G.R. No. 169332 February 11, 2008
Was the broadcast of WINS WEEKLY by the claimant duly authorized by
ABS-CBN BROADCASTING CORPORATION, petitioner, vs. WORLD
INTERACTIVE NETWORK SYSTEMS (WINS) JAPAN CO., LTD.,
respondent.
DECISION
CORONA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court
seeks to set aside the February 16, 2005 decision1 and August 16, 2005
resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 81940.
On September 27, 1999, petitioner ABS-CBN Broadcasting Corporation
entered into a licensing agreement with respondent World Interactive
Network Systems (WINS) Japan Co., Ltd., a foreign corporation licensed
under the laws of Japan. Under the agreement, respondent was granted the
exclusive license to distribute and sublicense the distribution of the television
service known as "The Filipino Channel" (TFC) in Japan. By virtue thereof,
petitioner undertook to transmit the TFC programming signals to respondent
which the latter received through its decoders and distributed to its
subscribers.
A dispute arose between the parties when petitioner accused respondent of
inserting nine episodes of WINS WEEKLY, a weekly 35-minute community
news program for Filipinos in Japan, into the TFC programming from March
to May 2002.3 Petitioner claimed that these were "unauthorized insertions"
constituting a material breach of their agreement. Consequently, on May 9,
2002,4 petitioner notified respondent of its intention to terminate the
agreement effective June 10, 2002.
Thereafter, respondent filed an arbitration suit pursuant to the arbitration
clause of its agreement with petitioner. It contended that the airing of WINS
WEEKLY was made with petitioner's prior approval. It also alleged that
petitioner only threatened to terminate their agreement because it wanted to
renegotiate the terms thereof to allow it to demand higher fees. Respondent
also prayed for damages for petitioner's alleged grant of an exclusive
distribution license to another entity, NHK (Japan Broadcasting
Corporation).5
The parties appointed Professor Alfredo F. Tadiar to act as sole arbitrator.
They stipulated on the following issues in their terms of reference (TOR)6:
1.
the respondent [herein petitioner]?
2. Did such broadcast constitute a material breach of the agreement that is a
ground for termination of the agreement in accordance with Section 13 (a)
thereof?
3. If so, was the breach seasonably cured under the same contractual
provision of Section 13 (a)?
4. Which party is entitled to the payment of damages they claim and to the
other reliefs prayed for?
xxx xxx xxx
The arbitrator found in favor of respondent. He held that petitioner gave its
approval to respondent for the airing of WINS WEEKLY as shown by a series
of written exchanges between the parties. He also ruled that, had there really
been a material breach of the agreement, petitioner should have terminated
the same instead of sending a mere notice to terminate said agreement. The
arbitrator found that petitioner threatened to terminate the agreement due to
its desire to compel respondent to re-negotiate the terms thereof for higher
fees. He further stated that even if respondent committed a breach of the
agreement, the same was seasonably cured. He then allowed respondent to
recover temperate damages, attorney's fees and one-half of the amount it
paid as arbitrator's fee.
Petitioner filed in the CA a petition for review under Rule 43 of the Rules of
Court or, in the alternative, a petition for certiorari under Rule 65 of the same
Rules, with application for temporary restraining order and writ of preliminary
injunction. It was docketed as CA-G.R. SP No. 81940. It alleged serious
errors of fact and law and/or grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the arbitrator.
Respondent, on the other hand, filed a petition for confirmation of arbitral
award before the Regional Trial Court (RTC) of Quezon City, Branch 93,
docketed as Civil Case No. Q-04-51822.
Consequently, petitioner filed a supplemental petition in the CA seeking to
enjoin the RTC of Quezon City from further proceeding with the hearing of
respondent's petition for confirmation of arbitral award. After the petition was
admitted by the appellate court, the RTC of Quezon City issued an order
holding in abeyance any further action on respondent's petition as the
assailed decision of the arbitrator had already become the subject of an
appeal in the CA. Respondent filed a motion for reconsideration but no
resolution has been issued by the lower court to date.8
1
On February 16, 2005, the CA rendered the assailed decision dismissing
ABS-CBN’s petition for lack of jurisdiction. It stated that as the TOR itself
provided that the arbitrator's decision shall be final and unappealable and
that no motion for reconsideration shall be filed, then the petition for review
must fail. It ruled that it is the RTC which has jurisdiction over questions
relating to arbitration. It held that the only instance it can exercise jurisdiction
over an arbitral award is an appeal from the trial court's decision confirming,
vacating or modifying the arbitral award. It further stated that a petition for
certiorari under Rule 65 of the Rules of Court is proper in arbitration cases
only if the courts refuse or neglect to inquire into the facts of an arbitrator's
award. The dispositive portion of the CA decision read:
WHEREFORE, the instant petition is hereby DISMISSED for lack of
jurisdiction. The application for a writ of injunction and temporary restraining
order is likewise DENIED. The Regional Trial Court of Quezon City Branch
93 is directed to proceed with the trial for the Petition for Confirmation of
Arbitral Award.
SO ORDERED.
Petitioner moved for reconsideration. The same was denied. Hence, this
petition.
Petitioner contends that the CA, in effect, ruled that: (a) it should have first
filed a petition to vacate the award in the RTC and only in case of denial
could it elevate the matter to the CA via a petition for review under Rule 43
and (b) the assailed decision implied that an aggrieved party to an arbitral
award does not have the option of directly filing a petition for review under
Rule 43 or a petition for certiorari under Rule 65 with the CA even if the
issues raised pertain to errors of fact and law or grave abuse of discretion, as
the case may be, and not dependent upon such grounds as enumerated
under Section 24 (petition to vacate an arbitral award) of RA 876 (the
Arbitration Law). Petitioner alleged serious error on the part of the CA.
The issue before us is whether or not an aggrieved party in a voluntary
arbitration dispute may avail of, directly in the CA, a petition for review under
Rule 43 or a petition for certiorari under Rule 65 of the Rules of Court,
instead of filing a petition to vacate the award in the RTC when the grounds
invoked to overturn the arbitrator’s decision are other than those for a petition
to vacate an arbitral award enumerated under RA 876.
RA 876 itself mandates that it is the Court of First Instance, now the RTC,
which has jurisdiction over questions relating to arbitration,9 such as a
petition to vacate an arbitral award.
Section 24 of RA 876 provides for the specific grounds for a petition to
vacate an award made by an arbitrator:
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.
Based on the foregoing provisions, the law itself clearly provides that the
RTC must issue an order vacating an arbitral award only "in any one of the . .
. cases" enumerated therein. Under the legal maxim in statutory construction
expressio unius est exclusio alterius, the explicit mention of one thing in a
statute means the elimination of others not specifically mentioned. As RA
876 did not expressly provide for errors of fact and/or law and grave abuse of
discretion (proper grounds for a petition for review under Rule 43 and a
petition for certiorari under Rule 65, respectively) as grounds for maintaining
a petition to vacate an arbitral award in the RTC, it necessarily follows that a
party may not avail of the latter remedy on the grounds of errors of fact
and/or law or grave abuse of discretion to overturn an arbitral award.
Adamson v. Court of Appeals10 gave ample warning that a petition to vacate
filed in the RTC which is not based on the grounds enumerated in Section 24
of RA 876 should be dismissed. In that case, the trial court vacated the
arbitral award seemingly based on grounds included in Section 24 of RA 876
but a closer reading thereof revealed otherwise. On appeal, the CA reversed
the decision of the trial court and affirmed the arbitral award. In affirming the
CA, we held:
2
The Court of Appeals, in reversing the trial court's decision held that the
nullification of the decision of the Arbitration Committee was not based on the
grounds provided by the Arbitration Law and that xxx private respondents
(petitioners herein) have failed to substantiate with any evidence their claim
of partiality. Significantly, even as respondent judge ruled against the
arbitrator's award, he could not find fault with their impartiality and integrity.
Evidently, the nullification of the award rendered at the case at bar was not
made on the basis of any of the grounds provided by law.
xxx xxx xxx
It is clear, therefore, that the award was vacated not because of evident
partiality of the arbitrators but because the latter interpreted the contract in a
way which was not favorable to herein petitioners and because it considered
that herein private respondents, by submitting the controversy to arbitration,
was seeking to renege on its obligations under the contract.
xxx xxx xxx
It is clear then that the Court of Appeals reversed the trial court not because
the latter reviewed the arbitration award involved herein, but because the
respondent appellate court found that the trial court had no legal basis for
vacating the award. (Emphasis supplied).
In cases not falling under any of the aforementioned grounds to vacate an
award, the Court has already made several pronouncements that a petition
for review under Rule 43 or a petition for certiorari under Rule 65 may be
availed of in the CA. Which one would depend on the grounds relied upon by
petitioner.
In Luzon Development Bank v. Association of Luzon Development Bank
Employees,11 the Court held that a voluntary arbitrator is properly classified
as a "quasi-judicial instrumentality" and is, thus, within the ambit of Section 9
(3) of the Judiciary Reorganization Act, as amended. Under this section, the
Court of Appeals shall exercise:
xxx xxx xxx
(3) Exclusive appellate jurisdiction over all final judgments, decisions,
resolutions, orders or awards of Regional Trial Courts and quasi-judicial
agencies, instrumentalities, boards or commissions, including the Securities
and Exchange Commission, the Employees’ Compensation Commission and
the Civil Service Commission, except those falling within the appellate
jurisdiction of the Supreme Court in accordance with the Constitution, the
Labor Code of the Philippines under Presidential Decree No. 442, as
amended, the provisions of this Act and of subparagraph (1) of the third
paragraph and subparagraph (4) of the fourth paragraph of Section 17 of the
Judiciary Act of 1948. (Emphasis supplied)
As such, decisions handed down by voluntary arbitrators fall within the
exclusive appellate jurisdiction of the CA. This decision was taken into
consideration in approving Section 1 of Rule 43 of the Rules of Court.12
Thus:
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 Number 6657,
Government Service Insurance System, Employees Compensation
Commission, Agricultural Inventions Board, Insurance Commission,
Philippine Atomic Energy Commission, Board of Investments, Construction
Industry Arbitration Commission, and voluntary arbitrators authorized by law.
(Emphasis supplied)
This rule was cited in Sevilla Trading Company v. Semana,13 Manila
Midtown Hotel v. Borromeo,14 and Nippon Paint Employees Union-Olalia v.
Court of Appeals.15 These cases held that the proper remedy from the
adverse decision of a voluntary arbitrator, if errors of fact and/or law are
raised, is a petition for review under Rule 43 of the Rules of Court. Thus,
petitioner's contention that it may avail of a petition for review under Rule 43
under the circumstances of this case is correct.
As to petitioner's arguments that a petition for certiorari under Rule 65 may
also be resorted to, we hold the same to be in accordance with the
Constitution and jurisprudence.
Section 1 of Article VIII of the 1987 Constitution provides that:
SECTION 1. The judicial power shall be vested in one Supreme Court and in
such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (Emphasis supplied)
3
As may be gleaned from the above stated provision, it is well within the
power and jurisdiction of the Court to inquire whether any instrumentality of
the Government, such as a voluntary arbitrator, has gravely abused its
discretion in the exercise of its functions and prerogatives. Any agreement
stipulating that "the decision of the arbitrator shall be final and unappealable"
and "that no further judicial recourse if either party disagrees with the whole
or any part of the arbitrator's award may be availed of" cannot be held to
preclude in proper cases the power of judicial review which is inherent in
courts.16 We will not hesitate to review a voluntary arbitrator's award where
there is a showing of grave abuse of authority or discretion and such is
properly raised in a petition for certiorari17 and there is no appeal, nor any
plain, speedy remedy in the course of law.18
Significantly, Insular Savings Bank v. Far East Bank and Trust Company19
definitively outlined several judicial remedies an aggrieved party to an arbitral
award may undertake:
(1) a petition in the proper RTC to issue an order to vacate the award on the
grounds provided for in Section 24 of RA 876;
(2) a petition for review in the CA under Rule 43 of the Rules of Court on
questions of fact, of law, or mixed questions of fact and law; and
(3) a petition for certiorari under Rule 65 of the Rules of Court should the
arbitrator have acted without or in excess of his jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction.
Nevertheless, although petitioner’s position on the judicial remedies available
to it was correct, we sustain the dismissal of its petition by the CA. The
remedy petitioner availed of, entitled "alternative petition for review under
Rule 43 or petition for certiorari under Rule 65," was wrong.
Time and again, we have ruled that the remedies of appeal and certiorari are
mutually exclusive and not alternative or successive.20
Proper issues that may be raised in a petition for review under Rule 43
pertain to errors of fact, law or mixed questions of fact and law.21 While a
petition for certiorari under Rule 65 should only limit itself to errors of
jurisdiction, that is, grave abuse of discretion amounting to a lack or excess
of jurisdiction.22 Moreover, it cannot be availed of where appeal is the proper
remedy or as a substitute for a lapsed appeal.23
In the case at bar, the questions raised by petitioner in its alternative petition
before the CA were the following:
A. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT THE
BROADCAST OF "WINS WEEKLY" WAS DULY AUTHORIZED BY ABS-
CBN.
B. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT THE
UNAUTHORIZED BROADCAST DID NOT CONSTITUTE MATERIAL
BREACH OF THE AGREEMENT.
C. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT WINS
SEASONABLY CURED THE BREACH.
D. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT TEMPERATE
DAMAGES IN THE AMOUNT OF P1,166,955.00 MAY BE AWARDED TO
WINS.
E. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN AWARDING ATTORNEY'S FEES
IN THE UNREASONABLE AMOUNT AND UNCONSCIONABLE AMOUNT
OF P850,000.00.
F. THE ERROR COMMITTED BY THE SOLE ARBITRATOR IS NOT A
SIMPLE ERROR OF JUDGMENT OR ABUSE OF DISCRETION. IT IS
GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS
OF JURISDICTION.
A careful reading of the assigned errors reveals that the real issues calling
for the CA's resolution were less the alleged grave abuse of discretion
exercised by the arbitrator and more about the arbitrator’s appreciation of the
issues and evidence presented by the parties. Therefore, the issues clearly
fall under the classification of errors of fact and law — questions which may
be passed upon by the CA via a petition for review under Rule 43. Petitioner
cleverly crafted its assignment of errors in such a way as to straddle both
judicial remedies, that is, by alleging serious errors of fact and law (in which
case a petition for review under Rule 43 would be proper) and grave abuse
of discretion (because of which a petition for certiorari under Rule 65 would
be permissible).
It must be emphasized that every lawyer should be familiar with the
distinctions between the two remedies for it is not the duty of the courts to
determine under which rule the petition should fall.24 Petitioner's ploy was
fatal to its cause. An appeal taken either to this Court or the CA by the wrong
4
or inappropriate mode shall be dismissed.25 Thus, the alternative petition
filed in the CA, being an inappropriate mode of appeal, should have been
dismissed outright by the CA.

