Law. Section 5 of this statute
states:
"Sec. 5. Public bidding of projects. - . . .
"In the 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 this Act, has submitted
the lowest bid and most favorable terms for the project,
based on the present value of its proposed tolls, fees, rentals
and charges over a fixed term for the facility to be
constructed, rehabilitated, operated and maintained
according to the prescribed minimum design and
performance standards, plans and specifications. . . ."
(Emphasis supplied.)
The same provision requires that the price challenge via public
bidding "must be conducted under a two-envelope/two-stage system:
the first envelope to contain the technical proposal and the second
envelope to contain the financial proposal." Moreover, the 1994
Implementing Rules and Regulations (IRR) provide that only those
bidders that have passed the prequalification stage are permitted to
have their two envelopes reviewed.
In other words, prospective bidders must prequalify by submitting
their prequalification documents for evaluation; and only the pre-
qualified bidders would be entitled to have their bids opened,
evaluated and appreciated. On the other hand, disqualified bidders
are to be informed of the reason for their disqualification. This
procedure was confirmed and reiterated in the Bid Documents,
which I quote thus: "Prequalified proponents will be considered
eligible to move to second stage technical proposal evaluation. The
second and third envelopes of pre-disqualified proponents will be
returned."11
Aside from complying with the legal and technical requirements
(track record or experience of the firm and its key personnel), a
project proponent desiring to prequalify must also demonstrate its
financial capacity to undertake the project. To establish such
capability, a proponent must prove that it is able to raise the
minimum amount of equity required for the project and to procure
the loans or financing needed for it. Section 5.4(c) of the 1994 IRR
provides:
"Sec. 5.4. Prequalification Requirements. - To pre-qualify, a
project proponent must comply with the following
requirements:
x x x           x x x           x x x
"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 prequalification, 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 prequalification, the minimum amount of equity
needed. . . . ." (Italics supplied)
Since the minimum amount of equity for the project was set at 30
percent12 of the minimum project cost of US$350 million, the
minimum amount of equity required of any proponent stood at
US$105 million. Converted to pesos at the exchange rate then of
P26.239 to US$1.00 (as quoted by the Bangko Sentral ng Pilipinas),
the peso equivalent of the minimum equity was P2,755,095,000.
However, the combined equity or net worth of the Paircargo
consortium stood at only P558,384,871.55.13 This amount was only
slightly over 6 percent of the minimum project cost and very much
short of the required minimum equity, which was equivalent to 30
percent of the project cost. Such deficiency should have immediately
caused the disqualification of the Paircargo consortium. This matter
was brought to the attention of the Prequalification and Bidding
Committee (PBAC).
Notwithstanding the glaring deficiency, DOTC Undersecretary
Primitivo C. Cal, concurrent chair of the PBAC, declared in a
Memorandum dated 14 October 1996 that "the Challenger
(Paircargo consortium) was found to have a combined net worth of
P3,926,421,242.00 that could support a project costing
approximately P13 billion." To justify his conclusion, he asserted:
"It is not a requirement that the networth must be `unrestricted'. To
impose this as a requirement now will be nothing less than unfair."
He further opined, "(T)he networth reflected in the Financial
Statement should not be taken as the amount of money to be used to
answer the required thirty (30%) percent 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 (Sec. 12.1 of IRR of the BOT Law) but not for
prequalification (Sec. 5.4 of same document)."
On the basis of the foregoing dubious declaration, the Paircargo
consortium was deemed prequalified and thus permitted to proceed
to the other stages of the bidding process.
By virtue of the prequalified status conferred upon the Paircargo,
Undersecretary Cal's findings in effect relieved the consortium of the
need to comply with the financial capability requirement imposed by
the BOT Law and IRR. This position is unmistakably and squarely at
odds with the Supreme Court's consistent doctrine emphasizing the
strict application of pertinent rules, regulations and guidelines for the
public bidding process, in order to place each bidder - actual or
potential - on the same footing. Thus, it is unarguably irregular and
contrary to the very concept of public bidding to permit a variance
between the conditions under which bids are invited and those under
which proposals are submitted and approved.
Republic v. Capulong,14 teaches that if one bidder is relieved from
having to conform to the conditions that impose some duty upon it,
that bidder is not contracting in fair competition with those bidders
that propose to be bound by all conditions. The essence of public
bidding is, after all, an opportunity for fair competition and a basis
for the precise comparison of bids. 15 Thus, each bidder must bid
under the same conditions; and be subject to the same guidelines,
requirements and limitations. The desired result is to be able to
determine the best offer or lowest bid, all things being equal.
Inasmuch as the Paircargo consortium did not possess the minimum
equity equivalent to 30 percent of the minimum project cost, it
should not have been prequalified or allowed to participate further in
the bidding. The Prequalification and Bidding Committee (PBAC)
should therefore not have opened the two envelopes of the
consortium containing its technical and financial proposals; required
AEDC to match the consortium's bid; 16 or awarded the Concession
Agreement to the consortium's successor-in-interest, Piatco.
As there was effectively no public bidding to speak of, the entire
bidding process having been flawed and tainted from the very outset,
therefore, the award of the concession to Paircargo's successor Piatco
was void, and the Concession Agreement executed with the latter
was likewise void ab initio. For this reason, Piatco cannot and should
not be allowed to benefit from that Agreement. 17
AEDC Was Deprived of the Right to Match PIATCO's Price
Challenge
In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal
declared that, for purposes of matching the price challenge of Piatco,
AEDC as originator of the unsolicited proposal would be permitted
access only to the schedule of proposed Annual Guaranteed
Payments submitted by Piatco, and not to the latter's financial and
technical proposals that constituted the basis for the price challenge
in the first place. This was supposedly in keeping with Section 11.6
of the 1994 IRR, which provides that proprietary information is to be
respected, protected and treated with utmost confidentiality, and is
therefore not to form part of the bidding/tender and related
documents.
This pronouncement, I believe, was a grievous misapplication of the
mentioned provision. The "proprietary information" referred to in
Section 11.6 of the IRR pertains only to the proprietary information
of the originator of an unsolicited proposal, and not to those
belonging to a challenger. The reason for the protection accorded
proprietary information at all is the fact that, according to Section 4-
A of the BOT Law as amended, a proposal qualifies as an
"unsolicited proposal" when it pertains to a project that involves "a
new concept or technology", and/or a project that is not on the
government's list of priority projects.
To be considered as utilizing a new concept or technology, a project
must involve the possession of exclusive rights (worldwide or
regional) over a process; or possession of intellectual property rights
over a design, methodology or engineering concept. 18 Patently, the
intent of the BOT Law is to encourage individuals and groups to
come up with creative innovations, fresh ideas and new technology.
Hence, the significance and necessity of protecting proprietary
information in connection with unsolicited proposals. And to make
the encouragement real, the law also extends to such individuals and
groups what amounts to a "right of first refusal" to undertake the
project they conceptualized, involving the use of new technology or
concepts, through the mechanism of matching a price challenge.
A competing bid is never just any figure conjured from out of the
blue; it is arrived at after studying economic, financial, technical and
other, factors; it is likewise based on certain assumptions as to the
nature of the business, the market potentials, the probable demand
for the product or service, the future behavior of cost items, political
and other risks, and so on. It is thus self-evident that in order to be
able to intelligently match a bid or price challenge, a bidder must be
given access to the assumptions and the calculations that went into
crafting the competing bid.
In this instance, the financial and technical proposals of Piatco would
have provided AEDC with the necessary information to enable it to
make a reasonably informed matching bid. To put it more simply, a
bidder unable to access the competitor's assumptions will never
figure out how the competing bid came about; requiring him to
"counter-propose" is like having him shoot at a target in the dark
while blindfolded.
By withholding from AEDC the challenger's financial and technical
proposals containing the critical information it needed,
Undersecretary Cal actually and effectively deprived AEDC of the
ability to match the price challenge. One could say that AEDC did
not have the benefit of a "level playing field." It seems to me,
though, that AEDC was actually shut out of the game altogether.
At the end of the day, the bottom line is that the validity and the
propriety of the award to Piatco had been irreparably impaired.
Delayed Issuance of the Notice of Award Violated the BOT Law
and the IRR
Section 9.5 of the IRR requires that the Notice of Award must
indicate the time frame within which the winner of the bidding (and
therefore the prospective awardee) shall submit the prescribed
performance security, proof of commitment of equity contributions,
and indications of sources of financing (loans); and, in the case of
joint ventures, an agreement showing that the members are jointly
and severally responsible for the obligations of the project proponent
under the contract.
The purpose of having a definite and firm timetable for the
submission of the aforementioned requirements is not only to prevent
delays in the project implementation, but also to expose and weed
out unqualified proponents, who might have unceremoniously
slipped through the earlier prequalification process, by compelling
them to put their money where their mouths are, so to speak.
Nevertheless, this provision can be easily circumvented by merely
postponing the actual issuance of the Notice of Award, in order to
give the favored proponent sufficient time to comply with the
requirements. Hence, to avert or minimize the manipulation of the
post-bidding process, the IRR not only set out the precise sequence
of events occurring between the completion of the evaluation of the
technical bids and the issuance of the Notice of Award, but also
specified the timetables for each such event. Definite allowable
extensions of time were provided for, as were the consequences of a
failure to meet a particular deadline.
In particular, Section 9.1 of the 1994 IRR prescribed that within 30
calendar days from the time the second-stage evaluation shall have
been completed, the Committee must come to a decision whether or
not to award the contract and, within 7 days therefrom, the Notice of
Award must be approved by the head of agency or local government
unit (LGU) concerned, and its issuance must follow within another 7
days thereafter.
Section 9.2 of the IRR set the procedure applicable to projects
involving substantial government undertakings as follows: Within 7
days after the decision to award is made, the draft contract shall be
submitted to the ICC for clearance on a no-objection basis. If the
draft contract includes government undertakings already previously
approved, then the submission shall be for information only.
However, should there be additional or new provisions different
from the original government undertakings, the draft shall have to be
reviewed and approved. The ICC has 15 working days to act thereon,
and unless otherwise specified, its failure to act on the contract
within the specified time frame signifies that the agency or LGU may
proceed with the award. The head of agency or LGU shall approve
the Notice of Award within seven days of the clearance by the ICC
on a no-objection basis, and the Notice itself has to be issued within
seven days thereafter.
The highly regulated time-frames within which the agents of
government were to act evinced the intent to impose upon them the
duty to act expeditiously throughout the process, to the end that the
project be prosecuted and implemented without delay. This regulated
scenario was likewise intended to discourage collusion and
substantially reduce the opportunity for agents of government to
abuse their discretion in the course of the award process.
Despite the clear timetables set out in the IRR, several lengthy and
still-unexplained delays occurred in the award process, as can be
observed from the presentation made by the counsel for public
respondents,19 quoted hereinbelow:
"11 Dec. 1996 - The Paircargo Joint Venture was informed
by the PBAC that AEDC failed to match and that
negotiations preparatory to Notice of Award should be
commenced. This was the decision to award that should
have commenced the running of the 7-day period to approve
the Notice of Award, as per Section 9.1 of the IRR, or to
submit the draft contract to the ICC for approval
conformably with Section 9.2.
 "01 April 1997 - The PBAC resolved that a copy of the final
draft of the Concession Agreement be submitted to the
NEDA for clearance on a no-objection basis. This resolution
came more than 3 months too late as it should have been
made on the 20th of December 1996 at the latest.
"16 April 1997 - The PBAC resolved that the period of
signing the Concession Agreement be extended by 15 days.
"18 April 1997 - NEDA approved the Concession
Agreement. Again this is more than 3 months too late as the
NEDA's decision should have been released on the 16th of
January 1997 or fifteen days after it should have been
submitted to it for review.
"09 July 1997 - The Notice of Award was issued to
PIATCO. Following the provisions of the IRR, the Notice of
Award should have been issued fourteen days after NEDA's
approval, or the 28th of January 1997. In any case, even if it
were to be assumed that the release of NEDA's approval on
the 18th of April was timely, the Notice of Award should
have been issued on the 9th of May 1997. In both cases,
therefore, the release of the Notice of Award occurred in a
decidedly less than timely fashion."
This chronology of events bespeaks an unmistakable disregard, if not
disdain, by the persons in charge of the award process for the time
limitations prescribed by the IRR. Their attitude flies in the face of
this Court's solemn pronouncement in Republic v. Capulong,20 that
"strict observance of the rules, regulations and guidelines of the
bidding process is the only safeguard to a fair, honest and
competitive public bidding."
From the foregoing, the only conclusion that can possibly be drawn
is that the BOT law and its IRR were repeatedly violated with
unmitigated impunity - and by agents of government, no less! On
account of such violation, the award of the contract to Piatco, which
undoubtedly gained time and benefited from the delays, must be
deemed null and void from the beginning.
Further Amendments Resulted in a Substantially Different
Contract, Awarded Without Public Bidding
But the violations and desecrations did not stop there. After the
PBAC made its decision on December 11, 1996 to award the
contract to Piatco, the latter negotiated changes to the Contract
bidded out and ended up with what amounts to a substantially new
contract without any public bidding. This Contract was subsequently
further amended four more times through negotiation and without
any bidding. Thus, the contract actually executed between Piatco and
DOTC/MIAA on July 12, 1997 (the Concession Agreement or "CA")
differed from the contract bidded out (the draft concession agreement
or "DCA") in the following very significant respects:
1. The CA inserted stipulations creating a monopoly in favor
of Piatco in the business of providing airport-related services
for international airlines and passengers. 21
2. The CA provided that government is to answer for Piatco's
unpaid loans and debts (lumped under the term Attendant
Liabilities) in the event Piatco fails to pay its senior
lenders.22
3. The CA provided that in case of termination of the
contract due to the fault of government, government shall
pay all expenses that Piatco incurred for the project plus the
appraised value of the Terminal.23
4. The CA imposed new and special obligations on
government, including delivery of clean possession of the
site for the terminal; acquisition of additional land at the
government's expense for construction of road networks
required by Piatco's approved plans and specifications; and
assistance to Piatco in securing site utilities, as well as all
necessary permits, licenses and authorizations. 24
5. Where Section 3.02 of the DCA requires government to
refrain from competing with the contractor with respect to
the operation of NAIA Terminal III, Section 3.02(b) of the
CA excludes and prohibits everyone, including government,
from directly or indirectly competing with Piatco, with
respect to the operation of, as well as operations in, NAIA
Terminal III. Operations in is sufficiently broad to
encompass all retail and other commercial business
enterprises operating within Terminal III, inclusive of the
businesses of providing various airport-related services to
international airlines, within the scope of the prohibition.
6. Under Section 6.01 of the DCA, the following fees are
subject to the written approval of MIAA: lease/rental
charges, concession privilege fees for passenger services,
food services, transportation utility concessions,
groundhandling, catering and miscellaneous concession fees,
porterage fees, greeter/well-wisher fees, carpark fees,
advertising fees, VIP facilities fees and others. Moreover,
adjustments to the groundhandling fees, rentals and
porterage fees are permitted only once every two years and
in accordance with a parametric formula, per DCA Section
6.03. However, the CA as executed with Piatco provides in
Section 6.06 that all the aforesaid fees, rentals and charges
may be adjusted without MIAA's approval or intervention.
Neither are the adjustments to these fees and charges subject
to or limited by any parametric formula.25
7. Section 1.29 of the DCA provides that the terminal fees,
aircraft tacking fees, aircraft parking fees, check-in counter
fees and other fees are to be quoted and paid in Philippine
pesos. But per Section 1.33 of the CA, all the aforesaid fees
save the terminal fee are denominated in US Dollars.
8. Under Section 8.07 of the DCA, the term attendant
liabilities refers to liabilities pertinent to NAIA Terminal III,
such as payment of lease rentals and performance of other
obligations under the Land Lease Agreement; the obligations
under the Tenant Agreements; and payment of all taxes, fees,
charges and assessments of whatever kind that may be
imposed on NAIA Terminal III or parts thereof. But in
Section 1.06 of the CA, Attendant Liabilities refers
to unpaid debts of Piatco: "All amounts recorded and from
time to time outstanding in the books of (Piatco) 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 [Piatco] to its suppliers,
contractors and subcontractors."
9. Per Sections 8.04 and 8.06 of the DCA, government may,
on account of the contractors breach, rescind the contract
and select one of four options: (a) take over the terminal and
assume all its attendant liabilities; (b) allow the contractor's
creditors to assign the Project to another entity acceptable to
DOTC/MIAA; (c) pay the contractor rent for the facilities
and equipment the DOTC may utilize; or (d) purchase the
terminal at a price established by independent appraisers.
Depending on the option selected, government may take
immediate possession and control of the terminal and its
operations. Government will be obligated to compensate the
contractor for the "equivalent or proportionate contract costs
actually disbursed," but only where government is the one in
breach of the contract. But under Section 8.06(a) of the CA,
whether on account of Piatco's breach of contract or its
inability to pay its creditors, government is obliged to either
 (a) take over Terminal III and assume all of Piatco's debts or
(b) permit the qualified unpaid creditors to be substituted in
place of Piatco or to designate a new operator. And in the
event of government's breach of contract, Piatco may compel
it to purchase the terminal at fair market value, per Section
8.06(b) of the CA.
10. Under the DCA, any delay by Piatco in the payment of
the amounts due the government constitutes breach of
contract. However, under the CA, such delay does not
necessarily constitute breach of contract, since Piatco is
permitted to suspend payments to the government in order to
first satisfy the claims of its secured creditors, per Section
8.04(d) of the CA.
It goes without saying that the amendment of the Contract bidded out
(the DCA or draft concession agreement) - in such substantial
manner, without any public bidding, and after the bidding process
had been concluded on December 11, 1996 - is violative of public
policy on public biddings, as well as the spirit and intent of the BOT
Law. The whole point of going through the public bidding exercise
was completely lost. Its very rationale was totally subverted by
permitting Piatco to amend the contract for which public bidding
had already been concluded. Competitive bidding aims to obtain the
best deal possible by fostering transparency and preventing
favoritism, collusion and fraud in the awarding of contracts. That is
the reason why procedural rules pertaining to public bidding demand
strict observance.26
In a relatively early case, Caltex v. Delgado Brothers,27 this Court
made it clear that substantive amendments to a contract for which a
public bidding has already been finished should only be awarded
after another public bidding:
"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."28
