G.R. No. 126619 stipulated that the project shall be completed not later than 28 February 1993.
stipulated that the project shall be completed not later than 28 February 1993. The project was completed
UNIWIDE SALES REALTY AND
RESOURCES CORPORATION,
Petitioner,
- versus
TITAN-IKEDA CONSTRUCTION
AND DEVELOPMENT CORPORATION,
Respondent.
December 20, 2006
x ------------------------------------------------------------------------------------x
DECISION
TINGA, J.:
This Petition for Review on Certiorari under Rule 45 seeks the partial reversal of the 21
February 1996 Decision[1] of the Court of Appeals Fifteenth Division in CA-G.R. SP No. 37957 which
modified the 17 April 1995 Decision[2] of the Construction Industry Arbitration Commission (CIAC).
The case originated from an action for a sum of money filed by Titan-Ikeda Construction and
Development Corporation (Titan) against Uniwide Sales Realty and Resources Corporation (Uniwide)
with the Regional Trial Court (RTC), Branch 119,[3] Pasay City arising from Uniwides non-payment of
certain claims billed by Titan after completion of three projects covered by agreements they entered into
with each other. Upon Uniwides motion to dismiss/suspend proceedings and Titans open court
manifestation agreeing to the suspension, Civil Case No. 98-0814 was suspended for it to undergo
arbitration.[4] Titans complaint was thus re-filed with the CIAC.[5] Before the CIAC, Uniwide filed an
answer which was later amended and re-amended, denying the material allegations of the complaint, with
counterclaims for refund of overpayments, actual and exemplary damages, and attorneys fees. The
agreements between Titan and Uniwide are briefly described below.
PROJECT 1.[6]
The first agreement (Project 1) was a written Construction Contract entered into by Titan and
Uniwide sometime in May 1991 whereby Titan undertook to construct Uniwides Warehouse Club
and Administration Building in Libis, Quezon City for a fee of P120,936,591.50, payable in monthly
progress billings to be certified to by Uniwides representative.[7] The parties stipulated that the building
shall be completed not later than 30 November 1991. As found by the CIAC, the building was eventually
finished on 15 February 1992[8] and turned over to Uniwide.
PROJECT 2.
Sometime in July 1992, Titan and Uniwide entered into the second agreement (Project 2)
whereby the former agreed to construct an additional floor and to renovate the latters warehouse located at
the EDSA Central Market Area in Mandaluyong City. There was no written contract executed between the
parties for this project. Construction was allegedly to be on the basis of drawings and specifications
provided by Uniwides structural engineers. The parties proceeded on the basis of a cost estimate
of P21,301,075.77 inclusive of Titans 20% mark-up. Titan conceded in its complaint to having
received P15,000,000.00 of this amount. This project was completed in the latter part of October 1992 and
turned over to Uniwide.
PROJECT 3.[9]
The parties executed the third agreement (Project 3) in May 1992. In a written Construction Contract,
Titan undertook to construct the Uniwide Sales Department Store Building in Kalookan City for the price
of P118,000,000.00 payable in progress billings to be certified to by Uniwides representative.[10] It was
1|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
and turned over to Uniwide in June 1993.
Uniwide asserted in its petition that: (a) it overpaid Titan for unauthorized additional works in Project 1
and Project 3; (b) it is not liable to pay the Value-Added Tax (VAT) for Project 1; (c) it is entitled to
liquidated damages for the delay incurred in constructing Project 1 and Project 3; and (d) it should not
have been found liable for deficiencies in the defectively constructed Project 2.
An Arbitral Tribunal consisting of a chairman and two members was created in accordance
with the CIAC Rules of Procedure Governing Construction Arbitration. It conducted a preliminary
conference with the parties and thereafter issued a Terms of Reference (TOR) which was signed by the
parties. The tribunal also conducted an ocular inspection, hearings, and received the evidence of the
parties consisting of affidavits which were subject to cross-examination. On 17 April 1995, after the
parties submitted their respective memoranda, the Arbitral Tribunal promulgated a Decision,
[11]
the decretal portion of which is as follows:
WHEREFORE, judgment is hereby rendered as follows:
On Project 1 Libis:
[Uniwide] is absolved of any liability for the claims made by [Titan] on this
Project.
Project 2 Edsa Central:
[Uniwide] is absolved of any liability for VAT payment on this project, the
same being for the account of the [Titan]. On the other hand, [Titan] is
absolved of any liability on the counterclaim for defective construction of this
project.
[Uniwide] is held liable for the unpaid balance in the amount of P6,301,075.77
which is ordered to be paid to the [Titan] with 12% interest per annum
commencing from 19 December 1992 until the date of payment.
On Project 3 Kalookan:
[Uniwide] is held liable for the unpaid balance in the amount of P5,158,364.63
which is ordered to be paid to the [Titan] with 12% interest per annum
commencing from 08 September 1993 until the date of payment.
[Uniwide] is held liable to pay in full the VAT on this project, in such amount
as may be computed by the Bureau of Internal Revenue to be paid directly
thereto. The BIR is hereby notified that [Uniwide] Sales Realty and Resources
Corporation has assumed responsibility and is held liable for VAT payment on
this project. This accordingly exempts Claimant Titan-Ikeda Construction and
Development Corporation from this obligation.
Let a copy of this Decision be furnished the Honorable Aurora P. Navarette
Recina, Presiding Judge, Branch 119, Pasay City, in Civil Case No. 94-0814
entitled Titan-Ikeda Construction Development Corporation, Plaintiff versus
Uniwide Sales Realty and Resources Corporation, Defendant, pending before
said court for information and proper action.
SO ORDERED.[12]
Uniwide filed a motion for reconsideration of the 17 April 1995 decision which was denied by
the CIAC in its Resolution dated 6 July 1995. Uniwide accordingly filed a petition for review with the
Court of Appeals,[13] which rendered the assailed decision on 21 February 1996. Uniwides motion for
reconsideration was likewise denied by the Court of Appeals in its assailed Resolution[14] dated 30
September 1996.
Hence, Uniwide comes to this Court via a petition for review under Rule 45. The issues
submitted for resolution of this Court are as follows:[15] (1) Whether Uniwide is entitled to a return of the
amount it allegedly paid by mistake to Titan for additional works done on Project 1; (2) Whether Uniwide
is liable for the payment of the Value-Added Tax (VAT) on Project 1; (3) Whether Uniwide is entitled to
liquidated damages for Projects 1 and 3; and (4) Whether Uniwide is liable for deficiencies in Project 2.
As a rule, findings of fact of administrative agencies and quasi-judicial bodies, which have
acquired expertise because their jurisdiction is confined to specific matters, are generally accorded not
only respect, but also finality, especially when affirmed by the Court of Appeals. [16] In particular, factual
findings of construction arbitrators are final and conclusive and not reviewable by this Court on appeal.
[17]
This rule, however admits of certain exceptions.
In David v. Construction Industry and Arbitration Commission,[18] we ruled that, as exceptions,
factual findings of construction arbitrators may be reviewed by this Court when the petitioner proves
affirmatively that: (1) the award was procured by corruption, fraud or other undue means; (2) there was
evident partiality or corruption of the arbitrators or of 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 nine of Republic Act No. 876 and willfully
refrained from disclosing such disqualifications or of any other misbehavior by which the rights of any
party have been materially prejudiced; or (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.[19]
Other recognized exceptions are as follows: (1) when there is a very clear showing of grave
abuse of discretion[20] 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,[21] (2) when the findings of the Court of Appeals are contrary to those of
the CIAC,[22] and (3) when a party is deprived of administrative due process.[23]
Thus, in Hi-Precision Steel Center, Inc. v. Lim Kim Builders, Inc.,[24] we refused to review the
findings of fact of the CIAC for the reason that petitioner was requiring the Court to go over each
individual claim and counterclaim submitted by the parties in the CIAC. A review of the CIACs findings
of fact would have had the effect of setting at naught the basic objective of a voluntary arbitration and
would reduce arbitration to a largely inutile institution. Further, petitioner therein failed to show any
serious error of law amounting to grave abuse of discretion resulting in lack of jurisdiction on the part of
the Arbitral Tribunal, in either the methods employed or the results reached by the Arbitral Tribunal, in
disposing of the detailed claims of the respective parties. In Metro Construction, Inc. v. Chatham
Properties, Inc.,[25] we reviewed the findings of fact of the Court of Appeals because its findings on the
issue of whether petitioner therein was in delay were contrary to the findings of the CIAC. Finally,
in Megaworld Globus Asia, Inc. v. DSM Construction and Development Corporation, [26] we declined to
depart from the findings of the Arbitral Tribunal considering that the computations, as well as the
propriety of the awards, are unquestionably factual issues that have been discussed by the Arbitral
Tribunal and affirmed by the Court of Appeals.
In the present case, only the first issue presented for resolution of this Court is a question of law while the
rest are factual in nature. However, we do not hesitate to inquire into these factual issues for the reason
that the CIAC and the Court of Appeals, in some matters, differed in their findings.
We now proceed to discuss the issues in seriatim.
Payment by Mistake for Project 1
2|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
The first issue refers to the P5,823,481.75 paid by Uniwide for additional works done on Project 1.
Uniwide asserts that Titan was not entitled to be paid this amount because the additional works were
without any written authorization.
It should be noted that the contracts do not contain stipulations on additional works, Uniwides
liability for additional works, and prior approval as a requirement before Titan could perform additional
works.
Nonetheless, Uniwide cites Article (Art. ) 1724 of the New Civil Code as basis for its claim that it is not
liable to pay for additional works it did not authorize or agree upon in writing. The provision states:
Art. 1724. The contractor who undertakes to build a structure or any
other work for a stipulated price, in conformity with plans and specifications
agreed upon with the landowner, can neither withdraw from the contract nor
demand an increase in the price on account of the higher cost of labor or
materials, save when there has been a change in the plans and specifications,
provided:
(1) Such change has been authorized by the proprietor in
writing; and
(2) The additional price to be paid to the contractor has
been determined in writing by both parties.
The Court of Appeals did take note of this provision, but deemed it inapplicable to the case at bar because
Uniwide had already paid, albeit with unwritten reservations, for the additional works. The provision
would have been operative had Uniwide refused to pay for the costs of the additional works. Instead, the
Court of Appeals applied Art. 1423[27] of the New Civil Code and characterized Uniwides payment of the
said amount as a voluntary fulfillment of a natural obligation. The situation was characterized as being
akin to Uniwide being a debtor who paid a debt even while it knew that it was not legally compelled to do
so. As such debtor, Uniwide could no longer demand the refund of the amount already paid.
Uniwide counters that Art. 1724 makes no distinction as to whether payment for the additional works had
already been made. It claims that it had made the payments, subject to reservations, upon the false
representation of Titan-Ikeda that the additional works were authorized in writing. Uniwide characterizes
the payment as a mistake, and not a voluntary fulfillment under Art. 1423 of the Civil Code. Hence, it
urges the application, instead, of the principle of solutio indebiti under Arts. 2154[28] and 2156[29] of the
Civil Code.
To be certain, this Court has not been wont to give an expansive construction of Art. 1724, denying, for
example, claims that it applies to constructions made of ship vessels,[30] or that it can validly deny the
claim for payment of professional fees to the architect.[31] The present situation though presents a thornier
problem. Clearly, Art. 1724 denies, as a matter of right, payment to the contractor for additional works
which were not authorized in writing by the proprietor, and the additional price of which was not
determined in writing by the parties.
Yet the distinction pointed out by the Court of Appeals is material. The issue is no longer centered on the
right of the contractor to demand payment for additional works undertaken because payment, whether
mistaken or not, was already made by Uniwide. Thus, it would not anymore be incumbent on Titan to
establish that it had the right to demand or receive such payment.
But, even if the Court accepts Art. 1724 as applicable in this case, such recognition does
not ipso facto accord Uniwide the right to be reimbursed for payments already made, since Art. 1724 does
not effect such right of reimbursement. It has to be understood that Art. 1724 does not preclude the
payment to the contractor who performs additional works without any prior written authorization or
agreement as to the price for such works if the owner decides anyway to make such payment. What the
provision does preclude is the right of the contractor to insist upon payment for unauthorized additional
works.
Accordingly, Uniwide, as the owner who did pay the contractor for such additional works even if they had
not been authorized in writing, has to establish its own right to reimbursement not under Art. 1724, but
under a different provision of law. Uniwides burden of establishing its legal right to reimbursement
becomes even more crucial in the light of the general presumption contained in Section 3(f), Rule 131 of
the Rules of Court that money paid by one to another was due to the latter.
Uniwide undertakes such a task before this Court, citing the provisions on solutio indebiti under Arts.
2154 and 2156 of the Civil Code. However, it is not enough to prove that the payments made by Uniwide
to Titan were not due because there was no prior authorization or agreement with respect to additional
works. There is a further requirement that the payment by the debtor was made either through mistake or
under a cloud of doubt. In short, for the provisions on solutio indebiti to apply, there has to be evidence
establishing the frame of mind of the payor at the time the payment was made.[32]
The CIAC refused to acknowledge that the additional works on Project 1 were indeed unauthorized by
Uniwide. Neither did the Court of Appeals arrive at a contrary determination. There would thus be some
difficulty for this Court to agree with this most basic premise submitted by Uniwide that it did not
authorize the additional works on Project 1 undertaken by Titan. Still, Uniwide does cite testimonial
evidence from the record alluding to a concession by employees of Titan that these additional works on
Project 1 were either authorized or documented.[33]
Yet even conceding that the additional works on Project 1 were not authorized or committed into writing,
the undisputed fact remains that Uniwide paid for these additional works. Thus, to claim a refund of
payments made under the principle of solutio indebiti, Uniwide must be able to establish that these
payments were made through mistake. Again, this is a factual matter that would have acquired a mantle of
invulnerability had it been determined by both the CIAC and the Court of Appeals. However, both bodies
failed to arrive at such a conclusion. Moreover, Uniwide is unable to direct our attention to any pertinent
part of the record that would indeed establish that the payments were made by reason of mistake.
We note that Uniwide alleged in its petition that the CIAC award in favor of Titan in the
amount P5,158,364.63 as the unpaid balance in Project 3 included claims for additional works
of P1,087,214.18 for which no written authorization was presented. Unfortunately, this issue was not
included in its memorandum as one of the issues submitted for the resolution of the Court.
Liability for the Value-Added Tax (VAT)
The second issue takes us into an inquiry on who, under the law, is liable for the payment of
the VAT, in the absence of a written stipulation on the matter. Uniwide claims that the VAT was already
included in the contract price for Project 1. Citing Secs. 99 and 102 of the National Internal Revenue
Code, Uniwide asserts that VAT, being an indirect tax, may be shifted to the buyer by including it in the
cash or selling price and it is entirely up to the buyer to agree or not to agree to absorb the VAT.
[34]
Thus, Uniwide concludes, if there is no provision in the contract as to who should pay the VAT, it is
presumed that it would be the seller.[35]
The contract for Project 1 is silent on which party should shoulder the VAT while the contract
for Project 3 contained a provision to the effect that Uniwide is the party responsible for the payment of
the VAT.[36] Thus, when Uniwide paid the amount of P2,400,000.00 as billed by Titan for VAT, it assumed
that it was the VAT for Project 3. However, the CIAC and the Court of Appeals found that the same was
for Project 1.
We agree with the conclusions of both the CIAC and the Court of Appeals that the amount
of P2,400,000.00 was paid by Uniwide as VAT for Project 1. This conclusion was drawn from an Order of
Payment[37] dated 7 October 1992 wherein Titan billed Uniwide the amount of P2,400,000.00 as Value
Added Tax based on P60,000,000.00 Contract, computed on the basis of 4% of P60,000,000.00. Said
document which was approved by the President of Uniwide expressly indicated that the project involved
was the UNIWIDE SALES WAREHOUSE CLUB & ADMIN BLDG. located at 90 E. RODRIGUEZ JR.
AVE., LIBIS, Q.C. The reduced base for the computation of the tax, according to the Court of Appeals,
was an indication that the parties agreed to pass the VAT for Project 1 to Uniwide but based on a lower
contract price. Indeed, the CIAC found as follows:
3|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Without any documentary evidence than Exhibit H to show the
extent of tax liability assumed by [Uniwide], the Tribunal holds that the parties
is [sic] obliged to pay only a share of the VAT payment up to P60,000,000.00
out of the total contract price of P120,936,591.50. As explained by Jimmy
Gow, VAT is paid on labor only for construction contracts since VAT had
already been paid on the materials purchased. Since labor costs is [sic]
proportionately placed at 60%-40% of the contract price, simplified
accounting computes VAT at 4% of the contract price. Whatever is the
balance for VAT that remains to be paid on Project 1 Libis shall remain the
obligation of [Titan]. (Emphasis supplied.)[38]
Liquidated Damages
On the third issue of liquidated damages, the CIAC rejected such claim while the Court of
Appeals held that the matter should be left for determination in future proceedings where the issue has
been made clear.
In rejecting Uniwides claim for liquidated damages, the CIAC held that there is no legal basis
for passing upon and resolving Uniwides claim for the following reasons: (1) no claim for liquidated
damages arising from the alleged delay was ever made by Uniwide at any time before the commencement
of Titans complaint; (2) the claim for liquidated damages was not included in the counterclaims stated in
Uniwides answer to Titans complaint; (3) the claim was not formulated as an issue to be resolved by the
CIAC in the TOR;[39] and (4) no attempt was made to modify the TOR to accommodate the same as an
issue to be resolved.
Uniwide insists that the CIAC should have applied Section 5, Rule 10 of the Rules of Court.
[40]
On this matter, the Court of Appeals held that the CIAC is an arbitration body, which is not necessarily
bound by the Rules of Court. Also, the Court of Appeals found that the issue has never been made
concrete enough to make Titan and the CIAC aware that it will be an issue. In fact, Uniwide only
introduced and quantified its claim for liquidated damages in its Memorandum submitted to the CIAC at
the end of the arbitration proceeding. The Court of Appeals also noted that the only evidence on record to
prove delay in the construction of Project 1 is the testimony of Titans engineer regarding the date of
completion of the project while the only evidence of delay in the construction of Project 3 is the affidavit
of Uniwides President.