WHEREFORE, the petition is hereby DENIED. The February 16, 2005

decision and August 16, 2005 resolution of the Court of Appeals in CA-G.R.
SP No. 81940 directing the Regional Trial Court of Quezon City, Branch 93
to proceed with the trial of the petition for confirmation of arbitral award is
AFFIRMED.

Costs against petitioner.

SO ORDERED.

5
G.R. No. 185572 February 7, 2012
CHINA NATIONAL MACHINERY & EQUIPMENT CORP. (GROUP),
Petitioner, vs. HON. CESAR D. SANTAMARIA, in his official capacity as
Presiding Judge of Branch 145, Regional Trial Court of Makati City,
HERMINIO HARRY L. ROQUE, JR., JOEL R. BUTUYAN, ROGER R.
RAYEL, ROMEL R. BAGARES, CHRISTOPHER FRANCISCO C.
BOLASTIG, LEAGUE OF URBAN POOR FOR ACTION (LUPA), KILUSAN
NG MARALITA SA MEYCAUAYAN (KMM-LUPA CHAPTER), DANILO M.
CALDERON, VICENTE C. ALBAN, MERLYN M. VAAL, LOLITA S.
QUINONES, RICARDO D. LANOZO, JR., CONCHITA G. GOZO, MA.
TERESA D. ZEPEDA, JOSEFINA A. LANOZO, and SERGIO C. LEGASPI,
JR., KALIPUNAN NG DAMAYANG MAHIHIRAP (KADAMAY), EDY
CLERIGO, RAMMIL DINGAL, NELSON B. TERRADO, CARMEN
DEUNIDA, and EDUARDO LEGSON, Respondents.
DECISION
SERENO, J.:
This is a Petition for Review on Certiorari with Prayer for the Issuance of a
Temporary Restraining Order (TRO) and/or Preliminary Injunction assailing
the 30 September 2008 Decision and 5 December 2008 Resolution of the
Court of Appeals (CA) in CA–G.R. SP No. 103351.
On 14 September 2002, petitioner China National Machinery & Equipment
Corp. (Group) (CNMEG), represented by its chairperson, Ren Hongbin,
entered into a Memorandum of Understanding with the North Luzon Railways
Corporation (Northrail), represented by its president, Jose L. Cortes, Jr. for
the conduct of a feasibility study on a possible railway line from Manila to
San Fernando, La Union (the Northrail Project).
On 30 August 2003, the Export Import Bank of China (EXIM Bank) and the
Department of Finance of the Philippines (DOF) entered into a Memorandum
of Understanding (Aug 30 MOU), wherein China agreed to extend
Preferential Buyer’s Credit to the Philippine government to finance the
Northrail Project. The Chinese government designated EXIM Bank as the
lender, while the Philippine government named the DOF as the borrower.
Under the Aug 30 MOU, EXIM Bank agreed to extend an amount not
exceeding USD 400,000,000 in favor of the DOF, payable in 20 years, with a
5-year grace period, and at the rate of 3% per annum.
On 1 October 2003, the Chinese Ambassador to the Philippines, Wang
Chungui (Amb. Wang), wrote a letter to DOF Secretary Jose Isidro Camacho
(Sec. Camacho) informing him of CNMEG’s designation as the Prime
Contractor for the Northrail Project.
On 30 December 2003, Northrail and CNMEG executed a Contract
Agreement for the construction of Section I, Phase I of the North Luzon
Railway System from Caloocan to Malolos on a turnkey basis (the Contract
Agreement). The contract price for the Northrail Project was pegged at USD
421,050,000.
On 26 February 2004, the Philippine government and EXIM Bank entered
into a counterpart financial agreement – Buyer Credit Loan Agreement No.
BLA 04055 (the Loan Agreement). In the Loan Agreement, EXIM Bank
agreed to extend Preferential Buyer’s Credit in the amount of USD
400,000,000 in favor of the Philippine government in order to finance the
construction of Phase I of the Northrail Project.
On 13 February 2006, respondents filed a Complaint for Annulment of
Contract and Injunction with Urgent Motion for Summary Hearing to
Determine the Existence of Facts and Circumstances Justifying the Issuance
of Writs of Preliminary Prohibitory and Mandatory Injunction and/or TRO
against CNMEG, the Office of the Executive Secretary, the DOF, the
Department of Budget and Management, the National Economic
Development Authority and Northrail.11 The case was docketed as Civil
Case No. 06-203 before the Regional Trial Court, National Capital Judicial
Region, Makati City, Branch 145 (RTC Br. 145). In the Complaint,
respondents alleged that the Contract Agreement and the Loan Agreement
were void for being contrary to (a) the Constitution; (b) Republic Act No. 9184
(R.A. No. 9184), otherwise known as the Government Procurement Reform
Act; (c) Presidential Decree No. 1445, otherwise known as the Government
Auditing Code; and (d) Executive Order No. 292, otherwise known as the
Administrative Code.12
RTC Br. 145 issued an Order dated 17 March 2006 setting the case for
hearing on the issuance of injunctive reliefs. On 29 March 2006, CNMEG
filed an Urgent Motion for Reconsideration of this Order. Before RTC Br. 145
could rule thereon, CNMEG filed a Motion to Dismiss dated 12 April 2006,
arguing that the trial court did not have jurisdiction over (a) its person, as it
was an agent of the Chinese government, making it immune from suit, and
(b) the subject matter, as the Northrail Project was a product of an executive
agreement.
On 15 May 2007, RTC Br. 145 issued an Omnibus Order denying CNMEG’s
Motion to Dismiss and setting the case for summary hearing to determine
whether the injunctive reliefs prayed for should be issued. CNMEG then filed
a Motion for Reconsideration, which was denied by the trial court in an Order
6
dated 10 March 2008.18 Thus, CNMEG filed before the CA a Petition for
Certiorari with Prayer for the Issuance of TRO and/or Writ of Preliminary
Injunction dated 4 April 2008.
In the assailed Decision dated 30 September 2008, the appellate court
dismissed the Petition for Certiorari. Subsequently, CNMEG filed a Motion for
Reconsideration,21 which was denied by the CA in a Resolution dated 5
December 2008.22 Thus, CNMEG filed the instant Petition for Review on
Certiorari dated 21 January 2009, raising the following issues:
Whether or not petitioner CNMEG is an agent of the sovereign People’s
Republic of China.
Whether or not the Northrail contracts are products of an executive
agreement between two sovereign states.
Whether or not the certification from the Department of Foreign Affairs is
necessary under the foregoing circumstances.
Whether or not the act being undertaken by petitioner CNMEG is an act jure
imperii.
Whether or not the Court of Appeals failed to avoid a procedural limbo in the
lower court.
Whether or not the Northrail Project is subject to competitive public bidding.
Whether or not the Court of Appeals ignored the ruling of this Honorable
Court in the Neri case.
CNMEG prays for the dismissal of Civil Case No. 06-203 before RTC Br. 145
for lack of jurisdiction. It likewise requests this Court for the issuance of a
TRO and, later on, a writ of preliminary injunction to restrain public
respondent from proceeding with the disposition of Civil Case No. 06-203.
The crux of this case boils down to two main issues, namely:
1. Whether CNMEG is entitled to immunity, precluding it from being sued
before a local court.
2. Whether the Contract Agreement is an executive agreement, such that it
cannot be questioned by or before a local court.
First issue: Whether CNMEG is entitled to immunity
This Court explained the doctrine of sovereign immunity in Holy See v.
Rosario, to wit:
There are two conflicting concepts of sovereign immunity, each widely held
and firmly established. According to the classical or absolute theory, a
sovereign cannot, without its consent, be made a respondent in the courts of
another sovereign. According to the newer or restrictive theory, the immunity
of the sovereign is recognized only with regard to public acts or acts jure
imperii of a state, but not with regard to private acts or acts jure gestionis.
(Emphasis supplied; citations omitted.)
xxx xxx xxx
The restrictive theory came about because of the entry of sovereign states
into purely commercial activities remotely connected with the discharge of
governmental functions. This is particularly true with respect to the
Communist states which took control of nationalized business activities and
international trading.
In JUSMAG v. National Labor Relations Commission,25 this Court affirmed
the Philippines’ adherence to the restrictive theory as follows:
The doctrine of state immunity from suit has undergone further
metamorphosis. The view evolved that the existence of a contract does not,
per se, mean that sovereign states may, at all times, be sued in local courts.
The complexity of relationships between sovereign states, brought about by
their increasing commercial activities, mothered a more restrictive application
of the doctrine.
xxx xxx xxx
As it stands now, the application of the doctrine of immunity from suit has
been restricted to sovereign or governmental activities (jure imperii). The
mantle of state immunity cannot be extended to commercial, private and
proprietary acts (jure gestionis).26 (Emphasis supplied.)
Since the Philippines adheres to the restrictive theory, it is crucial to
ascertain the legal nature of the act involved – whether the entity claiming
immunity performs governmental, as opposed to proprietary, functions. As
held in United States of America v. Ruiz –27
The restrictive application of State immunity is proper only when the
proceedings arise out of commercial transactions of the foreign sovereign, its
commercial activities or economic affairs. Stated differently, a State may be
said to have descended to the level of an individual and can thus be deemed
to have tacitly given its consent to be sued only when it enters into business
7
contracts. It does not apply where the contract relates to the exercise of its
sovereign functions.
A. CNMEG is engaged in a proprietary activity.
A threshold question that must be answered is whether CNMEG performs
governmental or proprietary functions. A thorough examination of the basic
facts of the case would show that CNMEG is engaged in a proprietary
activity.
The parties executed the Contract Agreement for the purpose of constructing
the Luzon Railways, viz:
WHEREAS the Employer (Northrail) desired to construct the railways form
Caloocan to Malolos, section I, Phase I of Philippine North Luzon Railways
Project (hereinafter referred to as THE PROJECT);
AND WHEREAS the Contractor has offered to provide the Project on
Turnkey basis, including design, manufacturing, supply, construction,
commissioning, and training of the Employer’s personnel;
AND WHEREAS the Loan Agreement of the Preferential Buyer’s Credit
between Export-Import Bank of China and Department of Finance of
Republic of the Philippines;
NOW, THEREFORE, the parties agree to sign this Contract for the
Implementation of the Project.
The above-cited portion of the Contract Agreement, however, does not on its
own reveal whether the construction of the Luzon railways was meant to be a
proprietary endeavor. In order to fully understand the intention behind and
the purpose of the entire undertaking, the Contract Agreement must not be
read in isolation. Instead, it must be construed in conjunction with three other
documents executed in relation to the Northrail Project, namely: (a) the
Memorandum of Understanding dated 14 September 2002 between Northrail
and CNMEG;30 (b) the letter of Amb. Wang dated 1 October 2003
addressed to Sec. Camacho;31 and (c) the Loan Agreement.32
1. Memorandum of Understanding dated 14 September 2002
The Memorandum of Understanding dated 14 September 2002 shows that
CNMEG sought the construction of the Luzon Railways as a proprietary
venture. The relevant parts thereof read:
WHEREAS, CNMEG has the financial capability, professional competence
and technical expertise to assess the state of the [Main Line North (MLN)]
and recommend implementation plans as well as undertake its rehabilitation
and/or modernization;
WHEREAS, CNMEG has expressed interest in the rehabilitation and/or
modernization of the MLN from Metro Manila to San Fernando, La Union
passing through the provinces of Bulacan, Pampanga, Tarlac, Pangasinan
and La Union (the ‘Project’);
WHEREAS, the NORTHRAIL CORP. welcomes CNMEG’s proposal to
undertake a Feasibility Study (the "Study") at no cost to NORTHRAIL
CORP.;
WHEREAS, the NORTHRAIL CORP. also welcomes CNMEG’s interest in
undertaking the Project with Supplier’s Credit and intends to employ CNMEG
as the Contractor for the Project subject to compliance with Philippine and
Chinese laws, rules and regulations for the selection of a contractor;
WHEREAS, the NORTHRAIL CORP. considers CNMEG’s proposal
advantageous to the Government of the Republic of the Philippines and has
therefore agreed to assist CNMEG in the conduct of the aforesaid Study;
xxx xxx xxx
II. APPROVAL PROCESS
2.1 As soon as possible after completion and presentation of the Study in
accordance with Paragraphs 1.3 and 1.4 above and in compliance with
necessary governmental laws, rules, regulations and procedures required
from both parties, the parties shall commence the preparation and
negotiation of the terms and conditions of the Contract (the "Contract") to be
entered into between them on the implementation of the Project. The parties
shall use their best endeavors to formulate and finalize a Contract with a
view to signing the Contract within one hundred twenty (120) days from
CNMEG’s presentation of the Study.33 (Emphasis supplied)
Clearly, it was CNMEG that initiated the undertaking, and not the Chinese
government. The Feasibility Study was conducted not because of any
diplomatic gratuity from or exercise of sovereign functions by the Chinese
government, but was plainly a business strategy employed by CNMEG with a
view to securing this commercial enterprise.
2. Letter dated 1 October 2003
8