The aforementioned case dealt with the unauthorized amendment of
a contract executed after public bidding; in the situation before us,
the amendments were made also after the bidding, but prior to
execution. Be that as it may, the same rationale underlying Caltex
applies to the present situation with equal force. Allowing the
winning bidder to renegotiate the contract for which the bidding
process has ended is tantamount to permitting it to put in anything it
wants. Here, the winning bidder (Piatco) did not even bother to wait
until after actual execution of the contract before rushing to amend it.
Perhaps it believed that if the changes were made to a contract
already won through bidding (DCA) instead of waiting until it is
executed, the amendments would not be noticed or discovered by the
public.
In a later case, Mata v. San Diego,29 this Court reiterated its ruling as
follows:
"It is true that modification of government contracts, after
the same had been awarded after a public bidding, is not
allowed because such modification serves to nullify the
effects of the bidding and whatever advantages the
Government had secured thereby and may also result in
manifest injustice to the other bidders. This prohibition,
 however, refers to a change in vital and essential particulars
of the agreement which results in a substantially new
contract."
Piatco's counter-argument may be summed up thus: There was
nothing in the 1994 IRR that prohibited further negotiations and
eventual amendments to the DCA even after the bidding had been
concluded. In fact, PBAC Bid Bulletin No. 3 states: "[A]mendments
to the Draft Concession Agreement shall be issued from time to time.
Said amendments will only cover items that would not materially
affect the preparation of the proponent's proposal."
I submit that accepting such warped argument will result in
perverting the policy underlying public bidding. The BOT Law
cannot be said to allow the negotiation of contractual stipulations
resulting in a substantially new contract after the bidding process and
price challenge had been concluded. In fact, the BOT Law, in
recognition of the time, money and effort invested in an unsolicited
proposal, accords its originator the privilege of matching the
challenger's bid.
Section 4-A of the BOT Law specifically refers to a
"lower price proposal" by a competing bidder; and to the right of the
original proponent "to match the price" of the challenger. Thus, only
the price proposals are in play. The terms, conditions and
stipulations in the contract for which public bidding has been
concluded are understood to remain intact and not be subject to
further negotiation. Otherwise, the very essence of public bidding
will be destroyed - there will be no basis for an exact comparison
between bids.
Moreover, Piatco misinterpreted the meaning behind PBAC Bid
Bulletin No. 3. The phrase amendments . . . from time to time refers
only to those amendments to the draft concession agreement issued
by the PBAC prior to the submission of the price challenge; it
certainly does not include or permit amendments negotiated for and
introduced after the bidding process, has been terminated.
Piatco's Concession Agreement Was Further Amended, (ARCA)
Again Without Public Bidding
Not satisfied with the Concession Agreement, Piatco - once more
without bothering with public bidding - negotiated with government
for still more substantial changes. The result was the Amended and
Restated Concession Agreement (ARCA) executed on November 26,
1998. The following changes were introduced:
1. The definition of Attendant Liabilities was further
amended with the result that the unpaid loans of Piatco, for
which government may be required to answer, are no longer
limited to only those loans recorded in Piatco's books or
loans whose proceeds were actually used in the Terminal III
project.30
2. Although the contract may be terminated due to breach by
Piatco, it will not be liable to pay the government any
Liquidated Damages if a new operator is designated to take
over the operation of the terminal.31
3. The Liquidated Damages which government becomes
liable for in case of its breach of contract were substantially
increased.32
4. Government's right to appoint a comptroller for Piatco in
case the latter encounters liquidity problems was deleted. 33
5. Government is made liable for Incremental and
Consequential Costs and Losses in case it fails to comply or
cause any third party under its direct or indirect control to
comply with the special obligations imposed on
government.34
6. The insurance policies obtained by Piatco covering the
terminal are now required to be assigned to the Senior
Lenders as security for the loans; previously, their proceeds
were to be used to repair and rehabilitate the facility in case
of damage.35
7. Government bound itself to set the initial rate of the
terminal fee, to be charged when Terminal III begins
operations, at an amount higher than US$20.36
8. Government waived its defense of the illegality of the
contract and even agreed to be liable to pay damages to
Piatco in the event the contract was declared illegal. 37
9. Even though government may be entitled to terminate the
ARCA on account of breach by Piatco, government is still
liable to pay Piatco the appraised value of Terminal III or the
Attendant Liabilities, if the termination occurs before the In-
Service Date.38 This condition contravenes the BOT Law
provision on termination compensation.
10. Government is obligated to take the administrative action
required for Piatco's imposition, collection and application of
all Public Utility Revenues.39 No such obligation existed
previously.
11. Government is now also obligated to perform and cause
other persons and entities under its direct or indirect control
to perform all acts necessary to perfect the security interests
to be created in favor of Piatco's Senior Lenders. 40 No such
obligation existed previously.
12. DOTC/MIAA's right of intervention in instances where
Piatco's Non-Public Utility Revenues become exorbitant or
excessive has been removed.41
13. The illegality and unenforceability of the ARCA or any
of its material provisions was made an event of default on
the part of government only, thus constituting a ground for
Piatco to terminate the ARCA.42
14. Amounts due from and payable by government under the
contract were made payable on demand - net of taxes, levies,
imposts, duties, charges or fees of any kind except as
required by law.43
15. The Parametric Formula in the contract, which is utilized
to compute for adjustments/increases to the public utility
revenues (i.e., aircraft parking and tacking fees, check-in
counter fee and terminal fee), was revised to permit Piatco to
input its more costly short-term borrowing rates instead of
the longer-terms rates in the computations for adjustments,
with the end result that the changes will redound to its
greater financial benefit.
16. The Certificate of Completion simply deleted the
successful performance-testing of the terminal facility in
accordance with defined performance standards as a pre-
condition for government's acceptance of the terminal
facility.44
In sum, the foregoing revisions and amendments as embodied in the
ARCA constitute very material alterations of the terms and
conditions of the CA, and give further manifestly undue advantage to
Piatco at the expense of government. Piatco claims that the changes
to the CA were necessitated by the demands of its foreign lenders.
However, no proof whatsoever has been adduced to buttress this
claim.
In any event, it is quite patent that the sum total of the
aforementioned changes resulted in drastically weakening the
position of government to a degree that seems quite excessive, even
from the standpoint of a businessperson who regularly transacts with
banks and foreign lenders, is familiar with their mind-set, and
understands what motivates them. On the other hand, whatever it
was that impelled government officials concerned to accede to those
grossly disadvantageous changes, I can only hazard a guess.
There is no question in my mind that the ARCA was unauthorized
and illegal for lack of public bidding and for being patently
disadvantageous to government.
The Three Supplements Imposed New Obligations on Government,
Also Without Prior Public Bidding
After Piatco had managed to breach the protective rampart of public
bidding, it recklessly went on a rampage of further assaults on the
ARCA.
The First Supplement Is as Void as the ARCA
In the First Supplement ("FS") executed on August 27, 1999, the
following changes were made to the ARCA:
1. The amounts payable by Piatco to government
were reduced by allowing additional exceptions to the Gross
Revenues in which government is supposed to participate. 45
2. Made part of the properties which government is obliged
to construct and/or maintain and keep in good repair are (a)
the access road connecting Terminals II and III - the
construction of this access road is the obligation of Piatco, in
lieu of its obligation to construct an Access Tunnel
connecting Terminals II and III; and (b) the taxilane and
taxiway - these are likewise part of Piatco's obligations,
since they are part and parcel of the project as described in
Clause 1.3 of the Bid Documents .46
3. The MIAA is obligated to provide funding for the
maintenance and repair of the airports and facilities owned
or operated by it and by third persons under its control. It
will also be liable to Piatco for the latter's losses, expenses
and damages as well as liability to third persons, in case
MIAA fails to perform such obligations. In addition, MIAA
will also be liable for the incremental and consequential
costs of the remedial work done by Piatco on account of the
former's default.47
4. The FS also imposed on government ten (10) "Additional
Special Obligations," including the following:
(a) Working for the removal of the general aviation
traffic from the NAIA airport complex48
(b) Providing through MIAA the land required by
Piatco for the taxilane and one taxiway at no cost to
Piatco49
(c) Implementing the government's existing storm
drainage master plan50
(d) Coordinating with DPWH the financing, the
implementation and the completion of the following
works before the In-Service Date: three left-turning
overpasses (EDSA to Tramo St., Tramo to Andrews
Ave., and Manlunas Road to Sales Ave.); 51 and a
road upgrade and improvement program involving
widening, repair and resurfacing of Sales Road,
Andrews Avenue and Manlunas Road; improvement
of Nichols Interchange; and removal of squatters
along Andrews Avenue.52
 (e) Dealing directly with BCDA and the Phil. Air
Force in acquiring additional land or right of way for
the road upgrade and improvement program.53
5. Government is required to work for the immediate
reversion to MIAA of the Nayong Pilipino National Park.54
6. Government's share in the terminal fees collected was
revised from a flat rate of P180 to 36 percent thereof;
together with government's percentage share in the gross
revenues of Piatco, the amount will be remitted to
government in pesos instead of US dollars. 55 This
amendment enables Piatco to benefit from the further
erosion of the peso-dollar exchange rate, while preventing
government from building up its foreign exchange reserves.
7. All payments from Piatco to government are now to be
invoiced to MIAA, and payments are to accrue to the latter's
exclusive benefit.56 This move appears to be in support of the
funds MIAA advanced to DPWH.
I must emphasize that the First Supplement is void in two
respects. First, it is merely an amendment to the ARCA, upon which
it is wholly dependent; therefore, since the ARCA is void, inexistent
and not capable of being ratified or amended, it follows that the FS
too is void, inexistent and inoperative. Second, even
assuming arguendo that the ARCA is somehow remotely valid,
nonetheless the FS, in imposing significant new obligations upon
government, altered the fundamental terms and stipulations of the
ARCA, thus necessitating a public bidding all over again. That the
FS was entered into sans public bidding renders it utterly void and
inoperative.
The Second Supplement Is Similarly Void and Inexistent
The Second Supplement ("SS") was executed between the
government and Piatco on September 4, 2000. It calls for Piatco,
acting not as concessionaire of NAIA Terminal III but as a public
works contractor, to undertake - in the government's stead - the
clearing, removal, demolition and disposal of improvements,
subterranean obstructions and waste materials at the project site. 57
The scope of the works, the procedures involved, and the obligations
of the contractor are provided for in Parts II and III of the SS.
Section 4.1 sets out the compensation to be paid, listing specific rates
per cubic meter of materials for each phase of the work - excavation,
leveling, removal and disposal, backfilling and dewatering. The
amounts collectible by Piatco are to be offset against the Annual
Guaranteed Payments it must pay government.
Though denominated as Second Supplement, it was nothing less than
an entirely new public works contract. Yet it, too, did not undergo
any public bidding, for which reason it is also void and inoperative.
Not surprisingly, Piatco had to subcontract the works to a certain
Wintrack Builders, a firm reputedly owned by a former high-ranking
DOTC official. But that is another story altogether.
The Third Supplement Is Likewise Void and Inexistent
The Third Supplement ("TS"), executed between the government and
Piatco on June 22, 2001, passed on to the government certain
obligations of Piatco as Terminal III concessionaire, with respect to
the surface road connecting Terminals II and III.
By way of background, at the inception of and forming part of the
NAIA Terminal III project was the proposed construction of an
access tunnel crossing Runway 13/31, which. would connect
Terminal III to Terminal II. The Bid Documents in Section
4.1.2.3[B][i] declared that the said access tunnel was subject to
further negotiation; but for purposes of the bidding, the proponent
should submit a bid for it as well. Therefore, the tunnel was
supposed to be part and parcel of the Terminal III project.
However, in Section 5 of the First Supplement, the parties declared
that the access tunnel was not economically viable at that time. In
lieu thereof, the parties agreed that a surface access road (now called
the T2-T3 Road) was to be constructed by Piatco to connect the two
terminals. Since it was plainly in substitution of the tunnel, the
surface road construction should likewise be considered part and
parcel of the same project, and therefore part of Piatco's obligation as
well. While the access tunnel was estimated to cost about P800
million, the surface road would have a price tag in the vicinity of
about P100 million, thus producing significant savings for Piatco.
Yet, the Third Supplement, while confirming that Piatco would
construct the T2-T3 Road, nevertheless shifted to government some
of the obligations pertaining to the former, as follows:
1. Government is now obliged to remove at its own expense
all tenants, squatters, improvements and/or waste materials
on the site where the T2-T3 road is to be constructed. 58 There
was no similar obligation on the part of government insofar
as the access tunnel was concerned.
2. Should government fail to carry out its obligation as above
described, Piatco may undertake it on government's behalf,
subject to the terms and conditions (including compensation
payments) contained in the Second Supplement.59
3. MIAA will answer for the operation, maintenance and
repair of the T2-T3 Road.60
The TS depends upon and is intended to supplement the ARCA as
well as the First Supplement, both of which are void and inexistent
and not capable of being ratified or amended. It follows that the TS
is likewise void, inexistent and inoperative. And even if,
hypothetically speaking, both ARCA and FS are valid, still, the Third
Supplement - imposing as it does significant new obligations upon
government - would in effect alter the terms and stipulations of the
ARCA in material respects, thus necessitating another public
bidding. Since the TS was not subjected to public bidding, it is
consequently utterly void as well. At any rate, the TS created new
monetary obligations on the part of government, for which there
were no prior appropriations. Hence it follows that the same is void
ab initio.
In patiently tracing the progress of the Piatco contracts from their
inception up to the present, I noted that the whole process was
riddled with significant lapses, if not outright irregularity and
wholesale violations of law and public policy. The rationale of
beginning at the beginning, so to speak, will become evident when
the question of what to do with the five Piatco contracts is discussed
later on.
In the meantime, I shall take up specific, provisions or changes in the
contracts and highlight the more prominent objectionable features.
Government Directly Guarantees Piatco Debts
Certainly the most discussed provision in the parties' arguments is
the one creating an unauthorized, direct government guarantee of
Piatco's obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited
proposals, such as the NAIA Terminal III Project, may be accepted
by government provided inter alia that no direct government
guarantee, subsidy or equity is required. In short, such guarantee is
prohibited in unsolicited proposals. Section 2(n) of the same
legislation defines direct government guarantee as "an agreement
whereby the government or any of its agencies or local government
units (will) assume responsibility for the repayment of debt directly
incurred by the project proponent in implementing the project in case
of a loan default."
Both the CA and the ARCA have provisions that undeniably create
such prohibited government guarantee. Section 4.04 (c)(iv) to (vi) of
the ARCA, which is similar to Section 4.04 of the CA, provides thus:
"(iv) that if Concessionaire 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 . . .;
(v) . . . the Senior Lenders may after written notification to
GRP, transfer the Concessionaire's rights and obligations to a
transferee . . .;
(vi) if the Senior Lenders . . . are unable to . . . effect a
transfer . . ., then GRP and the Senior Lenders shall endeavor
. . . to enter into any other arrangement relating to the
Development Facility . . . If no agreement relating to the
Development Facility is arrived at by GRP and the Senior
Lenders within the said 180-day period, then at the end
thereof the Development Facility shall be transferred by the
Concessionaire to GRP or its designee and GRP shall make a
termination payment to Concessionaire equal to the
Appraised Value (as hereinafter defined) of the Development
Facility or the sum of the Attendant Liabilities, if
greater. . . ."
In turn, the term Attendant Liabilities is defined in Section 1.06 of
the ARCA as follows:
"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 to Senior
Lenders or any other persons or entities who have provided,
loaned or advanced funds or provided financial facilities to
Concessionaire for the Project, 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 to its professional consultants and
advisers, suppliers, contractors and sub-contractors."
Government's agreement to pay becomes effective in the event of
a default by Piatco on any of its loan obligations to the Senior
Lenders, and the amount to be paid by government is the greater of
either the Appraised Value of Terminal III or the aggregate amount
of the moneys owed by Piatco - whether to the Senior Lenders or to
other entities, including its suppliers, contractors and subcontractors.
In effect, therefore, this agreement already constitutes the prohibited
assumption by government of responsibility for repayment of
Piatco's debts in case of a loan default. In fine, a direct government
guarantee.
It matters not that there is a roundabout procedure prescribed by
Section 4.04(c)(iv), (v) and (vi) that would require, first, an attempt
(albeit unsuccessful) by the Senior Lenders to transfer Piatco's rights
to a transferee of their choice; and, second, an effort (equally
unsuccessful) to "enter into any other arrangement" with the
government regarding the Terminal III facility, before government is
required to make good on its guarantee. What is abundantly clear is
the fact that, in the devious labyrinthine process detailed in the
aforesaid section, it is entirely within the Senior Lenders' power,
prerogative and control - exercisable via a mere refusal or
inability to agree upon "a transferee" or "any other arrangement"
regarding the terminal facility - to push the process forward to the
ultimate contractual cul-de-sac, wherein government will be
compelled to abjectly surrender and make good on its guarantee of
payment.
Piatco also argues that there is no proviso requiring government to
pay the Senior Lenders in the event of Piatco's default. This is
literally true, in the sense that Section 4.04(c)(vi) of ARCA speaks of
government making the termination payment to Piatco, not to the
lenders. However, it is almost a certainty that the Senior Lenders will
already have made Piatco sign over to them, ahead of time, its right
to receive such payments from government; and/or they may already
have had themselves appointed its attorneys-in-fact for the purpose
of collecting and receiving such payments.
Nevertheless, as petitioners-in-intervention pointed out in their
Memorandum,61 the termination payment is to be made to Piatco, not
to the lenders; and there is no provision anywhere in the contract
documents to prevent it from diverting the proceeds to its own
benefit and/or to ensure that it will necessarily use the same to pay
off the Senior Lenders and other creditors, in order to avert the
foreclosure of the mortgage and other liens on the terminal facility.
Such deficiency puts the interests of government at great risk.
Indeed, if the unthinkable were to happen, government would be
paying several hundreds of millions of dollars, but the mortgage
liens on the facility may still be foreclosed by the Senior Lenders just
the same.
Consequently, the Piatco contracts are also objectionable for
grievously failing to adequately protect government's interests. More
accurately, the contracts would consistently weaken and do away
with protection of government interests. As such, they are therefore
grossly lopsided in favor of Piatco and/or its Senior Lenders.
While on this subject, it is well to recall the earlier discussion
regarding a particularly noticeable alteration of the concept of
"Attendant Liabilities." In Section 1.06 of the CA defining the term,
the Piatco debts to be assumed/paid by government were qualified by
the phrases recorded and from time to time outstanding in the books
