You are on page 1of 28

Jurisprudence: Koppel,

Inc. vs. Makati Rotary Club


Foundation, Inc. [2013]
Will the disagreement between parties to a contract be rendered
non-arbitrable if, in the arbitration thereof, the validity of the
contract itself will have to be determined?
May a party to a contract invoke the arbitration clause thereof and,
at the same time, impugn the validity of the contract itself?
Is it necessary for a party seeking arbitration to first file a request
or an application therefor with the court to render an arbitration
clause operational?
If parties to a contract already underwent Judicial Dispute Resolution (JDR)
proceedings before the court, may they still refer their dispute to arbitration?

G.R. No. 198075 (September 04, 2013)


PEREZ, J.:
FACTS:

In 1975, Fedders Koppel, Incorporated (FKI) bequeathed a parcel of land


exclusive of improvements thereon in favor of Respondent Makati Rotary
Club Foundation, Inc. by way of aconditional donation. Respondent
accepted the donation with all of its conditions. On 26 May 1975, FKI and
the Respondent executed a Deed of Donation evidencing their consensus.
One of the conditions of the donation required the Respondent to lease the
subject land back to FKI under terms specified in their Deed of Donation.
With the Respondents acceptance of the donation, a lease agreement
between them was, therefore, effectively incorporated in the Deed of
Donation.

Pertinent terms of such lease agreement, as provided in the Deed of


Donation, were as follows:
1. The period of the lease is for twenty-five (25) years, or until the 25 th of
May
2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is
P40,126.00 perannum.

The Deed of Donation also stipulated that the lease over the subject
property is renewable for another period of twenty-five (25) years upon
mutual agreement of FKI and the Respondent. In which case, the amount
of rent shall be determined in accordance with item 2(g) of the Deed of
Donation.
In October 1976, FKI and the Respondent executed an Amended Deed of
Donation that reiterated the provisions of the Deed of Donation, including
those relating to the lease of the subject land.

Verily, by virtue of the lease agreement contained in the Deed of


Donation and Amended Deed of Donation, FKI was able to continue in its
possession and use of the subject land.

Two (2) days before the lease incorporated in the Deed of


Donation and Amended Deed of Donation was set to expire, or on 23 May
2000, FKI and Respondent executed another contract of lease (2000 Lease
Contract) covering the subject land. In this 2000 Lease Contract, FKI and
Respondent agreed on a new five-year lease to take effect on the 26 th of May
2000, with annual rents ranging from P4M for the first year up to P4.9M
for the fifth year.

The 2000 Lease Contract also contained an arbitration clause enforceable


in the event the parties come to disagreement about the interpretation,
application and execution of the lease.
After the 2000 Lease Contract expired, FKI and Respondent agreed to
renew their lease for another five (5) years. This new lease (2005 Lease
Contract) required FKI to pay a fixed annual rent of P4.2M.In addition to
paying the fixed rent, however, the 2005 Lease Contract also obligated FKI
to make a yearly donation of money to the Respondent. Such donations
ranged from P3M for the first year up to P3.9M for the fifth year.
Notably, the 2005 Lease Contract contained an arbitration clause similar to
that in the 2000 Lease Contract, to wit:
19. Governing Law The provisions of this [2005 Lease Contract] shall be
governed, interpreted and construed in all aspects in accordance with the
laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this
[2005 Lease Contract] shall be submitted to a board of three (3) arbitrators
constituted in accordance with the arbitration law of the Philippines. The
decision of the majority of the arbitrators shall be binding upon [FKI and
Respondent]. (Emphasis supplied)

From 2005 to 2008, FKI faithfully paid the rentals and donations due it
per the 2005 Lease Contract. But in June of 2008, FKI sold all its rights and
properties relative to its business in favor of herein Petitioner Koppel,
Incorporated.

On 29 August 2008, FKI and Petitioner executed an Assignment and


Assumption of Lease and Donationwherein FKI, with the conformity of
the Respondent, formally assigned all of its interests and obligations under
the Amended Deed of Donation and the 2005 Lease Contract in favor of
Petitioner.

The following year, Petitioner discontinued the payment of the rent and
donation under the 2005Lease Contract.

Petitioners refusal to pay such rent and donation emanated from its
belief that the rental stipulations of the 2005 Lease Contract, and even of
the 2000 Lease Contract, cannot be given effect because they violated one
of the material conditions of the donation of the subject land, as stated in
the Deed of Donation and Amended Deed of Donation.
According to Petitioner, the Deed of Donation and Amended Deed of
Donation actually established not only one but two (2) lease agreements
between FKI and Respondent, i.e., one lease for the first twenty-five (25)
years or from 1975 to 2000, and another lease for the next twenty-five (25)
years thereafter or from 2000 to 2025. Both leases are material conditions
of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second
twenty-five (25) year lease was not fixed in the Deed of
Donation and Amended Deed of Donation, both deeds nevertheless
prescribed rules and limitations by which the same may be determined.
Such rules and limitations ought to be observed in any succeeding lease
agreements between Petitioner and Respondent for they are, in themselves,
material conditions of the donation of the subject land.