That CNMEG, and not the Chinese government, initiated the Northrail Project
was confirmed by Amb. Wang in his letter dated 1 October 2003, thus:
1. CNMEG has the proven competence and capability to undertake the
Project as evidenced by the ranking of 42 given by the ENR among 225
global construction companies.
2. CNMEG already signed an MOU with the North Luzon Railways
Corporation last September 14, 2000 during the visit of Chairman Li Peng.
Such being the case, they have already established an initial working
relationship with your North Luzon Railways Corporation. This would
categorize CNMEG as the state corporation within the People’s Republic of
China which initiated our Government’s involvement in the Project.
3. Among the various state corporations of the People’s Republic of China,
only CNMEG has the advantage of being fully familiar with the current
requirements of the Northrail Project having already accomplished a
Feasibility Study which was used as inputs by the North Luzon Railways
Corporation in the approvals (sic) process required by the Republic of the
Philippines.34 (Emphasis supplied.)
Thus, the desire of CNMEG to secure the Northrail Project was in the
ordinary or regular course of its business as a global construction company.
The implementation of the Northrail Project was intended to generate profit
for CNMEG, with the Contract Agreement placing a contract price of USD
421,050,000 for the venture.35 The use of the term "state corporation" to
refer to CNMEG was only descriptive of its nature as a government-owned
and/or -controlled corporation, and its assignment as the Primary Contractor
did not imply that it was acting on behalf of China in the performance of the
latter’s sovereign functions. To imply otherwise would result in an absurd
situation, in which all Chinese corporations owned by the state would be
automatically considered as performing governmental activities, even if they
are clearly engaged in commercial or proprietary pursuits.
3. The Loan Agreement
CNMEG claims immunity on the ground that the Aug 30 MOU on the
financing of the Northrail Project was signed by the Philippine and Chinese
governments, and its assignment as the Primary Contractor meant that it was
bound to perform a governmental function on behalf of China. However, the
Loan Agreement, which originated from the same Aug 30 MOU, belies this
reasoning, viz:
Article 11. xxx (j) Commercial Activity The execution and delivery of this
Agreement by the Borrower constitute, and the Borrower’s performance of
and compliance with its obligations under this Agreement will constitute,
private and commercial acts done and performed for commercial purposes
under the laws of the Republic of the Philippines and neither the Borrower
nor any of its assets is entitled to any immunity or privilege (sovereign or
otherwise) from suit, execution or any other legal process with respect to its
obligations under this Agreement, as the case may be, in any jurisdiction.
Notwithstanding the foregoing, the Borrower does not waive any immunity
with respect of its assets which are (i) used by a diplomatic or consular
mission of the Borrower and (ii) assets of a military character and under
control of a military authority or defense agency and (iii) located in the
Philippines and dedicated to public or governmental use (as distinguished
from patrimonial assets or assets dedicated to commercial use). (Emphasis
supplied.)
(k) Proceedings to Enforce Agreement In any proceeding in the Republic of
the Philippines to enforce this Agreement, the choice of the laws of the
People’s Republic of China as the governing law hereof will be recognized
and such law will be applied. The waiver of immunity by the Borrower, the
irrevocable submissions of the Borrower to the non-exclusive jurisdiction of
the courts of the People’s Republic of China and the appointment of the
Borrower’s Chinese Process Agent is legal, valid, binding and enforceable
and any judgment obtained in the People’s Republic of China will be if
introduced, evidence for enforcement in any proceedings against the
Borrower and its assets in the Republic of the Philippines provided that (a)
the court rendering judgment had jurisdiction over the subject matter of the
action in accordance with its jurisdictional rules, (b) the Republic had notice
of the proceedings, (c) the judgment of the court was not obtained through
collusion or fraud, and (d) such judgment was not based on a clear mistake
of fact or law.36
Further, the Loan Agreement likewise contains this express waiver of
immunity:
15.5 Waiver of Immunity The Borrower irrevocably and unconditionally
waives, any immunity to which it or its property may at any time be or
become entitled, whether characterized as sovereign immunity or otherwise,
from any suit, judgment, service of process upon it or any agent, execution
on judgment, set-off, attachment prior to judgment, attachment in aid of
execution to which it or its assets may be entitled in any legal action or
proceedings with respect to this Agreement or any of the transactions
contemplated hereby or hereunder. Notwithstanding the foregoing, the
Borrower does not waive any immunity in respect of its assets which are (i)
used by a diplomatic or consular mission of the Borrower, (ii) assets of a
military character and under control of a military authority or defense agency
and (iii) located in the Philippines and dedicated to a public or governmental
9
use (as distinguished from patrimonial assets or assets dedicated to
commercial use).37
Thus, despite petitioner’s claim that the EXIM Bank extended financial
assistance to Northrail because the bank was mandated by the Chinese
government, and not because of any motivation to do business in the
Philippines,38 it is clear from the foregoing provisions that the Northrail
Project was a purely commercial transaction.
Admittedly, the Loan Agreement was entered into between EXIM Bank and
the Philippine government, while the Contract Agreement was between
Northrail and CNMEG. Although the Contract Agreement is silent on the
classification of the legal nature of the transaction, the foregoing provisions of
the Loan Agreement, which is an inextricable part of the entire undertaking,
nonetheless reveal the intention of the parties to the Northrail Project to
classify the whole venture as commercial or proprietary in character.
Thus, piecing together the content and tenor of the Contract Agreement, the
Memorandum of Understanding dated 14 September 2002, Amb. Wang’s
letter dated 1 October 2003, and the Loan Agreement would reveal the
desire of CNMEG to construct the Luzon Railways in pursuit of a purely
commercial activity performed in the ordinary course of its business.
B. CNMEG failed to adduce evidence that it is immune from suit under
Chinese law.
Even assuming arguendo that CNMEG performs governmental functions,
such claim does not automatically vest it with immunity. This view finds
support in Malong v. Philippine National Railways, in which this Court held
that "(i)mmunity from suit is determined by the character of the objects for
which the entity was organized."39
In this regard, this Court’s ruling in Deutsche Gesellschaft Für Technische
Zusammenarbeit (GTZ) v. CA40 must be examined. In Deutsche
Gesellschaft, Germany and the Philippines entered into a Technical
Cooperation Agreement, pursuant to which both signed an arrangement
promoting the Social Health Insurance–Networking and Empowerment
(SHINE) project. The two governments named their respective implementing
organizations: the Department of Health (DOH) and the Philippine Health
Insurance Corporation (PHIC) for the Philippines, and GTZ for the
implementation of Germany’s contributions. In ruling that GTZ was not
immune from suit, this Court held:
The arguments raised by GTZ and the [Office of the Solicitor General (OSG)]
are rooted in several indisputable facts. The SHINE project was implemented
pursuant to the bilateral agreements between the Philippine and German
governments. GTZ was tasked, under the 1991 agreement, with the
implementation of the contributions of the German government. The activities
performed by GTZ pertaining to the SHINE project are governmental in
nature, related as they are to the promotion of health insurance in the
Philippines. The fact that GTZ entered into employment contracts with the
private respondents did not disqualify it from invoking immunity from suit, as
held in cases such as Holy See v. Rosario, Jr., which set forth what remains
valid doctrine:
Certainly, the mere entering into a contract by a foreign state with a private
party cannot be the ultimate test. Such an act can only be the start of the
inquiry. The logical question is whether the foreign state is engaged in the
activity in the regular course of business. If the foreign state is not engaged
regularly in a business or trade, the particular act or transaction must then be
tested by its nature. If the act is in pursuit of a sovereign activity, or an
incident thereof, then it is an act jure imperii, especially when it is not
undertaken for gain or profit.
Beyond dispute is the tenability of the comment points (sic) raised by GTZ
and the OSG that GTZ was not performing proprietary functions
notwithstanding its entry into the particular employment contracts. Yet there
is an equally fundamental premise which GTZ and the OSG fail to address,
namely: Is GTZ, by conception, able to enjoy the Federal Republic’s
immunity from suit?
The principle of state immunity from suit, whether a local state or a foreign
state, is reflected in Section 9, Article XVI of the Constitution, which states
that "the State may not be sued without its consent." Who or what consists of
"the State"? For one, the doctrine is available to foreign States insofar as
they are sought to be sued in the courts of the local State, necessary as it is
to avoid "unduly vexing the peace of nations."
If the instant suit had been brought directly against the Federal Republic of
Germany, there would be no doubt that it is a suit brought against a State,
and the only necessary inquiry is whether said State had consented to be
sued. However, the present suit was brought against GTZ. It is necessary for
us to understand what precisely are the parameters of the legal personality of
GTZ.
Counsel for GTZ characterizes GTZ as "the implementing agency of the
Government of the Federal Republic of Germany," a depiction similarly
adopted by the OSG. Assuming that the characterization is correct, it does
not automatically invest GTZ with the ability to invoke State immunity from
10
suit. The distinction lies in whether the agency is incorporated or
unincorporated.
xxx xxx xxx
State immunity from suit may be waived by general or special law. The
special law can take the form of the original charter of the incorporated
government agency. Jurisprudence is replete with examples of incorporated
government agencies which were ruled not entitled to invoke immunity from
suit, owing to provisions in their charters manifesting their consent to be
sued.
xxx xxx xxx
It is useful to note that on the part of the Philippine government, it had
designated two entities, the Department of Health and the Philippine Health
Insurance Corporation (PHIC), as the implementing agencies in behalf of the
Philippines. The PHIC was established under Republic Act No. 7875, Section
16 (g) of which grants the corporation the power "to sue and be sued in
court." Applying the previously cited jurisprudence, PHIC would not enjoy
immunity from suit even in the performance of its functions connected with
SHINE, however, (sic) governmental in nature as (sic) they may be.
Is GTZ an incorporated agency of the German government? There is some
mystery surrounding that question. Neither GTZ nor the OSG go beyond the
claim that petitioner is "the implementing agency of the Government of the
Federal Republic of Germany." On the other hand, private respondents
asserted before the Labor Arbiter that GTZ was "a private corporation
engaged in the implementation of development projects." The Labor Arbiter
accepted that claim in his Order denying the Motion to Dismiss, though he
was silent on that point in his Decision. Nevertheless, private respondents
argue in their Comment that the finding that GTZ was a private corporation
"was never controverted, and is therefore deemed admitted." In its Reply,
GTZ controverts that finding, saying that it is a matter of public knowledge
that the status of petitioner GTZ is that of the "implementing agency," and not
that of a private corporation.
In truth, private respondents were unable to adduce any evidence to
substantiate their claim that GTZ was a "private corporation," and the Labor
Arbiter acted rashly in accepting such claim without explanation. But neither
has GTZ supplied any evidence defining its legal nature beyond that of the
bare descriptive "implementing agency." There is no doubt that the 1991
Agreement designated GTZ as the "implementing agency" in behalf of the
German government. Yet the catch is that such term has no precise
definition that is responsive to our concerns. Inherently, an agent acts in
behalf of a principal, and the GTZ can be said to act in behalf of the German
state. But that is as far as "implementing agency" could take us. The term by
itself does not supply whether GTZ is incorporated or unincorporated,
whether it is owned by the German state or by private interests, whether it