According to Uniwide, the ruling of the Court of Appeals on the issue of liquidated damages
goes against the established judicial policy that a court should always strive to settle in one proceeding the
entire controversy leaving no root or branch to bear the seeds of future litigations. [41] Uniwide claims that
the required evidence for an affirmative ruling on its claim is already on the record. It cites the pertinent
provisions of the written contracts which contained deadlines for liquidated damages. Uniwide also noted
that the evidence show that Project 1 was completed either on 15 February 1992, as found by the CIAC,
or 12 March 1992, as shown by Titans own evidence, while Project 3, according to Uniwides President,
was completed in June 1993. Furthermore, Uniwide asserts, the CIAC should have applied procedural
rules such as Section 5, Rule 10 with more liberality because it was an administrative tribunal free from
the rigid technicalities of regular courts.[42]
On this point, the CIAC held:
The Rule of Procedure Governing Construction Arbitration
promulgated by the CIAC contains no provision on the application of the Rules
of Court to arbitration proceedings, even in a suppletory capacity.
Hypothetically admitting that there is such a provision, suppletory application
is made only if it would not contravene a specific provision in the arbitration
rules and the spirit thereof. The Tribunal holds that such importation of the
Rules of Court provision on amendment to conform to evidence would
contravene the spirit, if not the letter of the CIAC rules. This is for the
reason that the formulation of the Terms of Reference is done with the active
 participation of the parties and their counsel themselves. The TOR is further
required to be signed by all the parties, their respective counsel and all the
members of the Arbitral Tribunal. Unless the issues thus carefully formulated in
the Terms of Reference were expressly showed [sic] to be amended, issues
outside thereof may not be resolved. As already noted in the Decision, no
attempt was ever made by the [Uniwide] to modify the TOR in order to
accommodate the issues related to its belated counterclaim on this issue.
(Emphasis supplied.)
Arbitration has been defined as an arrangement for taking and abiding by the judgment of
selected persons in some disputed matter, instead of carrying it to established tribunals of justice, and is
intended to avoid the formalities, the delay, the expense and vexation of ordinary litigation.[43] Voluntary
arbitration, on the other hand, 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. [44] As an arbitration body, the CIAC
can only resolve issues brought before it by the parties through the TOR which functions similarly as a
pre-trial brief. Thus, if Uniwides claim for liquidated damages was not raised as an issue in the TOR or in
any modified or amended version of it, the CIAC cannot make a ruling on it. The Rules of Court cannot be
used to contravene the spirit of the CIAC rules, whose policy and objective is to provide a fair and
expeditious settlement of construction disputes through a non-judicial process which ensures harmonious
and friendly relations between or among the parties.[45]
Further, a party may not be deprived of due process of law by an amendment of the complaint
as provided in Section 5, Rule 10 of the Rules of Court. In this case, as noted by the Court of Appeals,
Uniwide only introduced and quantified its claim for liquidated damages in its memorandum submitted to
the CIAC at the end of the arbitration proceeding. Verily, Titan was not given a chance to present evidence
to counter Uniwides claim for liquidated damages.
Uniwide alludes to an alleged judicial admission made by Engr. Luzon Tablante wherein he
stated that Project 1 was completed on 10 March 1992. It now claims that by virtue of Engr. Tablantes
statement, Titan had admitted that it was in delay. We disagree. The testimony of Engr. Tablante was
offered only to prove that Project 1 was indeed completed. It was not offered to prove the fact of delay. It
must be remembered that the purpose for which evidence is offered must be specified because such
evidence may be admissible for several purposes under the doctrine of multiple admissibility, or may be
admissible for one purpose and not for another, otherwise the adverse party cannot interpose the proper
objection. Evidence submitted for one purpose may not be considered for any other purpose.
[46]
Furthermore, even assuming, for the sake of argument, that said testimony on the date of completion of
Project 1 is admitted, the establishment of the mere fact of delay is not sufficient for the imposition of
liquidated damages. It must further be shown that delay was attributable to the contractor if not otherwise
justifiable. Contrarily, Uniwides belated claim constitutes an admission that the delay was justified and
implies a waiver of its right to such damages.
Project 2: as-built plans, overpricing, defective construction
To determine whether or not Uniwide is liable for the unpaid balance of P6,301,075.77 for
Project 2, we need to resolve four sub-issues, namely: (1) whether or not it was necessary for Titan to
submit as-built plans before it can be paid by Uniwide; (2) whether or not there was overpricing of the
project; (3) whether or not the P15,000,000.00 paid by Uniwide to Titan for Project 2 constitutes full
payment; and (4) whether or not Titan can be held liable for defective construction of Project 2.
The CIAC, as affirmed by the Court of Appeals, held Uniwide liable for deficiency relating to Project 2 in
the amount of P6,301,075.77. It is nonetheless alleged by Uniwide that Titan failed to submit any as-built
plans for Project 2, such plans allegedly serving as a condition precedent for payment. Uniwide further
claims that Titan had substantially overcharged Uniwide for Project 2, there being uncontradicted expert
testimony that the total cost of Project 2 did not exceed P7,812,123.60. Furthermore, Uniwide alleged that
4|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
the works performed were structurally defective, as evidenced by the structural damage on four columns
as observed on ocular inspection by the CIAC and confirmed by Titans project manager.
On the necessity of submitting as-built plans, this Court rules that the submission of such plans is not a
pre-requisite for Titan to be paid by Uniwide. The argument that said plans are required by Section 308 of
Presidential Decree No. 1098 (National Building Code) and by Section 2.11 of its Implementing Rules
before payment can be made is untenable. The purpose of the law is to safeguard life, health, property, and
public welfare, consistent with the principles of sound environmental management and control. The
submission of these plans is necessary only in furtherance of the laws purpose by setting minimum
standards and requirements to control the location, site, design, quality of materials, construction, use,
occupancy, and maintenance of buildings constructed and not as a requirement for payment to the
contractor.[47] The testimony of Engr. Tablante to the effect that the as-built plans are required before
payment can be claimed by Titan is a mere legal conclusion which is not binding on this Court.
Uniwide claims that, according to one of its consultants, the true price for Project 2 is
only P7,812,123.60. The CIAC and the Court of Appeals, however, found the testimony of this consultant
suspect and ruled that the total contract price for Project 2 is P21,301,075.77. The CIAC held:
The Cost Estimate for Architectural and Site Development
Works for the EDSA Central, Dau Branch Project (Exhibit 2-A for [Uniwide]
and made as a common exhibit by [Titan] who had it marked at [sic] its
own Exhibit U), which was admittedly prepared by Fermindoza and Associates,
[Uniwide]s own architects, shows that the amount of P17,750,896.48 was
arrived at. Together with the agreed upon mark-up of 20% on said amount,
the total project cost was P21,301,075.77.
The Tribunal holds that the foregoing document is binding upon the
[Uniwide], it being the mode agreed upon by which its liability for the project
cost was to be determined.[48] (Emphasis supplied.)
Indeed, Uniwide is bound by the amount indicated in the above document. Claims of connivance or
fraudulent conspiracy between Titan and Uniwides representatives which, it is alleged, grossly
exaggerated the price may properly be dismissed. As held by the CIAC:
The Tribunal holds that [Uniwide] has not introduced any
evidence to sustain its charge of fraudulent conspiracy. As a matter of fact,
[Uniwide]s own principal witness, Jimmy Gow, admitted on cross-
examination that he does not have any direct evidence to prove his charge of
connivance or complicity between the [Titan] and his own
representatives. He only made that conclusion by the process of his own
logical reasoning arising from his consultation with other contractors who gave
him a much lower estimate for the construction of the Dau Project. There is
thus no reason to invalidate the binding character of Exhibit 2-A which, it
is significant to point out, is [Uniwide]s own evidence.[49] (Emphasis
supplied.)
Accordingly, deducting the P15,000,000.00 already paid by Uniwide from the total contract
price of P21,301,075.77, the unpaid balance due for Project 2 is P6,301,075.77. This is the same amount
reflected in the Order of Payment prepared by Uniwides representative, Le Consultech, Inc. and signed by
no less than four top officers and architects of Le Consultech, Inc. endorsing for payment by Uniwide to
Titan the amount of P6,301,075.77.[50]
Uniwide asserts that Titan should not have been allowed to recover on Project 2 because the said project
was defective and would require repairs in the amount of P800,000.00. It claims that the CIAC and the
Court of Appeals should have applied Nakpil and Sons v. Court of Appeals[51] and Art. 1723 of the New
Civil Code holding a contractor responsible for damages if the edifice constructed falls within fifteen
years from completion on account of defects in the construction or the use of materials of inferior quality
furnished by him or due to any violation of the terms of the contract.
On this matter, the CIAC conducted an ocular inspection of the premises on 30 January 1995.
What transpired in the said ocular inspection is described thus:
On 30 January 1995, an ocular inspection was conducted by the
Arbitral Tribunal as requested by [Uniwide]. Photographs were taken of the
alleged construction defects, an actual ripping off of the plaster of a certain
column to expose the alleged structural defect that is claimed to have resulted
in its being heavily damaged was done,clarificatory questions were asked and
manifestations on observations were made by the parties and their respective
counsels. The entire proceedings were recorded on tape and subsequently
transcribed. The photographs and transcript of the ocular inspection form part
of the records and considered as evidence.[52]
And, according to these evidence, the CIAC concluded as follows:
It is likewise the holding of this Tribunal that [Uniwide]s counterclaim of
defective construction has not been sufficiently proven. The credibility of Engr. Cruz,
[Uniwide]s principal witness on this issue, has been severely impaired. During the
ocular inspection of the premises, he gave such assurance of the soundness of his opinion
as an expert that a certain column was heavily damaged judging from the external cracks
that was readily apparent x x x
xxxx
On insistence of the Tribunal, the plaster was chipped off and
revealed a structurally sound column x x x
Further, it turns out that what was being passed off as a defective
construction by [Titan], was in fact an old column, as admitted by Mr. Gow
himself x x x x[53](Emphasis supplied.)
Uniwide had the burden of proving that there was defective construction in Project 2 but it
failed to discharge this burden. Even the credibility of its own witness was severely impaired. Further, it
was found that the concrete slab placed by Titan was not attached to the old columns where cracks were
discovered. The CIAC held that the post-tensioning of the new concrete slab could not have caused any of
the defects manifested by the old columns. We are bound by this finding of fact by the CIAC.
It is worthy to stress our ruling in Hi-Precision Steel Center, Inc. v. Lim Kim Steel Builders,
Inc.[54] which was reiterated in David v. Construction Industry and Arbitration Commission,[55] that:
x x x 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 facts" and will not pass upon issues which are,
at bottom, issues of fact, no matter how cleverly disguised they might be as
5|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
"legal questions." The parties here had recourse to arbitration and chose
the arbitrators themselves; they must have had confidence in such
arbitrators. 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 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. (Emphasis supplied.)
WHEREFORE, premises considered, the petition is DENIED and the Decision of the Court of
Appeals dated 21 February 1996 in CA-G.R. SP No. 37957 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 175404
CARGILL PHILIPPINES, INC.,
- versus -
SAN FERNANDO REGALA TRADING, INC.,
January 31, 2011
x--------------------------------------------------x
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to reverse and set aside the Decision[1] dated July
31, 2006 and the Resolution[2] dated November 13, 2006 of the Court of Appeals (CA) in CA G.R. SP No.
50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with the Regional Trial Court
(RTC) of Makati City a Complaint for Rescission of Contract with Damages[3] against petitioner Cargill
Philippines, Inc. In its Complaint, respondent alleged that it was engaged in buying and selling of
molasses and petitioner was one of its various sources from whom it purchased molasses. Respondent
alleged that it entered into a contract dated July 11, 1996 with petitioner, wherein it was agreed upon that
respondent would purchase from petitioner 12,000 metric tons of Thailand origin cane blackstrap
molasses at the price of US$192 per metric ton; that the delivery of the molasses was to be made in
January/February 1997 and payment was to be made by means of an Irrevocable Letter of Credit payable
at sight, to be opened by September 15, 1996; that sometime prior to September 15, 1996, the parties
agreed that instead of January/February 1997, the delivery would be made in April/May 1997 and that
payment would be by an Irrevocable Letter of Credit payable at sight, to be opened upon petitioner's
advice. Petitioner, as seller, failed to comply with its obligations under the contract, despite demands from
respondent, thus, the latter prayed for rescission of the contract and payment of damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to
Voluntary Arbitration,[4] wherein it argued that the alleged contract between the parties, dated July 11,
1996, was never consummated because respondent never returned the proposed agreement bearing its
written acceptance or conformity nor did respondent open the Irrevocable Letter of Credit at
sight. Petitioner contended that the controversy between the parties was whether or not the alleged
contract between the parties was legally in existence and the RTC was not the proper forum to ventilate
such issue. It claimed that the contract contained an arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the American
Arbitration Association. The Arbitration Award shall be final and binding on both
parties.[5]
that respondent must first comply with the arbitration clause before resorting to court, thus, the RTC must
either dismiss the case or suspend the proceedings and direct the parties to proceed with arbitration,
pursuant to Sections 6[6] and 7[7] of Republic Act (R.A.) No. 876, or the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has jurisdiction over the action for
rescission of contract and could not be changed by the subject arbitration clause. It cited cases wherein
arbitration clauses, such as the subject clause in the contract, had been struck down as void for being
contrary to public policy since it provided that the arbitration award shall be final and binding on both
parties, thus, ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already inapplicable, having been rendered
prior to the effectivity of the New Civil Code in 1950 and the Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by petitioner is invalid and
unenforceable, considering that the requirements imposed by the provisions of the Arbitration Law had not
been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even clarified that the issue boiled
down to whether the arbitration clause contained in the contract subject of the complaint is valid and
enforceable; that the arbitration clause did not violate any of the cited provisions of the Arbitration Law.
On September 17, 1998, the RTC rendered an Order,[8] the dispositive portion of which reads:
Premises considered, defendant's Motion To Dismiss/Suspend Proceedings and To
Refer Controversy To Voluntary Arbitration is hereby DENIED. Defendant is directed
to file its answer within ten (10) days from receipt of a copy of this order.[9]
In denying the motion, the RTC found that there was no clear basis for petitioner's plea to dismiss the
case, pursuant to Section 7 of the Arbitration Law. The RTC said that the provision directed the court
concerned only to stay the action or proceeding brought upon an issue arising out of an agreement
providing for the arbitration thereof, but did not impose the sanction of dismissal. However, the RTC did
not find the suspension of the proceedings warranted, since the Arbitration Law contemplates an
arbitration proceeding that must be conducted in the Philippines under the jurisdiction and control of the
RTC; and before an arbitrator who resides in the country; and that the arbitral award is subject to court
approval, disapproval and modification, and that there must be an appeal from the judgment of the
RTC. The RTC found that the arbitration clause in question contravened these procedures, i.e., the
arbitration clause contemplated an arbitration proceeding in New York before a non-resident arbitrator
(American Arbitration Association); that the arbitral award shall be final and binding on both parties. The
RTC said that to apply Section 7 of the Arbitration Law to such an agreement would result in disregarding
the other sections of the same law and rendered them useless and mere surplusages.
6|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Petitioner filed its Motion for Reconsideration, which the RTC denied in an Order[10] dated November 25,
1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that the RTC acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss or at least suspend the proceedings a
quo, despite the fact that the party's agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then required to file their respective
Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition and affirming the RTC
Orders.
In denying the petition, the CA found that stipulation providing for arbitration in contractual obligation is
both valid and constitutional; that arbitration as an alternative mode of dispute resolution has long been
accepted in our jurisdiction and expressly provided for in the Civil Code; that R.A. No. 876 (the
Arbitration Law) also expressly authorized the arbitration of domestic disputes. The CA found error in the
RTC's holding that Section 7 of R.A. No. 876 was inapplicable to arbitration clause simply because the
clause failed to comply with the requirements prescribed by the law. The CA found that there was nothing
in the Civil Code, or R.A. No.876, that require that arbitration proceedings must be conducted only in
the Philippines and the arbitrators should be Philippine residents. It also found that the RTC ruling
effectively invalidated not only the disputed arbitration clause, but all other agreements which provide for
foreign arbitration. The CA did not find illegal or against public policy the arbitration clause so as to
render it null and void or ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be brought under the Arbitration Law
for the purpose of suspending the proceedings before the RTC, since in its Motion to Dismiss/Suspend
proceedings, petitioner alleged, as one of the grounds thereof, that the subject contract between the parties
did not exist or it was invalid; that the said contract bearing the arbitration clause was never consummated
by the parties, thus, it was proper that such issue be first resolved by the court through an appropriate trial;
that the issue involved a question of fact that the RTC should first resolve. Arbitration is not proper when
one of the parties repudiated the existence or validity of the contract.
Petitioner's motion for reconsideration was denied in a Resolution dated November 13, 2006.
Hence, this petition.
Petitioner alleges that the CA committed an error of law in ruling that arbitration cannot
proceed despite the fact that: (a) it had ruled, in its assailed decision, that the arbitration clause is valid,
enforceable and binding on the parties; (b) the case of Gonzales v. Climax Mining Ltd.[11] is inapplicable
here; (c) parties are generally allowed, under the Rules of Court, to adopt several defenses, alternatively or
hypothetically, even if such defenses are inconsistent with each other; and (d) the complaint filed by
respondent with the trial court is premature.