of the Concessionaire and actually used for the project. These
phrases were eliminated from the ARCA's definition of Attendant
Liabilities.
Since no explanation has been forthcoming from Piatco as to the
possible justification for such a drastic change, the only conclusion,
possible is that it intends to have all of its debts covered by the
guarantee, regardless of whether or not they are disclosed in its
books. This has particular reference to those borrowings which were
obtained in violation of the loan covenants requiring Piatco to
maintain a minimum 70:30 debt-to-equity ratio, and even if the loan
proceeds were not actually used for the project itself.
This point brings us back to the guarantee itself. In Section 4.04(c)
(vi) of ARCA, the amount which government has guaranteed to pay
as termination payment is the greater of either (i) the Appraised
Value of the terminal facility or (ii) the aggregate of the Attendant
Liabilities. Given that the Attendant Liabilities may include
practically any Piatco debt under the sun, it is highly conceivable
that their sum may greatly exceed the appraised value of the facility,
and government may end up paying very much more than the real
worth of Terminal III. (So why did government have to bother with
public bidding anyway?)
In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is
diametrically at odds with the spirit and the intent of the BOT Law.
The law meant to mobilize private resources (the private sector) to
take on the burden and the risks of financing the construction,
operation and maintenance of relevant infrastructure and
development projects for the simple reason that government is not in
a position to do so. By the same token, government guarantee was
prohibited, since it would merely defeat the purpose and raison d'être
of a build-operate-and-transfer project to be undertaken by the
private sector.
To the extent that the project proponent is able to obtain loans to
fund the project, those risks are shared between the project proponent
on the one hand, and its banks and other lenders on the other. But
where the proponent or its lenders manage to cajol or coerce the
government into extending a guarantee of payment of the loan
obligations, the risks assumed by the lenders are passed right back to
government. I cannot understand why, in the instant case,
government cheerfully assented to re-assuming the risks of the
project when it gave the prohibited guarantee and thus simply
negated the very purpose of the BOT Law and the protection it gives
the government.
Contract Termination Provisions in the Piatco Contracts Are Void
The BOT Law as amended provides for contract termination as
follows:
"Sec. 7. Contract Termination. - In the event that a project is
revoked, cancelled or terminated by the government through
no fault of the project proponent or by mutual agreement, the
Government shall compensate the said project proponent for
its actual expenses incurred in the project plus a reasonable
rate of return thereon not exceeding that stated in the
contract as of the date of such revocation, cancellation or
termination: Provided, That the interest of the Government
in this instances [sic] shall be duly insured with the
Government Service Insurance System or any other
insurance entity duly accredited by the Office of the
Insurance Commissioner: Provided, finally, That the cost of
the insurance coverage shall be included in the terms and
conditions of the bidding referred to above.
"In the event that the government defaults on certain major
obligations in the contract and such failure is not remediable
or if remediable shall remain unremedied for an
unreasonable length of time, the project proponent/contractor
may, by prior notice to the concerned national government
agency or local government unit specifying the turn-over
date, terminate the contract. The project
proponent/contractor shall be reasonably compensated by the
Government for equivalent or proportionate contract cost as
defined in the contract."
The foregoing statutory provision in effect provides for the following
limited instances when termination compensation may be allowed:
1. Termination by the government through no fault of the
project proponent
2. Termination upon the parties' mutual agreement
3. Termination by the proponent due to government's default
on certain major contractual obligations
To emphasize, the law does not permit compensation for the project
proponent when contract termination is due to the proponent's own
fault or breach of contract.
This principle was clearly violated in the Piatco Contracts. The
ARCA stipulates that government is to pay termination
compensation to Piatco even when termination is initiated by
government for the following causes:
"(i) Failure of Concessionaire to finish the Works in all
material respects in accordance with the Tender Design and
the Timetable;
(ii) Commission by Concessionaire of a material breach of
this Agreement . . .;
(iii) . . . a change in control of Concessionaire arising from
the sale, assignment, transfer or other disposition of capital
 stock which results in an ownership structure violative of
statutory or constitutional limitations;
(iv) A pattern of continuing or repeated non-compliance,
willful violation, or non-performance of other terms and
conditions hereof which is hereby deemed a material breach
of this Agreement . . ."62
As if that were not bad enough, the ARCA also inserted into Section
8.01 the phrase "Subject to Section 4.04." The effect of this insertion
is that in those instances where government may terminate the
contract on account of Piatco's breach, and it is nevertheless required
under the ARCA to make termination compensation to Piatco even
though unauthorized by law, such compensation is to be equivalent
to the payment amount guaranteed by government - either a) the
Appraised Value of the terminal facility or (b) the aggregate of the
Attendant Liabilities, whichever amount is greater!
Clearly, this condition is not in line with Section 7 of the BOT Law.
That provision permits a project proponent to recover the actual
expenses it incurred in the prosecution of the project plus a
reasonable rate of return not in excess of that provided in the
contract; or to be compensated for the equivalent or proportionate
contract cost as defined in the contract, in case the government is in
default on certain major contractual obligations.
Furthermore, in those instances where such termination
compensation is authorized by the BOT Law, it is indispensable that
the interest of government be duly insured. Section 5.08 the ARCA
mandates insurance coverage for the terminal facility; but all
insurance policies are to be assigned, and all proceeds are payable, to
the Senior Lenders. In brief, the interest being secured by such
coverage is that of the Senior Lenders, not that of government. This
can hardly be considered compliance with law.
In essence, the ARCA provisions on termination compensation result
in another unauthorized government guarantee, this time in favor of
Piatco.
A Prohibited Direct Government Subsidy, Which at the Same Time
Is an Assault on the National Honor
Still another contractual provision offensive to law and public policy
is Section 8.01(d) of the ARCA, which is a "bolder and badder"
version of Section 8.04(d) of the CA.
It will be recalled that Section 4-A of the BOT Law as amended
prohibits not only direct government guarantees, but likewise
a direct government subsidy for unsolicited proposals. Section 13.2.
b. iii. of the 1999 IRR defines a direct government subsidy as
encompassing "an agreement whereby the Government . . .
will . . . postpone any payments due from the proponent."
Despite the statutory ban, Section 8.01 (d) of the ARCA provides
thus:
"(d) The provisions of Section 8.01(a) notwithstanding, and
for the purpose of preventing a disruption of the operations
in the Terminal and/or Terminal Complex, in the event that
at any time Concessionaire is of the reasonable opinion that
it shall be unable to meet a payment obligation owed to the
Senior Lenders, Concessionaire shall give prompt notice to
GRP, through DOTC/MIAA and to the Senior Lenders. In
such circumstances, the Senior Lenders (or the Senior
Lenders' Representative) may ensure that after making
provision for administrative expenses and depreciation, the
cash resources of Concessionaire shall first be used and
applied to meet all payment obligations owed to the Senior
Lenders. Any excess cash, after meeting such payment
obligations, shall be earmarked for the payment of all sums
payable by Concessionaire to GRP under this Agreement. If
 by reason of the foregoing GRP should be unable to collect
in full all payments due to GRP under this Agreement, then
the unpaid balance shall be payable within a 90-day grace
period counted from the relevant due date, with interest per
annum at the rate equal to the average 91-day Treasury Bill
Rate as of the auction date immediately preceding the
relevant due date. If payment is not effected by
Concessionaire within the grace period, then a spread of five
(5%) percent over the applicable 91-day Treasury Bill Rate
shall be added on the unpaid amount commencing on the
expiry of the grace period up to the day of full payment.
When the temporary illiquidity of Concessionaire shall have
been corrected and the cash position of Concessionaire
should indicate its ability to meet its maturing obligations,
then the provisions set forth under this Section 8.01(d) shall
cease to apply. The foregoing remedial measures shall be
applicable only while there remains unpaid and outstanding
amounts owed to the Senior Lenders." (Emphasis supplied)
By any manner of interpretation or application, Section 8.01(d) of
the ARCA clearly mandates the indefinite postponement of payment
of all of Piatco's obligations to the government, in order to ensure
that Piatco's obligations to the Senior Lenders are paid in full first.
That is nothing more or less than the direct government subsidy
prohibited by the BOT Law and the IRR. The fact that Piatco will
pay interest on the unpaid amounts owed to government does not
change the situation or render the prohibited subsidy any less
unacceptable.
But beyond the clear violations of law, there are larger issues
involved in the ARCA. Earlier, I mentioned that Section 8.01(d) of
the ARCA completely eliminated the proviso in Section 8.04(d) of
the CA which gave government the right to appoint a financial
controller to manage the cash position of Piatco during situations of
financial distress. Not only has government been deprived of any
means of monitoring and managing the situation; worse, as can be
seen from Section 8.01(d) above-quoted, the Senior Lenders have
effectively locked in on the right to exercise financial controllership
over Piatco and to allocate its cash resources to the payment of all
amounts owed to the Senior Lenders before allowing any payment to
be made to government.
In brief, this particular provision of the ARCA has placed in the
hands of foreign lenders the power and the authority to determine
how much (if at all) and when the Philippine government (as grantor
of the franchise) may be allowed to receive from Piatco. In that
situation, government will be at the mercy of the foreign lenders.
This is a situation completely contrary to the rationale of the BOT
Law and to public policy.
The aforesaid provision rouses mixed emotions - shame and
disgust at the parties' (especially the government officials') docile
submission and abject servitude and surrender to the imperious
and excessive demands of the foreign lenders, on the one hand;
and vehement outrage at the affront to the sovereignty of the
Republic and to the national honor, on the other. It is indeed
time to put an end to such an unbearable, dishonorable situation.
The Piatco Contracts Unarguably Violate Constitutional
Injunctions
I will now discuss the manner in which the Piatco Contracts offended
the Constitution.
The Exclusive Right Granted to Piatco to Operate a Public Utility Is
Prohibited by the Constitution
While Section 2.02 of the ARCA spoke of granting to Piatco "a
franchise to operate and maintain the Terminal Complex," Section
3.02(a) of the same ARCA granted to Piatco, for the entire term of
the concession agreement, "the exclusive right to operate a
commercial international passenger terminal within the Island of
Luzon" with the exception of those three terminals already
existing63 at the time of execution of the ARCA.
Section 11 of Article XII of the Constitution prohibits the grant of a
"franchise, certificate, or any other form of authorization for the
operation of a public utility" that is "exclusive in character."
In its Opinion No. 078, Series of 1995, the Department of justice
held that "the NAIA Terminal III which . . . is a 'terminal for public
use' is a public utility." Consequently, the constitutional prohibition
against the exclusivity of a franchise applies to the franchise for the
operation of NAIA Terminal III as well.
What was granted to Piatco was not merely a franchise, but an
"exclusive right" to operate an international passenger terminal
within the "Island of Luzon." What this grant effectively means is
that the government is now estopped from exercising its inherent
power to award any other person another franchise or a right to
operate such a public utility, in the event public interest in Luzon
requires it. This restriction is highly detrimental to government and
to the public interest. Former Secretary of Justice Hernando B. Perez
expressed this point well in his Memorandum for the President dated
21 May 2002:
"Section 3.02 on 'Exclusivity'
"This provision gives to PIATCO (the Concessionaire) the
exclusive right to operate a commercial international airport
within the Island of Luzon with the exception of those
already existing at the time of the execution of the
Agreement, such as the airports at Subic, Clark and Laoag
City. In the case of the Clark International Airport, however,
the provision restricts its operation beyond its design
capacity of 850,000 passengers per annum and the operation
of new terminal facilities therein until after the new NAIA
Terminal III shall have consistently reached or exceeded its
design capacity of ten (10) million passenger capacity per
year for three (3) consecutive years during the concession
period.
"This is an onerous and disadvantageous provision. It
effectively grants PIATCO a monopoly in Luzon and ties the
hands of government in the matter of developing new
airports which may be found expedient and necessary in
carrying out any future plan for an inter-modal transportation
system in Luzon.
"Additionally, it imposes an unreasonable restriction on the
operation of the Clark International Airport which could
adversely affect the operation and development of the Clark
Special Economic Zone to the economic prejudice of the
local constituencies that are being benefited by its
operation." (Emphasis supplied)
While it cannot be gainsaid that an enterprise that is a public utility
may happen to constitute a monopoly on account of the very nature
of its business and the absence of competition, such a situation does
not however constitute justification to violate the constitutional
prohibition and grant an exclusive franchise or exclusive right to
operate a public utility.
Piatco's contention that the Constitution does not actually prohibit
monopolies is beside the point. As correctly argued, 64 the existence
of a monopoly by a public utility is a situation created by
circumstances that do not encourage competition. This situation is
different from the grant of a franchise to operate a public utility, a
privilege granted by government. Of course, the grant of a franchise
may result in a monopoly. But making such franchise exclusive is
what is expressly proscribed by the Constitution.
Actually, the aforementioned Section 3.02 of the ARCA more than
just guaranteed exclusivity; it also guaranteed that the government
will not improve or expand the facilities at Clark - and in fact is
required to put a cap on the latter's operations - until after Terminal
III shall have been operated at or beyond its peak capacity for
three consecutive years.65 As counsel for public respondents pointed
out, in the real world where the rate of influx of international
passengers can fluctuate substantially from year to year, it may take
many years before Terminal III sees three consecutive years'
operations at peak capacity. The Diosdado Macapagal International
Airport may thus end up stagnating for a long time. Indeed, in order
to ensure greater profits for Piatco, the economic progress of a region
has had to be sacrificed.
The Piatco Contracts Violate the Time Limitation on Franchises
Section 11 of Article XII of the Constitution also provides that "no
franchise, certificate or any other form of authorization for the
operation of a public utility shall be . . . for a longer period than fifty
years." After all, a franchise held for an unreasonably long time
would likely give rise to the same evils as a monopoly.
The Piatco Contracts have come up with an innovative way to
circumvent the prohibition and obtain an extension. This fact can be
gleaned from Section 8.03(b) of the ARCA, which I quote thus:
"Sec. 8.03. Termination Procedure and Consequences of
Termination. -
a) x x x           x x x           x x x
b) In the event the Agreement is terminated pursuant
to Section 8.01 (b) hereof, Concessionaire shall be
entitled to collect the Liquidated Damages specified
in Annex 'G'. The full payment by GRP to
Concessionaire of the Liquidated Damages shall be a
condition precedent to the transfer by
Concessionaire to GRP of the Development Facility.
Prior to the full payment of the Liquidated Damages,
Concessionaire shall to the extent practicable
continue to operate the Terminal and the Terminal
Complex and shall be entitled to retain and withhold
all payments to GRP for the purpose of offsetting the
same against the Liquidated Damages. Upon full
payment of the Liquidated Damages, Concessionaire
shall immediately transfer the Development Facility
to GRP on 'as-is-where-is' basis."
The aforesaid easy payment scheme is less beneficial than it first
appears. Although it enables government to avoid having to make
outright payment of an obligation that will likely run into billions of
pesos, this easy payment plan will nevertheless cost government
considerable loss of income, which it would earn if it were to operate
Terminal III by itself. Inasmuch as payments to the concessionaire
(Piatco) will be on "installment basis," interest charges on the
remaining unpaid balance would undoubtedly cause the total
outstanding balance to swell. Piatco would thus be entitled to remain
in the driver's seat and keep operating the terminal for an indefinite
length of time.
The Contracts Create Two Monopolies for Piatco
By way of background, two monopolies were actually created by the
Piatco contracts. The first and more obvious one refers to the
business of operating an international passenger terminal in Luzon,
the business end of which involves providing international airlines
with parking space for their aircraft, and airline passengers with the
use of departure and arrival areas, check-in counters, information
systems, conveyor systems, security equipment and paraphernalia,
immigrations and customs processing areas; and amenities such as
comfort rooms, restaurants and shops.
In furtherance of the first monopoly, the Piatco Contracts stipulate
that the NAIA Terminal III will be the only facility to be operated as
an international passenger terminal; 66 that NAIA Terminals I and II
will no longer be operated as such; 67 and that no one (including the
government) will be allowed to compete with Piatco in the operation
of an international passenger terminal in the NAIA Complex. 68 Given
that, at this time, the government and Piatco are the only ones
engaged in the business of operating an international passenger
terminal, I am not acutely concerned with this particular
monopolistic situation.
There was however another monopoly within the NAIA created by
the subject contracts for Piatco - in the business of providing
international airlines with the following: groundhandling, in-flight
catering, cargo handling, and aircraft repair and maintenance
services. These are lines of business activity in which are engaged
many service providers (including the petitioners-in-intervention),
who will be adversely affected upon full implementation of the
Piatco Contracts, particularly Sections 3.01(d) 69 and (e)70 of both the
ARCA and the CA.
On the one hand, Section 3.02(a) of the ARCA makes Terminal III
the only international passenger terminal at the NAIA, and therefore
the only place within the NAIA Complex where the business of
providing airport-related services to international airlines may be
conducted. On the other hand, Section 3.01(d) of the ARCA requires
government, through the MIAA, not to allow service providers with
expired MIAA contracts to renew or extend their contracts to render
airport-related services to airlines. Meanwhile, Section 3.01(e) of the
ARCA requires government, through the DOTC and MIAA, not to
allow service providers - those with subsisting concession
agreements for services and operations being conducted at Terminal
I - to carry over their concession agreements, services and operations
to Terminal III, unless they first enter into a separate agreement with
Piatco.
The aforementioned provisions vest in Piatco effective and exclusive
control over which service provider may and may not operate at
Terminal III and render the airport-related services needed by
international airlines. It thereby possesses the power to exclude
competition. By necessary implication, it also has effective control
over the fees and charges that will be imposed and collected by these
service providers.
This intention is exceedingly clear in the declaration by Piatco that it
is "completely within its rights to exclude any party that it has not
contracted with from NAIA Terminal III."71
Worse, there is nothing whatsoever in the Piatco Contracts that can
serve to restrict, control or regulate the concessionaire's discretion
and power to reject any service provider and/or impose any term or
condition it may see fit in any contract it enters into with a service
provider. In brief, there is no safeguard whatsoever to ensure free
and fair competition in the service-provider sector.
In the meantime, and not surprisingly, Piatco is first in line, ready to
exploit the unique business opportunity. It announced 72 that it has
accredited three groundhandlers for Terminal III. Aside from the
Philippine Airlines, the other accredited entities are the Philippine
Airport and Ground Services Globeground, Inc.
("PAGSGlobeground") and the Orbit Air Systems, Inc. ("Orbit").
PAGSGlobeground is a wholly-owned subsidiary of the Philippine