In this connection, Petitioner cites item 2(g) of the Deed of


Donation and Amended Deed of Donation that supposedly limits the
amount of rent for the lease over the second twenty-five (25) years to only
three percent (3%) of the fair market value of the [subject] land excluding
the improvements.

For Petitioner then, the rental stipulations of both the 2000 Lease
Contract and 2005 Lease Contract cannot be enforced as they are clearly, in
view of their exorbitant exactions, in violation of the aforementioned
threshold in item 2(g) of the Deed of Donation and Amended Deed of
Donation. Consequently, Petitioner insists that the amount of rent it has to
pay thereon is and must still be governed by the limitations prescribed in
the Deed of Donation and Amended Deed of Donation.
Respondent then sent Demand Letters to Petitioners notifying the latter of
its default, demanding for the settlement of the rent and donations due
for the year 2009. Respondent intimated of cancelling the 2005 Lease
Contract should Petitioner fail to settle the said obligations. In its last sent
Demand Letter, Respondent demand Petitioner to immediately vacate the
leased premises should it fail to pay such obligations within seven (7) days
from its receipt of the letter.
Petitioner refused to comply with the demands of the Respondent. Instead,
on 30 September 2009, Petitioner filed with the RTC of Paraaque City
a Complaint for the Rescission or Cancellation of the Deed of
Donation and Amended Deed of Donation against the Respondent.
On 5 October 2009, Respondent filed an Unlawful Detainer case against
the Petitioner before the MeTC of Paraaque City.

On 4 November 2009, Petitioner filed an Answer with Compulsory


Counterclaim.In it, Petitioner reiterated its objection over the rental
stipulations of the 2005 Lease Contract for being violative of the material
conditions of the Deed of Donation and Amended Deed of Donation.

On 27 April 2010, the MeTC rendered judgment in favor of the Petitioner.


While the MeTC refused to dismiss the action on the ground that the
dispute is subject to arbitration, it nonetheless sided with the Petitioner
with respect to the issues regarding the insufficiency of the Respondents
demand and the nullity of the 2005 Lease Contract.
The Respondent appealed to the RTC which reversed the MeTCs decision.

Aggrieved, the Petitioner appealed to the CA which affirmed the decision of


the RTC.
Hence, the present Petition for Review on Certiorari under Rule 45.

ISSUE:

Whether or not the present dispute is arbitrable under the Arbitration


Clause of the 2005 Lease Agreement Contract?
ARGUMENTS:

At different points in the proceedings of this case, the following arguments


were offered against the application of the arbitration clause of the 2005
Lease Contract:
1. The disagreement between the Petitioner and Respondent is nonarbitrable as it will inevitably touch upon the issue of the validity of
the 2005 Lease Contract. It was submitted that one of the reasons
offered by the Petitioner in justifying its failure to pay under the 2005
Lease Contract was the nullity of such contract for being contrary to
law and public policy. The Supreme Court, in Gonzales v. Climax
Mining, Ltd. [2005], held that the validity of contract cannot be
subject of arbitration proceedings as such questions are legal in
nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function.
2. The Petitioner cannot validly invoke the arbitration clause of
the 2005 Lease Contract while, at the same time, impugn such
contracts validity.

3. Even assuming that it can invoke the arbitration clause whilst denying
the validity of the2005 Lease Contract, Petitioner still did not file a
formal application before the MeTC so as to render such arbitration
clause operational. Section 24 of Republic Act No. 9285 requires the
party seeking arbitration to first file a request or an application
therefor with the court not later than the preliminary conference.

4. Petitioner and Respondent already underwent JDR proceedings


before the RTC. Hence, a further referral of the dispute to arbitration
would only be circuitous. Moreover, an ejectment case, in view of its
summary nature, already fulfills the prime purpose of
arbitration, i.e., to provide parties in conflict with an expedient
method for the resolution of their dispute. Arbitration then would no
longer be necessary in this case.

RULING:

YES. None of the above-mentioned arguments have any merit. The MeTC,
RTC and CA all erred in overlooking the significance of the arbitration
clause incorporated in the 2005 Lease Contract. As the SC sees it, that is a
fatal mistake.

Hence, the Petition is GRANTED and thus referring the Petitioner and the
Respondent to arbitration pursuant to the arbitration clause of the 2005
Lease Contract, repeatedly included in the 2000 Lease Contract and in the
1976 Amended Deed of Donation.

RATIO DECIDENDI:
The arbitration clause of the 2005 Lease Contract stipulates that any
disagreement as to the interpretation, application or execution of
the 2005 Lease Contract ought to be submitted to arbitration. To the mind
of the Court, such stipulation is clear and is comprehensive enough so as to
include virtually any kind of conflict or dispute that may arise from
the 2005 Lease Contractincluding the one that presently besets Petitioner
and Respondent.

First. The disagreement between the Petitioner and Respondent falls within
the all-encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such
disagreement, the validity of the 2005 Lease Contract, or at least, of such
contracts rental stipulations would have to be determined, the same would
not
render
such
disagreement
non-arbitrable.
The
quotation
from Gonzales case that was used to justify the contrary position was taken
out of context.