Petitioner alleges that the CA adopted inconsistent positions when it found the arbitration clause between
the parties as valid and enforceable and yet in the same breath decreed that the arbitration cannot proceed
because petitioner assailed the existence of the entire agreement containing the arbitration
clause. Petitioner claims the inapplicability of the cited Gonzales case decided in 2005, because in the
present case, it was respondent who had filed the complaint for rescission and damages with the RTC,
which based its cause of action against petitioner on the alleged agreement dated July 11, 2006 between
the parties; and that the same agreement contained the arbitration clause sought to be enforced by
petitioner in this case. Thus, whether petitioner assails the genuineness and due execution of the
agreement, the fact remains that the agreement sued upon provides for an arbitration clause; that
respondent cannot use the provisions favorable to him and completely disregard those that are
unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two alternative defenses, i.e., the parties
had not entered into any agreement upon which respondent as plaintiff can sue upon; and, assuming that
such agreement existed, there was an arbitration clause that should be enforced, thus, the dispute must first
be submitted to arbitration before an action can be instituted in court. Petitioner argues that under Section
1(j) of Rule 16 of the Rules of Court, included as a ground to dismiss a complaint is when a condition
precedent for filing the complaint has not been complied with; and that submission to arbitration when
such has been agreed upon is one such condition precedent. Petitioner submits that the proceedings in the
RTC must be dismissed, or at least suspended, and the parties be ordered to proceed with arbitration.
On March 12, 2007, petitioner filed a Manifestation[12] saying that the CA's rationale in declining to order
arbitration based on the 2005 Gonzales ruling had been modified upon a motion for reconsideration
decided in 2007; that the CA decision lost its legal basis, because it had been ruled that the arbitration
agreement can be implemented notwithstanding that one of the parties thereto repudiated the contract
which contained such agreement based on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the remedy against an
order denying a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to Voluntary
Arbitration. It claims that the Arbitration Law which petitioner invoked as basis for its Motion prescribed,
under its Section 29, a remedy, i.e., appeal by a petition for review on certiorari under Rule
45. Respondent contends that the Gonzales case, which was decided in 2007, is inapplicable in this case,
especially as to the doctrine of separability enunciated therein. Respondent argues that even if the
existence of the contract and the arbitration clause is conceded, the decisions of the RTC and the CA
declining referral of the dispute between the parties to arbitration would still be correct. This is so because
respondent's complaint filed in Civil Case No. 98-1376 presents the principal issue of whether under the
facts alleged in the complaint, respondent is entitled to rescind its contract with petitioner and for the latter
to pay damages; that such issue constitutes a judicial question or one that requires the exercise of judicial
function and cannot be the subject of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a defendant to adopt in the same
action several defenses, alternatively or hypothetically, even if such defenses are inconsistent with each
other refers to allegations in the pleadings, such as complaint, counterclaim, cross-claim, third-party
complaint, answer, but not to a motion to dismiss. Finally, respondent claims that petitioner's argument is
premised on the existence of a contract with respondent containing a provision for arbitration. However,
its reliance on the contract, which it repudiates, is inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission and damages on the basis of the
contract, thus, respondent admitted the existence of all the provisions contained thereunder, including the
arbitration clause; that if respondent relies on said contract for its cause of action against petitioner, it must
also consider itself bound by the rest of the terms and conditions contained thereunder
notwithstanding that respondent may find some provisions to be adverse to its position; that respondents
citation of the Gonzales case, decided in 2005, to show that the validity of the contract cannot be the
subject of the arbitration proceeding and that it is the RTC which has the jurisdiction to resolve the
situation between the parties herein, is not correct since in the resolution of the Gonzales' motion for
reconsideration in 2007, it had been ruled that an arbitration agreement is effective notwithstanding the
fact that one of the parties thereto repudiated the main contract which contained it.
We first address the procedural issue raised by respondent that petitioners petition for certiorari under
Rule 65 filed in the CA against an RTC Order denying a Motion to Dismiss/Suspend Proceedings and to
Refer Controversy to Voluntary Arbitration was a wrong remedy invoking Section 29 of R.A. No.
876, which provides:
Section 29.
x x x An appeal may be taken from an order made in a proceeding under this Act, or
from a judgment entered upon an award through certiorari proceedings, but such
appeals shall be limited to question of law. x x x.
7|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
To support its argument, respondent cites the case of Gonzales v. Climax Mining Ltd.[13] (Gonzales case),
wherein we ruled the impropriety of a petition for certiorariunder Rule 65 as a mode of appeal from an
RTC Order directing the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition to compel arbitration
under R.A. No. 876, pursuant to the arbitration clause found in the Addendum Contract it entered with
Gonzales. Judge Oscar Pimentel of the RTC of Makati then directed the parties to arbitration proceedings.
Gonzales filed a petition for certiorari with Us contending that Judge Pimentel acted with grave abuse of
discretion in immediately ordering the parties to proceed with arbitration despite the proper, valid and
timely raised argument in his Answer with counterclaim that the Addendum Contract containing the
arbitration clause was null and void. Climax-Arimco assailed the mode of review availed of by Gonzales,
citing Section 29 of R.A. No. 876 contending that certiorari under Rule 65 can be availed of only if there
was no appeal or any adequate remedy in the ordinary course of law; that R.A. No. 876 provides for an
appeal from such order. We then ruled that Gonzales' petition for certiorari should be dismissed as it was
filed in lieu of an appeal by certiorari which was the prescribed remedy under R.A. No. 876 and the
petition was filed far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question of law, but not a question of jurisdiction;
that Judge Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when he ordered
Gonzales to proceed with arbitration and appointed a sole arbitrator after making the determination that
there was indeed an arbitration agreement. It had been held that as long as a court acts within its
jurisdiction and does not gravely abuse its discretion in the exercise thereof, any supposed error
committed by it will amount to nothing more than an error of judgment reviewable by a timely appeal and
not assailable by a special civil action of certiorari.[14]
In this case, petitioner raises before the CA the issue that the respondent Judge acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss, or at least suspend, the proceedings a
quo, despite the fact that the partys agreement to arbitrate had not been complied with. Notably, the RTC
found the existence of the arbitration clause, since it said in its decision that hardly disputed is the fact that
the arbitration clause in question contravenes several provisions of the Arbitration Law x x x and to apply
Section 7 of the Arbitration Law to such an agreement would result in the disregard of the afore-cited
sections of the Arbitration Law and render them useless and mere surplusages. However, notwithstanding
the finding that an arbitration agreement existed, the RTC denied petitioner's motion and directed
petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,[15] it was held that R.A. No. 876 explicitly
confines the courts authority only to the determination of whether or not there is an agreement in writing
providing for arbitration. In the affirmative, the statute ordains that the court shall issue an order
summarily directing the parties to proceed with the arbitration in accordance with the terms thereof. If the
court, upon the other hand, finds that no such agreement exists, the proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend Proceedings and to
Refer Controversy to Voluntary Arbitration, the RTC went beyond its authority of determining only the
issue of whether or not there is an agreement in writing providing for arbitration by directing petitioner to
file an answer, instead of ordering the parties to proceed to arbitration. In so doing, it acted in excess of its
jurisdiction and since there is no plain, speedy, and adequate remedy in the ordinary course of law,
petitioners resort to a petition for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding that this case
cannot be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted
in our jurisdiction.[16] R.A. No. 876[17] authorizes arbitration of domestic disputes. Foreign arbitration, as a
system of settling commercial disputes of an international character, is likewise recognized.[18] The
enactment of R.A. No. 9285 on April 2, 2004 further institutionalized the use of alternative dispute
resolution systems, including arbitration, in the settlement of disputes.[19]
A contract is required for arbitration to take place and to be binding.[20] Submission to
arbitration is a contract [21] and a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitration is a contract.[22] The provision to submit to arbitration any dispute
arising therefrom and the relationship of the parties is part of the contract and is itself a contract. [23]
In this case, the contract sued upon by respondent provides for an arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the American
Arbitration Association, The Arbitration Award shall be final and binding on both
parties.
The CA ruled that arbitration cannot be ordered in this case, since petitioner alleged that the contract
between the parties did not exist or was invalid and arbitration is not proper when one of the parties
repudiates the existence or validity of the contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed
arbitration clause providing for foreign arbitration, it is our considered opinion that
the case at bench still cannot be brought under the Arbitration Law for the purpose of
suspending the proceedings before the trial court. We note that in its Motion to
Dismiss/Suspend Proceedings, etc, petitioner Cargill alleged, as one of the grounds
thereof, that the alleged contract between the parties do not legally exist or is invalid.
As posited by petitioner, it is their contention that the said contract, bearing the
arbitration clause, was never consummated by the parties. That being the case, it is
but proper that such issue be first resolved by the court through an appropriate trial.
The issue involves a question of fact that the trial court should first resolve.
Arbitration is not proper when one of the parties repudiates the existence or
validity of the contract. Apropos is Gonzales v. Climax Mining Ltd., 452 SCRA
607, (G.R.No.161957), where the Supreme Court held that:
The question of validity of the contract
containing the agreement to submit to arbitration will
affect the applicability of the arbitration clause itself. A
party cannot rely on the contract and claim rights or
obligations under it and at the same time impugn its
existence or validity. Indeed, litigants are enjoined from
taking inconsistent positions....
Consequently, the petitioner herein cannot claim that the contract was never
consummated and, at the same time, invokes the arbitration clause provided for
under the contract which it alleges to be non-existent or invalid. Petitioner claims
that private respondent's complaint lacks a cause of action due to the absence of
any valid contract between the parties. Apparently, the arbitration clause is being
invoked merely as a fallback position. The petitioner must first adduce evidence in
support of its claim that there is no valid contract between them and should the
court a quo find the claim to be meritorious, the parties may then be spared the
rigors and expenses that arbitration in a foreign land would surely entail.[24]
However, the Gonzales case,[25] which the CA relied upon for not ordering arbitration, had been modified
upon a motion for reconsideration in this wise:
8|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
x x x The adjudication of the petition in G.R. No. 167994 effectively modifies
part of the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now
hold that the validity of the contract containing the agreement to submit to
arbitration does not affect the applicability of the arbitration clause itself. A
contrary ruling would suggest that a party's mere repudiation of the main
contract is sufficient to avoid arbitration. That is exactly the situation that the
separability doctrine, as well as jurisprudence applying it, seeks to avoid. We add
that when it was declared in G.R. No. 161957 that the case should not be brought for
arbitration, it should be clarified that the case referred to is the case actually filed by
Gonzales before the DENR Panel of Arbitrators, which was for the nullification of
the main contract on the ground of fraud, as it had already been determined that the
case should have been brought before the regular courts involving as it did judicial
issues.[26]
In so ruling that the validity of the contract containing the arbitration agreement does not affect the
applicability of the arbitration clause itself, we then applied the doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it,
enunciates that an arbitration agreement is independent of the main contract. The
arbitration agreement is to be treated as a separate agreement and the arbitration
agreement does not automatically terminate when the contract of which it is a part
comes to an end.
The separability of the arbitration agreement is especially significant to the
determination of whether the invalidity of the main contract also nullifies the
arbitration clause. Indeed, the doctrine denotes that the invalidity of the main
contract, also referred to as the "container" contract, does not affect the validity of the
arbitration agreement. Irrespective of the fact that the main contract is invalid, the
arbitration clause/agreement still remains valid and enforceable.[27]
Respondent argues that the separability doctrine is not applicable in petitioner's case, since in
the Gonzales case, Climax-Arimco sought to enforce the arbitration clause of its contract with Gonzales
and the former's move was premised on the existence of a valid contract; while Gonzales, who resisted the
move of Climax-Arimco for arbitration, did not deny the existence of the contract but merely assailed the
validity thereof on the ground of fraud and oppression. Respondent claims that in the case before Us,
petitioner who is the party insistent on arbitration also claimed in their Motion to Dismiss/Suspend
Proceedings that the contract sought by respondent to be rescinded did not exist or was not consummated;
thus, there is no room for the application of the separability doctrine, since there is no container or main
contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of the main contract
shall not be regarded as invalid or non-existent just because the main contract is invalid or did not come
into existence, since the arbitration agreement shall be treated as a separate agreement independent of the
main contract. To reiterate. a contrary ruling would suggest that a party's mere repudiation of the main
contract is sufficient to avoid arbitration and that is exactly the situation that the separability doctrine
sought to avoid. Thus, we find that even the party who has repudiated the main contract is not prevented
from enforcing its arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission of contract and
damages with the RTC. In so doing, respondent alleged that a contract exists between respondent and
petitioner. It is that contract which provides for an arbitration clause which states that any dispute which
the Buyer and Seller may not be able to settle by mutual agreement shall be settled before the City of New
York by the American Arbitration Association. The arbitration agreement clearly expressed the parties'
intention that any dispute between them as buyer and seller should be referred to arbitration. It is for the
arbitrator and not the courts to decide whether a contract between the parties exists or is valid.
Respondent contends that assuming that the existence of the contract and the arbitration clause is
conceded, the CA's decision declining referral of the parties' dispute to arbitration is still correct. It claims
that its complaint in the RTC presents the issue of whether under the facts alleged, it is entitled to rescind
the contract with damages; and that issue constitutes a judicial question or one that requires the exercise of
judicial function and cannot be the subject of an arbitration proceeding. Respondent cites our ruling
in Gonzales, wherein we held that a panel of arbitrator is bereft of jurisdiction over the complaint for
declaration of nullity/or termination of the subject contracts on the grounds of fraud and oppression
attendant to the execution of the addendum contract and the other contracts emanating from it, and that the
complaint should have been filed with the regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of Arbitrators, Region II, Mines and
Geosciences Bureau, of the Department of Environment and Natural Resources (DENR) against
respondents Climax- Mining Ltd, Climax-Arimco and Australasian Philippines Mining Inc, seeking the
declaration of nullity or termination of the addendum contract and the other contracts emanating from it
on the grounds of fraud and oppression. The Panel dismissed the complaint for lack of jurisdiction.
However, the Panel, upon petitioner's motion for reconsideration, ruled that it had jurisdiction over the
dispute maintaining that it was a mining dispute, since the subject complaint arose from a contract
between the parties which involved the exploration and exploitation of minerals over the disputed area.
Respondents assailed the order of the Panel of Arbitrators via a petition for certiorari before the CA. The
CA granted the petition and declared that the Panel of Arbitrators did not have jurisdiction over the
complaint, since its jurisdiction was limited to the resolution of mining disputes, such as those which
raised a question of fact or matter requiring the technical knowledge and experience of mining authorities
and not when the complaint alleged fraud and oppression which called for the interpretation and
application of laws. The CA further ruled that the petition should have been settled through arbitration
under R.A. No. 876 the Arbitration Law as provided under the addendum contract.
On a review on certiorari, we affirmed the CAs finding that the Panel of Arbitrators who, under R.A. No.
7942 of the Philippine Mining Act of 1995, has exclusive and original jurisdiction to hear and decide
mining disputes, such as mining areas, mineral agreements, FTAAs or permits and surface owners,
occupants and claimholders/concessionaires, is bereft of jurisdiction over the complaint for declaration of
nullity of the addendum contract; thus, the Panels' jurisdiction is limited only to those mining disputes
which raised question of facts or matters requiring the technical knowledge and experience of mining
authorities. We then said:
In Pearson v. Intermediate Appellate Court, this Court observed that the
trend has been to make the adjudication of mining cases a purely administrative
matter. Decisions of the Supreme Court on mining disputes have recognized a
distinction between (1) the primary powers granted by pertinent provisions of law to
the then Secretary of Agriculture and Natural Resources (and the bureau directors) of
an executive or administrative nature, such as granting of license, permits, lease and
contracts, or approving, rejecting, reinstating or canceling applications, or deciding
conflicting applications, and (2) controversies or disagreements of civil or contractual
nature between litigants which are questions of a judicial nature that may be
adjudicated only by the courts of justice. This distinction is carried on even in Rep.
Act No. 7942.[28]
We found that since the complaint filed before the DENR Panel of Arbitrators charged
respondents with disregarding and ignoring the addendum contract, and acting in a fraudulent and
oppressive manner against petitioner, the complaint filed before the Panel was not a dispute involving
rights to mining areas, or was it a dispute involving claimholders or concessionaires, but essentially
judicial issues. We then said that the Panel of Arbitrators did not have jurisdiction over such issue, since it
does not involve the application of technical knowledge and expertise relating to mining. It is in this
context that we said that:
9|A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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.[29]
In fact, We even clarified in our resolution on Gonzales motion for reconsideration that when we declared
that the case should not be brought for arbitration, it should be clarified that the case referred to is the case
actually filed by Gonzales before the DENR Panel of Arbitrators, which was for the nullification of the
main contract on the ground of fraud, as it had already been determined that the case should have been
brought before the regular courts involving as it did judicial issues. We made such clarification in our
resolution of the motion for reconsideration after ruling that the parties in that case can proceed to
arbitration under the Arbitration Law, as provided under the Arbitration Clause in their Addendum
Contract.
WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2006 and the
Resolution dated November 13, 2006 of the Court of Appeals in CA-G.R. SP No. 50304 are REVERSED
and SET ASIDE. The parties are hereby ORDERED to SUBMIT themselves to the arbitration of their
dispute, pursuant to their July 11, 1996 agreement. SO ORDERED.
G.R. No. 156660
ORMOC SUGARCANE PLANTERS ASSOCIATION, INC. (OSPA),OCCIDENTAL LEYTE
FARMERS MULTI-PURPOSE COOPERATIVE, INC. (OLFAMCA), UNIFARM MULTI-
PURPOSE COOPERATIVE, INC. (UNIFARM) and ORMOC NORTH DISTRICT IRRIGATION
MULTI-PURPOSE COOPERATIVE, INC. (ONDIMCO)
- versus -
THE COURT OF APPEALS (Special Former Sixth Division), HIDECO SUGAR MILLING CO.,
INC., and ORMOC SUGAR MILLING CO., INC.,
August 24, 2009
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a special civil action for certiorari assailing the Decision [1] dated December
7, 2001 and the Resolution dated October 30, 2002 of the Court of Appeals (CA) in CA-G.R. SP No.