Airport and Ground Services, Inc. or PAGS, 73 while Orbit is a
wholly-owned subsidiary of Friendship Holdings, Inc., 74 which is in
turn owned 80 percent by PAGS.75 PAGS is a service provider
owned 60 percent by the Cheng Family; 76 it is a stockholder of 35
percent of Piatco77 and is the latter's designated contractor-operator
for NAIA Terminal III.78
Such entry into and domination of the airport-related services sector
appear to be very much in line with the following provisions
contained in the First Addendum to the Piatco Shareholders
Agreement,79 executed on July 6, 1999, which appear to constitute a
sort of master plan to create a monopoly and combinations in
restraint of trade:
"11. The Shareholders shall ensure:
a. x x x           x x x           x x x.;
b. That (Phil. Airport and Ground Services, Inc.) PAGS
and/or its designated Affiliates shall, at all times during the
Concession Period, be exclusively authorized by (PIATCO)
to engage in the provision of ground-handling, catering and
fueling services within the Terminal Complex.
c. That PAIRCARGO and/or its designated Affiliate shall,
during the Concession Period, be the only entities authorized
to construct and operate a warehouse for all cargo handling
and related services within the Site."
Precisely, proscribed by our Constitution are the monopoly and the
restraint of trade being fostered by the Piatco Contracts through the
erection of barriers to the entry of other service providers into
Terminal III. In Tatad v. Secretary of the Department of
Energy,80 the Court ruled:
". . . [S]ection 19 of Article XII of the Constitution . . .
mandates: '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.'
"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 or
the whole supply of a particular commodity. It is a form of
market structure in which one or only a few firms dominate
the total sales of a product or service. On the other hand, a
combination in restraint of trade is an agreement or
understanding between two or more persons, in the form of a
contract, trust, pool, holding company, or other form of
association, for the purpose of unduly restricting
competition, monopolizing trade and commerce in a certain
commodity, controlling its production, distribution and price,
or otherwise interfering with freedom of trade without
statutory authority. Combination in restraint of trade refers to
the means while monopoly refers to the end.
"x x x           x x x           x x x
"Section 19, Article XII of our Constitution is anti-trust in
history and in spirit. It espouses competition. The
desirability of competition is the reason for the prohibition
against restraint of trade, the reason for the interdiction of
unfair competition, and the reason for regulation of
unmitigated monopolies. Competition is thus the underlying
principle of [S]ection 19, Article XII of our
Constitution, . . ."81
Gokongwei Jr. v. Securities and Exchange Commission 82 elucidates
the criteria to be employed: "A 'monopoly' embraces any
combination the tendency of which is to prevent competition in the
broad and general sense, or to control prices to the detriment of the
public. In short, it is the concentration of business in the hands of a
few. The material consideration in determining its existence is not
that prices are raised and competition actually excluded, but that
power exists to raise prices or exclude competition when
desired."83 (Emphasis supplied)
The Contracts Encourage Monopolistic Pricing, Too
Aside from creating a monopoly, the Piatco contracts also give the
concessionaire virtually limitless power over the charging of fees,
rentals and so forth. What little "oversight function" the government
might be able and minded to exercise is less than sufficient to protect
the public interest, as can be gleaned from the following provisions:
"Sec. 6.06. Adjustment of Non-Public Utility Fees and
Charges
"For fees, rentals and charges constituting Non-Public Utility
Revenues, Concessionaire may make any adjustments it
deems appropriate without need for the consent of GRP or
any government agency subject to Sec. 6.03(c)."
Section 6.03(c) in turn provides:
"(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/wellwisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may 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."
It will be noted that the above-quoted provision has no teeth, so the
concessionaire can defy the government without fear of any sanction.
Moreover, Section 6.06 - taken together with Section 6.03(c) of the
ARCA - falls short of the standard set by the BOT Law as amended,
which expressly requires in Section 2(b) that the project proponent is
"allowed to charge facility users appropriate tolls, fees, rentals and
charges not exceeding those proposed in its bid or as negotiated
and incorporated in the contract x x x."
The Piatco Contracts Violate Constitutional Prohibitions Against
Impairment of Contracts and Deprivation of Property Without Due
Process
Earlier, I discussed how Section 3.01(e) 84 of both the CA and the
ARCA requires government, through DOTC/MIAA, not to permit
the carry-over to Terminal III of the services and operations of
certain service providers currently operating at Terminal I with
subsisting contracts.
By the In-Service Date, Terminal III shall be the only facility to be
operated as an international passenger terminal at the NAIA; 85 thus,
Terminals I and II shall no longer operate as such, 86 and no one shall
be allowed to compete with Piatco in the operation of an
international passenger terminal in the NAIA. 87 The bottom line is
that, as of the In-Service Date, Terminal III will be the only terminal
where the business of providing airport-related services to
international airlines and passengers may be conducted at all.
Consequently, government through the DOTC/MIAA will be
compelled to cease honoring existing contracts with service
providers after the In-Service Date, as they cannot be allowed to
operate in Terminal III.
In short, the CA and the ARCA obligate and constrain government to
break its existing contracts with these service providers.
Notably, government is not in a position to require Piatco to
accommodate the displaced service providers, and it would be
unrealistic to think that these service providers can perform their
service contracts in some other international airport outside Luzon.
Obviously, then, these displaced service providers are - to borrow a
quaint expression - up the river without a paddle. In plainer terms,
they will have lost their businesses entirely, in the blink of an eye.
What we have here is a set of contractual provisions that impair the
obligation of contracts and contravene the constitutional prohibition
against deprivation of property without due process of law. 88
Moreover, since the displaced service providers, being unable to
operate, will be forced to close shop, their respective employees -
among them Messrs. Agan and Lopez et al. - have very grave cause
for concern, as they will find themselves out of employment and
bereft of their means of livelihood. This situation comprises still
another violation of the constitution prohibition against deprivation
of property without due process.
True, doing business at the NAIA may be viewed more as a privilege
than as a right. Nonetheless, where that privilege has been availed of
by the petitioners-in-intervention service providers for years on end,
a situation arises, similar to that in American Inter-fashion v.
GTEB.89 We held therein that a privilege enjoyed for seven years
"evolved into some form of property right which should not be
removed x x x arbitrarily and without due process." Said
pronouncement is particularly relevant and applicable to the situation
at bar because the livelihood of the employees of petitioners-
intervenors are at stake.
The Piatco Contracts Violate Constitutional Prohibition
Against Deprivation of Liberty Without Due Process
The Piatco Contracts by locking out existing service providers from
entry into Terminal III and restricting entry of future service
providers, thereby infringed upon the freedom - guaranteed to and
heretofore enjoyed by international airlines - to contract with local
service providers of their choice, and vice versa.
Both the service providers and their client airlines will be deprived of
the right to liberty, which includes the right to enter into all
contracts,90 and/or the right to make a contract in relation to one's
business.91
By Creating New Financial Obligations for Government,
Supplements to the ARCA Violate the Constitutional
Ban on Disbursement of Public Funds Without Valid
Appropriation
Clearly prohibited by the Constitution is the disbursement of public
funds out of the treasury, except in pursuance of an appropriation
made by law.92 The immediate effect of this constitutional ban is that
all the various agencies of government are constrained to limit their
expenditures to the amounts appropriated by law for each fiscal year;
and to carefully count their cash before taking on contractual
commitments. Giving flesh and form to the injunction of the
fundamental law, Sections 46 and 47 of Executive Order 292,
otherwise known as the Administrative Code of 1987, provide as
follows:
"Sec. 46. Appropriation Before Entering into Contract. - (1)
No contract involving the expenditure of public funds shall
be entered into unless there is an appropriation therefor, the
unexpended balance of which, free of other obligations, is
sufficient to cover the proposed expenditure; and . .
"Sec. 47. Certificate Showing Appropriation to Meet
Contract. - Except in the case of a contract for personal
service, for supplies for current consumption or to be carried
in stock not exceeding the estimated consumption for three
(3) months, or banking transactions of government-owned or
controlled banks, no contract involving the expenditure of
public funds by any government agency shall be entered into
or authorized unless the proper accounting official of the
agency concerned shall have certified to the officer entering
into the obligation that funds have been duly appropriated
for the purpose and that the amount necessary to cover the
proposed contract for the current calendar year is available
for expenditure on account thereof, subject to verification by
the auditor concerned. The certificate signed by the proper
accounting official and the auditor who verified it, shall be
attached to and become an integral part of the proposed
 contract, and the sum so certified shall not thereafter be
available for expenditure for any other purpose until the
obligation of the government agency concerned under the
contract is fully extinguished."
Referring to the aforequoted provisions, this Court has held that "(I)t
is quite evident from the tenor of the language of the law that the
existence of appropriations and the availability of funds are
indispensable pre-requisites to or conditions sine qua non for the
execution of government contracts. The obvious intent is to impose
such conditions as a priori requisites to the validity of the proposed
contract."93
Notwithstanding the constitutional ban, statutory mandates and
Jurisprudential precedents, the three Supplements to the ARCA,
which were not approved by NEDA, imposed on government the
additional burden of spending public moneys without prior
appropriation.
In the First Supplement ("FS") dated August 27, 1999, the following
requirements were imposed on the government:
• To construct, maintain and keep in good repair and
operating condition all airport support services, facilities,
equipment and infrastructure owned and/or operated by
MIAA, which are not part of the Project or which are located
outside the Site, even though constructed by Concessionaire
- including the access road connecting Terminals II and III
and the taxilane, taxiways and runways
• To obligate the MIAA to provide funding for the upkeep,
maintenance and repair of the airports and facilities owned
or operated by it and by third persons under its control in
order to ensure compliance with international standards; and
holding MIAA liable to Piatco for the latter's losses,
expenses and damages as well as for the latter's liability to
third persons, in case MIAA fails to perform such
obligations; in addition, MIAA will also be liable for the
incremental and consequential costs of the remedial work
done by Piatco on account of the former's default.
• Section 4 of the FS imposed on government ten (10)
"Additional Special Obligations," including the following:
o Providing thru MIAA the land required by Piatco for
the taxilane and one taxiway, at no cost to Piatco
o Implementing the government's existing storm
drainage master plan
o Coordinating with DPWH the financing,
implementation and completion of the following
works before the In-Service Date: three left-turning
overpasses (Edsa to Tramo St., Tramo to Andrews
Ave., and Manlunas Road to Sales Ave.) and a road
upgrade and improvement program involving
widening, repair and resurfacing of Sales Road,
Andrews Avenue and Manlunas Road; improvement
of Nichols Interchange; and removal of squatters
along Andrews Avenue
o Dealing directly with BCDA and the Philippine Air
Force in acquiring additional land or right of way for
the road upgrade and improvement program
o Requiring government to work for the immediate
reversion to MIAA of the Nayong Pilipino National
Park, in order to permit the building of the second
west parallel taxiway
• Section 5 of the FS also provides that in lieu of the access
tunnel, a surface access road (T2-T3) will be constructed.
This provision requires government to expend funds to
purchase additional land from Nayong Pilipino and to clear
the same in order to be able to deliver clean possession of
the site to Piatco, as required in Section 5(c) of the FS.
On the other hand, the Third Supplement ("TS") obligates the
government to deliver, within 120 days from date thereof, clean
possession of the land on which the T2-T3 Road is to be constructed.
The foregoing contractual stipulations undeniably impose on
government the expenditures of public funds not included in any
congressional appropriation or authorized by any other statute. Piatco
however attempts to take these stipulations out of the ambit of
Sections 46 and 47 of the Administrative Code by characterizing
them as stipulations for compliance on a "best-efforts basis" only.
To determine whether the additional obligations under the
Supplements may really be undertaken on a best-efforts basis only,
the nature of each of these obligations must be examined in the
context of its relevance and significance to the Terminal III Project,
as well as of any adverse impact that may result if such obligation is
not performed or undertaken on time. In short, the criteria for
determining whether the best-efforts basis will apply is whether the
obligations are critical to the success of the Project and, accordingly,
whether failure to perform them (or to perform them on time)
could result in a material breach of the contract.
Viewed in this light, the "Additional Special Obligations" set out in
Section 4 of the FS take on a different aspect. In particular, each of
the following may all be deemed to play a major role in the
successful and timely prosecution of the Terminal III Project: the
obtention of land required by PIATCO for the taxilane and taxiway;
the implementation of government's existing storm drainage master
plan; and coordination with DPWH for the completion of the three
left-turning overpasses before the In-Service Date, as well as
acquisition and delivery of additional land for the construction of the
T2-T3 access road.
Conversely, failure to deliver on any of these obligations may
conceivably result in substantial prejudice to the concessionaire, to
such an extent as to constitute a material breach of the Piatco
Contracts. Whereupon, the concessionaire may outrightly terminate
the Contracts pursuant to Section 8.01(b)(i) and (ii) of the ARCA
and seek payment of Liquidated Damages in accordance with
Section 8.02(a) of the ARCA; or the concessionaire may instead
require government to pay the Incremental and Consequential Losses
under Section 1.23 of the ARCA. 94 The logical conclusion then is
that the obligations in the Supplements are not to be performed on a
best-efforts basis only, but are unarguably mandatory in character.
Regarding MIAA's obligation to coordinate with the DPWH for the
complete implementation of the road upgrading and improvement
program for Sales, Andrews and Manlunas Roads (which provide
access to the Terminal III site) prior to the In-Service Date, it is
essential to take note of the fact that there was a pressing need to
complete the program before the opening of Terminal III. 95 For that
reason, the MIAA was compelled to enter into a memorandum of
agreement with the DPWH in order to ensure the timely completion
of the road widening and improvement program. MIAA agreed to
advance the total amount of P410.11 million to DPWH for the
works, while the latter was committed to do the following:
"2.2.8. Reimburse all advance payments to MIAA including
but not limited to interest, fees, plus other costs of money
within the periods CY2004 and CY2006 with payment of no
less than One Hundred Million Pesos (PhP100M) every year.
"2.2.9. Perform all acts necessary to include in its CY2004 to
CY2006 budget allocation the repayments for the advances
made by MIAA, to ensure that the advances are fully repaid
by CY2006. For this purpose, DPWH shall include the
amounts to be appropriated for reimbursement to MIAA in
the "Not Needing Clearance" column of their Agency
Budget Matrix (ABM) submitted to the Department of
Budget and Management."
It can be easily inferred, then, that DPWH did not set aside enough
funds to be able to complete the upgrading program for the crucially
situated access roads prior to the targeted opening date of Terminal
III; and that, had MIAA not agreed to lend the P410 Million, DPWH
would not have been able to complete the program on time. As a
consequence, government would have been in breach of a material
obligation. Hence, this particular undertaking of government may
likewise not be construed as being for best-efforts compliance only.
They also Infringe on the Legislative Prerogative and Power Over
the Public Purse
But the particularly sad thing about this transaction between MIAA
and DPWH is the fact that both agencies were maneuvered into (or
allowed themselves to be maneuvered into) an agreement that would
ensure delivery of upgraded roads for Piatco's benefit, using funds
not allocated for that purpose. The agreement would then be
presented to Congress as a done deal. Congress would thus be
obliged to uphold the agreement and support it with the necessary
allocations and appropriations for three years, in order to enable
DPWH to deliver on its committed repayments to MIAA. The net
result is an infringement on the legislative power over the public
purse and a diminution of Congress' control over expenditures of
public funds - a development that would not have come about, were
it not for the Supplements. Very clever but very illegal!
EPILOGUE
What Do We Do Now?
In the final analysis, there remains but one ultimate question, which I
raised during the Oral Argument on December 10, 2002: What do
we do with the Piatco Contracts and Terminal III?96 (Feeding
directly into the resolution of the decisive question is the other
nagging issue: Why should we bother with determining the legality
and validity of these contracts, when the Terminal itself has already
been built and is practically complete?)
Prescinding from all the foregoing disquisition, I find that all the
Piatco contracts, without exception, are void ab initio, and therefore
inoperative. Even the very process by which the contracts came into
being - the bidding and the award - has been riddled with
irregularities galore and blatant violations of law and public policy,
far too many to ignore. There is thus no conceivable way, as
proposed by some, of saving one (the original Concession
Agreement) while junking all the rest.
Neither is it possible to argue for the retention of the Draft
Concession Agreement (referred to in the various pleadings as the
Contract Bidded Out) as the contract that should be kept in force and
effect to govern the situation, inasmuch as it was never executed by
the parties. What Piatco and the government executed was the
Concession Agreement which is entirely different from the Draft
Concession Agreement.
Ultimately, though, it would be tantamount to an outrageous,
grievous and unforgivable mutilation of public policy and an insult
to ourselves if we opt to keep in place a contract - any contract - for
to do so would assume that we agree to having Piatco continue as
the concessionaire for Terminal III.
Despite all the insidious contraventions of the Constitution, law and
public policy Piatco perpetrated, keeping Piatco on as concessionaire
and even rewarding it by allowing it to operate and profit from
Terminal III - instead of imposing upon it the stiffest sanctions
permissible under the laws - is unconscionable.
It is no exaggeration to say that Piatco may not really mind which
contract we decide to keep in place. For all it may care, we can do
just as well without one, if we only let it continue and operate the
facility. After all, the real money will come not from building the
Terminal, but from actually operating it for fifty or more years and
charging whatever it feels like, without any competition at all. This
scenario must not be allowed to happen.
If the Piatco contracts are junked altogether as I think they should be, How the payment or series of payments to the builder, funders,
should not AEDC automatically be considered the winning bidder investors and contractors will be staggered and scheduled, will have
and therefore allowed to operate the facility? My answer is a stone- to be built into the bids, along with the annual guaranteed payments
cold 'No'. AEDC never won the bidding, never signed any contract, to government. In this manner, this whole sordid mess could result in
and never built any facility. Why should it be allowed something truly beneficial for all, especially for the Filipino people.
to automatically step in and benefit from the greed of another?
WHEREFORE, I vote to grant the Petitions and to declare the
Should government pay at all for reasonable expenses incurred in the subject contracts NULL and VOID.
construction of the Terminal? Indeed it should, otherwise it will be
unjustly enriching itself at the expense of Piatco and, in particular, its
funders, contractors and investors - both local and foreign. After all,
there is no question that the State needs and will make use of
Terminal III, it being part and parcel of the critical infrastructure and
transportation-related programs of government.