The pivotal issue that confronted the Court in the Gonzales case was
whether the complaint for arbitration raises arbitrable issues that the Panel
of Arbitrators of the Mines and Geosciences Bureau (PA-MGB) can take
cognizance of.

Gonzales decided the issue in the negative. In holding that the PA-MGB was
devoid of any jurisdiction to take cognizance of the complaint for
arbitration, this Court pointed out to the provisions of R.A. No. 7942, or
the Mining Act of 1995, which granted the PA-MGB with exclusive original
jurisdiction only over mining disputes, i.e., disputes involving rights to
mining areas, mineral agreements or permits, and surface owners,
occupants, claimholders or concessionaires requiring the technical
knowledge and experience of mining authorities in order to be resolved.
Accordingly, since the complaint for arbitration in Gonzales did not
raise mining disputes as contemplated under R.A. No. 7942 but only issues
relating to the validity of certain mining related agreements, SC held that
such complaint could not be arbitrated before the PA-MGB. It is in this
context that SC made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a
disagreement between the parties as to some provisions of the contract
between them, which needs the interpretation and the application of that
particular knowledge and expertise possessed by members of that Panel. It
is not proper when one of the parties repudiates the existence or validity of
such contract or agreement on the ground of fraud or oppression as in this
case. The validity of the contract cannot be subject of arbitration
proceedings. Allegations of fraud and duress in the execution of a contract
are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation
of
laws
and
jurisprudence
which
is
necessarily
a
judicial
function. (Emphasis supplied)
SC in Gonzales did not simply base its rejection of the complaint for
arbitration on the ground that the issue raised therein, i.e., the validity of
contracts, is per se non-arbitrable. The real consideration behind the ruling
was the limitation that was placed by R.A. No. 7942 upon the jurisdiction of
the PA-MGB as an arbitral body. Gonzales rejected the complaint for
arbitration because the issue raised therein is not a mining dispute per R.A.
No. 7942 and it is for this reason, and only for this reason, that such issue is
rendered non-arbitrable before the PA-MGB. As stated beforehand, R.A.
No. 7942 clearly limited the jurisdiction of the PA-MGB only tomining
disputes.
Much more instructive for our purposes, on the other hand, is the recent
case of Cargill Philippines, Inc. v. San Fernando Regal Trading,
Inc [2011]. In Cargill, SC answered the question of whether issues
involving the rescission of a contract are arbitrable. The respondent
in Cargill argued against arbitrability, also citing therein Gonzales. After
dissecting Gonzales, SC ruled in favor of arbitrability. Thus, SC held:

Respondent contends that assuming that the existence of the contract and
the arbitration clause is conceded, the CAs decision declining referral of
the parties dispute to arbitration is still correct. It claims that its complaint
in the RTC presents the issue of whether under the facts alleged, it is
entitled to rescind the contract with damages; and that issue constitutes a
judicial question or one that requires the exercise of judicial function and
cannot be the subject of an arbitration proceeding. Respondent cites our
ruling in Gonzales, wherein we held that a panel of arbitrator is bereft of
jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to
the execution of the addendum contract and the other contracts emanating
from it, and that the complaint should have been filed with the regular
courts as it involved issues which are judicial in nature.

Such argument is misplaced and respondent cannot rely on


the Gonzales case to support its argument. (Emphasis ours)

Second. Petitioner may still invoke the arbitration clause of the 2005 Lease
Contractnotwithstanding the fact that it assails the validity of such contract.
This is due to the doctrine of separability.
Under the doctrine of separability, an arbitration agreement is considered
as independent of the main contract. Being a separate contract in itself, the
arbitration agreement may thus be invoked regardless of the possible
nullity or invalidity of the main contract.
Once again instructive is Cargill, wherein SC held that, as a further
consequence of the doctrine of separability, even the very party who
repudiates the main contract may invoke its arbitration clause.
Third. The operation of the arbitration clause in this case is not at all
defeated by the failure of the Petitioner to file a formal request or
application therefor with the MeTC. SC finds that the filing of a request
pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an
arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:

SEC. 24. Referral to Arbitration. A court before which an action is


brought in a matter which is the subject matter of an arbitration agreement
shall, if at least one party so requestsnot later that the pre-trial conference,
or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void,
inoperative or incapable of being performed. [Emphasis ours; italics
original]
The request referred to in the above provision is, in turn, implemented by
Rules 4.1 to 4.3 ofA.M. No. 07-11-08-SC or the Special Rules of Court on
Alternative Dispute Resolution (Special ADR Rules):

RULE 4: REFERRAL TO ADR


Rule 4.1. Who makes the request. A party to a pending action filed in
violation of the arbitration agreement, whether contained in an arbitration
clause or in a submission agreement, may request the court to refer the
parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. (A) Where the arbitration agreement
exists before the action is filed. The request for referral shall be made not
later than the pre-trial conference. After the pre-trial conference, the court
will only act upon the request for referral if it is made with the agreement of
all parties to the case.

(B) Submission agreement. If there is no existing arbitration agreement


at the time the case is filed but the parties subsequently enter into an
arbitration agreement, they may request the court to refer their dispute to
arbitration at any time during the proceedings.