56166 which set aside the Joint Orders[2] dated August 26, 1999 and October 29, 1999 issued by the
Regional Trial Court (RTC) of Ormoc City, Branch 12 upholding petitioners legal personality to demand
arbitration from respondents and directing respondents to nominate two arbitrators to represent them in the
Board of Arbitrators.
Petitioners are associations organized by and whose members are individual sugar planters
(Planters). The membership of each association follows: 264 Planters were members of OSPA; 533
Planters belong to OLFAMCA; 617 Planters joined UNIFARM; 760 Planters enlisted with ONDIMCO;
and the rest belong to BAP-MPC which did not join the lawsuit.
 Respondents Hideco Sugar Milling Co., Inc. (Hideco) and Ormoc Sugar Milling Co, Inc.
(OSCO) are sugar centrals engaged in grinding and milling sugarcane delivered to them by numerous
individual sugar planters, who may or may not be members of an association such as petitioners.
Petitioners assert that the relationship between respondents and the individual sugar planters is
governed by milling contracts. To buttress this claim, petitioners presented representative samples of the
milling contracts.[3]
Notably, Article VII of the milling contracts provides that 34% of the sugar and molasses
produced from milling the Planters sugarcane shall belong to the centrals (respondents) as compensation,
65% thereof shall go to the Planter and the remaining 1% shall go the association to which the Planter
concerned belongs, as aid to the said association. The 1% aid shall be used by the association for any
purpose that it may deem fit for its members, laborers and their dependents. If the Planter was not a
member of any association, then the said 1% shall revert to the centrals. Article XIV, paragraph B [4] states
that the centrals may not, during the life of the milling contract, sign or execute any contract or agreement
that will provide better or more benefits to a Planter, without the written consent of the existing and
recognized associations except to Planters whose plantations are situated in areas beyond thirty (30)
kilometers from the mill. Article XX provides that all differences and controversies which may arise
between the parties concerning the agreement shall be submitted for discussion to a Board of Arbitration,
consisting of five (5) memberstwo (2) of which shall be appointed by the centrals, two (2) by the Planter
and the fifth to be appointed by the four appointed by the parties.
On June 4, 1999, petitioners, without impleading any of their individual members, filed twin
petitions with the RTC for Arbitration under R.A. 876, Recovery of Equal Additional Benefits, Attorneys
Fees and Damages, against HIDECO and OSCO, docketed as Civil Case Nos. 3696-O and 3697-O,
respectively.
Petitioners claimed that respondents violated the Milling Contract when they gave to
independent planters who do not belong to any association the 1% share, instead of reverting said share to
the centrals. Petitioners contended that respondents unduly accorded the independent Planters more
benefits and thus prayed that an order be issued directing the parties to commence with arbitration in
accordance with the terms of the milling contracts. They also demanded that respondents be penalized by
increasing their member Planters 65% share provided in the milling contract by 1%, to 66%.
Respondents filed a motion to dismiss on ground of lack of cause of action because petitioners
had no milling contract with respondents. According to respondents, only some eighty (80) Planters who
were members of OSPA, one of the petitioners, executed milling contracts. Respondents and these 80
Planters were the signatories of the milling contracts. Thus, it was the individual Planters, and not
petitioners, who had legal standing to invoke the arbitration clause in the milling contracts. Petitioners, not
being privy to the milling contracts, had no legal standing whatsoever to demand or sue for arbitration.
On August 26, 1999, the RTC issued a Joint Order[5] denying the motion to dismiss, declaring
the existence of a milling contract between the parties, and directing respondents to nominate two
arbitrators to the Board of Arbitrators, to wit:
When these cases were called for hearing today, counsels for the petitioners and
respondents argued their respective stand. The Court is convinced that there is an
existing milling contract between the petitioners and respondents and these planters
are represented by the officers of the associations. The petitioners have the right to
sue in behalf of the planters.
This Court, acting on the petitions, directs the respondents to nominate two
arbitrators to represent HIDECO/HISUMCO and OSCO in the Board of Arbitrators
within fifteen (15) days from receipt of this Order. xxx
However, if the respondents fail to nominate their two arbitrators, upon proper
motion by the petitioners, then the Court will be compelled to use its discretion to
appoint the two (2) arbitrators, as embodied in the Milling Contract and R.A. 876.
10 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
xxx
Their subsequent motion for reconsideration having been denied by the RTC in its Joint
Order[6] dated October 29, 1999, respondents elevated the case to the CA through a Petition for Certiorari
with Prayer for the Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction.
On December 7, 2001, the CA rendered its challenged Decision, setting aside the assailed
Orders of the RTC. The CA held that petitioners neither had an existing contract with respondents nor
were they privy to the milling contracts between respondents and the individual Planters. In the main, the
CA concluded that petitioners had no legal personality to bring the action against respondents or to
demand for arbitration.
Petitioners filed a motion for reconsideration, but it too was denied by the CA in its
Resolution[7] dated October 30, 2002. Thus, the instant petition.
At the outset, it must be noted that petitioners filed the instant petition for certiorari under Rule
65 of the Rules of Court, to challenge the judgment of the CA. Section 1 of Rule 65 states:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising
judicial or quasi-judicial functions has acted without or in excess of its jurisdiction,
or with grave abuse of discretion amounting to lack or excess of its or his
jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in
the course of law, a person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental relief as law and justice require. xxx xxx xxx (emphasis
ours)
The instant recourse is improper because the resolution of the CA was a final order from which the
remedy of appeal was available under Rule 45 in relation to Rule 56. The existence and availability of the
right of appeal proscribes resort to certiorari because one of the requirements for availment of the latter is
precisely that there should be no appeal. It is elementary that for certiorari to prosper, it is not enough that
the trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction; the
requirement that there is no appeal, nor any plain, speedy and adequate remedy in the ordinary course of
law must likewise be satisfied.[8] The proper mode of recourse for petitioners was to file a petition for
review of the CAs decision under Rule 45.
Petitioners principally argue that the CA committed a grave error in setting aside the
challenged Joint Orders of the RTC which allegedly unduly curtailed the right of petitioners to represent
their planters-members and enforce the milling contracts with respondents. Petitioners assert the said
which orders were issued in accordance with Article XX of the Milling Contract and the applicable
provisions of Republic Act (R.A.) No. 876.
Where the issue or question involved affects the wisdom or legal soundness of the decision not
the jurisdiction of the court to render said decision the same is beyond the province of a special civil
action for certiorari. Erroneous findings and conclusions do not render the appellate court vulnerable to
the corrective writ of certiorari. For where the court has jurisdiction over the case, even if its findings are
not correct, they would, at most constitute errors of law and not abuse of discretion correctable by
certiorari.[9]
Moreover, even if this Court overlooks the procedural lapse committed by petitioners and
decides this matter on the merits, the present petition will still not prosper.
Stripped to the core, the pivotal issue here is whether or not petitioners sugar planters
associations are clothed with legal personality to file a suit against, or demand arbitration from,
respondents in their own name without impleading the individual Planters.
On this point, we agree with the findings of the CA.
 Section 2 of R.A. No. 876 (the Arbitration Law)[10] pertinently provides:
Sec. 2. Persons and matters subject to arbitration. Two or more persons
or parties may submit to the arbitration of one or more arbitrators any
controversy existing between them at the time of the submission and which may
be the subject of an action, or the parties to any contract may in such contract
agree to settle by arbitration a controversy thereafter arising between
them. Such submission or contract shall be valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of any contract. xxx (Emphasis
ours)
The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit to
arbitration some future dispute, usually stipulated upon in a civil contract between the parties, and known
as an agreement to submit to arbitration, and (b) an agreement submitting an existing matter of difference
to arbitrators, termed the submission agreement. Article XX of the milling contract is an agreement to
submit to arbitration because it was made in anticipation of a dispute that might arise between the parties
after the contracts execution.
Except where a compulsory arbitration is provided by statute, the first step toward the
settlement of a difference by arbitration is the entry by the parties into a valid agreement to arbitrate. An
agreement to arbitrate is a contract, the relation of the parties is contractual, and the rights and liabilities of
the parties are controlled by the law of contracts.[11] In an agreement for arbitration, the ordinary elements
of a valid contract must appear, including an agreement to arbitrate some specific thing, and an agreement
to abide by the award, either in express language or by implication.
The requirements that an arbitration agreement must be written and subscribed by the parties
thereto were enunciated by the Court in B.F. Corporation v. CA.[12]
During the proceedings before the CA, it was established that there were more than two
thousand (2,000) Planters in the district at the time the case was commenced at the RTC in 1999. The CA
further found that of those 2,000 Planters, only about eighty (80) Planters, who were all members of
petitioner OSPA, in fact individually executed milling contracts with respondents. No milling contracts
signed by members of the other petitioners were presented before the CA.
By their own allegation, petitioners are associations duly existing and organized under
Philippine law, i.e. they have juridical personalities separate and distinct from that of their member
Planters. It is likewise undisputed that the eighty (80) milling contracts that were presented were signed
only by the member Planter concerned and one of the Centrals as parties. In other words, none of the
petitioners were parties or signatories to the milling contracts. This circumstance is fatal to petitioners'
cause since they anchor their right to demand arbitration from the respondent sugar centrals upon the
arbitration clause found in the milling contracts.There is no legal basis for petitioners' purported right to
demand arbitration when they are not parties to the milling contracts, especially when the language of the
arbitration clause expressly grants the right to demand arbitration only to the parties to the contract.
Simply put, petitioners do not have any agreement to arbitrate with respondents. Only eighty
(80) Planters who were all members of OSPA were shown to have such an agreement to arbitrate, included
as a stipulation in their individual milling contracts. The other petitioners failed to prove that any of their
members had milling contracts with respondents, much less, that respondents had an agreement to
arbitrate with the petitioner associations themselves.
Even assuming that all the petitioners were able to present milling contracts in favor of their
members, it is undeniable that under the arbitration clause in these contracts it is the parties thereto who
have the right to submit a controversy or dispute to arbitration.
Section 4 of R.A. 876 provides:
Section 4. Form of Arbitration Agreement A contract to arbitrate a controversy
thereafter arising between the parties, as well as a submission to arbitrate an
11 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
existing controversy, shall be in writing and subscribed by the party sought to be
charged, or by his lawful agent.
The making of a contract or submission for arbitration described in
section two hereof, providing for arbitration of any controversy, shall be deemed a
consent of the parties to the jurisdiction of the Court of First Instance of the
province or city where any of the parties resides, to enforce such contract of
submission.
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be
in writing and (b) it must be subscribed by the parties or their representatives. To subscribe means to write
underneath, as ones name; to sign at the end of a document. That word may sometimes be construed to
mean to give consent to or to attest.[13]
Petitioners would argue that they could sue respondents, notwithstanding the fact that they
were not signatories in the milling contracts because they are the recognized representatives of the
Planters.
This claim has no leg to stand on since petitioners did not sign the milling contracts at all,
whether as a party or as a representative of their member Planters.The individual Planter and the
appropriate central were the only signatories to the contracts and there is no provision in the milling
contracts that the individual Planter is authorizing the association to represent him/her in a legal action in
case of a dispute over the milling contracts.
Moreover, even assuming that petitioners are indeed representatives of the member Planters
who have milling contracts with the respondents and assuming further that petitioners signed the milling
contracts as representatives of their members, petitioners could not initiate arbitration proceedings in their
own name as they had done in the present case. As mere agents, they should have brought the suit in the
name of the principals that they purportedly represent. Even if Section 4 of R.A. No. 876 allows the
agreement to arbitrate to be signed by a representative, the principal is still the one who has the right to
demand arbitration.
Indeed, Rule 3, Section 2 of the Rules of Court requires suits to be brought in the name of the
real party in interest, to wit:
Sec. 2. Parties in interest. A real party in interest is the party who stands
to be benefited or injured by the judgment in the suit, or the party entitled to the
avails of the suit. Unless otherwise authorized by law or these Rules, every action
must be prosecuted or defended in the name of the real party in interest.
We held in Oco v. Limbaring[14] that:
As applied to the present case, this provision has two requirements: 1) to institute
an action, the plaintiff must be the real party in interest; and 2) the action must be
prosecuted in the name of the real party in interest. Necessarily, the purposes of this
provision are 1) to prevent the prosecution of actions by persons without any right,
title or interest in the case; 2) to require that the actual party entitled to legal relief
be the one to prosecute the action; 3) to avoid a multiplicity of suits; and 4) to
discourage litigation and keep it within certain bounds, pursuant to sound public
policy.
Interest within the meaning of the Rules means material interest or
an interest in issue to be affected by the decree or judgment of the case, as
distinguished from mere curiosity about the question involved. One having no
material interest to protect cannot invoke the jurisdiction of the court as the plaintiff
in an action. When the plaintiff is not the real party in interest, the case is
dismissible on the ground of lack of cause of action.
xxx xxx xxx
The parties to a contract are the real parties in interest in an action
upon it, as consistently held by the Court. Only the contracting parties are bound
 by the stipulations in the contract; they are the ones who would benefit from and
could violate it. Thus, one who is not a party to a contract, and for whose benefit it
was not expressly made, cannot maintain an action on it. One cannot do so, even
if the contract performed by the contracting parties would incidentally inure to
ones benefit. (emphasis ours)
In Uy v. Court of Appeals,[15] this Court held that the agents of the parties to a contract do not
have the right to bring an action even if they rendered some service on behalf of their principals. To quote
from that decision:
[Petitioners] are mere agents of the owners of the land subject of the sale. As agents,
they only render some service or do something in representation or on behalf of
their principals. The rendering of such service did not make them parties to the
contracts of sale executed in behalf of the latter. Since a contract may be violated
only by the parties thereto as against each other, the real parties-in-interest, either
as plaintiff or defendant, in an action upon that contract must, generally, either
be parties to said contract. (emphasis and words in brackets ours)
The main cause of action of petitioners in their request for arbitration with the RTC is the
alleged violation of the clause in the milling contracts involving the proportionate sharing in the proceeds
of the harvest. Petitioners essentially demand that respondents increase the share of the member Planters
to 66% to equalize their situation with those of the non-member Planters. Verily, from petitioners' own
allegations, the party who would be injured or benefited by a decision in the arbitration proceedings will
be the member Planters involved and not petitioners. In sum, petitioners are not the real parties in interest
in the present case.
Assuming petitioners had properly brought the case in the name of their members who had existing
milling contracts with respondents, petitioners must still prove that they were indeed authorized by the
said members to institute an action for and on the members' behalf. In the same manner that an officer of
the corporation cannot bring action in behalf of a corporation unless it is clothed with a board resolution
authorizing an officer to do so, an authorization from the individual member planter is a sine qua non for
the association or any of its officers to bring an action before the court of law. The mere fact that
petitioners were organized for the purpose of advancing the interests and welfare of their members does
not necessarily mean that petitioners have the authority to represent their members in legal proceedings,
including the present arbitration proceedings.
As we see it, petitioners had no intention to litigate the case in a representative capacity, as they
contend. All the pleadings from the RTC to this Court belie this claim. Under Section 3 of Rule 3, where
the action is allowed to be prosecuted by a representative, the beneficiary shall be included in the title of
the case and shall be deemed to be the real party in interest. As repeatedly pointed out earlier, the
individual Planters were not even impleaded as parties to this case. In addition, petitioners need a power-
of-attorney to represent the Planters whether in the lawsuit or to demand arbitration.[16] None was ever
presented here.
Lastly, petitioners theorize that they could demand and sue for arbitration independently of the
Planters because the milling contract is a contract pour autruiunder Article 1311 of the Civil Code.
ART. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person,
he may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.
12 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
To summarize, the requisites of a stipulation pour autrui or a stipulation in favor of a third
person are the following: (1) there must be a stipulation in favor of a third person, (2) the stipulation must
be a part, not the whole, of the contract, (3) the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental benefit or interest, (4) the third person must
have communicated his acceptance to the obligor before its revocation, and (5) neither of the contracting
parties bears the legal representation or authorization of the third party. [17] These requisites are not present
in this case.
Article VI of the Milling Contract is the solitary provision that mentions some benefit in favor
of the association of which the planter is a member and we quote:
VI
SHARE IN THE SUGAR
Thirty four per centrum (34%) of the sugar ad molasses resulting from
the milling of the PLANTERs sugarcane, as computed from the weight and analysis
of the sugarcane delivered by the PLANTER, shall belong to the CENTRAL; sixty
five per centum (65%) thereof to the PLANTER, and one per centum (1%) as aid to
the association of the PLANTER; provided that, if the PLANTER is not a member
of any association recognized by the CENTRAL, said one per centum (1%) shall
revert to the CENTRAL. The 1% aid shall be used by the association for any
purpose that it may deem fit for its members, laborers and their dependents, or for
its other socio-economic projects.
The foregoing provision cannot, by any stretch of the imagination, be considered as a
stiputation pour autrui or for the benefit of the petitioners. The primary rationale for the said stipulation is
to ensure a just share in the proceeds of the harvest to the Planters. In other words, it is a stipulation meant
to benefit the Planters.Even the 1% share to be given to the association as aid does not redound to the
benefit of the association but is intended to be used for its member Planters. Not only that, it is explicit
that said share reverts back to respondent sugar centrals if the contracting Planter is not affiliated with any
recognized association.
To be considered a pour autrui provision, an incidental benefit or interest, which another
person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor
upon a third person.[18] Even the clause stating that respondents must secure the consent of the association
if respondents grant better benefits to a Planter has for its rationale the protection of the member
Planter. The only interest of the association therein is that its member Planter will not be put at a
disadvantage vis a vis other Planters. Thus, the associations interest in these milling contracts is only
incidental to their avowed purpose of advancing the welfare and rights of their member Planters.
In all, the Court finds no grave abuse of discretion nor reversible error committed by the CA in
setting aside the Joint Orders issued by the RTC.
WHEREFORE, petition is hereby DISMISSED.
Costs against petitioners.
SO ORDERED.