has juridical personality independent of the German government or none at
all.
xxx xxx xxx
Again, we are uncertain of the corresponding legal implications under
German law surrounding "a private company owned by the Federal Republic
of Germany." Yet taking the description on face value, the apparent
equivalent under Philippine law is that of a corporation organized under the
Corporation Code but owned by the Philippine government, or a government-
owned or controlled corporation without original charter. And it bears notice
that Section 36 of the Corporate Code states that "[e]very corporation
incorporated under this Code has the power and capacity x x x to sue and be
sued in its corporate name."
It is entirely possible that under German law, an entity such as GTZ or
particularly GTZ itself has not been vested or has been specifically deprived
the power and capacity to sue and/or be sued. Yet in the proceedings below
and before this Court, GTZ has failed to establish that under German law, it
has not consented to be sued despite it being owned by the Federal Republic
of Germany. We adhere to the rule that in the absence of evidence to the
contrary, foreign laws on a particular subject are presumed to be the same
as those of the Philippines, and following the most intelligent assumption we
can gather, GTZ is akin to a governmental owned or controlled corporation
without original charter which, by virtue of the Corporation Code, has
expressly consented to be sued. At the very least, like the Labor Arbiter and
the Court of Appeals, this Court has no basis in fact to conclude or presume
that GTZ enjoys immunity from suit.41 (Emphasis supplied.)
Applying the foregoing ruling to the case at bar, it is readily apparent that
CNMEG cannot claim immunity from suit, even if it contends that it performs
governmental functions. Its designation as the Primary Contractor does not
automatically grant it immunity, just as the term "implementing agency" has
no precise definition for purposes of ascertaining whether GTZ was immune
from suit. Although CNMEG claims to be a government-owned corporation, it
failed to adduce evidence that it has not consented to be sued under
Chinese law. Thus, following this Court’s ruling in Deutsche Gesellschaft, in
the absence of evidence to the contrary, CNMEG is to be presumed to be a
government-owned and -controlled corporation without an original charter. As
a result, it has the capacity to sue and be sued under Section 36 of the
Corporation Code.
C. CNMEG failed to present a certification from the Department of
Foreign Affairs.
11
In Holy See,42 this Court reiterated the oft-cited doctrine that the
determination by the Executive that an entity is entitled to sovereign or
diplomatic immunity is a political question conclusive upon the courts, to wit:
In Public International Law, when a state or international agency wishes to
plead sovereign or diplomatic immunity in a foreign court, it requests the
Foreign Office of the state where it is sued to convey to the court that said
defendant is entitled to immunity.
xxx xxx xxx
In the Philippines, the practice is for the foreign government or the
international organization to first secure an executive endorsement of its
claim of sovereign or diplomatic immunity. But how the Philippine Foreign
Office conveys its endorsement to the courts varies. In International Catholic
Migration Commission v. Calleja, 190 SCRA 130 (1990), the Secretary of
Foreign Affairs just sent a letter directly to the Secretary of Labor and
Employment, informing the latter that the respondent-employer could not be
sued because it enjoyed diplomatic immunity. In World Health Organization
v. Aquino, 48 SCRA 242 (1972), the Secretary of Foreign Affairs sent the trial
court a telegram to that effect. In Baer v. Tizon, 57 SCRA 1 (1974), the U.S.
Embassy asked the Secretary of Foreign Affairs to request the Solicitor
General to make, in behalf of the Commander of the United States Naval
Base at Olongapo City, Zambales, a "suggestion" to respondent Judge. The
Solicitor General embodied the "suggestion" in a Manifestation and
Memorandum as amicus curiae.
In the case at bench, the Department of Foreign Affairs, through the Office of
Legal Affairs moved with this Court to be allowed to intervene on the side of
petitioner. The Court allowed the said Department to file its memorandum in
support of petitioner’s claim of sovereign immunity.
In some cases, the defense of sovereign immunity was submitted directly to
the local courts by the respondents through their private counsels (Raquiza
v. Bradford, 75 Phil. 50 [1945]; Miquiabas v. Philippine-Ryukyus Command,
80 Phil. 262 [1948]; United States of America v. Guinto, 182 SCRA 644
[1990] and companion cases). In cases where the foreign states bypass the
Foreign Office, the courts can inquire into the facts and make their own
determination as to the nature of the acts and transactions involved.43
(Emphasis supplied.)
The question now is whether any agency of the Executive Branch can make
a determination of immunity from suit, which may be considered as
conclusive upon the courts. This Court, in Department of Foreign Affairs
(DFA) v. National Labor Relations Commission (NLRC),44 emphasized the
DFA’s competence and authority to provide such necessary determination, to
wit:
The DFA’s function includes, among its other mandates, the determination of
persons and institutions covered by diplomatic immunities, a determination
which, when challenge, (sic) entitles it to seek relief from the court so as not
to seriously impair the conduct of the country's foreign relations. The DFA
must be allowed to plead its case whenever necessary or advisable to
enable it to help keep the credibility of the Philippine government before the
international community. When international agreements are concluded, the
parties thereto are deemed to have likewise accepted the responsibility of
seeing to it that their agreements are duly regarded. In our country, this task
falls principally of (sic) the DFA as being the highest executive department
with the competence and authority to so act in this aspect of the international
arena.45 (Emphasis supplied.)
Further, the fact that this authority is exclusive to the DFA was also
emphasized in this Court’s ruling in Deutsche Gesellschaft:
It is to be recalled that the Labor Arbiter, in both of his rulings, noted that it
was imperative for petitioners to secure from the Department of Foreign
Affairs "a certification of respondents’ diplomatic status and entitlement to
diplomatic privileges including immunity from suits." The requirement might
not necessarily be imperative. However, had GTZ obtained such certification
from the DFA, it would have provided factual basis for its claim of immunity
that would, at the very least, establish a disputable evidentiary presumption
that the foreign party is indeed immune which the opposing party will have to
overcome with its own factual evidence. We do not see why GTZ could not
have secured such certification or endorsement from the DFA for purposes of
this case. Certainly, it would have been highly prudential for GTZ to obtain
the same after the Labor Arbiter had denied the motion to dismiss. Still, even
at this juncture, we do not see any evidence that the DFA, the office of the
executive branch in charge of our diplomatic relations, has indeed endorsed
GTZ’s claim of immunity. It may be possible that GTZ tried, but failed to
secure such certification, due to the same concerns that we have discussed
herein.
Would the fact that the Solicitor General has endorsed GTZ’s claim of State’s
immunity from suit before this Court sufficiently substitute for the DFA
certification? Note that the rule in public international law quoted in Holy See
referred to endorsement by the Foreign Office of the State where the suit is
filed, such foreign office in the Philippines being the Department of Foreign
Affairs. Nowhere in the Comment of the OSG is it manifested that the DFA
has endorsed GTZ’s claim, or that the OSG had solicited the DFA’s views on
the issue. The arguments raised by the OSG are virtually the same as the
12
arguments raised by GTZ without any indication of any special and distinct
perspective maintained by the Philippine government on the issue. The
Comment filed by the OSG does not inspire the same degree of confidence
as a certification from the DFA would have elicited.46 (Emphasis supplied.)
In the case at bar, CNMEG offers the Certification executed by the Economic
and Commercial Office of the Embassy of the People’s Republic of China,
stating that the Northrail Project is in pursuit of a sovereign activity.47 Surely,
this is not the kind of certification that can establish CNMEG’s entitlement to
immunity from suit, as Holy See unequivocally refers to the determination of
the "Foreign Office of the state where it is sued."
Further, CNMEG also claims that its immunity from suit has the executive
endorsement of both the OSG and the Office of the Government Corporate
Counsel (OGCC), which must be respected by the courts. However, as
expressly enunciated in Deutsche Gesellschaft, this determination by the
OSG, or by the OGCC for that matter, does not inspire the same degree of
confidence as a DFA certification. Even with a DFA certification, however, it
must be remembered that this Court is not precluded from making an inquiry
into the intrinsic correctness of such certification.
D. An agreement to submit any dispute to arbitration may be construed
as an implicit waiver of immunity from suit.
In the United States, the Foreign Sovereign Immunities Act of 1976 provides
for a waiver by implication of state immunity. In the said law, the agreement
to submit disputes to arbitration in a foreign country is construed as an
implicit waiver of immunity from suit. Although there is no similar law in the
Philippines, there is reason to apply the legal reasoning behind the waiver in
this case.
The Conditions of Contract,48 which is an integral part of the Contract
Agreement,49 states:
33. SETTLEMENT OF DISPUTES AND ARBITRATION
33.1. Amicable Settlement
Both parties shall attempt to amicably settle all disputes or controversies
arising from this Contract before the commencement of arbitration.
33.2. Arbitration
All disputes or controversies arising from this Contract which cannot be
settled between the Employer and the Contractor shall be submitted to
arbitration in accordance with the UNCITRAL Arbitration Rules at present in
force and as may be amended by the rest of this Clause. The appointing
authority shall be Hong Kong International Arbitration Center. The place of
arbitration shall be in Hong Kong at Hong Kong International Arbitration
Center (HKIAC).
Under the above provisions, if any dispute arises between Northrail and
CNMEG, both parties are bound to submit the matter to the HKIAC for
arbitration. In case the HKIAC makes an arbitral award in favor of Northrail,
its enforcement in the Philippines would be subject to the Special Rules on
Alternative Dispute Resolution (Special Rules). Rule 13 thereof provides for
the Recognition and Enforcement of a Foreign Arbitral Award. Under Rules
13.2 and 13.3 of the Special Rules, the party to arbitration wishing to have an
arbitral award recognized and enforced in the Philippines must petition the
proper regional trial court (a) where the assets to be attached or levied upon
is located; (b) where the acts to be enjoined are being performed; (c) in the
principal place of business in the Philippines of any of the parties; (d) if any of
the parties is an individual, where any of those individuals resides; or (e) in
the National Capital Judicial Region.
From all the foregoing, it is clear that CNMEG has agreed that it will not be
afforded immunity from suit. Thus, the courts have the competence and
jurisdiction to ascertain the validity of the Contract Agreement.
Second issue: Whether the Contract Agreement is an executive agreement
Article 2(1) of the Vienna Convention on the Law of Treaties (Vienna
Convention) defines a treaty as follows:
[A]n international agreement concluded between States in written form and
governed by international law, whether embodied in a single instrument or in
two or more related instruments and whatever its particular designation.
In Bayan Muna v. Romulo, this Court held that an executive agreement is
similar to a treaty, except that the former (a) does not require legislative
concurrence; (b) is usually less formal; and (c) deals with a narrower range of
subject matters.50
Despite these differences, to be considered an executive agreement, the
following three requisites provided under the Vienna Convention must
nevertheless concur: (a) the agreement must be between states; (b) it must
be written; and (c) it must governed by international law. The first and the
third requisites do not obtain in the case at bar.
A. CNMEG is neither a government nor a government agency.
13
The Contract Agreement was not concluded between the Philippines and
China, but between Northrail and CNMEG.51 By the terms of the Contract No pronouncement on costs of suit.
Agreement, Northrail is a government-owned or -controlled corporation, while
CNMEG is a corporation duly organized and created under the laws of the SO ORDERED.
People’s Republic of China.52 Thus, both Northrail and CNMEG entered into
the Contract Agreement as entities with personalities distinct and separate
from the Philippine and Chinese governments, respectively.