Rule 4.3. Contents of request. The request for referral shall be in the form
of a motion, which shall state that the dispute is covered by an arbitration
agreement.
Apart from other submissions, the movant shall attach to his motion an
authentic copy of the arbitration agreement.

The request shall contain a notice of hearing addressed to all parties


specifying the date and time when it would be heard. The party making the
request shall serve it upon the respondent to give him the opportunity to
file a comment or opposition as provided in the immediately succeeding
Rule before the hearing. [Emphasis ours; italics original]

Attention must be paid, however, to the salient wordings of Rule 4.1. It


reads: [a] party to a pending action filed in violation of the arbitration
agreement x x x may request the court to refer the parties to arbitration in
accordance with such agreement.
In using the word may to qualify the act of filing a request under
Section 24 of R.A. No. 9285, the Special ADR Rules clearly did not intend
to limit the invocation of an arbitration agreement in a pending suit
solely via such request. After all, non-compliance with an arbitration
agreement is a valid defense to any offending suit and, as such, may even be
raised in an answer as provided in our ordinary rules of procedure.
In this case, it is conceded that Petitioner was not able to file a separate
request of arbitration before the MeTC. However, it is equally conceded
that the Petitioner, as early as in its Answer with Counterclaim, had
already apprised the MeTC of the existence of the arbitration clause in
the 2005 Lease Contract and, more significantly, of its desire to have the
same enforced in this case. This act of Petitioner is enough valid invocation
of his right to arbitrate.

Fourth. The fact that the Petitioner and Respondent already underwent
through JDR proceedings before the RTC, will not make the subsequent
conduct of arbitration between the parties unnecessary or circuitous. The
JDR system is substantially different from arbitration proceedings.

The JDR framework is based on the processes of mediation,


conciliation or early neutral evaluation which entails the submission of a
dispute before a JDR judge who shall merely facilitate settlement
between the parties in conflict or make a non-binding evaluation or
assessment of the chances of each partys case. Thus in JDR, the JDR
judge lacks the authority to render a resolution of the dispute that is
binding upon the parties in conflict. In arbitration, on the other hand, the
dispute is submitted to an arbitrator/sa neutral third person or a group
of thereofwho shall have the authority to render a resolution binding
upon the parties.

Clearly, the mere submission of a dispute to JDR proceedings


would not necessarily render the subsequent conduct of arbitration a mere
surplusage. The failure of the parties in conflict to reach an amicable
settlement before the JDR may, in fact, be supplemented by their resort to
arbitration where a binding resolution to the dispute could finally be
achieved. This situation precisely finds application to the case at bench.
Neither would the summary nature of ejectment cases be a valid reason to
disregard the enforcement of the arbitration clause of the 2005 Lease
Contract. Notwithstanding the summary nature of ejectment cases,
arbitration still remains relevant as it aims not only to afford the parties an
expeditious method of resolving their dispute.

A pivotal feature of arbitration as an alternative mode of dispute resolution


is that it is, first and foremost, a product of party autonomy or the freedom
of the parties to make their own arrangements to resolve their own
disputes. Arbitration agreements manifest not only the desire of the
parties in conflict for an expeditious resolution of their dispute. They also
represent, if not more so, the parties mutual aspiration to achieve such
resolution outside of judicial auspices, in a more informal and less
antagonistic environment under the terms of their choosing. Needless to
state, this critical feature can never be satisfied in an ejectment case no
matter how summary it may be.

Legal Effect of the Application of the Arbitration Clause


Since there really are no legal impediments to the application of the
arbitration clause of the 2005 Contract of Lease in this case, We find that
the instant unlawful detainer action was instituted in violation of such
clause. The Law, therefore, should have governed the fate of the parties and
this suit:
R.A. No. 876

Section 7. Stay of civil action. If any suit or proceeding be brought upon


an issue arising out of an agreement providing for the arbitration thereof,
the court in which such suit or proceeding is pending, upon being satisfied
that the issue involved in such suit or proceeding is referable to
arbitration, shall stay the action or proceeding until an arbitration has been
had in accordance with the terms of the agreement: Provided, That the
applicant for the stay is not in default in proceeding with such arbitration.
[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. A court before which an action is
brought in a matter which is the subject matter of an arbitration agreement
shall, if at least one party so requests not later that the pre-trial conference,
or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void,
inoperative or incapable of being performed. [Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should
have been stayed; the Petitioner and the Respondent should have been
referred to arbitration pursuant to the arbitration clause of the 2005 Lease
Contract. The MeTC, however, did not do so in violation of the lawwhich
violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos. 876 and
9285 renders invalid all proceedings it undertook in the ejectment
case after the filing by Petitioner of its Answer with Counterclaimthe
point when the Petitioner and the Respondent should have been referred to
arbitration. This case must, therefore, be remanded to the MeTC and be
suspended at said point. Inevitably, the decisions of the MeTC, RTC and the
Court of Appeals must all be vacated and set aside.

The Petitioner and the Respondent must then be referred to arbitration


pursuant to the arbitration clause of the 2005 Lease Contract.