[G.R. No. 136154. February 7, 2001]
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS
HIDALGO, petitioners, vs. COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in
his capacity as Presiding Judge, RTC-Br. 74, Malabon, Metro Manila, MONTEBUENO
MARKETING, INC., LIONG LIONG C. SY and SABROSA FOODS, INC., respondents.
DECISION
BELLOSILLO, J.:
[1]
This Petition for Review on certiorari assails the 17 July 1998 Decision of the Court of Appeals
affirming the 11 November 1997 Order[2] of the Regional Trial Court which denied petitioners Motion to
Suspend Proceedings in Civil Case No. 2637-MN. It also questions the appellate courts Resolution[3] of 30
October 1998 which denied petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-
USA) appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive
distributor of its Del Monte products in the Philippines for a period of five (5) years, renewable for two (2)
consecutive five (5) year periods with the consent of the parties. The Agreement provided, among others,
for an arbitration clause which states -
12. GOVERNING LAW AND ARBITRATION[4]
This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United
States of America. All disputes arising out of or relating to this Agreement or the parties relationship,
including the termination thereof, shall be resolved by arbitration in the City of San Francisco, State of
California, under the Rules of the American Arbitration Association. The arbitration panel shall consist of
three members, one of whom shall be selected by DMC-USA, one of whom shall be selected by MMI, and
third of whom shall be selected by the other two members and shall have relevant experience in the
industry x x x x
In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of
Del Monte products in the Philippines was published in several newspapers in the country. Immediately
after its appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of
petitioner DMC-USA, as MMIs marketing arm to concentrate on its marketing and selling function as
well as to manage its critical relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director Liong Liong C.
Sy (LILY SY) filed a Complaint[5] against petitioners DMC-USA, Paul E. Derby, Jr.,[6]Daniel Collins[7] and
Luis Hidalgo,[8] and Dewey Ltd.[9] before the Regional Trial Court of Malabon, Metro Manila. Private
respondents predicated their complaint on the alleged violations by petitioners of Arts. 20,[10] 21[11] and
23[12] of the Civil Code. According to private respondents, DMC-USA products continued to be brought
into the country by parallel importers despite the appointment of private respondent MMI as the sole and
exclusive distributor of Del Monte products thereby causing them great embarrassment and substantial
damage. They alleged that the products brought into the country by these importers were aged, damaged,
fake or counterfeit, so that in March 1995 they had to cause, after prior consultation with Antonio Ongpin,
Market Director for Special Markets of Del Monte Philippines, Inc., the publication of a "warning to the
trade" paid advertisement in leading newspapers. Petitioners DMC-USA and Paul E. Derby, Jr., apparently
upset with the publication, instructed private respondent MMI to stop coordinating with Antonio Ongpin
and to communicate directly instead with petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal
with the former in bad faith by involving disinterested third parties and by proposing solutions which were
entirely out of their control. Private respondents claimed that they had exhausted all possible avenues for
an amicable resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice
and wanton attitude of petitioners, they should be held responsible for all the actual expenses incurred by
private respondents in the delayed shipment of orders which resulted in the extra handling thereof, the
actual expenses and cost of money for the unused Letters of Credit (LCs) and the substantial opportunity
losses due to created out-of-stock situations and unauthorized shipments of Del Monte-USA products to
13 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
the Philippine Duty Free Area and Economic Zone; that the bad faith, fraudulent acts and willful
negligence of petitioners, motivated by their determination to squeeze private respondents out of the
outstanding and ongoing Distributorship Agreement in favor of another party, had placed private
respondent LILY SY on tenterhooks since then; and, that the shrewd and subtle manner with which
petitioners concocted imaginary violations by private respondent MMI of the Distributorship Agreement
in order to justify the untimely termination thereof was a subterfuge. For the foregoing, private
respondents claimed, among other reliefs, the payment of actual damages, exemplary damages, attorneys
fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking the arbitration
clause in their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of
petitioners Motion to Suspend Proceedings as the grounds alleged therein did not constitute the suspension
of the proceedings considering that the action was for damages with prayer for the issuance of Writ of
Preliminary Attachment and not on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which private respondents
filed their Comment/Opposition. On 31 January 1997 petitioners filed their Reply.Subsequently, private
respondents filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This
Motion was admitted, over petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the
ground that it "will not serve the ends of justice and to allow said suspension will only delay the
determination of the issues, frustrate the quest of the parties for a judicious determination of their
respective claims, and/or deprive and delay their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the decision of the trial court. It held that the alleged
damaging acts recited in the Complaint, constituting petitioners causes of action, required the
interpretation of Art. 21 of the Civil Code[16] and that in determining whether petitioners had violated it
"would require a full blown trial" making arbitration "out of the question."[17] Petitioners Motion for
Reconsideration of the affirmation was denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties warrants an
order compelling them to submit to arbitration.
Petitioners contend that the subject matter of private respondents causes of action arises out of or
relates to the Agreement between petitioners and private respondents. Thus, considering that the
arbitration clause of the Agreement provides that all disputes arising out of or relating to the Agreement or
the parties relationship, including the termination thereof, shall be resolved by arbitration, they insist on
the suspension of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876[18] -
Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an
agreement providing for arbitration thereof, the court in which such suit or proceeding is pending, upon
being satisfied that the issue involved in such suit or proceeding is referable to arbitration, shall stay the
action or proceeding until an arbitration has been had in accordance with the terms of the
agreement. Provided, That the applicant for the stay is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21
and 23 of the Civil Code,[19] the determination of which demands a full blown trial, as correctly held by the
Court of Appeals. Moreover, they claim that the issues before the trial court were not joined so that the
Honorable Judge was not given the opportunity to satisfy himself that the issue involved in the case was
referable to arbitration. They submit that, apparently, petitioners filed a motion to suspend proceedings
instead of sending a written demand to private respondents to arbitrate because petitioners were not sure
whether the case could be a subject of arbitration. They maintain that had petitioners done so and private
respondents failed to answer the demand, petitioners could have filed with the trial court their demand for
arbitration that would warrant a determination by the judge whether to refer the case to
arbitration. Accordingly, private respondents assert that arbitration is out of the question.
Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition
on the same date[20] petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate
before the United States District Court in Northern California, docketed as Case No. C-98-4446. They
insist that the filing of the petition to compel arbitration in the United States made the petition filed before
this Court an alternative remedy and, in a way, an abandonment of the cause they are fighting for here in
the Philippines, thus warranting the dismissal of the present petition before this Court.
There is no doubt that arbitration is valid and constitutional in our jurisdiction.[21] Even before the
enactment of RA 876, this Court has countenanced the settlement of disputes through arbitration. Unless
the agreement is such as absolutely to close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable arrangement and will only interfere
with great reluctance to anticipate or nullify the action of the arbitrator.[22] Moreover, as RA 876 expressly
authorizes arbitration of domestic disputes, foreign arbitration as a system of settling commercial disputes
was likewise recognized when the Philippines adhered to the United Nations "Convention on the
Recognition and the Enforcement of Foreign Arbitral Awards of 1958" under the 10 May 1965 Resolution
No. 71 of the Philippine Senate, giving reciprocal recognition and allowing enforcement of international
arbitration agreements between parties of different nationalities within a contracting state.[23]
A careful examination of the instant case shows that the arbitration clause in the Distributorship
Agreement between petitioner DMC-USA and private respondent MMI is valid and the dispute between
the parties is arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The
provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of
that contract and is itself a contract. As a rule, contracts are respected as the law between the contracting
parties and produce effect as between them, their assigns and heirs. [24]Clearly, only parties to the
Agreement, i.e., petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr., and
private respondents MMI and its Managing Director LILY SY are bound by the Agreement and its
arbitration clause as they are the only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and
private respondent SFI, not parties to the Agreement and cannot even be considered assigns or heirs of the
parties, are not bound by the Agreement and the arbitration clause therein. Consequently, referral to
arbitration in the State of California pursuant to the arbitration clause and the suspension of the
proceedings in Civil Case No. 2637-MN pending the return of the arbitral award could be called for [25] but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and private respondents MMI and LILY SY, and
not as to the other parties in this case, in accordance with the recent case of Heirs of Augusto L. Salas, Jr.
v. Laperal Realty Corporation,[26] which superseded that of Toyota Motor Philippines Corp. v. Court of
Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become
dysfunctional because of the presence of third parties is untenable ratiocinating that "[c]ontracts are
respected as the law between the contracting parties"[28] and that "[a]s such, the parties are thereby
expected to abide with good faith in their contractual commitments."[29] However, in Salas, Jr., only parties
to the Agreement, their assigns or heirs have the right to arbitrate or could be compelled to arbitrate. The
Court went further by declaring that in recognizing the right of the contracting parties to arbitrate or to
compel arbitration, the splitting of the proceedings to arbitration as to some of the parties on one hand and
trial for the others on the other hand, or the suspension of trial pending arbitration between some of the
parties, should not be allowed as it would, in effect, result in multiplicity of suits, duplicitous procedure
and unnecessary delay.[30]
The object of arbitration is to allow the expeditious determination of a dispute.[31] Clearly, the issue
before us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration
proceedings and trial, or suspension of trial pending arbitration. Accordingly, the interest of justice would
only be served if the trial court hears and adjudicates the case in a single and complete proceeding. [32]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the
Order of the Regional Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied
14 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
petitioners Motion to Suspend Proceedings, is AFFIRMED. The Regional Trial Court concerned is
directed to proceed with the hearing of Civil Case No. 2637-MN with dispatch.No costs.
SO ORDERED.
G.R. No. 120105 March 27, 1998
BF CORPORATION, petitioner,
vs.
COURT OF APPEALS, SHANGRI-LA PROPERTIES, INC., RUFO B. COLAYCO, ALFREDO C.
RAMOS, MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents.
ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction
of the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc.
embodies an arbitration clause in case of disagreement between the parties in the implementation of
contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter
engaged the former to construct the main structure of the "EDSA Plaza Project," a shopping mall complex
in the City of Mandaluyong. The construction work was in progress when SPI decided to expand the
project by engaging the services of petitioner again. Thus, the parties entered into an agreement for the
main contract works after which construction work began.
However, petitioner incurred delay in the construction work that SPI considered as "serious and
substantial."1 On the other hand, according to petitioner, the construction works "progressed in faithful
compliance with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I" of
the Project.2 Hence, SPI proposed the re-negotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as
"Agreement for the Execution of Builder's Work for the EDSA Plaza Project." Said agreement would
cover the construction work on said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner "failed to complete the construction works and abandoned the project." 3 This
resulted in disagreements between the parties as regards their respective liabilities under the contract. On
July 12, 1993, upon SPI's initiative, the parties' respective representatives met in conference but they
failed to come to an agreement.4
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a
complaint for collection of the balance due under the construction agreement. Named defendants therein
were SPI and members of its board of directors namely, Alfredo C. Ramos, Rufo B. Calayco, Antonio B.
Olbes, Gerardo O. Lanuza, Jr., Maximo G. Licauco III and Benjamin C. Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an
answer. The motion was anchored on defendants' allegation that the formal trade contract for the
construction of the project provided for a clause requiring prior resort to arbitration before judicial
intervention could be invoked in any dispute arising from the contract. The following day, SPI submitted a
copy of the conditions of the contract containing the arbitration clause that it failed to append to its motion
to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although
they entered into an agreement defining their rights and obligations in undertaking the project. It
emphasized that the agreement did not provide for arbitration and therefore the court could not be
deprived of jurisdiction conferred by law by the mere allegation of the existence of an arbitration clause in
the agreement between the parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract
between petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the
court of its jurisdiction over the case and that arbitration would expedite rather than delay the settlement of
the parties' respective claims against each other.
In a rejoinder to SPI's reply, petitioner reiterated that there was no arbitration clause in the contract
between the parties. It averred that granting that such a clause indeed formed part of the contract,
suspension of the proceedings was no longer proper. It added that defendants should be declared in default
for failure to file their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioner's admission of the due execution of the
"Articles of Agreement." Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and
Bayani Fernando, president of petitioner appear, while page D/7 shows that the agreement is a public
document duly notarized on November 15, 1991 by Notary Public Nilberto R. Briones as document No.
345, page 70, book No. LXX, Series of 1991 of his notarial register.5
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court6 denied the motion to
suspend proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30, 1991
(Annex C, Complaint), plaintiff BF and defendant Shangri-La Properties, Inc.
agreed upon the terms and conditions of the Builders Work for the EDSA Plaza
Project (Phases I, II and Carpark), subject to the execution by the parties of a formal
trade contract. Defendants have submitted a copy of the alleged trade contract,
which is entitled "Contract Documents For Builder's Work Trade Contractor" dated
01 May 1991, page 2 of which is entitled "Contents of Contract Documents" with a
list of the documents therein contained, and Section A thereof consists of the
abovementioned Letter-Agreement dated May 30, 1991. Section C of the said
Contract Documents is entitled "Articles of Agreement and Conditions of Contract"
which, per its Index, consists of Part A (Articles of Agreement) and B (Conditions
of Contract). The said Articles of Agreement appears to have been duly signed by
President Rufo B. Colayco of Shangri-La Properties, Inc. and President Bayani F.
Fernando of BF and their witnesses, and was thereafter acknowledged before
Notary Public Nilberto R. Briones of Makati, Metro Manila on November 15,
1991. The said Articles of Agreement also provides that the "Contract Documents"
therein listed "shall be deemed an integral part of this Agreement", and one of the
said documents is the "Conditions of Contract" which contains the Arbitration
Clause relied upon by the defendants in their Motion to Suspend Proceedings.
This Court notes, however, that the 'Conditions of Contract' referred to, contains the following provisions:
3. Contract Document.
Three copies of the Contract Documents referred to in the
Articles of Agreement shall be signed by the parties to the
contract and distributed to the Owner and the Contractor for
their safe keeping." (emphasis supplied).
And it is significant to note further that the said "Conditions of Contract" is not duly
signed by the parties on any page thereof although it bears the initials of BF's
15 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
representatives (Bayani F. Fernando and Reynaldo M. de la Cruz) without the
initials thereon of any representative of Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was
not duly executed or signed by the parties, and the failure of the defendants to
submit any signed copy of the said document, this Court entertains serious doubt
whether or not the arbitration clause found in the said Conditions of Contract is
binding upon the parties to the Articles of Agreement." (Emphasis supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was
"too late in the day for defendants to invoke arbitration." It quoted the following provision of the
arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the
other party to the contract and a copy filed with the Project Manager. The demand
for arbitration shall be made within a reasonable time after the dispute has arisen
and attempts to settle amicably have failed; in no case, however, shall the demand
he made be later than the time of final payment except as otherwise expressly
stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was
to be completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay
counted from November 1, 1991 with "liquified (sic) damages up to a maximum of 5% of the total
contract price."
The lower court also found that after the project was completed in accordance with the agreement that
contained a provision on "progress payment billing," SPI "took possession and started operations thereof
by opening the same to the public in November, 1991." SPI, having failed to pay for the works, petitioner
billed SPI in the total amount of P110,883,101.52, contained in a demand letter sent by it to SPI on
February 17, 1993. Instead of paying the amount demanded, SPI set up its own claim of P220,000,000.00
and scheduled a conference on that claim for July 12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by
defendants, it is required that "Notice of the demand for arbitration of a dispute
shall be filed in writing with the other party . . . . in no case . . . . later than the time
of final payment . . . "which apparently, had elapsed, not only because defendants
had taken possession of the finished works and the plaintiff's billings for the
payment thereof had remained pending since November, 1991 up to the filing of
this case on July 14, 1993, but also for the reason that defendants have failed to file
any written notice of any demand for arbitration during the said long period of one
year and eight months, this Court finds that it cannot stay the proceedings in this
case as required by Sec. 7 of Republic Act No. 876, because defendants are in
default in proceeding with such arbitration.
The lower court denied SPI's motion for reconsideration for lack of merit and directed it and the other
defendants to file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules
of Court before the Court of Appeals. Said appellate court granted the petition, annulled and set aside the
orders and stayed the proceedings in the lower court. In so ruling, the Court of Appeals held:
 The reasons given by the respondent Court in denying petitioners' motion to
suspend proceedings are untenable.
1. The notarized copy of the articles of agreement attached as Annex A to
petitioners' reply dated August 26, 1993, has been submitted by them to the
respondent Court (Annex G, petition). It bears the signature of petitioner Rufo B.
Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani
Fernando, president of respondent Corporation (Annex G-1, petition). At page D/4
of said articles of agreement it is expressly provided that the conditions of contract
are "deemed an integral part" thereof (page 188, rollo). And it is at pages D/42 to
D/44 of the conditions of contract that the provisions for arbitration are found
(Annexes G-3 to G-5, petition, pp. 227-229). Clause No. 35 on arbitration
specifically provides:
Provided always that in case any dispute or difference shall
arise between the Owner or the Project Manager on his
behalf and the Contractor, either during the progress or after
the completion or abandonment of the Works as to the
construction of this Contract or as to any matter or thing of
whatsoever nature arising thereunder or in connection
therewith (including any matter or being left by this Contract
to the discretion of the Project Manager or the withholding
by the Project Manager of any certificate to which the
Contractor may claim to be entitled or the measurement and
valuation mentioned in clause 30 (5) (a) of these Conditions'
or the rights and liabilities of the parties under clauses 25, 26,
32 or 33 of these Conditions), the Owner and the Contractor
hereby agree to exert all efforts to settle their differences or
dispute amicably. Failing these efforts then such dispute or
difference shall be referred to Arbitration in accordance with
the rules and procedures of the Philippine Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only
the initials of respondent Corporation's representatives, Bayani Fernando and
Reynaldo de la Cruz, without that of the representative of petitioner Shangri-La
Properties, Inc. does not militate against its effectivity. Said petitioner having
categorically admitted that the document, Annex A to its reply dated August 26,
1993 (Annex G, petition), is the agreement between the parties, the initial or
signature of said petitioner's representative to signify conformity to arbitration is no
longer necessary. The parties, therefore, should be allowed to submit their dispute to
arbitration in accordance with their agreement.