Neither can it be said that CNMEG acted as agent of the Chinese

government. As previously discussed, the fact that Amb. Wang, in his letter
dated 1 October 2003,53 described CNMEG as a "state corporation" and
declared its designation as the Primary Contractor in the Northrail Project did
not mean it was to perform sovereign functions on behalf of China. That label
was only descriptive of its nature as a state-owned corporation, and did not
preclude it from engaging in purely commercial or proprietary ventures.

B. The Contract Agreement is to be governed by Philippine law.

Article 2 of the Conditions of Contract, which under Article 1.1 of the Contract
Agreement is an integral part of the latter, states:

APPLICABLE LAW AND GOVERNING LANGUAGE

The contract shall in all respects be read and construed in accordance with
the laws of the Philippines.

The contract shall be written in English language. All correspondence and

other documents pertaining to the Contract which are exchanged by the
parties shall be written in English language.

Since the Contract Agreement explicitly provides that Philippine law shall be
applicable, the parties have effectively conceded that their rights and
obligations thereunder are not governed by international law.

It is therefore clear from the foregoing reasons that the Contract Agreement
does not partake of the nature of an executive agreement. It is merely an
ordinary commercial contract that can be questioned before the local courts.

WHEREFORE, the instant Petition is DENIED. Petitioner China National

Machinery & Equipment Corp. (Group) is not entitled to immunity from suit,
and the Contract Agreement is not an executive agreement. CNMEG’s
prayer for the issuance of a TRO and/or Writ of Preliminary Injunction is
DENIED for being moot and academic. This case is REMANDED to the
Regional Trial Court of Makati, Branch 145, for further proceedings as
regards the validity of the contracts subject of Civil Case No. 06-203.