In Melchor v. Commission on Audit,97 this Court held that even if the

contract therein was void, the principle of payment by quantum
meruit was found applicable, and the contractor was allowed to
recover the reasonable value of the thing or services rendered
(regardless of any agreement as to the supposed value), in order to
avoid unjust enrichment on the part of government. The principle
of quantum meruit was likewise applied in Eslao v. Commission on
Audit,98 because to deny payment for a building almost completed
and already occupied would be to permit government to unjustly
enrich itself at the expense of the contractor. The same principle was
applied in Republic v. Court of Appeals.99

One possible practical solution would be for government - in view of

the nullity of the Piatco contracts and of the fact that Terminal III has
already been built and is almost finished - to bid out the operation of
the facility under the same or analogous principles as build-operate-
and-transfer projects. To be imposed, however, is the condition that
the winning bidder must pay the builder of the facility a price fixed
by government based on quantum meruit; on the real, reasonable -
not inflated - value of the built facility.

G. R. No. 141833 - March 26, 2003
LM POWER ENGINEERING CORPORATION, Petitioner,
vs. CAPITOL INDUSTRIAL CONSTRUCTION GROUPS,
INC., Respondent.
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration,
mediation, negotiation and conciliation -- are encouraged by the
Supreme Court. By enabling parties to resolve their disputes
amicably, they provide solutions that are less time-consuming, less
tedious, less confrontational, and more productive of goodwill and
lasting relationships.1
The Case
Before us is a Petition for Review on Certiorari 2 under Rule 45 of the
Rules of Court, seeking to set aside the January 28, 2000 Decision of
the Court of Appeals3 (CA) in CA-GR CV No. 54232. The
dispositive portion of the Decision reads as follows:
"WHEREFORE, the judgment appealed from is REVERSED and
SET ASIDE. The parties are ORDERED to present their dispute to
arbitration in accordance with their Sub-contract Agreement. The
surety bond posted by [respondent] is [d]ischarged."4
The Facts
On February 22, 1983, Petitioner LM Power Engineering
Corporation and Respondent Capitol Industrial Construction Groups
Inc. entered into a "Subcontract Agreement" involving electrical
work at the Third Port of Zamboanga.5
On April 25, 1985, respondent took over some of the work
contracted to petitioner.6 Allegedly, the latter had failed to finish it
because of its inability to procure materials. 7
Upon completing its task under the Contract, petitioner billed
respondent in the amount of P6,711,813.90.8 Contesting the accuracy
of the amount of advances and billable accomplishments listed by
the former, the latter refused to pay. Respondent also took refuge in
the termination clause of the Agreement. 9 That clause allowed it to
set off the cost of the work that petitioner had failed to undertake --
due to termination or take-over -- against the amount it owed the
latter.
Because of the dispute, petitioner filed with the Regional Trial Court
(RTC) of Makati (Branch 141) a Complaint 10 for the collection of the
amount representing the alleged balance due it under the
Subcontract. Instead of submitting an Answer, respondent filed a
Motion to Dismiss,11 alleging that the Complaint was premature,
because there was no prior recourse to arbitration.
In its Order12 dated September 15, 1987, the RTC denied the Motion
on the ground that the dispute did not involve the interpretation or
the implementation of the Agreement and was, therefore, not covered
by the arbitral clause.13
After trial on the merits, the RTC 14 ruled that the take-over of some
work items by respondent was not equivalent to a termination, but a
mere modification, of the Subcontract. The latter was ordered to give
full payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the
case to arbitration. The appellate court held as arbitrable the issue of
whether respondents take-over of some work items had been
intended to be a termination of the original contract under Letter "K"
of the Subcontract. It ruled likewise on two other issues: whether
petitioner was liable under the warranty clause of the Agreement,
and whether it should reimburse respondent for the work the latter
had taken over.15
Hence, this Petition.16
The Issues
In its Memorandum, petitioner raises the following issues for the
Courts consideration:
"A
Whether or not there exist[s] a controversy/dispute between
petitioner and respondent regarding the interpretation and
implementation of the Sub-Contract Agreement dated February 22,
1983 that requires prior recourse to voluntary arbitration;
"B
In the affirmative, whether or not the requirements provided in
Article III 1 of CIAC Arbitration Rules regarding request for
arbitration ha[ve] been complied with[.]"17
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation
or the implementation of the Agreement. Thus, without having to
resort to prior arbitration, it is entitled to collect the value of the
services it rendered through an ordinary action for the collection of a
sum of money from respondent. On the other hand, the latter
contends that there is a need for prior arbitration as provided in the
Agreement. This is because there are some disparities between the
parties positions regarding the extent of the work done, the amount
of advances and billable accomplishments, and the set off of
expenses incurred by respondent in its take-over of petitioners work.
We side with respondent. Essentially, the dispute arose from the
parties ncongruent positions on whether certain provisions of their
Agreement could be applied to the facts. The instant case involves
technical discrepancies that are better left to an arbitral body that has
expertise in those areas. In any event, the inclusion of an arbitration
clause in a contract does not ipso facto divest the courts of
jurisdiction to pass upon the findings of arbitral bodies, because the
awards are still judicially reviewable under certain conditions. 18
In the case before us, the Subcontract has the following arbitral
clause:
"6. The Parties hereto agree that any dispute or conflict as regards to
interpretation and implementation of this Agreement which cannot
be settled between [respondent] and [petitioner] amicably shall be
settled by means of arbitration x x x."19
Clearly, the resolution of the dispute between the parties herein
requires a referral to the provisions of their Agreement. Within the
scope of the arbitration clause are discrepancies as to the amount of
advances and billable accomplishments, the application of the
provision on termination, and the consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they
differ on the following questions: (1) Did a take-over/termination
occur? (2) May the expenses incurred by respondent in the take-over
be set off against the amounts it owed petitioner? (3) How much
were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the
provisions of the Agreement. According to respondent, the take-over
was caused by petitioners delay in completing the work. Such delay
was in violation of the provision in the Agreement as to time
schedule:
"G. TIME SCHEDULE
"[Petitioner] shall adhere strictly to the schedule related to the
WORK and complete the WORK within the period set forth in
Annex C hereof. NO time extension shall be granted by [respondent]
to [petitioner] unless a corresponding time extension is granted by
[the Ministry of Public Works and Highways] to the
CONSORTIUM."20
Because of the delay, respondent alleges that it took over some of the
work contracted to petitioner, pursuant to the following provision in
the Agreement:
"K. TERMINATION OF AGREEMENT
"[Respondent] has the right to terminate and/or take over this
Agreement for any of the following causes:
xxx-xxx-xxx
6. If despite previous warnings by [respondent], [petitioner] does not
execute the WORK in accordance with this Agreement,
or persistently or flagrantly neglects to carry out [its] obligations
under this Agreement."21
Supposedly, as a result of the "take-over," respondent incurred
expenses in excess of the contracted price. It sought to set off those
expenses against the amount claimed by petitioner for the work the
latter accomplished, pursuant to the following provision:
"If the total direct and indirect cost of completing the remaining part
of the WORK exceed the sum which would have been payable to
[petitioner] had it completed the WORK, the amount of such excess
[may be] claimed by [respondent] from either of the following:
1. Any amount due [petitioner] from [respondent] at the time of the
termination of this Agreement."22
The issue as to the correct amount of petitioners advances and
billable accomplishments involves an evaluation of the manner in
which the parties completed the work, the extent to which they did it,
and the expenses each of them incurred in connection therewith.
Arbitrators also need to look into the computation of foreign and
local costs of materials, foreign and local advances, retention fees
and letters of credit, and taxes and duties as set forth in the
Agreement. These data can be gathered from a review of the
Agreement, pertinent portions of which are reproduced hereunder:
"C. CONTRACT PRICE AND TERMS OF PAYMENT
xxx-xxx-xxx
"All progress payments to be made by [respondent] to [petitioner]
shall be subject to a retention sum of ten percent (10%) of the value
of the approved quantities. Any claims by [respondent] on
[petitioner] may be deducted by [respondent] from the progress
payments and/or retained amount. Any excess from the retained
amount after deducting [respondents] claims shall be released by
[respondent] to [petitioner] after the issuance of [the Ministry of
Public Works and Highways] of the Certificate of Completion and
final acceptance of the WORK by [the Ministry of Public Works and
Highways].
xxx-xxx-xxx
"D. IMPORTED MATERIALS AND EQUIPMENT
"[Respondent shall open the letters of credit for the importation of
equipment and materials listed in Annex E hereof after the drawings,
brochures, and other technical data of each items in the list have been
formally approved by [the Ministry of Public Works and Highways].
However, petitioner will still be fully responsible for all imported
materials and equipment.
"All expenses incurred by [respondent], both in foreign and local
currencies in connection with the opening of the letters of credit shall
be deducted from the Contract Prices.
xxx-xxx-xxx
"N. OTHER CONDITIONS
xxx-xxx-xxx
"2. All customs duties, import duties, contractors taxes, income
taxes, and other taxes that may be required by any government
agencies in connection with this Agreement shall be for the sole
account of [petitioner]."23
Being an inexpensive, speedy and amicable method of settling
disputes,24 arbitration -- along with mediation, conciliation and
negotiation -- is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind. 25 It is thus regarded as
the "wave of the future" in international civil and commercial
disputes.26 Brushing aside a contractual agreement calling for
arbitration between the parties would be a step backward. 27
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted.28 Any doubt should be resolved in favor of
arbitration.29
Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is
arbitrable, the failure to file a formal request for arbitration with the
Construction Industry Arbitration Commission (CIAC) precluded the
latter from acquiring jurisdiction over the question. To bolster its
position, petitioner even cites our ruling in Tesco Services
Incorporated v. Vera.30 We are not persuaded.
Section 1 of Article II of the old Rules of Procedure Governing
Construction Arbitration indeed required the submission of a request
for arbitration, as follows:
"SECTION. 1. Submission to Arbitration -- Any party to a
construction contract wishing to have recourse to arbitration by the
Construction Industry Arbitration Commission (CIAC) shall submit
its Request for Arbitration in sufficient copies to the Secretariat of
the CIAC; PROVIDED, that in the case of government construction
contracts, all administrative remedies available to the parties must
have been exhausted within 90 days from the time the dispute arose."
Tesco was promulgated by this Court, using the foregoing provision
as reference.
On the other hand, Section 1 of Article III of the new Rules of
Procedure Governing Construction Arbitration has dispensed with
this requirement and recourse to the CIAC may now be availed of
whenever a contract "contains a clause for the submission of a future
controversy to arbitration," in this wise:
"SECTION 1. Submission to CIAC Jurisdiction An arbitration clause
in a construction contract or a submission to arbitration of a
construction dispute shall be deemed an agreement to submit an
existing or future controversy to CIAC jurisdiction, notwithstanding
the reference to a different arbitration institution or arbitral body in
such contract or submission. When a contract contains a clause for
the submission of a future controversy to arbitration, it is not
necessary for the parties to enter into a submission agreement before
the claimant may invoke the jurisdiction of CIAC."
The foregoing amendments in the Rules were formalized by CIAC
Resolution Nos. 2-91 and 3-93.31
The difference in the two provisions was clearly explained in China
Chang Jiang Energy Corporation (Philippines) v. Rosal
Infrastructure Builders et al.32 (an extended unsigned Resolution)
and reiterated in National Irrigation Administration v. Court of
Appeals,33 from which we quote thus:
not be precluded from electing to submit their dispute before the
CIAC because this right has been vested upon each party by law, i.e.,
E.O. No. 1008."34
Clearly, there is no more need to file a request with the CIAC in
order to vest it with jurisdiction to decide a construction dispute.
The arbitral clause in the Agreement is a commitment on the part of
the parties to submit to arbitration the disputes covered therein.
Because that clause is binding, they are expected to abide by it in
good faith.35 And because it covers the dispute between the parties in
the present case, either of them may compel the other to arbitrate. 36
Since petitioner has already filed a Complaint with the RTC without
prior recourse to arbitration, the proper procedure to enable the
CIAC to decide on the dispute is to request the stay or suspension of
such action, as provided under RA 876 [the Arbitration Law]. 37
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.