2. The respondent Court held that petitioners "are in default in proceeding with such
arbitration." It took note of "the fact that under the supposed Arbitration Clause
invoked by defendants, it is required that "Notice of the demand for arbitration of a
dispute shall be filed in writing with the other party . . . in no case . . . later than the
time of final payment," which apparently, had elapsed, not only because defendants
had taken possession of the finished works and the plaintiff's billings for the
payment thereof had remained pending since November, 1991 up to the filing of
this case on July 14, 1993, but also for the reason that defendants have failed to file
any written notice of any demand for arbitration during the said long period of one
year and eight months, . . . ."
Respondent Court has overlooked the fact that under the arbitration
clause
16 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Notice of the demand for arbitration dispute shall be filed in writing with the
other party to the contract and a copy filed with the Project Manager. The
demand for arbitration shall be made within a reasonable time after the
dispute has arisen and attempts to settle amicably had failed; in no case,
however, shall the demand be made later than the time of final payment
except as otherwise expressly stipulated in the contract (emphasis
supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final
demand to pay the amount of P110,883,101.52, instead of paying, petitioners set up its
own claim against respondent Corporation in the amount of P220,000,000.00 and set a
conference thereon on July 12, 1993. Said conference proved futile. The next day, July 14,
1993, respondent Corporation filed its complaint against petitioners. On August 13, 1993,
petitioners wrote to respondent Corporation requesting arbitration. Under the
circumstances, it cannot be said that petitioners' resort to arbitration was made beyond
reasonable time. Neither can they be considered in default of their obligation to respondent
Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY
WRIT OF CERTIORARIALTHOUGH THE REMEDY OF APPEAL WAS
AVAILABLE TO RESPONDENTS.
B
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF
DISCRETION IN THE FACTUAL FINDINGS OF THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER
INTO AN AGREEMENT TO
ARBITRATE.
(ii) ASSUMING THAT THE PARTIES
DID ENTER INTO THE
AGREEMENT TO ARBITRATE,
RESPONDENTS ARE ALREADY IN
DEFAULT IN INVOKING THE
AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to
suspend proceedings "is a resolution of an incident on the merits." As such, upon the continuation of the
proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter render
a decision on the merits that may or may not sustain the existence of an arbitration clause. A decision
containing a finding that the contract has no arbitration clause can then be elevated to a higher court "in an
ordinary appeal" where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals
should have dismissed the petition for certioraribecause the remedy of appeal would still be available to
private respondents at the proper time.7
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of
appeal is succinctly reiterated in Ongsitco v. Court of Appeals8 as follows:
. . . . Countless times in the past, this Court has held that "where appeal is the proper
remedy, certiorariwill not lie." The writs of certiorari and prohibition are remedies
to correct lack or excess of jurisdiction or grave abuse of discretion equivalent to
lack of jurisdiction committed by a lower court. "Where the proper remedy is
appeal, the action for certiorari will not be entertained. . . . Certiorari is not a
remedy for errors of judgment. Errors of judgment are correctible by appeal, errors
of jurisdiction are reviewable by certiorari."
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition
and mandamus are available only when "there is no appeal or any plain, speedy and
adequate remedy in the ordinary course of law . . . ." That is why they are referred
to as "extraordinary." . . . .
The Court has likewise ruled that "certiorari will not be issued to cure errors in proceedings or correct
erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors
committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment which
are reviewable by timely appeal and not by a special civil action of certiorari."9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the
lower court over the controversy, the issue posed basically is whether the lower court prematurely
assumed jurisdiction over it. If the lower court indeed prematurely assumed jurisdiction over the case, then
it becomes an error of jurisdiction which is a proper subject of a petition for certiorari before the Court of
Appeals. And if the lower court does not have jurisdiction over the controversy, then any decision or order
it may render may be annulled and set aside by the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the
existence of the arbitration clause, which is a question of fact. In the instant case, the lower court found
that there exists an arbitration clause. However, it ruled that in contemplation of law, said arbitration
clause does not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the
Arbitration Clause does not in fact exist. On its face, the the question is one of fact which is not proper in
a petition for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact,
the Court of Appeals interpreted the construction of the subject contract documents containing the
Arbitration Clause in accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence
which will be extensively discussed hereunder. In effect, the issue posed before the Court of Appeals was
likewise a question of law. Being a question of law, the private respondents rightfully invoked the special
civil action of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned
by the petitioners before this Court. But at the heart of said issue is the question of whether there exists an
Arbitration Clause because if an Arbitration Clause does not exist, then private respondents took the
wrong mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode of
appeal, which, incidentally, is a question of law, then it has to answer the core issue of whether there exists
an Arbitration Clause which, admittedly, is a question of fact.
17 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result
in a manifest failure or miscarriage of justice, the provisions of the Rules of Court which are technical
rules may be relaxed. 10 As we shall show hereunder, had the Court of Appeals dismissed the petition
for certiorari, the issue of whether or not an arbitration clause exists in the contract would not have
been resolved in accordance with evidence extant in the record of the case. Consequently, this would
have resulted in a judicial rejection of a contractual provision agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the
contract between petitioner and private respondents is a legal issue that must be determined in this
petition for review on certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question,
asserts that in contemplation of law there could not have been one considering the following
points. First, the trial court found that the "conditions of contract" embodying the arbitration
clause is not duly signed by the parties. Second, private respondents misrepresented before the
Court of Appeals that they produced in the trial court a notarized duplicate original copy of the
construction agreement because what were submitted were mere photocopies thereof. The
contract(s) introduced in court by private respondents were therefore "of dubious authenticity"
because: (a) the Agreement for the Execution of Builder's Work for the EDSA Plaza Project does not
contain an arbitration clause, (b) private respondents "surreptitiously attached as Annexes "G-3" to
"G-5" to their petition before the Court of Appeals but these documents are not parts of the
Agreement of the parties as "there was no formal trade contract executed," (c) if the entire
compilation of documents "is indeed a formal trade contract," then it should have been duly
notarized, (d) the certification from the Records Management and Archives Office dated August 26,
1993 merely states that "the notarial record of Nilberto Briones . . . is available in the files of (said)
office as Notarial Registry Entry only," (e) the same certification attests that the document entered in
the notarial registry pertains to the Articles of Agreement only without any other accompanying
documents, and therefore, it is not a formal trade contract, and (f) the compilation submitted by
respondents are a "mere hodge-podge of documents and do not constitute a single intelligible
agreement."
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that
the representatives of the contracting corporations did not sign the "Conditions of Contract" that
contained the said clause. Its other contentions, specifically that insinuating fraud as regards the
alleged insertion of the arbitration clause, are questions of fact that should have been threshed out
below.
This Court may as well proceed to determine whether the arbitration clause does exist in the
parties' contract. Republic Act No. 876 provides for the formal requisites of an arbitration
agreement as follows:
Sec. 4. Form of arbitration agreement. A contract to arbitrate a controversy
thereafter arising between the parties, as well as a submission to arbitrate an
existing controversy, shall be in writing and subscribed by the party sought to be
charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section
two hereof, providing for arbitration of any controversy, shall be deemed a
consent of the parties of the province or city where any of the parties resides, to
enforce such contract of submission. (Emphasis supplied.).
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in
writing and (b) it must be subscribed by the parties or their representatives. There is no denying
that the parties entered into a written contract that was submitted in evidence before the lower
court. To "subscribe" means to write underneath, as one's name; to sign at the end of a
document. 11 That word may sometimes be construed to mean to give consent to or to attest.12
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with
in the contract in question. The Articles of Agreement, which incorporates all the other contracts
and agreements between the parties, was signed by representatives of both parties and duly
notarized. The failure of the private respondent's representative to initial the "Conditions of
Contract" would therefor not affect compliance with the formal requirements for arbitration
agreements because that particular portion of the covenants between the parties was included by
reference in the Articles of Agreement.
Petitioner's contention that there was no arbitration clause because the contract incorporating said
provision is part of a "hodge-podge" document, is therefore untenable. A contract need not be
contained in a single writing. It may be collected from several different writings which do not
conflict with each other and which, when connected, show the parties, subject matter, terms and
consideration, as in contracts entered into by correspondence. 13 A contract may be encompassed in
several instruments even though every instrument is not signed by the parties, since it is sufficient if
the unsigned instruments are clearly identified or referred to and made part of the signed
instrument or instruments. Similarly, a written agreement of which there are two copies, one signed
by each of the parties, is binding on both to the same extent as though there had been only one copy
of the agreement and both had signed it. 14
was invoking the arbitration clause, is a reasonable time. Indeed, petitioner may not be faulted for
resorting to the court to claim what was due it under the contract. However, we find its denial of the
existence of the arbitration clause as an attempt to cover up its misstep in hurriedly filing the
complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case.
Section 7 of Republic Act No. 876 provides that proceedings therein have only been stayed. After the
special proceeding of arbitration 16 has been pursued and completed, then the lower court may
confirm the award 17made by the arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even
before the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. 18 Republic Act No. 876 was adopted to supplement the
New Civil Code's provisions on arbitration. 19 Its potentials as one of the alternative dispute
resolution methods that are now rightfully vaunted as "the wave of the future" in international
relations, is recognized worldwide. To brush aside a contractual agreement calling for arbitration in
case of disagreement between the parties would therefore be a step backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the
petition for certiorari DENIED. This Decision is immediately executory. Costs against petitioner.

SO ORDERED.
The flaw in petitioner's contentions therefore lies in its having segmented the various components of
the whole contract between the parties into several parts. This notwithstanding, petitioner ironically
admits the execution of the Articles of Agreement. Notably, too, the lower court found that the said EQUITABLE PCI BANKING G.R. No. 182248
Articles of Agreement "also provides that the 'Contract Documents' therein listed 'shall be deemed
an integral part of this Agreement,' and one of the said documents is the 'Conditions of Contract' CORPORATION,[1]
which contains the Arbitration Clause.'" It is this Articles of Agreement that was duly signed by GEORGE L. GO, PATRICK D. GO, Present:
Rufo B. Colayco, president of private respondent SPI, and Bayani F. Fernando, president of GENEVIEVE W.J. GO,
petitioner corporation. The same agreement was duly subscribed before notary public Nilberto R. FERDINAND MARTIN G. QUISUMBING, J., Chairperson,
Briones. In other words, the subscription of the principal agreement effectively covered the other ROMUALDEZ, CARPIO MORALES,
documents incorporated by reference therein. OSCAR P. LOPEZ-DEE, TINGA,
RENE J. BUENAVENTURA, VELASCO, JR., and
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents GLORIA L. TAN-CLIMACO, BRION, JJ.
were not in default in invoking the provisions of the arbitration clause which states that "(t)he ROGELIO S. CHUA,
demand for arbitration shall be made within a reasonable time after the dispute has arisen and FEDERICO C. PASCUAL,
attempts to settle amicably had failed." Under the factual milieu, private respondent SPI should LEOPOLDO S. VEROY,
have paid its liabilities tinder the contract in accordance with its terms. However, WILFRIDO V. VERGARA,
misunderstandings appeared to have cropped up between the parties ostensibly brought about by EDILBERTO V. JAVIER,
either delay in the completion of the construction work or by force majeure or the fire that partially ANTHONY F. CONWAY,
gutted the project. The almost two-year delay in paying its liabilities may not therefore be wholly ROMULAD U. DY TANG,
ascribed to private respondent SPI. WALTER C. WESSMER, and
ANTONIO N. COTOCO,
Petitioners,
Besides, private respondent SPI's initiative in calling for a conference between the parties was a step - versus -
towards the agreed resort to arbitration. However, petitioner posthaste filed the complaint before Promulgated:
the lower court. Thus, while private respondent SPI's request for arbitration on August 13, 1993 RCBC CAPITAL CORPORATION,
might appear an afterthought as it was made after it had filed the motion to suspend proceedings, it Respondent. December 18, 2008
was because petitioner also appeared to act hastily in order to resolve the controversy through the x-----------------------------------------------------------------------------------------x
courts.
DECISION
The arbitration clause provides for a "reasonable time" within which the parties may avail of the
VELASCO, JR., J.:
relief under that clause. "Reasonableness" is a relative term and the question of whether the time
within which an act has to be done is reasonable depends on attendant circumstances. 15 This Court
The Case
finds that under the circumstances obtaining in this case, a one-month period from the time the
parties held a conference on July 12, 1993 until private respondent SPI notified petitioner that it

18 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
 This Petition for Review on Certiorari under Rule 45 seeks the reversal of the January 8,
2008[2] and March 17, 2008[3] Orders of the Regional Trial Court (RTC), Branch 148 in Makati City in SP
Proc. Case No. 6046, entitled In the Matter of ICC Arbitration Ref. No. 13290/MS/JB/JEM Between
RCBC Capital Corporation, (Claimant), and Equitable PCI Banking Corporation, Inc. et al.,
(Respondents). The assailed January 8, 2008 Order confirmed the Partial Award dated September 27,
2007[4] rendered by the International Chamber of Commerce-International Court of Arbitration (ICC-ICA)
in Case No. 13290/MS/JB/JEM, entitled RCBC Capital Corporation (Philippines) v. Equitable PCI Bank,
Inc. & Others (Philippines). The March 17, 2008 Order denied petitioners motion for reconsideration of
the January 8, 2008 Order.
The Facts
On May 24, 2000, petitioners Equitable PCI Bank, Inc. (EPCIB) and the individual
shareholders of Bankard, Inc., as sellers, and respondent RCBC Capital Corporation (RCBC), as buyer,
executed a Share Purchase Agreement[5] (SPA) for the purchase of petitioners interests in Bankard,
representing 226,460,000 shares, for the price of PhP 1,786,769,400. To expedite the purchase, RCBC
agreed to dispense with the conduct of a due diligence audit on the financial status of Bankard.
Under the SPA, RCBC undertakes, on the date of contract execution, to deposit, as
downpayment, 20% of the purchase price, or PhP 357,353,880, in an escrow account. The escrowed
amount, the SPA stated, should be released to petitioners on an agreed-upon release date and the balance
of the purchase price shall be delivered to the share buyers upon the fulfillment of certain conditions
agreed upon, in the form of a managers check.
The other relevant provisions of the SPA are:
Section 5. Sellers Representations and Warranties
The SELLERS jointly and severally represent and warrant to the
BUYER that:
xxxx
The Financial Condition of Bankard
g. The audited financial statements of Bankard for the three (3) fiscal
years ended December 31, 1997, 1998 and 1999, and the unaudited financial
statements for the first quarter ended 31 March 2000, are fair and accurate, and
complete in all material respects, and have been prepared in accordance with
generally accepted accounting principles consistently followed throughout the
period indicated and:
i) the balance sheet of Bankard as of 31 December 1999, as
prepared and certified by SGV & Co. (SGV), and the unaudited balance
sheet for the first quarter ended 31 March 2000, present a fair and
accurate statement as of those dates, of Bankards financial condition and
of all its assets and liabilities, and is complete in all material respects;
and
ii) the statements of Bankards profit and loss accounts for the fiscal years 1996 to
1999, as prepared and certified by SGV, and the unaudited profit and
loss accounts for the first quarter ended 31 March 2000, fairly and
accurately present the results of the operations of Bankard for the
periods indicated, and are complete in all material respects.
h. Except as disclosed in the Disclosures, and except to the extent set
forth or reserved in the audited financial statements of Bankard as of 31 December
19 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
1999 and its unaudited financial statements as of 31 March 2000, Bankard, as of
such dates and up to 31 May 2000, had and shall have no liabilities, omissions or
mistakes in its records which will have material adverse effect on the net worth or
financial condition of Bankard to the extent of more than One Hundred Million
Pesos (P100,000,000.00) in the aggregate. In the event such material adverse effect
on the net worth or financial condition of Bankard exceeds One Hundred Million
Pesos (P100,000,000.00), the Purchase Price shall be reduced in accordance with
the following formula:
Reduction in Purchase Price = X multiplied by 226,460,000
where
Amount by which negative
adjustment exceeds P100 Million
X = ------------------------------------------- (1.925)
338,000,000
xxxx
Section 7. Remedies for Breach of Warranties
a. If any of the representations and warranties of any or all of the
SELLERS or the BUYER (the Defaulting Party) contained in Sections 5 and 6 shall
be found to be untrue when made and/or as of the Closing Date, the other party, i.e.,
the BUYER if the Defaulting Party is any or all of the SELLERS and the SELLERS
if the Defaulting Party is the BUYER (hereinafter referred to as the Non-Defaulting
Party) shall have the right to require the Defaulting Party, at the latters expense, to
cure such breach, and/or seek damages, by providing notice or presenting a claim to
the Defaulting Party, reasonably specifying therein the particulars of the breach.
The foregoing remedies shall be available to the Non-Defaulting Party only if the
demand therefor is presented in writing to the Defaulting Party within three (3)
years from the Closing Date except that the remedy for a breach of the SELLERS
representation and warrant in Section 5 (h) shall be available only if the demand
therefor is presented to the Defaulting Party in writing together with schedules and
to substantiate such demand, within six (6) months from the Closing Date.[6]
On June 2, 2000, RCBC deposited the stipulated downpayment amount in an escrow account
after which it was given full management and operational control of Bankard. June 2, 2000 is also
considered by the parties as the Closing Date referred to in the SPA.
Thereafter, the parties executed an Amendment to Share Purchase Agreement (ASPA)
dated September 19, 2000.[7] Its paragraph 2(e) provided that:
2. Notwithstanding any provisions to the contrary in the Share Purchase
Agreement and/or any agreement, instrument or document entered into or executed
by the Parties in relation thereto (the Related Agreements), the Parties hereby agree
that:
xxxx
e) Notwithstanding the provisions of Sec. 7 of the Share Purchase
Agreement to the contrary, the remedy for a breach of the SELLERS
representation and warranty in Section 5(h) of the Share Purchase
Agreement shall be available if the demand therefor is presented to the
SELLERS in writing together with schedules and data to substantiate such demand,
on or before 31 December 2000. (Emphasis added.)