Jurisprudence: LM Power
Engineering Corporation vs.
Capitol Industrial Construction
Groups, Inc. [2003]

Is there a need to file first a Formal Request for Arbitration with


the Construction Industry Arbitration Commission (CIAC) in order to
vest it with jurisdiction to decide a construction dispute?
G.R. No. 141833 (March 26, 2003)
PANGANIBAN, J.:
FACTS:
Petitioner and Respondent entered into a Subcontract Agreement
involving electrical work at the Third Port of Zamboanga. Two years
thereafter, Respondent took over some of the work contracted to
Petitioner. Allegedly, the latter had failed to finish it because of its
inability to procure materials.
Upon completing its task under the Contract, Petitioner billed
Respondent in the amount of P6.7M. Respondent, however, refused
to pay and contested the accuracy of the amount of advances and
billable accomplishments listed by Petitioner. Respondent also took
refuge in the termination clause of the Agreement. That clause
allowed it to set off the cost of the work that Petitioner had failed to
undertake due to termination or take-over against the amount
it owed the latter.
Because of the dispute, Petitioner filed with the RTC of Makati
a Complaint for Collection of the amount representing the alleged
balance due it under the Subcontract. Instead of submitting
anAnswer, Respondent filed a Motion to Dismiss, alleging that the
Complaint was premature because there was no prior recourse to
arbitration.
RTC denied the Motion to Dismiss on the ground that the dispute did
not involve the interpretation or the implementation of the
Agreement and was, therefore, not covered by the arbitral clause.
The RTC ruled that the take-over of some work items by Respondent
was not equivalent to a termination, but a mere modification, of the
Subcontract. The latter was ordered to give full payment for the
work completed by Petitioner.
On appeal, the CA reversed the RTC and ordered the referral of the
case to arbitration. The CA held as arbitrable the issue of whether
Respondents take-over of some work items had been intended to
be a termination of the original contract under Letter K of the
Subcontract.
Hence, this Petition for Review on Certiorari under Rule 45.
ISSUES:
1. Whether or not there exists a controversy/dispute between
Petitioner and Respondent regarding the interpretation and
implementation of the Subcontract Agreement that requires
prior recourse to voluntary arbitration?;
2. In the affirmative, whether or not there is a need to file a
request first with the CIAC in order to vest it with jurisdiction
to decide a construction dispute?

ARGUMENTS:
1.
Petitioner claims that there is no conflict regarding the
interpretation or the implementation of the Agreement. Thus,
without having to resort to prior arbitration, it is entitled to collect
the value of the services it rendered through an ordinary action for
the collection of a sum of money from Respondent.
On the other hand, Respondent contends that there is a need for
prior arbitration as provided in the Agreement. This is because
there are some disparities between the parties positions regarding
the extent of the work done, the amount of advances and billable
accomplishments, and the set off of expenses incurred by
Respondent in its take-over of Petitioners work.
2.
According to Petitioner, assuming arguendo that the dispute is
arbitrable, the failure to file a formal request for arbitration with
the CIAC precluded the latter from acquiring jurisdiction over the
question.
RULING:
The Petition is unmeritorious; hence, DENIED. The assailed Decision
of the CA is AFFIRMED.
1.
YES. SC sides with Respondent. The instant case involves technical
discrepancies that are better left to an arbitral body that has
expertise in those areas.
2.
NO. SC is not persuaded with Petitioners contention. Section 1 of
Article III of the NEW Rules of Procedure Governing Construction
Arbitration has dispensed with the requirement to submit a request
for arbitration. Recourse to the CIAC may now be availed of
whenever a contract contains a clause for the submission of a
future controversy to arbitration.
RATIO DECIDENDI:
1.
In the instant case, the Subcontract has the following arbitral
clause:
6. The Parties hereto agree that any dispute or conflict as regards
to interpretation and implementation of this Agreement which
cannot be settled between [respondent] and [petitioner] amicably
shall be settled by means of arbitration x x x.
Clearly, the resolution of the dispute between the parties herein
requires a referral to the provisions of their Agreement. Within the
scope of the arbitration clause are discrepancies as to the amount
of advances and billable accomplishments, the application of the
provision on termination, and the consequent set-off of expenses.

A review of the factual allegations of the parties reveals that they


differ on the following questions, the resolutions of which lies in the
interpretation of the provisions of the Subcontract Agreement:
1. Did a take-over/termination occur?
2. May the expenses incurred by Respondent in the take-over be
set off against the amounts it owed Petitioner?
3. How much were the advances and billable accomplishments?