"Under the present Rules of Procedure, for a particular construction

contract to fall within the jurisdiction of CIAC, it is merely required
that the parties agree to submit the same to voluntary arbitration
Unlike in the original version of Section 1, as applied in the Tesco
case, the law as it now stands does not provide that the parties should
agree to submit disputes arising from their agreement specifically to
the CIAC for the latter to acquire jurisdiction over the same. Rather,
it is plain and clear that as long as the parties agree to submit to
voluntary arbitration, regardless of what forum they may choose,
their agreement will fall within the jurisdiction of the CIAC, such
that, even if they specifically choose another forum, the parties will

G.R. No. 141833            March 26, 2003
LM POWER ENGINEERING CORPORATION, petitioner,
vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS,
INC., respondent.
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration,
mediation, negotiation and conciliation -- are encouraged by the
Supreme Court. By enabling parties to resolve their disputes
amicably, they provide solutions that are less time-consuming, less
tedious, less confrontational, and more productive of goodwill and
lasting relationships.1
The Case
Before us is a Petition for Review on Certiorari 2 under Rule 45 of the
Rules of Court, seeking to set aside the January 28, 2000 Decision of
the Court of Appeals3 (CA) in CA-GR CV No. 54232. The
dispositive portion of the Decision reads as follows:
"WHEREFORE, the judgment appealed from is
REVERSED and SET ASIDE. The parties are ORDERED to
present their dispute to arbitration in accordance with their
Sub-contract Agreement. The surety bond posted by
[respondent] is [d]ischarged."4
The Facts
On February 22, 1983, Petitioner LM Power Engineering
Corporation and Respondent Capitol Industrial Construction Groups
Inc. entered into a "Subcontract Agreement" involving electrical
work at the Third Port of Zamboanga.5
On April 25, 1985, respondent took over some of the work
contracted to petitioner.6 Allegedly, the latter had failed to finish it
because of its inability to procure materials. 7
Upon completing its task under the Contract, petitioner billed
respondent in the amount of P6,711,813.90.8 Contesting the accuracy
of the amount of advances and billable accomplishments listed by
the former, the latter refused to pay. Respondent also took refuge in
the termination clause of the Agreement. 9 That clause allowed it to
set off the cost of the work that petitioner had failed to undertake --
due to termination or take-over -- against the amount it owed the
latter.
Because of the dispute, petitioner filed with the Regional Trial Court
(RTC) of Makati (Branch 141) a Complaint 10 for the collection of the
amount representing the alleged balance due it under the
Subcontract. Instead of submitting an Answer, respondent filed a
Motion to Dismiss,11 alleging that the Complaint was premature,
because there was no prior recourse to arbitration.
In its Order12 dated September 15, 1987, the RTC denied the Motion
on the ground that the dispute did not involve the interpretation or
the implementation of the Agreement and was, therefore, not covered
by the arbitral clause.13
After trial on the merits, the RTC 14 ruled that the take-over of some
work items by respondent was not equivalent to a termination, but a
mere modification, of the Subcontract. The latter was ordered to give
full payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the
case to arbitration. The appellate court held as arbitrable the issue of
whether respondent’s take-over of some work items had been
intended to be a termination of the original contract under Letter "K"
of the Subcontract. It ruled likewise on two other issues: whether
petitioner was liable under the warranty clause of the Agreement,
and whether it should reimburse respondent for the work the latter
had taken over.15
Hence, this Petition.16
The Issues
In its Memorandum, petitioner raises the following issues for the
Court’s consideration:
"A
Whether or not there exist[s] a controversy/dispute between
petitioner and respondent regarding the interpretation and
implementation of the Sub-Contract Agreement dated February 22,
1983 that requires prior recourse to voluntary arbitration;
"B
In the affirmative, whether or not the requirements provided in
Article III 1 of CIAC Arbitration Rules regarding request for
arbitration ha[ve] been complied with[.]"17
The Court’s Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation
or the implementation of the Agreement. Thus, without having to
resort to prior arbitration, it is entitled to collect the value of the
services it rendered through an ordinary action for the collection of a
sum of money from respondent. On the other hand, the latter
contends that there is a need for prior arbitration as provided in the
Agreement. This is because there are some disparities between the
parties’ positions regarding the extent of the work done, the amount
of advances and billable accomplishments, and the set off of
expenses incurred by respondent in its take-over of petitioner’s work.
We side with respondent. Essentially, the dispute arose from the
parties’ ncongruent positions on whether certain provisions of their
Agreement could be applied to the facts. The instant case involves
technical discrepancies that are better left to an arbitral body that has
expertise in those areas. In any event, the inclusion of an arbitration
clause in a contract does not ipso facto divest the courts of
jurisdiction to pass upon the findings of arbitral bodies, because the
awards are still judicially reviewable under certain conditions. 18
In the case before us, the Subcontract has the following arbitral
clause:
"6. The Parties hereto agree that any dispute or conflict as
regards to interpretation and implementation of this
 Agreement which cannot be settled between [respondent]
and [petitioner] amicably shall be settled by means of
arbitration x x x."19
Clearly, the resolution of the dispute between the parties herein
requires a referral to the provisions of their Agreement. Within the
scope of the arbitration clause are discrepancies as to the amount of
advances and billable accomplishments, the application of the
provision on termination, and the consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they
differ on the following questions: (1) Did a take-over/termination
occur? (2) May the expenses incurred by respondent in the take-over
be set off against the amounts it owed petitioner? (3) How much
were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the
provisions of the Agreement. According to respondent, the take-over
was caused by petitioner’s delay in completing the work. Such delay
was in violation of the provision in the Agreement as to time
schedule:
"G. TIME SCHEDULE
"[Petitioner] shall adhere strictly to the schedule related to
the WORK and complete the WORK within the period set
forth in Annex C hereof. NO time extension shall be granted
by [respondent] to [petitioner] unless a corresponding time
extension is granted by [the Ministry of Public Works and
Highways] to the CONSORTIUM."20
Because of the delay, respondent alleges that it took over some of the
work contracted to petitioner, pursuant to the following provision in
the Agreement:
"K. TERMINATION OF AGREEMENT
"[Respondent] has the right to terminate and/or take
over this Agreement for any of the following causes:
x x x           x x x           x x x
‘6. If despite previous warnings by [respondent],
[petitioner] does not execute the WORK in
accordance with this Agreement, or persistently or
flagrantly neglects to carry out [its] obligations
under this Agreement."21
Supposedly, as a result of the "take-over," respondent incurred
expenses in excess of the contracted price. It sought to set off those
expenses against the amount claimed by petitioner for the work the
latter accomplished, pursuant to the following provision:
"If the total direct and indirect cost of completing the
remaining part of the WORK exceed the sum which would
have been payable to [petitioner] had it completed the
WORK, the amount of such excess [may be] claimed by
[respondent] from either of the following:
‘1. Any amount due [petitioner] from [respondent] at the
time of the termination of this Agreement."22
The issue as to the correct amount of petitioner’s advances and
billable accomplishments involves an evaluation of the manner in
which the parties completed the work, the extent to which they did it,
and the expenses each of them incurred in connection therewith.
Arbitrators also need to look into the computation of foreign and
local costs of materials, foreign and local advances, retention fees
and letters of credit, and taxes and duties as set forth in the
Agreement. These data can be gathered from a review of the
Agreement, pertinent portions of which are reproduced hereunder:
"C. CONTRACT PRICE AND TERMS OF PAYMENT
 x x x           x x x           x x x
"All progress payments to be made by [respondent] to
[petitioner] shall be subject to a retention sum of ten percent
(10%) of the value of the approved quantities. Any claims by
[respondent] on [petitioner] may be deducted by
[respondent] from the progress payments and/or retained
amount. Any excess from the retained amount after
deducting [respondent’s] claims shall be released by
[respondent] to [petitioner] after the issuance of [the
Ministry of Public Works and Highways] of the Certificate
of Completion and final acceptance of the WORK by [the
Ministry of Public Works and Highways].
x x x           x x x           x x x
"D. IMPORTED MATERIALS AND EQUIPMENT
"[Respondent shall open the letters of credit for the
importation of equipment and materials listed in Annex E
hereof after the drawings, brochures, and other technical data
of each items in the list have been formally approved by [the
Ministry of Public Works and Highways]. However,
petitioner will still be fully responsible for all imported
materials and equipment.
"All expenses incurred by [respondent], both in foreign and
local currencies in connection with the opening of the letters
of credit shall be deducted from the Contract Prices.
x x x           x x x           x x x
"N. OTHER CONDITIONS
x x x           x x x           x x x
"2. All customs duties, import duties, contractor’s taxes,
income taxes, and other taxes that may be required by any
government agencies in connection with this Agreement
shall be for the sole account of [petitioner]."23
Being an inexpensive, speedy and amicable method of settling
disputes,24 arbitration -- along with mediation, conciliation and
negotiation -- is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind. 25 It is thus regarded as
the "wave of the future" in international civil and commercial
disputes.26 Brushing aside a contractual agreement calling for
arbitration between the parties would be a step backward. 27
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted.28 Any doubt should be resolved in favor of
arbitration.29
Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is
arbitrable, the failure to file a formal request for arbitration with the
Construction Industry Arbitration Commission (CIAC) precluded the
latter from acquiring jurisdiction over the question. To bolster its
position, petitioner even cites our ruling in Tesco Services
Incorporated v. Vera.30 We are not persuaded.
Section 1 of Article II of the old Rules of Procedure Governing
Construction Arbitration indeed required the submission of a request
for arbitration, as follows:
 "SECTION. 1. Submission to Arbitration -- Any party to a
construction contract wishing to have recourse to arbitration
by the Construction Industry Arbitration Commission
(CIAC) shall submit its Request for Arbitration in sufficient
copies to the Secretariat of the CIAC; PROVIDED, that in
the case of government construction contracts, all
administrative remedies available to the parties must have
been exhausted within 90 days from the time the dispute
arose."
Tesco was promulgated by this Court, using the foregoing provision
as reference.
On the other hand, Section 1 of Article III of the new Rules of
Procedure Governing Construction Arbitration has dispensed with
this requirement and recourse to the CIAC may now be availed of
whenever a contract "contains a clause for the submission of a future
controversy to arbitration," in this wise:
"SECTION 1. Submission to CIAC Jurisdiction — An
arbitration clause in a construction contract or a submission
to arbitration of a construction dispute shall be deemed an
agreement to submit an existing or future controversy to
CIAC jurisdiction, notwithstanding the reference to a
different arbitration institution or arbitral body in such
contract or submission. When a contract contains a clause
for the submission of a future controversy to arbitration, it is
not necessary for the parties to enter into a submission
agreement before the claimant may invoke the jurisdiction of
CIAC."
The foregoing amendments in the Rules were formalized by CIAC
Resolution Nos. 2-91 and 3-93.31
The difference in the two provisions was clearly explained in China
Chang Jiang Energy Corporation (Philippines) v. Rosal
Infrastructure Builders et al.32 (an extended unsigned Resolution)
and reiterated in National Irrigation Administration v. Court of
Appeals,33 from which we quote thus:
"Under the present Rules of Procedure, for a particular
construction contract to fall within the jurisdiction of CIAC,
it is merely required that the parties agree to submit the same
to voluntary arbitration Unlike in the original version of
Section 1, as applied in the Tesco case, the law as it now
stands does not provide that the parties should agree to
submit disputes arising from their agreement specifically to
the CIAC for the latter to acquire jurisdiction over the same.
Rather, it is plain and clear that as long as the parties agree
to submit to voluntary arbitration, regardless of what forum
they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically
choose another forum, the parties will not be precluded from
electing to submit their dispute before the CIAC because this
right has been vested upon each party by law, i.e., E.O. No.
1008."34
Clearly, there is no more need to file a request with the CIAC in
order to vest it with jurisdiction to decide a construction dispute.
The arbitral clause in the Agreement is a commitment on the part of
the parties to submit to arbitration the disputes covered therein.
Because that clause is binding, they are expected to abide by it in
good faith.35 And because it covers the dispute between the parties in
the present case, either of them may compel the other to arbitrate. 36
Since petitioner has already filed a Complaint with the RTC without
prior recourse to arbitration, the proper procedure to enable the
CIAC to decide on the dispute is to request the stay or suspension of
such action, as provided under RA 876 [the Arbitration Law]. 37
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
In our jurisdiction, the policy is to favor alternative methods of
resolving disputes, particularly in civil and commercial disputes.
Arbitration along with mediation, conciliation, and negotiation,
being inexpensive, speedy and less hostile methods have long been
favored by this Court. The petition before us puts at issue an
arbitration clause in a contract mutually agreed upon by the parties
stipulating that they would submit themselves to arbitration in a
foreign country. Regrettably, instead of hastening the resolution of
their dispute, the parties wittingly or unwittingly prolonged the
controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean

corporation which is engaged in the supply and installation of
Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants,
while private respondent Pacific General Steel Manufacturing Corp.
(PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a