 Sometime in September 2000, RCBC had Bankards accounts audited, creating for the purpose
an audit team led by a certain Rubio, the Vice-President for Finance of RCBC at the time. Rubios
conclusion was that the warranty, as contained in Section 5(h) of the SPA (simply Sec. 5[h] hereinafter),
was correct.
On December 28, 2000, RCBC paid the balance of the contract price. The corresponding deeds
of sale for the shares in question were executed in January 2001.
Thereafter, in a letter of May 5, 2003, RCBC informed petitioners of its having overpaid the
purchase price of the subject shares, claiming that there was an overstatement of valuation of accounts
amounting to PhP 478 million, resulting in the overpayment of over PhP 616 million. Thus, RCBC
claimed that petitioners violated their warranty, as sellers, embodied in Sec. 5(g) of the SPA (Sec. 5[g]
hereinafter).
Following unsuccessful attempts at settlement, RCBC, in accordance with Sec. 10 of the SPA,
filed a Request for Arbitration dated May 12, 2004[8] with the ICC-ICA. In the request, RCBC charged
Bankard with deviating from, contravening and not following generally accepted accounting principles
and practices in maintaining their books. Due to these improper accounting practices, RCBC alleged that
both the audited and unaudited financial statements of Bankard prior to the stock purchase were far from
fair and accurate and, hence, violated the representations and warranties of petitioners in the SPA. Per
RCBC, its overpayment amounted to PhP 556 million. It thus prayed for the rescission of the SPA,
restitution of the purchase price, payment of actual damages in the amount of PhP 573,132,110, legal
interest on the purchase price until actual restitution, moral damages, and litigation and attorneys fees. As
alternative to rescission and restitution, RCBC prayed for damages in the amount of at least PhP
809,796,092 plus legal interest.
To the Request for Arbitration, petitioners filed an Answer dated July 28, 2004,[9] denying
RCBCs inculpatory averments and setting up the following affirmative allegations: the period for filing of
the asserted claim had already lapsed by force of Sec. 7 of the SPA; RCBC is not entitled to rescission
having had ample opportunity and reasonable time to file a claim against petitioners; RCBC is not entitled
to its alternative prayer of damages, being guilty of laches and failing to set out the details of the breach as
required under Sec. 7.
Arbitration in the ICC-ICA proceeded after the formation of the arbitration tribunal consisting
of retired Justice Santiago M. Kapunan, nominated by petitioners; Neil Kaplan, RCBCs nominee; and Sir
Ian Barker, appointed by the ICC-ICA.
After drawn out proceedings with each party alleging deviation and non-compliance by the
other with arbitration rules, the tribunal, with Justice Kapunan dissenting, rendered a Partial Award dated
September 27, 2007,[10] the dispositive portion of which states:
15 AWARD AND DIRECTIONS
15.1 The Tribunal makes the following declarations by way of Partial
Award:
(a) The Claimants claim is not time-barred under the provisions of this
SPA.
(b) The Claimant is not estopped by its conduct or the equitable doctrine
of laches from pursuing its claim.
(c) As detailed in the Partial Award, the Claimant has established the
following breaches by the Respondents of clause 5(g) of the SPA:
i) the assets, revenue and net worth of Bankard were overstated by
reason of its policy on and recognition of Late Payment Fees;
ii) reported receivables were higher than their realizable
values by reason of the bucketing method, thus overstating Bankards
assets; and
20 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
iii) the relevant Bankard statements were inadequate and
misleading in that their disclosures caused readers to be misinformed
about Bankards accounting policies on revenue and receivables.
(d) Subject to proof of loss the Claimant is entitled to damages for the
foregoing breaches.
(e) The Claimant is not entitled to rescission of the SPA.
(f) All other issues, including any issue relating to costs, will be dealt
with in a further or final award.
15.2 A further Procedural Order will be necessary subsequent to the
delivery of this Partial Award to deal with the determination of quantum and in
particular, whether there should be an Expert appointed by the Tribunal under
Article 20(4) of the ICC Rules to assist the Tribunal in this regard.
15.3 This Award is delivered by a majority of the Tribunal (Sir Ian
Barker and Mr. Kaplan). Justice Kapunan is unable to agree with the majoritys
conclusion on the claim of estoppel brought by the respondents.
On the matter of prescription, the tribunal held that RCBCs claim is not time-barred, the claim
properly falling under the contemplation of Sec. 5(g) and not Sec. 5(h). As such, the tribunal concluded,
RCBCs claim was filed within the three (3)-year period under Sec. 5(g) and that the six (6)-month period
under Sec. 5(h) did not apply.
The tribunal also exonerated RCBC from laches, the latter having sought relief within the three
(3)-year period prescribed in the SPA. On the matter of estoppel suggested in petitioners answer, the
tribunal stated in par. 10.27 of the Partial Award the following:
10.27 Clearly, there has to be both an admission or representation by (in
this case) the Claimant [RCBC], plus reliance upon it by (in this case) the
Respondents [herein petitioners]. The Tribunal cannot find as proved any
admission/representation that the Claimant was abandoning a 5(g) claim, any
reliance by the Respondents on an admission, and any detriment to the Respondents
such as would entitle them to have the Claimant deprived of the benefit of clause
5(g). These aspects of the claim for estoppels are rejected.[11]
Notably, the tribunal considered the rescission of the SPA and ASPA as impracticable and
totally out of the question.[12]
In his Dissenting Opinion[13] which he submitted to and which was received on September 24,
2007 by the ICC-ICA, Justice Kapunan stated the observation that RCBCs claim is time-barred, falling as
such claim did under Sec. 5(h), which prescribes a comparatively shorter prescriptive period, not 5(g) as
held by the majority of the tribunal, to wit:
Claimant admits that the Claim is for recovery of P431 million on
account of alleged overvaluation of the net worth of Bankard, allegedly for
improper accounting practices resulting in its book value per share as of 31
December 1999 [being] overstated. Claimants witness, Dean Echanis asserts that
the inadequate provisioning for Bankards doubtful accounts result[ed] in an
overstatement of its December 31, 1999 total assets and net worth of by [sic] least
P418.2 million.
In addition, Claimants demand letter addressed to the Respondents
alleged that we overpaid for the Shares to the extent of the impact of the said
overstatement on the Book Value per share.
These circumstances establish beyond dispute that the Claim is based on
the alleged overstatement of the 1999 net worth of Bankard, which the parties relied
on in setting the purchase price of the shares. Moreover, it is clear that there was an
overstatement because of improper accounting practices which led Claimant to
overpay for the shares.
 Ultimately, the Claim is one for recovery of overpayment in the
purchase price of the shares. x x x
As to the issue of estoppel, Justice Kapunan stated:
Moreover, Mr. Rubios findings merely corroborated the disclosures
made in the Information Memorandum that Claimant received from the
Respondents prior to the execution of the SPA. In this connection, I note that
Bankards policy on provisioning and setting of allowances using the Bucketed
Method and income recognition from AR/Principal, AR/Interest and AR/LPFs were
disclosed in the Information Memorandum. Thus, these alleged improper
accounting practices were known to the Claimant even prior to the execution of the
SPA.
Thus, when Claimant paid the balance of the purchase price, it did so
with full knowledge of these accounting practices of Bankard that it now assails. By
paying the balance of the purchase price without taking exception or objecting to
the accounting practices disclosed through Mr. Rubio s review and the Information
Memorandum, Claimant is deemed to have accepted such practices as correctly
reporting the 1999 net worth. x x x
xxxx
As last point, I note that my colleagues invoke a principle that for
estoppels to apply there must be positive indication that the right to sue was waived.
I am of the view that there is no such principle under Philippine law. What is
applicable is the holding in Knecht and in Coca- Cola that prior knowledge of an
unfavorable fact is binding on the party who has such knowledge; when the
purchaser proceeds to make investigations by himself, and the vendor does nothing
to prevent such investigation from being as complete as the former might wish, the
purchaser cannot later allege that the vendor made false representations to him (Cf.
Songco v. Sellner, 37 Phil 254 citations omitted).
Applied to this case, the Claimant cannot seek relief on the basis that
when it paid the purchase price in December 2000, it was unaware that the
accounting practices that went into the reporting of the 1999 net worth as
amounting to P1,387,275,847 were not in conformity with GAAP [generally
accepted accounting principles]. (Emphasis added.)
On October 26, 2007, RCBC filed with the RTC a Motion to Confirm Partial Award. On the
same day, petitioners countered with a Motion to Vacate the Partial Award. On November 9, 2007,
petitioners again filed a Motion to Suspend and Inhibit Barker and Kaplan.
On January 8, 2008, the RTC issued the first assailed order confirming the Partial Award and
denying the adverted separate motions to vacate and to suspend and inhibit. From this order, petitioners
sought reconsideration, but their motion was denied by the RTC in the equally assailed second order
of March 17, 2008.
From the assailed orders, petitioners came directly to this Court through this petition for
review.
The Issues
This petition seeks the review, reversal and setting aside of the orders
Annexes A and B and, in lieu of them, it seeks judgment vacating the arbitrators
liability award, Annex C, on these grounds:
21 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
(a) The trial court acted contrary to law and judicial
authority in refusing to vacate the arbitral award, notwithstanding it was
rendered in plain disregard of the parties contract and applicable
Philippine law, under which the claim in arbitration was indubitably
time-barred.
(b) The trial court acted contrary to law and judicial
authority in refusing to vacate and in confirming the arbitral award,
notwithstanding that the arbitrators had plainly and admittedly failed to
accord petitioners due process by denying them a hearing on the basic
factual matter upon which their liability is predicated.
(c) The trial court committed grave error in confirming the
arbitrators award, which held petitioners-sellers liable for an alleged
improper recording of accounts, allegedly affecting the value of the
shares they sold, notwithstanding that the respondent-buyer knew before
contracting that the accounts were kept in the manner complained of,
and in fact ratified and adopted the questioned accounting practice and
policies.[14]
The Courts Ruling
The petition must be denied.
On Procedural Misstep of Direct Appeal to This Court
As earlier recited, the ICC-ICAs Partial Award dated September 27, 2007 was confirmed by the RTC in its
first assailed order of January 8, 2008. Thereafter, the RTC, by order of March 17, 2008, denied petitioners
motion for reconsideration. Therefrom, petitioners came directly to this Court on a petition for review
under Rule 45 of the Rules of Court.
This is a procedural miscue for petitioners who erroneously bypassed the Court of Appeals (CA) in pursuit
of its appeal. While this procedural gaffe has not been raised by RCBC, still we would be remiss in not
pointing out the proper mode of appeal from a decision of the RTC confirming, vacating, setting aside,
modifying, or correcting an arbitral award.
Rule 45 is not the remedy available to petitioners as the proper mode of appeal assailing the decision of
the RTC confirming as arbitral award is an appeal before the CA pursuant to Sec. 46 of Republic Act No.
(RA) 9285, otherwise known as the Alternative Dispute Resolution Act of 2004, or completely, An Act to
Institutionalize the Use of an Alternative Dispute Resolution System in the Philippines and to Establish
the Office for Alternative Dispute Resolution, and for other Purposes, promulgated on April 2, 2004 and
became effective on April 28, 2004 after its publication on April 13, 2004.
In Korea Technologies Co., Ltd v. Lerma, we explained, inter alia, that the RTC decision of an assailed
arbitral award is appealable to the CA and may further be appealed to this Court, thus:
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an
aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or
corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the
Regional Trial Court confirming, vacating, setting aside, modifying or correcting an
arbitral award may be appealed to the Court of Appeals in accordance with the
rules and procedure to be promulgated by the Supreme Court.
 The losing party who appeals from the judgment of the court confirming an arbitral
award shall be required by the appellate court to post a counterbond executed in
favor of the prevailing party equal to the amount of the award in accordance with
the rules to be promulgated by the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court
through a petition for review under Rule 45 of the Rules of Court.[15]
It is clear from the factual antecedents that RA 9285 applies to the instant case. This law was already
effective at the time the arbitral proceedings were commenced by RCBC through a request for arbitration
filed before the ICC-ICA on May 12, 2004. Besides, the assailed confirmation order of the RTC was
issued on March 17, 2008. Thus, petitioners clearly took the wrong mode of appeal and the instant petition
can be outright rejected and dismissed.
Even if we entertain the petition, the outcome will be the same.
The Court Will Not Overturn an Arbitral Award
Unless It Was Made in Manifest Disregard of the Law
In Asset Privatization Trust v. Court of Appeals,[16] the Court passed on similar issues as the
ones tendered in the instant petition. In that case, the arbitration committee issued an arbitral award which
the trial court, upon due proceedings, confirmed despite the opposition of the losing party. Motions for
reconsideration by the losing party were denied. An appeal interposed by the losing party to the CA was
denied due course. On appeal to this Court, we established the parameters by which an arbitral award may
be set aside, to wit:
As a rule, the award of an arbitrator cannot be set aside for mere
errors of judgment either as to the law or as to the facts. Courts are without
power to amend or overrule merely because of disagreement with matters of
law or facts determined by the arbitrators. They will not review the findings of
law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an
award the commencement, not the end, of litigation. Errors of law and fact, or
an erroneous decision of matters submitted to the judgment of the arbitrators,
are insufficient to invalidate an award fairly and honestly made. Judicial
review of an arbitration is, thus, more limited than judicial review of a trial.
Nonetheless, the arbitrators awards is not absolute and without
exceptions. The arbitrators cannot resolve issues beyond the scope of the
submission agreement. The parties to such an agreement are bound by the
arbitrators award only to the extent and in the manner prescribed by the contract
and only if the award is rendered in conformity thereto. Thus, Sections 24 and 25 of
the Arbitration Law provide grounds for vacating, rescinding or modifying an
arbitration award. Where the conditions described in Articles 2038, 2039 and 2040
of the Civil Code applicable to compromises and arbitration are attendant, the
arbitration award may also be annulled.
xxxx
Finally, it should be stressed that while a court is precluded from
overturning an award for errors in determination of factual issues, nevertheless, if
an examination of the record reveals no support whatever for the arbitrators
determinations, their award must be vacated. In the same manner, an award must
be vacated if it was made in manifest disregard of the law.[17] (Emphasis
supplied.)
22 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Following Asset Privatization Trust, errors in law and fact would not generally justify the
reversal of an arbitral award. A party asking for the vacation of an arbitral award must show that any of the
grounds for vacating, rescinding, or modifying an award are present or that the arbitral award was made in
manifest disregard of the law. Otherwise, the Court is duty-bound to uphold an arbitral award.
The instant petition dwells on the alleged manifest disregard of the law by the ICC-ICA.
The US case of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros[18] expounded on the
phrase manifest disregard of the law in the following wise:
This court has emphasized that manifest disregard of the law is a very
narrow standard of review. Anaconda Co. v. District Lodge No. 27, 693 F.2d 35
(6th Cir.1982). A mere error in interpretation or application of the law is
insufficient. Anaconda, 693 F.2d at 37-38. Rather, the decision must fly in the face
of clearly established legal precedent. When faced with questions of law, an
arbitration panel does not act in manifest disregard of the law unless (1) the
applicable legal principle is clearly defined and not subject to reasonable debate;
and (2) the arbitrators refused to heed that legal principle.
Thus, to justify the vacation of an arbitral award on account of manifest disregard of the law,
the arbiters findings must clearly and unequivocally violate an established legal precedent. Anything less
would not suffice.
In the present case, petitioners, in a bid to establish that the arbitral award was issued in
manifest disregard of the law, allege that the Partial Award violated the principles of prescription, due
process, and estoppel. A review of petitioners arguments would, however, show that their arguments are
bereft of merit. Thus, the Partial Award dated September 27, 2007 cannot be vacated.
RCBCs Claim Is Not Time-Barred
Petitioners argue that RCBCs claim under Sec. 5(g) is based on overvaluation of Bankards
revenues, assets, and net worth, hence, for price reduction falling under Sec. 5(h), in which case it was
belatedly filed, for RCBC presented the claim to petitioners on May 5, 2003, when the period for
presenting it under Sec. 5(h) expired on December 31, 2000. As a counterpoint, RCBC asserts that its
claim clearly comes under Sec. 5(g) in relation to Sec. 7 which thus gave it three (3) years from the
closing date of June 2, 2000, or until June 1, 2003, within which to make its claim. RCBC contends
having acted within the required period, having presented its claim-demand on May 5, 2003.