Being an inexpensive, speedy and amicable method of settling


disputes, arbitration along with mediation, conciliation and
negotiation is encouraged by the SC. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the wave
of the future in international civil and commercial disputes.
Brushing aside a contractual agreement calling for arbitration
between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible of
an interpretation that covers the asserted dispute, an order to
arbitrate should be granted. Any doubt should be resolved in favor
of arbitration.
2.
Section 1 of Article III of the NEW Rules of Procedure Governing
Construction Arbitration provides:
SECTION 1. Submission to CIAC Jurisdiction An arbitration clause
in a construction contract or a submission to arbitration of a
construction dispute shall be deemed an agreement to submit an
existing or future controversy to CIAC jurisdiction, notwithstanding
the reference to a different arbitration institution or arbitral body in
such contract or submission. When a contract contains a clause for
the submission of a future controversy to arbitration, it is not
necessary for the parties to enter into a submission agreement
before the claimant may invoke the jurisdiction of CIAC.
As clearly explained in China Chang Jiang Energy Corporation
(Philippines) v. Rosal Infrastructure Builders et al. (an extended
unsigned
Resolution)
and
reiterated
in National
Irrigation
Administration v. Court of Appeals [1999], from which SC quote
thus:
Under the present Rules of Procedure, for a particular construction
contract to fall within the jurisdiction of CIAC, it is merely required
that the parties agree to submit the same to voluntary arbitration
unlike in the original version of Section 1, as applied in the Tesco
case, the law as it now stands does not provide that the parties
should agree to submit disputes arising from their agreement
specifically to the CIAC for the latter to acquire jurisdiction over the
same. Rather, it is plain and clear that as long as the parties agree
to submit to voluntary arbitration, regardless of what forum they
may choose, their agreement will fall within the jurisdiction of the
CIAC, such that, even if they specifically choose another forum, the
parties will not be precluded from electing to submit their dispute
before the CIAC because this right has been vested upon each party
by law, i.e., E.O. No. 1008.

Clearly, there is no more need to file a request with the CIAC in


order to vest it with jurisdiction to decide a construction dispute.
The arbitral clause in the Agreement is a commitment on the part of
the parties to submit to arbitration the disputes covered therein.
Because that clause is binding, they are expected to abide by it in
good faith. And because it covers the dispute between the parties in
the present case, either of them may compel the other to arbitrate.

Jurisprudence: Tuna
Processing, Inc. vs. Philippine
Kingford, Inc. [2012]

May a foreign corporation not licensed to do business in the


Philippines, but which collects royalties from entities in the
Philippines, sue here to enforce a foreign arbitral award?
G.R. No. 185582 (February 29, 2012)
PEREZ, J.:
FACTS:
Kanemitsu Yamaoka, co-patentee of a US Patent, Philippine Letters Patent,
and an Indonesian Patent, entered into a Memorandum of Agreement
(MOA) with five Philippine tuna processors including Respondent
Philippine Kingford, Inc. (KINGFORD). The MOA provides for the
enforcing of the abovementioned patents, granting licenses under the same,
and collecting royalties, and for the establishment of herein Petitioner Tuna
Processors, Inc. (TPI).
Due to a series of events not mentioned in the Petition, the tuna processors,
including Respondent KINGFORD, withdrew from Petitioner TPI and
correspondingly reneged on their obligations. Petitioner TPI submitted the
dispute for arbitration before the International Centre for Dispute
Resolution in the State of California, United States and won the case against
Respondent KINGFORD.
To enforce the award, Petitioner TPI filed a Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award before the RTC
of Makati City. Respondent KINGFORD filed a Motion to Dismiss, which
the RTC denied for lack of merit. Respondent KINGFORD then sought for
the inhibition of the RTC judge, Judge Alameda, and moved for the
reconsideration of the order denying the Motion. Judge Alameda inhibited
himself notwithstanding [t]he unfounded allegations and unsubstantiated
assertions in the motion. Judge Ruiz, to which the case was re-raffled, in
turn, granted Respondent KINGFORDSs Motion for Reconsideration and
dismissed the Petition on the ground that Petitioner TPI lacked legal
capacity to sue in the Philippines. Petitioner TPI is a corporation
established in the State of California and not licensed to do business in the
Philippines.
Hence, the present Petition for Review on Certiorari under Rule 45.

ISSUE:
Whether or not a foreign corporation not licensed to do business in the
Philippines, but which collects royalties from entities in the Philippines,
sue here to enforce a foreign arbitral award?

ARGUMENT:
Petitioner TPI contends that it is entitled to seek for the recognition and
enforcement of the subject foreign arbitral award in accordance with RA
No.
9285
(Alternative
Dispute
Resolution
Act
of
2004 ),
the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards drafted during the United Nations Conference on
International Commercial Arbitration in 1958 (New York Convention),
and the UNCITRAL Model Law on International Commercial
Arbitration (Model Law), as none of these specifically requires that the
party seeking for the enforcement should have legal capacity to sue.

RULING:
YES. Petitioner TPI, although not licensed to do business in the Philippines,
may seek recognition and enforcement of the foreign arbitral award in
accordance with the provisions of the Alternative Dispute Resolution
Act of 2004. A foreign corporations capacity to sue in the Philippines is
not material insofar as the recognition and enforcement of a foreign
arbitral award is concerned.
The Resolution of the RTC is REVERSED and SET ASIDE.