14
G.R. No. 198226 July 18, 2014
ABOITIZ TRANSPORT SYSTEM CORPORATION and ABOITIZ SHIPPING
CORPORATION, Petitioners, vs. CARLOS A. GOTHONG LINES, INC.
and VICTOR S. CHIONGBIAN, Respondents.
x-----------------------x
G.R. No. 198228
ABOITIZ TRANSPORT SYSTEM CORPORATION, Petitioner, vs.
CARLOS A. GOTHONG LINES, INC. and VICTOR S. CHIONGBIAN,
Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in these petitions for review on certiorari1 are the Orders dated
August 13, 2010,2 April 15, 2011,3 and July 6, 20114 of the Regional Trial
Court of Cebu City, Branch 20 (RTC) in Civil Case No. CEB-34951, which
confirmed the notice of dismissal filed by respondent Carlos A. Gothong
Lines, Inc. (CAGLI) and, consequently, dismissed the case without prejudice,
denied petitioners Aboitiz Transport System Corporation (ATSC) and Aboitiz
Shipping Corporation’s (ASC) motion for reconsideration, and deemed
ATSC’s motion to exclude respondent Victor S. Chiongbian (respondent
Chiongbian) from arbitration moot and academic, respectively.
The Facts
ASC, CAGLI, and William Lines, Inc. (WLI), principally owned by the Aboitiz,
Gothong, and Chiongbian families, respectively, entered into an Agreement5
dated January 8, 1996, which was signed by Jon Ramon Aboitiz for ASC,
Benjamin D. Gothong (Gothong) for CAGLI, and respondent Chiongbian for
WLI. In the said Agreement, ASC and CAGLI agreed to transfer their
shipping assets to WLI inexchange for the latter’s shares of capital stock.
The parties likewise agreed that WLI would run the merged shipping
business and be renamed "WG&A, Inc." Pertinently, Section 11.06 of the
Agreement provides that all disputes arising out of or in connection with the
Agreement shall be finally settled by arbitration in accordance with Republic
Act No. (RA) 876, otherwise known as "The Arbitration Law," and that each
of the parties shall appoint one arbitrator, and the three arbitrators would
then appoint the fourth arbitrator who shall act as Chairman.
Among the attachments to the Agreement was a letter dated January 8, 1996
written by respondent Chiongbian and addressed to Gothong, stating that
WLI committed to acquire from CAGLI’s inventory certain spare parts and
materials not exceeding ₱400 Million. In this relation, a valuation of CAGLI’s
inventory was conducted wherein it was shown that the same amounted to
₱514 Million.8 Thereafter, WLI received inventory valued at ₱558.89 Million,
but only paid CAGLI the amount of ₱400 Million as agreed upon in the
Agreement. Dissatisfied, CAGLI sent to WLI various letters in 2001,
demanding that the latter pay or return the inventory that it received in
excess of ₱400 Million.
Sometime in 2002, the Chiongbian and Gothong families decided to sell their
respective interests in WLI/WG&A to the Aboitiz family. This resulted in the
execution of a Share Purchase Agreement11 whereby Aboitiz Equity
Ventures (AEV) agreed to purchase and acquire the WLI/WG&A shares of
the Chiongbian and Gothong families. Thereafter, the corporate name of
WLI/WG&A was changed to ATSC.
Six (6) years later, or in 2008, CAGLI sent a letter dated February 14, 2008
to ATSC demanding that the latter pay the excess inventory it delivered to
WLI amounting to 158,399,700.00. CAGLI likewise demanded AEV and
respondent Chiongbian that they refer their dispute to arbitration. In
response, AEV countered that the excess inventory had already been
returned to CAGLI and that it should not be included in the dispute,
considering that it is an entity separate and distinct from ATSC. Thus, CAGLI
was constrained to file a complaint before the RTC against Chiongbian,
ATSC, ASC, and AEV to compel them to submit to arbitration.
For their part, ATSC and AEV moved for the dismissal of the case,
contending that CAGLI did not have a cause of action for arbitration since its
claim had already been paid or otherwise, extinguished, and, in any event,
said action had already prescribed.
The RTC Proceedings
In an Order18 dated December 4, 2009, the RTC dismissed the complaint
only with respect to AEV for lack of cause of action,19 but not as to the other
defendants. Thereafter, the RTC issued an Order20 dated February 26,
2010, directing CAGLI, respondent Chiongbian, ATSC, and ASC to proceed
to arbitration, and accordingly, the parties appointed their respective
arbitrators, with ATSC and ASC doing so only on an ad cautelam basis.
Meanwhile, ATSC filed a Motion for Reconsideration/To Exclude22 dated
March 25, 2010 praying that respondent Chiongbian be excluded from the
arbitration proceedings since the latter was not a party to the Agreement.
Pending resolution of the said motion,CAGLI filed a Notice of Dismissal23
dated July 8, 2010, averring that it has decided to withdraw its complaint in
15
view of the fact that the opposing parties had not filed their respective
responsive pleadings.
In an Order dated August 13, 2010, the RTC found CAGLI’s Notice of
Dismissal meritorious, and, thus, confirmed the same and ordered the case
dismissed without prejudice. Dissatisfied, ATSC and ASC moved for
reconsideration which was, however, denied in an Order dated April 15,
2011. In said Order, the RTC cited Section 1 of Rule 17 of the Rules of Court
which allows the plaintiff to file a notice of dismissal of the complaint as a
matter of right "before service of the answer or a motion for summary
judgment." It further ruled that, save for the condition that no answer or
motion for summary judgment had been priorly filed, nothing in the rules or
law expressly prohibits or restricts the right of the plaintiff to withdraw the
complaint by mere notice of dismissal at any stage of the proceedings.
Separately, the RTC issued an Order28 dated July 6, 2011, denying ATSC’s
Motion for Reconsideration/To Exclude, holding that the issue raised in the
said motion has been rendered moot and academic in view of the
confirmation of CAGLI’s notice of dismissal.
Hence, the instant petitions.
The Issues Before the Court
The issues for the Court’s resolution are as follows: (a) whether or not the
RTC was correct in confirming CAGLI’s notice of dismissal and,
consequently, dismissing the case without prejudice; and (b) whether or not
respondent Chiongbian should be excluded from the arbitration proceedings.
The Court’s Ruling
The petition is meritorious.
A. Propriety of CAGLI’s Notice of Dismissal.
At the outset, the Court notes that the nature of the complaint filed by CAGLI
before the RTC is for the enforcement of an arbitration agreement, governed
by Section 6 of RA 876, viz.:
Section 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. Ifthe 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.
x x x x (Emphasis supplied)
In the case of Gonzales v. Climax Mining, Ltd. (Gonzales),29 the Court had
instructed that the special proceeding under the above-quoted provision is
the procedural mechanism for the enforcement of the contract to arbitrate.30
RA 876 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. If
there is such agreement, the court shall issue an order summarily directing
the parties to proceed with the arbitration in accordance with the terms
thereof; otherwise,the proceeding shall be dismissed.31 To stress, such
proceeding is merelya summary remedy to enforce the agreement to
arbitrate and the duty of the court is not to resolve the merits of the parties’
claims but only to determine if they should proceed to arbitration or not.32
In the present case, the records show that the primary relief sought for in
CAGLI’s complaint, i.e., to compel the parties to submit to arbitration,33 had
already been granted by the RTC through its Order34 dated February 26,
2010. Undeniably, such Order partakes of a judgment on the merits of the
complaint for the enforcement ofthe arbitration agreement.
At this point, although no responsive pleading had been filed by ATS C,35 it
is the rules on appeal, or other proceedings after rendition of a judgment or
final order – no longer those on notice of dismissal – that come into play.
Verily, upon the rendition of a judgment or final order,36 the period "before
service of the answer or of a motion for summary judgment," mentioned in
Section 137 of Rule 17 of the Rules of Court when a notice of dismissal may
be filed by the plaintiff, no longer applies. As a consequence, a notice of
dismissal filed by the plaintiff at such judgment stage should no longer be
entertained or confirmed.1âwphi1
In view of the foregoing, it was anerror on the part of the RTC to have
confirmed the notice of dismissal and to have dismissed the complaint
without prejudice.
16
B. Parties covered by Arbitration Proceedings.
Section 2 of RA 876 specifies who may be subjected to arbitration, to wit:
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 atthe 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 byarbitration 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.
the arbitration agreement. Hence, respondent Chiongbian cannot be included
in the arbitration proceedings.
WHEREFORE, the petitions are GRANTED. The Orders dated August 13,
2010, April 15, 2011, and July 6, 2011 of the Regional Trial Court of Cebu
City, Branch 20 (RTC) in Civil Case No. CEB-34951 are hereby REVERSED
and SET ASIDE. The Order dated February 26, 2010 of the RTC is
REINSTATED with MODIFICATION excluding Victor S. Chiongbian from the
arbitration proceedings.
SO ORDERED.

xxxx
In Gonzales, the Court explained that "[d]isputes 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." Furthermore, in Del Monte Corporation – USA v. Court of Appeals,
the Court stated that "[t]he provision to submit to arbitration any dispute
arising therefrom and the relationship of the parties is part of that contract. As
a rule, contracts are respected as the law between the contracting parties
and produce effectas between them, their assigns and heirs." Succinctly put,
only those parties who have agreed to submit a controversy to arbitration
who, as against each other, may be compelled to submit to arbitration. In the
present case, Section 11.06 of the Agreement, which embodies the
Arbitration Agreement among the parties, provides:

All disputes arising out of or inconnection with this Agreement including any
issue as to this Agreement's validity or enforceability, which cannot be settled
amicably among the parties, shall be finally settled by arbitration in
accordance with the Arbitration Law (Republic Act No. 876) by an arbitration
tribunal composed of four (4) arbitrators. Each of the parties shall appoint
one (1) arbitrator, the three (3) to appoint the fourth arbitrator who shall act
as Chairman. Any award by the arbitration tribunal shall be final and binding
upon the parties and shall be enforced by judgment of the Courts of Cebu or
Metro Manila.

The three parties to the Agreement and necessarily to the arbitration

agreement embodied therein are: (a) ASC, (b) CAGLI, and (c)
WLI/WG&A/ATSC. Contracts, like the subject arbitration agreement, take
effect only between the parties, their assigns and heirs.42 Respondent
Chiongbian, having merely physically signed the Agreement as a
representative of WLI, is not a party thereto and to the arbitration agreement
contained therein. Neither is he an assignee or an heir of any of the parties to