Contract1 whereby KOGIES would set up an LPG Cylinder
Manufacturing Plant in Carmona, Cavite. The contract was executed
in the Philippines. On April 7, 1997, the parties executed, in Korea,
an Amendment for Contract No. KLP-970301 dated March 5,
G.R. No. 143581             January 7, 2008 19972 amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and
KOREA TECHNOLOGIES CO., LTD., petitioner, facilities necessary for manufacturing LPG cylinders for which
vs. PGSMC would pay USD 1,224,000. KOGIES would install and
HON. ALBERTO A. LERMA, in his capacity as Presiding Judge initiate the operation of the plant for which PGSMC bound itself to
of Branch 256 of Regional Trial Court of Muntinlupa City, and pay USD 306,000 upon the plant’s production of the 11-kg. LPG
PACIFIC GENERAL STEEL MANUFACTURING cylinder samples. Thus, the total contract price amounted to USD
CORPORATION, respondents. 1,530,000.

DECISION On October 14, 1997, PGSMC entered into a Contract of Lease 3 with
Worth Properties, Inc. (Worth) for use of Worth’s 5,079-square
VELASCO, JR., J.: meter property with a 4,032-square meter warehouse building to
house the LPG manufacturing plant. The monthly rental was PhP
322,560 commencing on January 1, 1998 with a 10% annual
increment clause. Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped,
delivered, and installed in the Carmona plant. PGSMC paid KOGIES
USD 1,224,000.
However, gleaned from the Certificate 4 executed by the parties on
January 22, 1998, after the installation of the plant, the initial
operation could not be conducted as PGSMC encountered financial
difficulties affecting the supply of materials, thus forcing the parties
to agree that KOGIES would be deemed to have completely
complied with the terms and conditions of the March 5, 1997
contract.
For the remaining balance of USD306,000 for the installation and
initial operation of the plant, PGSMC issued two postdated checks:
(1) BPI Check No. 0316412 dated January 30, 1998 for PhP
4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998
for PhP 4,500,000.5
When KOGIES deposited the checks, these were dishonored for the
reason "PAYMENT STOPPED." Thus, on May 8, 1998, KOGIES
sent a demand letter6 to PGSMC threatening criminal action for
violation of Batas Pambansa Blg. 22 in case of nonpayment. On the
same date, the wife of PGSMC’s President faxed a letter dated May
7, 1998 to KOGIES’ President who was then staying at a Makati
City hotel. She complained that not only did KOGIES deliver a
different brand of hydraulic press from that agreed upon but it had
not delivered several equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued
KOGIES were fully funded but the payments were stopped for
reasons previously made known to KOGIES.7
On June 1, 1998, PGSMC informed KOGIES that PGSMC was
canceling their Contract dated March 5, 1997 on the ground that
KOGIES had altered the quantity and lowered the quality of the
machineries and equipment it delivered to PGSMC, and that PGSMC
would dismantle and transfer the machineries, equipment, and
facilities installed in the Carmona plant. Five days later, PGSMC
filed before the Office of the Public Prosecutor an Affidavit-
Complaint for Estafa docketed as I.S. No. 98-03813 against Mr. Dae
Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that
PGSMC could not unilaterally rescind their contract nor dismantle
and transfer the machineries and equipment on mere imagined
violations by KOGIES. It also insisted that their disputes should be
settled by arbitration as agreed upon in Article 15, the arbitration
clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the
contents of its June 1, 1998 letter threatening that the machineries,
equipment, and facilities installed in the plant would be dismantled
and transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES
instituted an Application for Arbitration before the Korean
Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to
Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific
Performance, docketed as Civil Case No. 98-117 8 against PGSMC
before the Muntinlupa City Regional Trial Court (RTC). The RTC
granted a temporary restraining order (TRO) on July 4, 1998, which
was subsequently extended until July 22, 1998. In its complaint,
KOGIES alleged that PGSMC had initially admitted that the checks
that were stopped were not funded but later on claimed that it
stopped payment of the checks for the reason that "their value was
not received" as the former allegedly breached their contract by
"altering the quantity and lowering the quality of the machinery and
equipment" installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a
January 22, 1998 Certificate. Likewise, KOGIES averred that
PGSMC violated Art. 15 of their Contract, as amended, by
unilaterally rescinding the contract without resorting to arbitration.
KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant
which the latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing
that KOGIES was not entitled to the TRO since Art. 15, the
arbitration clause, was null and void for being against public policy
as it ousts the local courts of jurisdiction over the instant
controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim9 asserting that it had the full right to dismantle and
transfer the machineries and equipment because it had paid for them
in full as stipulated in the contract; that KOGIES was not entitled to
the PhP 9,000,000 covered by the checks for failing to completely
install and make the plant operational; and that KOGIES was liable
for damages amounting to PhP 4,500,000 for altering the quantity
and lowering the quality of the machineries and equipment.
Moreover, PGSMC averred that it has already paid PhP 2,257,920 in
rent (covering January to July 1998) to Worth and it was not willing
to further shoulder the cost of renting the premises of the plant
considering that the LPG cylinder manufacturing plant never became
operational.
After the parties submitted their Memoranda, on July 23, 1998, the
RTC issued an Order denying the application for a writ of
preliminary injunction, reasoning that PGSMC had paid KOGIES
USD 1,224,000, the value of the machineries and equipment as
shown in the contract such that KOGIES no longer had proprietary
rights over them. And finally, the RTC held that Art. 15 of the
Contract as amended was invalid as it tended to oust the trial court or
any other court jurisdiction over any dispute that may arise between
the parties. KOGIES’ prayer for an injunctive writ was denied. 10 The
dispositive portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this
Court believes and so holds that no cogent reason exists for
this Court to grant the writ of preliminary injunction to
restrain and refrain defendant from dismantling the
machineries and facilities at the lot and building of Worth
Properties, Incorporated at Carmona, Cavite and transfer the
same to another site: and therefore denies plaintiff’s
application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.11 KOGIES denied it had altered the quantity and
lowered the quality of the machinery, equipment, and facilities it
delivered to the plant. It claimed that it had performed all the
undertakings under the contract and had already produced certified
samples of LPG cylinders. It averred that whatever was unfinished
was PGSMC’s fault since it failed to procure raw materials due to
lack of funds. KOGIES, relying on Chung Fu Industries (Phils.),
Inc. v. Court of Appeals,12 insisted that the arbitration clause was
without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss13 answering PGSMC’s memorandum of July 22, 1998 and
seeking dismissal of PGSMC’s counterclaims, KOGIES, on August
4, 1998, filed its Motion for Reconsideration 14 of the July 23, 1998
Order denying its application for an injunctive writ claiming that the
contract was not merely for machinery and facilities worth USD
1,224,000 but was for the sale of an "LPG manufacturing plant"
consisting of "supply of all the machinery and facilities" and
"transfer of technology" for a total contract price of USD 1,530,000
such that the dismantling and transfer of the machinery and facilities
would result in the dismantling and transfer of the very plant itself to
the great prejudice of KOGIES as the still unpaid owner/seller of the
plant. Moreover, KOGIES points out that the arbitration clause under
Art. 15 of the Contract as amended was a valid arbitration stipulation
under Art. 2044 of the Civil Code and as held by this Court in Chung
Fu Industries (Phils.), Inc.15
In the meantime, PGSMC filed a Motion for Inspection of
Things16 to determine whether there was indeed alteration of the
quantity and lowering of quality of the machineries and equipment,
and whether these were properly installed. KOGIES opposed the
motion positing that the queries and issues raised in the motion for
inspection fell under the coverage of the arbitration clause in their
contract.
On September 21, 1998, the trial court issued an Order (1) granting
PGSMC’s motion for inspection; (2) denying KOGIES’ motion for
reconsideration of the July 23, 1998 RTC Order; and (3) denying
KOGIES’ motion to dismiss PGSMC’s compulsory counterclaims as
these counterclaims fell within the requisites of compulsory
counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration17 of the September 21, 1998 RTC Order granting
inspection of the plant and denying dismissal of PGSMC’s
compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the
resolution of its October 2, 1998 urgent motion for reconsideration,
KOGIES filed before the Court of Appeals (CA) a petition for
certiorari18 docketed as CA-G.R. SP No. 49249, seeking annulment
of the July 23, 1998 and September 21, 1998 RTC Orders and
praying for the issuance of writs of prohibition, mandamus, and
preliminary injunction to enjoin the RTC and PGSMC from
inspecting, dismantling, and transferring the machineries and
equipment in the Carmona plant, and to direct the RTC to enforce the
specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES’
urgent motion for reconsideration and directed the Branch Sheriff to
proceed with the inspection of the machineries and equipment in the
plant on October 28, 1998.19
Thereafter, KOGIES filed a Supplement to the Petition 20 in CA-G.R.
SP No. 49249 informing the CA about the October 19, 1998 RTC
Order. It also reiterated its prayer for the issuance of the writs of
prohibition, mandamus and preliminary injunction which was not
acted upon by the CA. KOGIES asserted that the Branch Sheriff did
not have the technical expertise to ascertain whether or not the
machineries and equipment conformed to the specifications in the
contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriff’s
Report21 finding that the enumerated machineries and equipment
were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision 22 affirming
the RTC Orders and dismissing the petition for certiorari filed by
KOGIES. The CA found that the RTC did not gravely abuse its
discretion in issuing the assailed July 23, 1998 and September 21,
1998 Orders. Moreover, the CA reasoned that KOGIES’ contention
that the total contract price for USD 1,530,000 was for the whole
plant and had not been fully paid was contrary to the finding of the
RTC that PGSMC fully paid the price of USD 1,224,000, which was
for all the machineries and equipment. According to the CA, this
determination by the RTC was a factual finding beyond the ambit of
a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed
with the lower court that an arbitration clause which provided for a
final determination of the legal rights of the parties to the contract by
arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a
certificate of non-forum shopping by PGSMC, the CA held that the
counterclaims of PGSMC were compulsory ones and payment of
docket fees was not required since the Answer with counterclaim c. DECREEING PRIVATE RESPONDENT’S
was not an initiatory pleading. For the same reason, the CA said a COUNTERCLAIMS TO BE ALL COMPULSORY NOT
certificate of non-forum shopping was also not required. NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;
Furthermore, the CA held that the petition for certiorari had been
filed prematurely since KOGIES did not wait for the resolution of its d. RULING THAT THE PETITION WAS FILED
urgent motion for reconsideration of the September 21, 1998 RTC PREMATURELY WITHOUT WAITING FOR THE
Order which was the plain, speedy, and adequate remedy available. RESOLUTION OF THE MOTION FOR
According to the CA, the RTC must be given the opportunity to RECONSIDERATION OF THE ORDER DATED
correct any alleged error it has committed, and that since the assailed SEPTEMBER 21, 1998 OR WITHOUT GIVING THE
orders were interlocutory, these cannot be the subject of a petition TRIAL COURT AN OPPORTUNITY TO CORRECT
for certiorari. ITSELF;

Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following
errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP
OVER THE MACHINERY AND FACILITIES AS "A
QUESTION OF FACT" "BEYOND THE AMBIT OF A
PETITION FOR CERTIORARI" INTENDED ONLY FOR
CORRECTION OF ERRORS OF JURISDICTION OR
GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OF (SIC) EXCESS OF JURISDICTION, AND
CONCLUDING THAT THE TRIAL COURT’S FINDING
ON THE SAME QUESTION WAS IMPROPERLY
RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE
ARBITRATION CLAUSE IN ARTICLE 15 OF THE
CONTRACT BETWEEN THE PARTIES FOR BEING
"CONTRARY TO PUBLIC POLICY" AND FOR
OUSTING THE COURTS OF JURISDICTION;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER
SUBJECTS OF CERTIORARI AND PROHIBITION FOR
BEING "INTERLOCUTORY IN NATURE;"
f. NOT GRANTING THE RELIEFS AND REMEDIES
PRAYED FOR IN HE (SIC) PETITION AND, INSTEAD,
DISMISSING THE SAME FOR ALLEGEDLY
23
"WITHOUT MERIT."
The Court’s Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the
procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims,
it should have paid docket fees and filed a certificate of non-forum
shopping, and that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were
incorporated in its Answer with Compulsory Counterclaim dated
July 17, 1998 in accordance with Section 8 of Rule 11, 1997 Revised
Rules of Civil Procedure, the rule that was effective at the time the
Answer with Counterclaim was filed. Sec. 8 on existing counterclaim
or cross-claim states, "A compulsory counterclaim or a cross-claim
that a defending party has at the time he files his answer shall be
contained therein."
On July 17, 1998, at the time PGSMC filed its Answer incorporating
its counterclaims against KOGIES, it was not liable to pay filing fees
for said counterclaims being compulsory in nature. We stress,
however, that effective August 16, 2004 under Sec. 7, Rule 141, as
amended by A.M. No. 04-2-04-SC, docket fees are now required to
be paid in compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMC’s
Answer is not an initiatory pleading which requires a certification
against forum shopping under Sec. 524 of Rule 7, 1997 Revised Rules
of Civil Procedure. It is a responsive pleading, hence, the courts a
quo did not commit reversible error in denying KOGIES’ motion to
dismiss PGSMC’s compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,25 the CA also pronounced that "certiorari
and Prohibition are neither the remedies to question the propriety of
an interlocutory order of the trial court." 26 The CA erred on its
reliance on Gamboa. Gamboa involved the denial of a motion to
acquit in a criminal case which was not assailable in an action for
certiorari since the denial of a motion to quash required the accused
to plead and to continue with the trial, and whatever objections the
accused had in his motion to quash can then be used as part of his
defense and subsequently can be raised as errors on his appeal if the
judgment of the trial court is adverse to him. The general rule is that
interlocutory orders cannot be challenged by an appeal. 27 Thus,
in Yamaoka v. Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from
an adverse judgment on the merits, incorporating in said
appeal the grounds for assailing the interlocutory orders.
Allowing appeals from interlocutory orders would result in
the ‘sorry spectacle’ of a case being subject of a
counterproductive ping-pong to and from the appellate court
as often as a trial court is perceived to have made an error in
any of its interlocutory rulings. However, where the assailed
interlocutory order was issued with grave abuse of discretion
or patently erroneous and the remedy of appeal would not
afford adequate and expeditious relief, the Court allows
certiorari as a mode of redress.28
Also, appeals from interlocutory orders would open the floodgates to
endless occasions for dilatory motions. Thus, where the interlocutory
order was issued without or in excess of jurisdiction or with grave
abuse of discretion, the remedy is certiorari. 29
The alleged grave abuse of discretion of the respondent court
equivalent to lack of jurisdiction in the issuance of the two assailed
orders coupled with the fact that there is no plain, speedy, and
adequate remedy in the ordinary course of law amply provides the
basis for allowing the resort to a petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in
filing the petition for certiorari. Note that KOGIES’ motion for
reconsideration of the July 23, 1998 RTC Order which denied the
issuance of the injunctive writ had already been denied. Thus,
KOGIES’ only remedy was to assail the RTC’s interlocutory order
via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of
the September 21, 1998 RTC Order relating to the inspection of
things, and the allowance of the compulsory counterclaims has not
yet been resolved, the circumstances in this case would allow an
exception to the rule that before certiorari may be availed of, the
petitioner must have filed a motion for reconsideration and said
motion should have been first resolved by the court a quo. The
reason behind the rule is "to enable the lower court, in the first
instance, to pass upon and correct its mistakes without the
intervention of the higher court."30
The September 21, 1998 RTC Order directing the branch sheriff to
inspect the plant, equipment, and facilities when he is not competent
and knowledgeable on said matters is evidently flawed and devoid of
any legal support. Moreover, there is an urgent necessity to resolve
the issue on the dismantling of the facilities and any further delay
would prejudice the interests of KOGIES. Indeed, there is real and
imminent threat of irreparable destruction or substantial damage to
KOGIES’ equipment and machineries. We find the resort to
certiorari based on the gravely abusive orders of the trial court sans
the ruling on the October 2, 1998 motion for reconsideration to be
proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the
Contract, the arbitration clause. It provides:
Article 15. Arbitration.—All disputes, controversies, or
differences which may arise between the parties, out of or in
relation to or in connection with this Contract or for the
breach thereof, shall finally be settled by arbitration in Seoul,
Korea in accordance with the Commercial Arbitration Rules
of the Korean Commercial Arbitration Board. The award
rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis
supplied.)
Petitioner claims the RTC and the CA erred in ruling that the
arbitration clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place
where the contract is made governs. Lex loci contractus. The
contract in this case was perfected here in the Philippines. Therefore,
our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code
sanctions the validity of mutually agreed arbitral clause or the
finality and binding effect of an arbitral award. Art. 2044 provides,
"Any stipulation that the arbitrators’ award or decision shall be
final, is valid, without prejudice to Articles 2038, 2039 and 2040."
(Emphasis supplied.)
Arts. 2038,31 2039,32 and 204033 abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to
Art. 2043,34 may be voided, rescinded, or annulled, but these would
not denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by
the parties. It has not been shown to be contrary to any law, or
against morals, good customs, public order, or public policy. There
has been no showing that the parties have not dealt with each other
on equal footing. We find no reason why the arbitration clause
should not be respected and complied with by both parties.
In Gonzales v. Climax Mining Ltd.,35 we held that submission to
arbitration is a contract and that a clause in a contract providing that
all matters in dispute between the parties shall be referred to
arbitration is a contract.36 Again in Del Monte Corporation-USA v.
Court of Appeals, we likewise ruled 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." 37
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be
done in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the KCAB, and that the arbitral award is final and binding,
is not contrary to public policy. This Court has sanctioned the
validity of arbitration clauses in a catena of cases. In the 1957 case
of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,38 this
Court had occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms is
valid. In BF Corporation v. Court of Appeals, we held that "[i]n this
jurisdiction, arbitration has been held valid and constitutional. Even
before the approval on June 19, 1953 of Republic Act No. 876, this
Court has countenanced the settlement of disputes through
arbitration. Republic Act No. 876 was adopted to supplement the
New Civil Code’s provisions on arbitration."39 And in LM Power
Engineering Corporation v. Capitol Industrial Construction Groups,
Inc., we declared that:
Being an inexpensive, speedy and amicable method of
settling disputes, arbitration––along with mediation,
conciliation and negotiation––is encouraged by the Supreme
Court. Aside from unclogging judicial dockets, arbitration
also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the
future" in international civil and commercial disputes.
Brushing aside a contractual agreement calling for
arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should
liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted
dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration.40
Having said that the instant arbitration clause is not against public
policy, we come to the question on what governs an arbitration
clause specifying that in case of any dispute arising from the
contract, an arbitral panel will be constituted in a foreign country and
the arbitration rules of the foreign country would govern and its
award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to
arbitrate disputes arising from contractual relations. In case a foreign
arbitral body is chosen by the parties, the arbitration rules of our
domestic arbitration bodies would not be applied. As signatory to the
Arbitration Rules of the UNCITRAL Model Law on International
Commercial Arbitration41 of the United Nations Commission on
International Trade Law (UNCITRAL) in the New York Convention
on June 21, 1985, the Philippines committed itself to be bound by the
Model Law. We have even incorporated the Model Law in Republic
Act No. (RA) 9285, otherwise known as the Alternative Dispute
Resolution Act of 2004 entitled 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, promulgated on April 2, 2004. Secs. 19 and 20 of
Chapter 4 of the Model Law are the pertinent provisions:
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 for enactment by the General
 Assembly in Resolution No. 40/72 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."
While RA 9285 was passed only in 2004, it nonetheless applies in
the instant case since it is a procedural law which has a retroactive
effect. Likewise, KOGIES filed its application for arbitration before
the KCAB on July 1, 1998 and it is still pending because no arbitral
award has yet been rendered. Thus, RA 9285 is applicable to the
instant case. Well-settled is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at
the time of their passage, and are deemed retroactive in that sense
and to that extent. As a general rule, the retroactive application of
procedural laws does not violate any personal rights because no
vested right has yet attached nor arisen from them. 42
Among the pertinent features of RA 9285 applying and incorporating
the UNCITRAL Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that
are properly the subject of arbitration pursuant to an arbitration
clause, and mandates the referral to arbitration in such cases, thus:
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.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in
the arbitration clause to be final and binding are not immediately
enforceable or cannot be implemented immediately. Sec. 35 43 of the
UNCITRAL Model Law stipulates the requirement for the arbitral
award to be recognized by a competent court for enforcement, which
court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285
incorporated these provisos to Secs. 42, 43, and 44 relative to Secs.
47 and 48, thus:
SEC. 42. Application of the New York Convention.––The
New York Convention shall govern the recognition and
enforcement of arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards
shall be filed with the 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 in party to the New York
Convention.
xxxx
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, on grounds of comity and
reciprocity, recognize and enforce a non-convention 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 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
xxxx
SEC. 47. Venue and Jurisdiction.––Proceedings for
recognition and enforcement of an arbitration agreement or
for vacations, 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 filed 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 part cannot be
served notice at such address, at such party’s last known
address. The notice shall be sent al least fifteen (15) days
before the date set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the
RTC are deemed not as a judgment of a foreign court but as a foreign
arbitral award, and when confirmed, are enforced as final and
executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding
arbitral award is similar to judgments or awards given by some of
our quasi-judicial bodies, like the National Labor Relations
Commission and Mines Adjudication Board, whose final judgments
are stipulated to be final and binding, but not immediately executory
in the sense that they may still be judicially reviewed, upon the
instance of any party. Therefore, the final foreign arbitral awards are
similarly situated in that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the
RTC with specific authority and jurisdiction to set aside, reject, or
vacate a foreign arbitral award on grounds provided under Art. 34(2)
of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.––The
New York Convention shall govern the recognition and
enforcement of arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards
shall be filed with the 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 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.
xxxx
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 procedures and 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.
Thus, while the RTC does not have jurisdiction over disputes
governed by arbitration mutually agreed upon by the parties, still the
foreign arbitral award is subject to judicial review by the RTC which
can set aside, reject, or vacate it. In this sense, what this Court held
in Chung Fu Industries (Phils.), Inc. relied upon by KOGIES is
applicable insofar as the foreign arbitral awards, while final and
binding, do not oust courts of jurisdiction since these arbitral awards
are not absolute and without exceptions as they are still judicially
reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral
awards, whether domestic or foreign, are subject to judicial review
on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign
arbitral awards
The differences between a final arbitral award from an international
or foreign arbitral tribunal and an award given by a local arbitral
tribunal are the specific grounds or conditions that vest jurisdiction
over our courts to review the awards.
For foreign or international arbitral awards which must first be
confirmed by the RTC, the grounds for setting aside, rejecting or
vacating the award by the RTC are provided under Art. 34(2) of the
UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by
the RTC pursuant to Sec. 23 of RA 876 44 and shall be recognized as
final and executory decisions of the RTC, 45 they may only be
assailed before the RTC and vacated on the grounds provided under
Sec. 25 of RA 876.46
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the
remedy of an aggrieved party in cases where the RTC sets aside,
rejects, vacates, modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or 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 and procedure to be promulgated by the Supreme
Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the
appellate court to post a 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.
Thereafter, the CA decision may further be appealed or reviewed
before this Court through a petition for review under Rule 45 of the
Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must
submit to the foreign arbitration as it bound itself through the subject
contract. While it may have misgivings on the foreign arbitration
done in Korea by the KCAB, it has available remedies under RA
9285. Its interests are duly protected by the law which requires that
the arbitral award that may be rendered by KCAB must be confirmed
here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention
that an arbitration clause, stipulating that the arbitral award is final
and binding, does not oust our courts of jurisdiction as the
international arbitral award, the award of which is not absolute and
without exceptions, is still judicially reviewable under certain
conditions provided for by the UNCITRAL Model Law on ICA as
applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract
which provides that the parties may dispense with the arbitration
clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is
valid and binding on the parties, and not contrary to public policy;
consequently, being bound to the contract of arbitration, a party may
not unilaterally rescind or terminate the contract for whatever cause
without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles47 and reiterated in succeeding cases, 48 that the act of treating
a contract as rescinded on account of infractions by the other
contracting party is valid albeit provisional as it can be judicially
assailed, is not applicable to the instant case on account of a valid
stipulation on arbitration. Where an arbitration clause in a contract is
availing, neither of the parties can unilaterally treat the contract as
rescinded since whatever infractions or breaches by a party or
differences arising from the contract must be brought first and
resolved by arbitration, and not through an extrajudicial rescission or
judicial action.
The issues arising from the contract between PGSMC and KOGIES
on whether the equipment and machineries delivered and installed
were properly installed and operational in the plant in Carmona,
Cavite; the ownership of equipment and payment of the contract
price; and whether there was substantial compliance by KOGIES in
the production of the samples, given the alleged fact that PGSMC
could not supply the raw materials required to produce the sample
LPG cylinders, are matters proper for arbitration. Indeed, we note
that on July 1, 1998, KOGIES instituted an Application for
Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of
the Contract as amended. Thus, it is incumbent upon PGSMC to
abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting
PGSMC’s Motion for Inspection of Things on September 21, 1998,
as the subject matter of the motion is under the primary jurisdiction
of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC
Branch Sheriff from the inspection made on October 28, 1998, as
ordered by the trial court on October 19, 1998, is of no worth as said
Sheriff is not technically competent to ascertain the actual status of
the equipment and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998
RTC Orders pertaining to the grant of the inspection of the
equipment and machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on
whether the total contract price of USD 1,530,000 was for the whole
plant and its installation is beyond the ambit of a Petition for
Certiorari.
Petitioner’s position is untenable.
It is settled that questions of fact cannot be raised in an original
action for certiorari.49 Whether or not there was full payment for the
machineries and equipment and installation is indeed a factual issue
prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is
the order of the RTC in resolving the issue on the ownership of the
plant when it is the arbitral body (KCAB) and not the RTC which
has jurisdiction and authority over the said issue. The RTC’s
determination of such factual issue constitutes grave abuse of
discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive
writ paving the way for PGSMC to dismantle and transfer the
equipment and machineries, we find it to be in order considering the
factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment
and machineries might well be under the primary jurisdiction of the
arbitral body to decide, yet the RTC under Sec. 28 of RA 9285 has
jurisdiction to hear and grant interim measures to protect vested
rights of the parties. Sec. 28 pertinently provides:
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 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 or to the extent that the
arbitral tribunal has no power to act or is unable to act
effectivity, 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 the request.
(b) The following rules on interim or provisional relief shall
be observed:
Any party may request that provisional relief be granted
against the adverse party.
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.
(c) The order granting provisional relief may be conditioned
upon the provision of security or any act or omission
specified in the order.
(d) 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 the evidence
supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an
arbitral tribunal.
(g) 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. (Emphasis
ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an
"interim measure" of protection as:
Article 17. Power of arbitral tribunal to order interim
measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether
in the form of an award or in another form, by which, at any
time prior to the issuance of the award by which the dispute
is finally decided, the arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending determination
of the dispute;
(b) Take action that would prevent, or refrain from taking
action that is likely to cause, current or imminent harm or
prejudice to the arbitral process itself;
(c) Provide a means of preserving assets out of which a
subsequent award may be satisfied; or
(d) Preserve evidence that may be relevant and material to
the resolution of the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts
power and jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim
measure in relation to arbitration proceedings, irrespective of
whether their place is in the territory of this State, as it has in
relation to proceedings in courts. The court shall exercise
such power in accordance with its own procedures in
consideration of the specific features of international
arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon
Hydro Corporation, we were explicit that even "the pendency of an
arbitral proceeding does not foreclose resort to the courts for
provisional reliefs." We explicated this way:
As a fundamental point, the pendency of arbitral proceedings
does not foreclose resort to the courts for provisional reliefs.
The Rules of the ICC, which governs the parties’ arbitral
dispute, allows the application of a party to a judicial
authority for interim or conservatory measures. Likewise,
Section 14 of Republic Act (R.A.) No. 876 (The Arbitration
Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter
which is the subject of the dispute in arbitration. In addition,
R.A. 9285, otherwise known as the "Alternative Dispute
Resolution Act of 2004," allows the filing of provisional or
interim measures with the regular courts whenever the
arbitral tribunal has no power to act or to act effectively. 50
It is thus beyond cavil that the RTC has authority and jurisdiction to
grant interim measures of protection.
Secondly, considering that the equipment and machineries are in the
possession of PGSMC, it has the right to protect and preserve the
equipment and machineries in the best way it can. Considering that
the LPG plant was non-operational, PGSMC has the right to
dismantle and transfer the equipment and machineries either for their
protection and preservation or for the better way to make good use of
them which is ineluctably within the management discretion of
PGSMC.
Thirdly, and of greater import is the reason that maintaining the
equipment and machineries in Worth’s property is not to the best
interest of PGSMC due to the prohibitive rent while the LPG plant as
set-up is not operational. PGSMC was losing PhP322,560 as monthly
rentals or PhP3.87M for 1998 alone without considering the 10%
annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or
petitions relating to the preservation or transfer of the equipment and
machineries as an interim measure, yet on hindsight, the July 23,
1998 Order of the RTC allowing the transfer of the equipment and
machineries given the non-recognition by the lower courts of the
arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been
paid a substantial amount based on the contract. Moreover, KOGIES
is amply protected by the arbitral action it has instituted before the
KCAB, the award of which can be enforced in our jurisdiction
through the RTC. Besides, by our decision, PGSMC is compelled to
submit to arbitration pursuant to the valid arbitration clause of its
contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle
and transfer the subject equipment and machineries, it does not have
the right to convey or dispose of the same considering the pending
arbitral proceedings to settle the differences of the parties. PGSMC
therefore must preserve and maintain the subject equipment and
machineries with the diligence of a good father of a family 51 until
final resolution of the arbitral proceedings and enforcement of the
award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249
is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in
Civil Case No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the
arbitration of their dispute and differences arising from the subject
Contract before the KCAB; and

(4) PGSMC is hereby ALLOWED to dismantle and transfer the

equipment and machineries, if it had not done so, and ORDERED to
preserve and maintain them until the finality of whatever arbitral
award is given in the arbitration proceedings.

No pronouncement as to costs.

SO ORDERED.