RATIO DECIDENDI:
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that
the opposing party in an application for recognition and enforcement of the
arbitral award may raise only those grounds that were enumerated under
Article V of the New York Convention, to wit:
Article V

1. Recognition and enforcement of the award may be refused, at the request


of the party against whom it is invoked, only if that party furnishes to the
competent authority where the recognition and enforcement is sought,
proof that:

a. The parties to the agreement referred to in Article II were, under the law
applicable to them, under some incapacity, or the said agreement is not
valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was
made;

b. The party against whom the award is invoked was not given proper notice
of the appointment of the arbitrator or of the arbitration proceedings or
was otherwise unable to present his case;
c. The award deals with a difference not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions
on matters beyond the scope of the submission to arbitration, provided
that, if the decisions on matters submitted to arbitration can be separated
from those not so submitted, that part of the award which contains
decisions on matters submitted to arbitration may be recognized and
enforced;

d. The composition of the arbitral authority or the arbitral procedure was


not in accordance with the agreement of the parties, or, failing such
agreement, was not in accordance with the law of the country where the
arbitration took place; or

e. The award has not yet become binding on the parties, or has been set
aside or suspended by a competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if
the competent authority in the country where recognition and enforcement
is sought finds that:

a. The subject matter of the difference is not capable of settlement by


arbitration under the law of that country; or

b. The recognition or enforcement of the award would be contrary to the


public policy of that country.

Not one of the abovementioned exclusive grounds touched on the capacity


to sue of the party seeking the recognition and enforcement of the award.
Pertinent provisions of the Special Rules of Court on Alternative
Dispute Resolution, which was promulgated by the Supreme Court,
likewise support this position.
Rule 13.1 of the Special Rules provides that [a]ny party to a foreign
arbitration may petition the court to recognize and enforce a foreign
arbitral award. The contents of such petition are enumerated in Rule 13.5.
Capacity to sue is not included. Oppositely, in the rule on local arbitral
awards or arbitrations in instances where the place of arbitration is in the
Philippines, it is specifically required that a petition to determine any
question concerning the existence, validity and enforceability of such
arbitration agreement available to the parties before the commencement
of arbitration and/or a petition for judicial relief from the ruling of the
arbitral tribunal on a preliminary question upholding or declining its
jurisdiction after arbitration has already commenced should state [t]he
facts showing that the persons named as petitioner or respondent have
legal capacity to sue or be sued.
Indeed, it is in the best interest of justice that in the enforcement of a
foreign arbitral award, the Court deny availment by the losing party of
the rule that bars foreign corporations not licensed to do business in the
Philippines from maintaining a suit in Philippine courts. When a party
enters into a contract containing a foreign arbitration clause and, as in
this case, in fact submits itself to arbitration, it becomes bound by the
contract, by the arbitration and by the result of arbitration, conceding
thereby the capacity of the other party to enter into the contract,
participate in the arbitration and cause the implementation of the result.
Although not on all fours with the instant case, also worthy to consider is
the wisdom of then Associate Justice Flerida Ruth P. Romero in her
Dissenting Opinion in Asset Privatization Trust v. Court of Appeals
[1998], to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining adherents
in legal and judicial circles here and abroad. If its tested mechanism can
simply be ignored by an aggrieved party, one who, it must be stressed,
voluntarily and actively participated in the arbitration proceedings from
the very beginning, it will destroy the very essence of mutuality inherent in
consensual contracts.
Clearly, on the matter of capacity to sue, a foreign arbitral award should be
respected not because it is favored over domestic laws and procedures, but
because Republic Act No. 9285 has certainly erased any conflict of law
question.

Finally, even assuming, only for the sake of argument, that the
RTC correctly observed that theModel Law, not the New York Convention,
governs the subject arbitral award, Petitioner TPI may still seek recognition
and enforcement of the award in Philippine court, since the Model
Law prescribes substantially identical exclusive grounds for refusing
recognition or enforcement.

Jurisprudence: J Plus Asia


Development Corporation vs.
Utility Assurance
Corporation [2013]

Does CA have jurisdiction to review arbitral awards?


G.R. No. 199650 (June 26, 2013)
VILLARAMA, JR., J.:
FACTS:
Petitioner J Plus Asia Development Corporation and Martin E. Mabunay
entered into aConstruction Agreement on December 24, 2007 whereby
the latter undertook to build the formers 72-room condominium/hotel
located in Boracay Island.
The project, costing P42M, was to be completed within one year or 365 days
reckoned from the first calendar day after signing of the Notice of
Award and Notice to Proceed and receipt of down payment (20% of
contract price). The P8.4M down payment was fully paid on January 14,
2008. Payment of the balance of the contract price will be based on actual
work finished within 15 days from receipt of the monthly progress billings.
Per the agreed work schedule, the completion date of the project was
December 2008. Mabunay also submitted the required Performance
Bond issued by Respondent Utility Assurance Corporation in the amount
equivalent to 20% down payment or P8.4M.
Mabunay commenced work at the project site on January 7, 2008.
Petitioner paid up to the 7th monthly progress billing sent by Mabunay. As
of September 16, 2008, Petitioner had paid the total amount of P15.98M
inclusive of the 20% down payment. However, as of said date, Mabunay had
accomplished only 27.5% of the project. It was later found out by the joint
inspection and evaluation by the Petitioner and Mabunay that, as of
November 14, 2008, the project was only 31.39% complete and that the
uncompleted portion was 68.61%.
On November 19, 2008, Petitioner terminated the contract and
sent Demand Letters to Mabunay and Respondent surety. As its demands
went unheeded, Petitioner filed a Request for Arbitrationbefore the
Construction Industry Arbitration Commission (CIAC).
In his Answer, Mabunay claimed that the delay was caused by retrofitting
and other revision works ordered by Petitioner. He asserted that he
actually had until April 30, 2009 to finish the project since the 365 days
period of completion started only on May 2, 2008 after clearing the
retrofitted old structure. Hence, the termination of the contract by
Petitioner was premature and the filing of the Complaint against him was
baseless, malicious and in bad faith.
Respondent, on the other hand, filed a Motion to Dismiss on the ground
that Petitioner has no cause of action and the complaint states no cause of
action against it. The CIAC denied the Motion to Dismiss.