17
G.R. No. 187543
WERR CORPORATION INTERNATIONAL, Petitioner vs. HIGHLANDS
PRIME INC., Respondent
x-----------------------x
G.R. No. 187580
HIGHLANDS PRIME, INC., Petitioner, vs. WERR CORPORATION
INTERNATIONAL, Respondent.
DECISION
JARDELEZA, J.:
These are consolidated petitions1 seeking to nullify the Court of Appeals'
(CA) February 9, 2009 Decision2 and April 16, 2009 Resolution3 in CA-G.R.
SP No. 105013. The CA modified the August 11, 2008 Decision4 of the
Construction Industry Arbitration Commission (CIAC) in CIAC Case No. 09-
2008, viz.:
WHEREFORE, premises considered, the instant petition for review is
PARTLY GRANTED. The assailed Decision dated August 11, 2008 of the
Construction Industry Arbitration Commission in CIAC Case No. 09-2008 is
hereby MODIFIED as follows:
1) Respondent Werr Corporation International shall pay petitioner Highlands
Prime, Inc. liquidated damages in the amount of ₱8,969,330.70;
2) Petitioner Highlands Prime, Inc. shall return to respondent Werr
Corporation International the balance of its retention money in the amount of
₱10,955,899.80 with the right to offset the award for liquidated damages in
the aforesaid amount of ₱8,969,330.70; and
3) The cost of arbitration shall be shared equally by the parties.
The rest of the decision stands.
SO ORDERED.
Facts
Highlands Prime, Inc. (HPI) and Werr Corporation International (Werr) are
domestic corporations engaged in property development and construction,
respectively. For the construction of 54 residential units contained in three
clusters of five-storey condominium structures, known as "The Horizon-
Westridge Project," in Tagaytay Midlands Complex, Talisay, Batangas, the
project owner, HPI, issued a Notice of Award/Notice to Proceed6 to its
chosen contractor, Werr, on July 22, 2005. Thereafter, the parties executed a
General Building Agreement7 (Agreement) on November 17, 2005.
Under the Agreement, Werr had the obligation to complete the project within
210 calendar days from receipt of the Notice of Award/Notice to Proceed on
July 22, 2005, or until February 19, 2006.9 For the completion of the project,
HPI undertook to pay Werr a lump sum contract price of ₱271,797,900.00
inclusive of applicable taxes, supply and transportation of materials, and
labor.10 It was agreed that this contract price shall be subject to the following
payment scheme: (1) HPI shall pay 20% of the contract price upon the
execution of the agreement and the presentation of the necessary bonds and
insurance required under the contract, and shall pay the balance on
installments progress billing subject to recoupment of downpayment and
retention money; (2) HPI shall retain 10% of the contract price in the form of
retention bond provided by Werr; (3) HPI may deduct or set off any sum
against monies due Werr, including expenses for the rectification of defects
in the construction project; and (4) HPI has the right to liquidated damages in
the event of delay in the construction of the project equivalent to 1/10 of 1%
of the contract price for every day of delay.
Upon HPI's payment of the stipulated 20% downpayment in the amount of
₱54,359,580.00, Werr commenced with the construction of the project. The
contract price was paid and the retention money was deducted, both in the
progress billings. The project, however, was not completed on the initial
completion date of February 19, 2006, which led HPI to grant several
extensions and a final extension until October 15, 2006. On May 8, 2006, W
err sought the assistance of HPI to pay its obligations with its suppliers under
a "Direct Payment Scheme" totaling ₱24,503,500.08, which the latter
approved only up to the amount of ₱18,762,541.67. The amount is to be
charged against the accumulated retention money. As of the last billing on
October 25, 2006, HPI had already paid the amount of ₱232,940,265.85
corresponding to 93.18% accomplishment rate of the project and retained the
amount of ₱25,738,258.01 as retention bond.
The project was not completed on the last extension given. Thus, HPI
terminated its contract with Werr on November 28, 2006, which the latter
accepted on November 30, 2006. No progress billing was adduced for the
period October 28, 2006 until the termination of the contract.
On October 3, 2007, Werr demanded from HPI payment of the balance of the
contract price as reflected in its financial status report which showed a
conditional net payable amount of ₱36,078,652.90.18 On January 24, 2007,
18
HPI informed Werr that based on their records, the amount due to the latter
as of December 31, 2006 is ₱14,834,926.71.19 This amount was confirmed
by Werr.20 Not having received any payment, Werr filed a Complaint for
arbitration against HPI before the CIAC to recover the ₱14,834,926.71
representing the balance of its retention money.
In its Answer,22 HPI countered that it does not owe Werr because the
balance of the retention money answered for the payments made to
suppliers and for the additional costs and expenses incurred after termination
of the contract. From the retention money of ₱25,738,258.0l, it deducted (1)
₱18,762,541.67 as payment to the suppliers under the Direct Payment
Scheme, and (2) ₱7,548,729.15 as additional costs and expenses further
broken down as follows: (a) ₱3,336,526.91 representing the unrecouped
portion of the 20% downpayment; (b) ₱542,500.00 representing the
remainder of Werr's unpaid advances; (c) ₱629,702.24 for the waterproofing
works done by Dubbel Philippines; and (d) ₱3,040,000.00 for the rectification
works performed by A.A. Manahan Construction after the termination of the
contract. Deducting the foregoing from the accumulated retention money
resulted in a deficiency of ₱573,012.81 in its favor.23 By way of
counterclaim, HPI prayed for the payment of liquidated damages in the
amount of ₱11,959,107.60 for the 44-day delay in the completion of the
project reckoned from October 15, 2006 up to the termination of the
Agreement on November 28, 2006; for actual damages in the sum of
₱573,012.81; and for attorney's fees of ₱500,000.00 and litigation expenses
of ₱100,000.00.
CIAC's Ruling
After due proceedings, the CIAC rendered its Decision on August 11, 2008
where it granted Werr's claim for the balance of the retention money in the
amount of ₱10,955,899.79 and arbitration costs. It also granted HPI's claim
for liquidated damages in the amount of ₱2,535,059.0l equivalent to 9.327
days of delay,26 but denied its counterclaim for damages, attorney's fees,
and litigation expenses.
From the claims of HPI, the CIAC only deducted the amounts of (1)
₱10,903,331.30 representing the direct payments made from September 26,
2006 until December 31, 2006,27 (2) ₱3,336,526.91 representing the
unrecouped retention money, and (3) P542,500.00 representing the unpaid
cash advances from the ₱25,738,258.0l retention money. It disallowed the
direct payments charged by HPI in 2007 and 2008 for having been supplied
after the termination of the project, for not corresponding to the list of
suppliers submitted, and for HPI failing to show that Werr requested it to
continue payments even after termination of the Agreement. It also
disallowed the amount of ₱629,702.24 for the waterproofing works done by
Dubbel Philippines for being works done after the termination of the contract.
The ₱3,040,000.00 for the rectification works performed after the termination
of the contract was also disallowed because while HPI presented its contract
with A.A. Manahan Construction for rectification and completion works, it
failed to present proof of how much was specifically paid for rectification
works only, as well as the proof of its payment. Moreover, prior notice of such
defective works was not shown to have been given to Werr as required under
the Agreement, and even noted that HPI's project manager approved of the
quality of the works up to almost 94%.
The CIAC further ruled that Werr incurred only 9.327 days of delay. Citing
Article 137629 of the Civil Code and considering the failure of the Agreement
to state otherwise, it applied the industry practice in the construction industry
that liquidated damages do not accrue after achieving substantial
compliance. It held that delay should be counted from October 27, 2006 until
the projected date of substantial completion. Since the last admitted
accomplishment is 93.18% on October 27, 2006, the period it will take Werr
to perform the remaining 1.82% is the period of delay. Based on the past
billings, since it took Werr 5 .128 days30 to achieve 1% accomplishment, it
will therefore take it 9.327 days to achieve substantial completion. Thus, the
CIAC concluded that the period of delay until substantial completion of the
project is 9.327 days. The liquidated damages under the Agreement being
1/10 of 1% of the ₱271,797,900.00 or ₱271,797.90 per day of delay, Werr is
liable for liquidated damages in the amount of ₱2,535,048.95.
Since the liquidated damages did not exhaust the balance of the retention
money, the CIAC likewise denied the claim for actual damages.
Thereafter, HPI filed its petition for review under Rule 43 with the CA on
August 28, 2008.
CA's Ruling
The CA rendered the assailed decision, affirming the CIAC's findings on the
allowable charges against the retention money, and on the attorney's fees
and litigation expenses. It, however, disagreed with the CIAC decision as to
the amount of liquidated damages and arbitration costs. According to the CA,
delay should be computed from October 27, 2006 until termination of the
contract on November 28, 2006, or 33 days, since the contract prevails over
the industry practice. Thus, the total liquidated damages is ₱8,969,330.70.
As to the arbitration costs, it ruled that it is more equitable that it be borne
equally by the parties since the claims of both were considered and partially
granted.
Hence, these consolidated petitions.
19
Arguments
Werr argues that the CA erred in modifying the CIAC decision on the amount
of liquidated damages and arbitration costs. It insists that the appellate court
disregarded Articles 1234, 1235, and 1376 of the Civil Code and the industry
practice (as evidenced by Clause 52.1 of the Construction Industry Authority
of the Philippines [CIAP] Document No. 101 or the "General Conditions of
Contract for Government Construction" and Article 20.11 of CIAP Document
No. 102 or the "Uniform General Conditions of Contract for Private
Construction") when it did not apply the construction industry practice in
computing liquidated damages only until substantial completion of the
project, and not until the termination of the contract. Werr further emphasizes
that the CIAC, being an administrative agency, has expertise on the subject
matter, and thus, its findings prevail over the appellate court's findings.
On the other hand, HPI argues that Werr was unjustly enriched when the CA
disallowed HPI' s recovery of the amounts it paid to suppliers. HPI claims
that: (1) payments made to suppliers identified in the Direct Payment
Scheme even after the termination of the contract should be charged against
the balance of the retention money, the same having been made pursuant to
Werr's express instructions; (2) the payments to Dubbel Philippines and the
cost of the contract with A.A. Manahan Construction are chargeable to the
retention money, pursuant to the terms of the Agreement; and (3) the
expenses incurred in excess of the retention money should be paid by Werr
as actual damages. These payments, while made after the termination of the
contract, were for prior incurred obligations.37 HPI also argues that it is not
liable for arbitration costs, and reiterates its claims for actual damages, and
payment of attorney's fees and litigation expenses.38
Issues
I. Whether the payments made to suppliers and contractors after the
termination of the contract are chargeable against the retention money.
II. Whether the industry practice of computing liquidated damages only up to
substantial completion of the project applies in the computation of liquidated
damages. Consequently, whether delay should be computed until termination
of the contract or until substantial completion of the project.
III. Whether the cost of arbitration should be shouldered by both parties.
IV. Whether HPI is entitled to attorney's fees and litigation expenses.
Our Ruling
We deny the consolidated petitions.
I. Charges against the Retention Money
Anent the first issue, we emphasize that what is before us is a petition for
review under Rule 45 where only questions of law may be raised.39 Factual
issues, which involve a review of the probative value of the evidence
presented, such as the credibility of witnesses, or the existence or relevance
of surrounding circumstances and their relation to each other, may not be
raised unless it is shown that the case falls under recognized exceptions.40
In cases of arbitral awards rendered by the CIAC, adherence to this rule is all
the more compelling. Executive Order No. 1008, which vests upon the CIAC
original and exclusive jurisdiction over disputes arising from, or connected
with, contracts entered into by parties involved in construction in the
Philippines, clearly provides that the arbitral award shall be binding upon the
parties and that it shall be final and inappealable except on questions of law
which shall be appealable to the Supreme Court. This rule on the finality of
an arbitral award is anchored on the premise that an impartial body, freely
chosen by the parties and to which they have confidence, has settled the
dispute after due proceedings:
Voluntary arbitration involves the reference of a dispute to an impartial body,
the members of which are chosen by the parties themselves, which parties
freely consent in advance to abide by the arbitral award issued after
proceedings where both parties had the opportunity to be heard. The basic
objective is to provide a speedy and inexpensive method of settling disputes
by allowing the parties to avoid the formalities, delay, expense and
aggravation which commonly accompany ordinary litigation, especially
litigation which goes through the entire hierarchy of courts. Executive Order
No. 1008 created an arbitration facility to which the construction industry in
the Philippines can have recourse. The Executive Order was enacted to
encourage the early and expeditious settlement of disputes in the
construction industry, a public policy the implementation of which is
necessary and important for the realization of national development goals.
Aware of the objective of voluntary arbitration in the labor field, in the
construction industry, and in any other area for that matter, the Court will not
assist one or the other or even both parties in any effort to subvert or defeat
that objective for their private purposes. The Court will not review the factual
findings of an arbitral tribunal upon the artful allegation that such body had
"misapprehended the facts" and will not pass upon issues which are, at
bottom, issues of fact, no matter how cleverly disguised they might be as
"legal questions." The parties here had recourse to arbitration and chose the