In its Answer Ex Abundante Ad Cautelam with Compulsory


Counterclaims
and
Cross-claims,
Respondent
argued
that
the Performance Bond merely guaranteed the 20% down payment and not
the entire obligation of Mabunay under the Construction Agreement.
Since the value of the projects accomplishment already exceeded the said
amount, Respondents obligation under thePerformance Bond had been
fully extinguished. As to the claim for alleged overpayment to Mabunay,
Respondent contended that it should not be credited against the 20% down
payment which was already exhausted and such application by Petitioner is
tantamount to reviving an obligation that had been legally extinguished by
payment. Respondent also set up a cross-claim against Mabunay who
executed in its favor an Indemnity Agreement whereby Mabunay
undertook to indemnify Respondent for whatever amounts it may be
adjudged liable to pay Petitioner under the surety bond.
On February 2, 2010, CIAC rendered its Decision and made Awards in favor
of Petitioner. CIAC ruled that Mabunay had incurred delay which entitled
Petitioner to the stipulated liquidated damages and unrecouped down
payment.
Dissatisfied, Respondent filed in the CA a Petition for Review under Rule
43 of the 1997 Rules of Civil Procedure, as amended, which reversed the
CIACs ruling.
Hence, the present Petition for Review on Certiorari under Rule
45 seeking to reverse the CA insofar as it denied its claims under
the Performance Bond and to reinstate in its entirety the February 2, 2010
CIAC Decision.
ISSUE:
Whether or not the Alternative Dispute Resolution Act of 2004 and
the Special ADR Rules have stripped the CA of jurisdiction to review
arbitral awards?
ARGUMENT:
Petitioner contends that that with the institutionalization of alternative
dispute resolution under RA No. 9285, otherwise known as the Alternative
Dispute Resolution Act of 2004, the CA was divested of jurisdiction to
review the decisions or awards of the CIAC.
RULING:

NO. The Petitioners contention is without merit. Petitioner erroneously


relied on the provision in RA No. 9285 allowing any party to a domestic
arbitration to file in the RTC a petition either to confirm, correct or vacate a
domestic arbitral award.

The Petition is GRANTED. The assailed decision of the CA is REVERSED


and SET ASIDE. The Award made in the Decision rendered by CIAC dated
February 2, 2010 is REINSTATED with MODIFICATIONS.
RATIO DECIDENDI:
SC holds that RA No. 9285 did not confer on RTCs jurisdiction to review
awards or decisions of the CIAC in construction disputes. On the contrary,
Section 40 thereof expressly declares that confirmation by the RTC is NOT
required, thus:
SEC. 40. Confirmation of Award. The confirmation of a domestic arbitral
award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same
manner as final and executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial
court in accordance with the Rules of Procedure to be promulgated by the
Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to
be executory as provided under E.O. No. 1008. (Emphasis supplied.)
EO No. 1008 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, whether the dispute arises
before or after the completion of the contract, or after the abandonment or
breach thereof. By express provision of Section 19 thereof, the arbitral
award of the CIAC is final and unappealable, except on questions of law,
which are appealable to the Supreme Court. With the amendments
introduced by RA No. 7902 and promulgation of the 1997 Rules of Civil
Procedure, as amended, the CIAC was included in the enumeration of
quasi- judicial agencies whose decisions or awards may be appealed to the
CA in a Petition for Review under Rule 43. Such review of the CIAC
award may involve either questions of fact, of law, or of fact and law.

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR


Rules) promulgated by the SC and which took effect on October 30, 2009.
Since RA No. 9285 explicitly excluded CIAC awards from domestic
arbitration awards that need to be confirmed to be executory, said awards
are therefore not covered by Rule 11 of the Special ADR Rules, as they
continue to be governed byEO No. 1008, as amended and the rules of
procedure of the CIAC. The CIAC Revised Rules of Procedure
Governing Construction Arbitration provide for the manner and mode of
appeal from CIAC decisions or awards in Section 18 thereof, which reads:
SECTION 18.2 Petition for review. A petition for review from a final
award may be taken by any of the parties within fifteen (15) days from
receipt thereof in accordance with the provisions of Rule 43 of the Rules of
Court.

You might also like