arbitrators themselves; they must have had confidence in such arbitrators.
20
The Court will not, therefore, permit the parties to relitigate before it the
issues of facts previously presented and argued before the Arbitral Tribunal,
save only where a very clear showing is made that, in reaching its factual
conclusions, the Arbitral Tribunal committed an error so egregious and hurtful
to one party as to constitute a grave abuse of discretion resulting in lack or
loss of jurisdiction. Prototypical examples would be factual conclusions of the
Tribunal which resulted in deprivation of one or the other party of a fair
opportunity to present its position before the Arbitral Tribunal, and an award
obtained through fraud or the corruption of arbitrators. Any other, more
relaxed, rule would result in setting at naught the basic objective of a
voluntary arbitration and would reduce arbitration to a largely inutile
institution.
In this case, the issues of whether HPI was able to prove that payments
made to suppliers and to third party contractors are prior incurred obligations
that should be charged against the retention money, and whether HPI
incurred expenses above the retention money that warrants actual damages,
are issues of facts beyond the review of the Court under Rule 45.
Moreover, even if we consider such factual issues, we are bound by the
findings of fact of the CIAC especially when affirmed by the CA. Factual
findings by a quasi-judicial body like the CIAC, which has acquired expertise
because its jurisdiction is confined to specific matters, are accorded not only
with respect but even finality if they are supported by substantial evidence.
We recognize that certain cases require the expertise, specialized skills, and
knowledge of the proper administrative bodies because technical matters or
intricate questions of facts are involved.
We nevertheless note that factual findings of the construction arbitrators are
not beyond review, such as when the petitioner affirmatively proves the
following: (1) the award was procured by corruption, fraud, or other undue
means; (2) there was evident partiality or corruption of the arbitrators or any
of them; (3) the arbitrators were guilty of misconduct in refusing to hear
evidence pertinent and material to the controversy; (4) one or more of the
arbitrators were disqualified to act as such under Section 1048 of Republic
Act No. 87649 and willfully refrained from disclosing such disqualifications or
of any other misbehavior by which the rights of any party have been
materially prejudiced; (5) 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; (6) when there is a very
clear showing of grave abuse of discretion resulting in lack or loss of
jurisdiction as when a party was deprived of a fair opportunity to present its
position before the arbitral tribunal or when an award is obtained through
fraud or the corruption of arbitrators; (7) when the findings of the CA are
contrary to those of the CIAC; or (8) when a party is deprived of
administrative due process.50 However, we do not find that HPI was able to
show any of the exceptions that should warrant a review and reversal of the
findings made by the CIAC and the CA.
Thus, we affirm the CIAC and CA's findings that direct payments charged by
HPI in 2007 and 2008 were for materials supplied after the termination of the
project and did not correspond to the list of suppliers submitted; that the
waterproofing works done by Dubbel Philippines in the amount of
₱629,702.24 were for works done after the termination of the contract that
were for the account of the new contractor; and that the rectification works
performed after the termination of the contract worth ₱3,040,000.00 were not
proven to have been paid, that it was for rectification works only, and that
prior notice of such defective works as required under the Agreement was
not proven. Accordingly, we affirm that the balance of the retention money is
₱10,955,899.79.
II. Delay in computing Liquidated Damages
On the other hand, the question on how liquidated damages should be
computed based on the Agreement and prevailing jurisprudence is a
question of law that we may review.
The pertinent provision on liquidated damages is found in clause 41.5 of the
Agreement, viz.:
41.5. Considering the importance of the timely completion of the WORKS on
the OWNER'S commitments to its clients, the CONTRACTOR agrees to pay
the OWNER liquidated damages in the amount of 1/10th of 1% of the amount
of the Contract price for every day of delay (inclusive of Sundays and
holidays).
Werr, as contractor, urges us to apply the construction industry practice that
liquidated damages do not accrue after the date of substantial completion of
the project, as evidenced in CIAP Document No. 102, which provides that:
20.11 SUBSTANTIAL COMPLETION AND ITS EFFECT:
A. [a] There is substantial completion when the Contractor completes 95% of
the Work, provided that the remaining work and the performance of the work
necessary to complete the Work shall not prevent the normal use of the
completed portion.
xxx
D. [a] No liquidated damages for delay beyond the Completion Time shall
accrue after the date of substantial completion of the Work.
21
We reject this claim of Werr and find that while this industry practice may
supplement the Agreement, Werr cannot benefit from it.
At the outset, we do not agree with the CA that industry practice be rejected
because liquidated damages is provided in the Agreement, autonomy of
contracts prevails, and industry practice is completely set aside. Contracting
parties are free to stipulate as to the terms and conditions of the contract for
as long as they are not contrary to law, morals, good customs, public order or
public policy. Corollary to this rule is that laws are deemed written in every
contract.
Deemed incorporated into every contract are the general provisions on
obligations and interpretation of contracts found in the Civil Code. The Civil
Code provides:
Art. 1234. If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.
Art. 1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
In previous cases, we applied these provisions in construction agreements to
determine whether the project owner is entitled to liquidated damages. We
held that substantial completion of the project equates to achievement of
95% project completion which excuses the contractor from the payment of
liquidated damages.
In Diesel Construction Co., Inc. v. UPSI Property Holdings, Inc.,54 we
applied Article 1234 of the Civil Code. In determining what is considered
substantial compliance, we used the CIAP Document No. 102 as evidence of
the construction industry practice that substantial compliance is equivalent to
95% accomplishment rate. In that case, the construction agreement requires
the contractor "to pay the owner liquidated damages in the amount
equivalent to one-fifth (1/5) of one (1) percent of the total Project cost for
each calendar day of delay."55 We declared that the contractor cannot be
liable for liquidated damages because it already accomplished 97.56% of the
project.56 We reiterated this in Transcept Construction and Management
Professionals, Inc. v. Aguilar57 where we ruled that since the contractor
accomplished 98.16% of the project, the project owner is not entitled to the
10% liquidated damages.58
Considering the foregoing, it: was error for the CA to immediately dismiss the
application of industry practice on the sole ground that there is an existing
agreement as to liquidated damages. As expressly stated under Articles
1234 and 1376, and in jurisprudence, the construction industry's prevailing
practice may supplement any ambiguities or omissions in the stipulations of
the contract.
Notably, CIAP Document N0. 102, by itself, was intended to have suppletory
effect on private construction contracts.1âwphi1 This is evident in CIAP
Board Resolution No. 1-98,59 which states:
Sec. 9. Policy-Making Body, - The [CIAP], through the CIAP Executive Office
and its various Implementing Agencies, shall continuously monitor and study
the operations of the construction industry, both domestic and overseas
operations, to identify its needs, problems and opportunities, in order to
provide for the pertinent policies and/or executive action and/or legislative
agenda necessary to implement plans, programs and measures required to
support the sustainable development of the construction industry, such as
but not limited to the following:
xxx
9.05 The promulgation and adoption of Standard Conditions of Contract for
the public construction and private construction sector which shall have
suppletory effect in cases where there is a conflict in the internal documents
of a construction contract or in the absence of the general conditions of a
construction agreement[.]
As the standard conditions for contract for private construction adopted and
promulgated by the CIAP, CIAP Document No. 102 applies suppletorily to
private construction contracts to remedy the conflict in the internal
documents of, or to fill in the omissions in, the construction agreement.
In this case, clause 41.5 of the Agreement is undoubtedly a valid stipulation.
However, while clause 41.5 requires payment of liquidated damages if there
is delay, it is silent as to the period until when liquidated damages shall run.
The Agreement does not state that liquidated damages is due until
termination of the project; neither does it completely reject that it is only due
until substantial completion of the project. This omission in the Agreement
may be supplemented by the provisions of the Civil Code, industry practice,
and the CIAP Document No. 102. Hence, the industry practice that
substantial compliance excuses the contractor from payment of liquidated
damages applies to the Agreement.
Nonetheless, we find that Werr cannot benefit from the effects of substantial
compliance.
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Paragraph A.[a.], Article 20.11 of CIAP Document No. 102 requires that the
contractor completes 95% of the work for there to be substantial completion
of the project. Also, in those cases where we applied the industry practice to
supplement the contracts and excused payment from liquidated damages
under Article 1234, the contractors there actually achieved 95% completion
of the project. Neither the CIAC nor the courts assumed as to when
substantial compliance will be achieved by the contractor, but the contractors
offered substantial evidence that they actually achieved at least 95%
completion of the project. Thus, the effects of substantial completion only
operate to relieve the contractor from the burden of paying liquidated
damages when it has, in reality, achieved substantial completion of the
project.
While the case before us presents a different scenario, as the contractor here
does not demand total release from payment of liquidated damages, we find
that in order to benefit from the effects of the substantial completion of a
project, the condition precedent must first be met-the contractor must
successfully prove by substantial evidence that it actually achieved 95%
completion rate of the project. As such, it is incumbent upon Werr to show
that it had achieved an accomplishment rate of 95% before or at the time of
the termination of the contract.
Here, there is no dispute that Werr failed to prove that it completed 95% of
the project before or at the time of the termination of the contract. As found
by CIAC, it failed to present evidence as to what accomplishment it achieved
from the time of the last billing until the termination of the contract.60 What
was admitted as accomplishment at the last billing is 93.18%. For this
reason, even if we adopt the rule that no liquidated damages shall run after
the date of substantial completion of the project, Werr cannot claim benefit
for it failed to meet the condition precedent, i.e., the contractor has
successfully proven that it actually achieved 95% completion rate.
More importantly, Werr failed to show that it is the construction industry's
practice to project the date of substantial completion of a project, and to
compute the period of delay based on the rate in past progress billings just
as what the CIAC has done. Consequently, the CIAC erred when it assumed
that Werr continued to perform works, and if it did, that it performed them at
the rate of accomplishment of the previous works in the absence of evidence.
That the effects of substantial completion will only apply when actual
substantial completion is reached is apparent when we consider the reason
behind the rules on substantial completion of the project found in Section
20.1l[E] of the CIAP Document No. 102, viz.:
E. The purpose of this Article [ART. 20, WORK; 20.11: SUBSTANTIAL
COMPLETION AND ITS EFFECT] is to ensure that the Contractor is paid for
Work completed and for the Owner to retain such portion of the Contract
Price which, together with the Performance Bond, is sufficient to complete
the Work without additional cost to the Owner.
The rules are intended to balance the allocation and burden of costs between
the contractor and the project owner so that the contractor still achieves a
return for its completed work, and the project owner will not incur further
costs. To compute the period of delay when substantial compliance is not yet
achieved but merely on the assumption that it will eventually be achieved
would result in an iniquitous situation where the project owner will bear the
risks and additional costs for the period excused from liquidated damages.
From the foregoing, we affirm the CA' s conclusion that the period of delay in
computing liquidated damages should be reckoned from October 27, 2006
until the termination of the contract or for 33 days, and not only until the
projected substantial completion date. Consistent with the CA's ruling that
liquidated damages did not exceed the retention money, we therefore affirm
that HPI did not suffer actual damages in the amount of ₱573,012.81.
III. Arbitration Costs, Attorney's Fees, and Litigation Costs
Courts are allowed to adjudge which party may bear the cost of the suit
depending on the circumstances of the case.61 Considering the CA's
findings that both parties were able to recover their claims, and neither was
guilty of bad faith, we do not find that the CA erred in dividing the arbitration
costs between the parties.
We also do not find the need to disturb the findings as to attorney's fees and
expenses of litigation, both the CIAC and the CA having found that there is
no basis for the award of attorney's fees and litigation expenses.62
WHEREFORE, the petitions are DENIED. The Court of Appeals' February 9,
2009 Decision and April 16, 2009 Resolution are AFFIRMED. The net award
in favor of Werr Corporation International shall earn interest at the rate of 6%
per annum from date of demand on October 3, 2007 until finality of this
Decision. Thereafter, the total amount shall earn interest from finality of this
Decision until fully paid.
SO ORDERED.
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