To make clear the issue at hand, we highlight the pertinent portions of Secs. 5(g), 5(h), and 7
bearing on what petitioners warranted relative to the financial condition of Bankard and the remedies
available to RCBC in case of breach of warranty:
g. The audited financial statements of Bankard for the three (3) fiscal years
ended December 31, 1997, 1998 and 1999, and the unaudited financial
statements for the first quarter ended 31 March 2000, are fair and
accurate, and complete in all material respects, and have been prepared in
accordance with generally accepted accounting principles consistently
followed throughout the period indicated and:
i) the balance sheet of Bankard as of 31 December 1999, as
prepared and certified by SGV & Co. (SGV), and the unaudited
balance sheet for the first quarter ended 31 March 2000, present a
fair and accurate statement as of those dates, of Bankards
financial condition and of all its assets and liabilities, and is
complete in all material respects; and
ii) the statements of Bankards profit and loss accounts for the
fiscal years 1996 to 1999, as prepared and certified by SGV, and
 the unaudited profit and loss accounts for the first quarter
ended 31 March 2000, fairly and accurately present the results
of the operations of Bankard for the periods indicated, and are
complete in all material respects.
h. Except as disclosed in the Disclosures, and except to the extent set forth or
reserved in the audited financial statements of Bankard as of 31 December
1999 and its unaudited financial statements for the first quarter ended 31
March 2000, Bankard, as of such dates and up to 31 May 2000, had and
shall have no liabilities, omissions or mistakes in its records which will
have a material adverse effect on the net worth or financial condition of
Bankard to the extent of more than One Hundred Million Pesos (P
100,000,000.00) in the aggregate. In the event such material adverse effect
on the net worth or financial condition of Bankard exceeds One Hundred
Million Pesos (P 100,000,000.00), the Purchase Price shall be reduced in
accordance with the following formula:
xxxx
Section 7. Remedies for Breach of Warranties
If any of the representations and warranties of any or all of the SELLERS or the
BUYER (the Defaulting Party) contained in Sections 5 and 6 shall be found to be
untrue when made and/or as of the Closing Date, the other party, i.e., the BUYER if
the Defaulting is any of the SELLERS and the SELLERS if the Defaulting Party is
the BUYER (hereinafter referred to as the Non-Defaulting Party) shall have the
right to require the Defaulting Party, at the latters expense, to cure such
breach, and/or seek damages, by providing notice or presenting a claim to the
Defaulting Party, reasonably specifying therein the particulars of the breach. The
foregoing remedies shall be available to the Non-Defaulting Party only if the
demand therefor is presented in writing to the Defaulting Party within three
(3) years from the Closing Date, except that the remedy for a breach of the
SELLERS representation and warranty in Section 5 (h) shall be available only
if the demand therefor is presented to the Defaulting Party in writing together
with schedules and data to substantiate such demand, within six (6) months from
the Closing Date. (Emphasis supplied.)
Before we address the issue put forward by petitioners, there is a necessity to determine the
nature and application of the reliefs provided under Sec. 5(g) and Sec. 5(h) in conjunction with Sec. 7,
thus:
(1) The relief under Sec. 5(h) is specifically for price reduction as said section explicitly
states that the Purchase Price shall be reduced in accordance with the following formula x x x. In addition,
Sec. 7 gives the aggrieved party the right to ask damages based on the stipulation that the non-defaulting
party shall have the right to require the Defaulting Party, at the latters expense, to cure such breach and/or
seek damages.
On the other hand, the remedy under Sec. 5(g) in conjunction with Sec. 7 can include
specific performance, damages, and other reliefs excluding price reduction.
(2) Sec. 5(g) warranty covers the audited financial statements (AFS) for the three (3) years
ending December 31, 1997 to 1999 and the unaudited financial statements (UFS) for the first quarter
ending March 31, 2000. On the other hand, the Sec. 5(h) warranty refers only to the AFS for the year
ending December 31, 1999and the UFS up to May 31, 2000. It is undenied that Sec. 5(h) refers to price
reduction as it covers only the most up-to-date audited and unaudited financial statements upon which the
price must have been based.[19]
23 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
(3) Under Sec. 5(h), the responsibility of petitioners for its warranty shall exclude the
disclosures and reservations made in AFS of Bankard as of December 31, 1999 and its UFS up to May 31,
2000. No such exclusions were made under Sec. 5(g) with respect to the warranty of petitioners in the
AFS and UFS of Bankard.
(4) Sec. 5(h) gives relief only if there is material adverse effect in the net worth in excess of
PhP 100 million and it provides a formula for price reduction.[20]On the other hand, Sec. 5(g) can be the
basis for remedies like specific performance, damages, and other reliefs, except price reduction, even if
the overvaluation is less or above PhP 100 million and there is no formula for computation of damages.
(5) Under Sec. 7, the aggrieved party shall present its written demand to the defaulting party
within three (3) years from closing date. Under Sec. 5(h), the written demand shall be presented within six
(6) months from closing date. In accordance with par. 2(c) of the ASPA, the deadline to file the demand
under Sec. 5(h) was extended to December 31, 2000.
From the above determination, it becomes clear that the aggrieved party is entitled to two (2) separate
alternative remedies under Secs. 5 and 7 of the SPA, thus:
1. A claim for price reduction under Sec. 5(h) and/or damages based on
the breach of warranty by Bankard on the absence of liabilities, omissions and
mistakes on the financial statements as of 31 December 1999 and the UFS as of 31
May 2000, provided that the material adverse effect on the net worth exceeds PhP
100M and the written demand is presented within six (6) months from closing date
(extended to 31 December 2000); and
2. An action to cure the breach like specific performance and/or
damages under Sec. 5(g) based on Bankards breach of warranty involving its AFS
for the three (3) fiscal years ending 31 December 1997, 1998, and 1999 and the
UFS for the first quarter ending 31 March 2000 provided that the written demand
shall be presented within three (3) years from closing date.
Has RCBC the option to choose between Sec. 5(g) or Sec. 5(h)?
The answer is yes. Sec. 5 and Sec. 7 are clear that it is discretionary on the aggrieved parties to avail
themselves of any remedy mentioned above. They may choose one and dispense with the other. Of course,
the relief for price reduction under Sec. 5(h) will have to conform to the prerequisites and time frame of
six (6) months; otherwise, it is waived.
Preliminarily, petitioners basic posture that RCBCs claim is for the recovery of overpayment is
specious. The records show that in its Request for Arbitration dated May 12, 2004, RCBC prayed for the
rescission of the SPA, restitution of the whole purchase price, and damages not for reduction of price or
for the return of any overpayment. Even in its May 5, 2000 letter,[21] RCBC did not ask for the recovery of
any overpayment or reduction of price, merely stating in it that the accounts of Bankard, as reflected in its
AFS for 1999, were overstated which, necessarily, resulted in an overpayment situation. RCBC was
emphatic and unequivocal that petitioners violated their warranty covered by Sec. 5(g) of the SPA.
It is thus evident that RCBC did not avail itself of the option under Sec. 5(h), i.e., for price reduction or
the return of any overpayment arising from the overvaluation of Bankards financial condition. Clearly,
RCBC invoked Sec. 5(g) to claim damages from petitioners which is one of the alternative reliefs granted
under Sec. 7 in addition to rescission and restitution of purchase price.
Petitioners do not deny that RCBC formally filed its claim under Sec. 5(g) which is anchored on the
material overstatement or overvaluation of Bankards revenues, assets, and net worth and, hence, the
overstatement of the purchase price. They, however, assert that such claim for overpayment is actually a
claim under Sec. 5(h) of the SPA for price reduction which it forfeited after December 31, 2000.
We cannot sustain petitioners position.

It cannot be disputed that an overstatement or overvaluation of Bankards financial condition as of closing
date translates into a misrepresentation not only of the accuracy and truthfulness of the financial
statements under Sec. 5(g), but also as to Bankards actual net worth mentioned in Sec. 5(h). Overvaluation
presupposes mistakes in the entries in the financial statements and amounts to a breach of petitioners
representations and warranties under Sec. 5. Consequently, such error in the financial statements would
impact on the figure representing the net worth of Bankard as of closing date. An overvaluation means
that the financial condition of Bankard as of closing date, i.e., June 2, 2000, is overstated, a situation that
will definitely result in a breach of EPCIBs representations and warranties.
A scrutiny of Sec. 5(g) and Sec. 5(h) in relation to Sec. 7 of the SPA would indicate the
following remedies available to RCBC should it be discovered, as of closing date, that there is
overvaluation which will constitute breach of the warranty clause under either Sec. 5(g) or (h), to wit:
(1) An overvaluation of Bankards actual financial condition as of closing date taints the
veracity and accuracy of the AFS for 1997, 1998, and 1999 and the UFS for the first quarter of 2000 and is
an actionable breach of petitioners warranties under Sec. 5(g).
(2) An overvaluation of Bankards financial condition as of May 31, 2000, encompassing the
warranted financial condition as of December 31, 1999 through the AFS for 1999 and as of March 31,
2000 through the UFS for the first quarter of 2000, is a breach of petitioners representations and
warranties under Sec. 5(h).
Thus, RCBC has two distinct alternative remedies in case of an overvaluation of Bankards
financial condition. It may invoke Sec. 5(h) when the conditions of the threshold aggregate overvaluation
and the claim made within the six-month time-bar are present. In the alternative, it may invoke Sec. 5(g)
when it finds that a claim for curing the breach and/or damages will be more advantageous to its interests
provided it is filed within three (3) years from closing date. Since it has two remedies, RCBC may opt to
exercise either one. Of course, the exercise of either one will preclude the other.
Moreover, the language employed in Sec. 5(g) and Sec. 5(h) is clear and bereft of any
ambiguity. The SPAs stipulations reveal that the non-use or waiver of Sec. 5(h) does not preclude RCBC
from availing itself of the second relief under Sec. 5(g). Article 1370 of the Civil Code is explicit that if
terms of a contract are clear and leave no doubt upon the intention of the contracting parties the literal
meaning of its stipulations shall control. Since the terms of a contract have the force of law between the
parties,[22] then the parties must respect and strictly conform to it. Lastly, it is a long held cardinal rule that
when the terms of an agreement are reduced to writing, it is deemed to contain all the terms agreed upon
and no evidence of such terms can be admitted other than the contents of the agreement itself.[23] Since the
SPA is unambiguous, and petitioners failed to adduce evidence to the contrary, then they are legally bound
to comply with it.
Petitioners agreed ultimately to the stipulation that:
Each of the representations and warranties of the SELLERS is deemed
to be a separate representation and warranty, and the BUYER has placed
complete reliance thereon in agreeing to the Purchase Price and in entering into this
Agreement. The representations and warranties of the SELLERS shall be correct as
of the date of this Agreement and as of the Closing Date with the same force and
effect as though such representations and warranties had been made as of the
Closing Date.[24] (Emphasis supplied.)
The Court sustains the finding in the Partial Award that Sec. 5(g) of the SPA is a free standing
warranty and not constricted by Sec. 5(h) of the said agreement.
Upon the foregoing premises and in the light of the undisputed facts on record, RCBCs claim
for rescission of the SPA and damages due to overvaluation of Bankards accounts was properly for a
breach of the warranty under Sec. 5(g) and was not time-barred. To repeat, RCBC presented its written
24 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
claim on May 5, 2003, or a little less than a month before closing date, well within the three (3)-year
prescriptive period provided under Sec. 7 for the exercise of the right provided under Sec. 5(g).
Petitioners bemoan the fact that the arbitrators liability award (a) disregarded the 6-month
contractual limitation for RCBCs overprice claim, and [b] substituted in its place the 3-year limitation
under the contract for other claims,[25] adopting in that regard the interpretation of the SPA made by
arbitral tribunal member, retired Justice Kapunan, in his Dissenting Opinion, in which he asserted:
Ultimately, the Claim is one for recovery of overpayment in the
purchase price of the shares. And it is in this context, that I respectfully submit that
Section 5(h) and not Section 5(g), applies to the present controversy.[26]
xxxx
True, without Section 5(h), the Claim for price recovery would fall
under Section 5(g). The recovery of the pecuniary loss of the Claimant in the form
of the excess price paid would be in the nature of a claim for actual damages by
way of compensation. In that situation, all the accounts in the 1999 financial
statements would be the subject of the warranty in Section 5(g).
However, since the parties explicitly included Section 5(h) in their SPA,
which assures the Claimant that there were no omissions or mistakes in the records
that would misstate the 1999 net worth account, I am left with no other conclusion
but that the accuracy of the net worth was the subject of the warranty in
Section 5(h), while the accuracy or correctness of the other accounts that did
not bear on, or affect Bankards net worth, were guaranteed by Section 5(g).
xxxx
This manner of reconciling the two provisions is consistent with the
principle in Rule 130, Section 12 of the Rules of Court that when a general and a
particular provision are inconsistent, the latter is paramount to the former [so] a
particular intent will control a general one that is inconsistent with it. This is also
consistent with existing doctrines on statutory construction, the application of
which is illustrated in the case of Commissioner of Customs vs. Court of Tax
Appeals, GR No. L-41861, dated March 23, 1987 x x x.
xxxx
The Claim is for recovery of the excess price by way of actual
damages.[27] x x x (Emphasis supplied.)
Justice Kapunan noted that without Sec. 5(h), RCBCs claim would fall under Sec. 5(g),
impliedly admitting that both provisions could very well cover RCBCs claim, except that Sec. 5(h)
excludes the situation contemplated in it from the general terms of Sec. 5(g).
Such view is incorrect.
While it is true that Sec. 5(h), as couched, is a warranty on the accuracy of the Bankards net
worth while Sec. 5(g), as also couched, is a warranty on the veracity, accuracy, and completeness of the
AFS in all material respects as prepared in accordance with generally accepted accounting principles
consistently followed throughout the period audited, yet both warranties boil down to the same thing and
stem from the same accounts as summarized in the AFS. Since the net worth is the balance of Bankards
assets less its liabilities, it necessarily includes all the accounts under the AFS. In short, there are no
accounts in the AFS that do not bear on the net worth of Bankard. Moreover, as earlier elucidated,
any overvaluation of Bankards net worth is necessarily a misrepresentation of the veracity, accuracy, and
completeness of the AFS and also a breach of the warranty under Sec. 5(g). Thus, the subject of the
warranty in Sec. 5(h) is also covered by the warranty in Sec. 5(g), and Sec. 5(h) cannot exclude such
breach from the ambit of Sec. 5(g). There is no need to rely on Sec. 12, Rule 130 of the Rules of Court for
both Sec. 5(g) and Sec. 5(h) as alternative remedies are of equal footing and one need not categorize one
section as a general provision and the other a particular provision.
More importantly, a scrutiny of the four corners of the SPA does not explicitly reveal any
stipulation nor even impliedly that the parties intended to limit the scope of the warranty in Sec. 5(g) or
gave priority to Sec. 5(h) over Sec. 5(g).
The arbitral tribunal did not find any legal basis in the SPA that Sec. 5(h) somehow cuts down
the scope of Sec. 5(g), thus:
9.10 In the opinion of the Tribunal, there is nothing in the wording
used in the SPA to give priority to one warranty over the other. There is
nothing in the wording used to indicate that the parties intended to limit the
scope of the warranty in 5(g). If it be contended that, on a true construction of the
two warranties, 5(h) somehow cuts down the scope of 5(g), the Tribunal can find
no justification for such conclusion on the wording used. Furthermore, the
Tribunal is of the view that very clear words would be needed to cut down the scope
of the 5(g) warranty.[28]
The Court upholds the conclusion of the tribunal and rules that the claim of RCBC under Sec.
5(g) is not time-barred.
Petitioners Were Not Denied Due Process
Petitioners impute on RCBC the act of creating summaries of the accounts of Bankard which in
turn were used by its experts to conclude that Bankard improperly recorded its receivables and committed
material deviations from GAAP requirements.[29] Later, petitioners would assert that the arbitrators partial
award admitted and used the Summaries as evidence, and held on the basis of the information contained in
them that petitioners were in breach of their warranty in GAAP compliance.
To petitioners, the ICC-ICAs use of such summaries but without presenting the source
documents violates their right to due process. Pressing the point, petitioners had moved, but to no avail,
for the exclusion of the said summaries. Petitioners allege that they had reserved the right to cross-
examine the witnesses of RCBC who testified on the summaries, pending the resolution of their motion to
exclude. But, according to them, they were effectively denied the right to cross-examine RCBCs witnesses
when the ICC-ICA admitted the summaries of RCBC as evidence.
Petitioners position is bereft of merit.
Anent the use but non-presentation of the source documents as the jumping board for a claim
of denial of due process, petitioners cite Compania Maritima v. Allied Free Workers Union.[30] It may be
stated, however, that such case is not on all fours with the instant case and, therefore, cannot be applied
here considering that it does not involve an administrative body exercising quasi-judicial function but
rather the regular court.
In a catena of cases, we have ruled that [t]he essence of due process is the opportunity to be
heard. What the law prohibits is not the absence of previous notice but the absolute absence thereof and
the lack of opportunity to be heard.[31]
We also explained in Lastimoso v. Asayo that [d]ue process in an administrative context does
not require trial type proceedings similar to those in courts of justice. Where an opportunity to be heard
either through oral arguments or through pleadings is accorded, there is no denial of procedural due
process.[32]
25 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Were petitioners afforded the opportunity to refute the summaries and pieces of evidence
submitted by RCBC which became the bases of the experts opinion?
The answer is in the affirmative.
We recall the events that culminated in the issuance of the challenged Partial Award, thus:
On May 17, 2004, the ICC-ICA received the Request for Arbitration dated May 12, 2004 from
RCBC seeking rescission of the SPA and restitution of all the amounts paid by RCBC to petitioners, with
actual and moral damages, interest, and costs of suit.
On August 8, 2004, petitioners filed an Answer to the Request for Arbitration dated July 28,
2004, setting up a counterclaim for USD 300,000 for actual and exemplary damages.
RCBC filed its Reply[33] dated August 31, 2004 to petitioners Answer to the Request for
Arbitration.
On October 4, 2004, the parties entered into the Terms of Reference.[34] At the same time, the
chairperson of the arbitral tribunal issued a provisional timetable[35] for the arbitration.
On October 25, 2004, as previously agreed upon in the meeting on October 4, 2004, petitioners
filed a Motion to Dismiss[36] while RCBC filed a Claimants Position Paper (Re: [Petitioners] Assertion that
RCBC CAPITAL CORPORATIONs Present Claim Is Time Barred).[37]
Then, the tribunal issued Procedural Order No. 1 dated January 12, 2005,[38] denying the
motion to dismiss and setting the initial hearing of the case on April 11, 2005.
In a letter dated February 9, 2005,[39] petitioners requested that the tribunal direct RCBC to
produce certain documents. At the same time, petitioners sought the postponement of the hearing on April
11, 2005 to March 21, 2005, in light of their own request.
On February 11, 2005, petitioners received RCBCs brief of evidence and supporting
documentation in accordance with the provisional timetable.[40] In the brief of evidence, RCBC provided
summaries of the accounts of Bankard, which petitioners now question.
Later, in a letter dated February 14, 2005,[41] petitioners complained to the tribunal with regard
to their lack of access to RCBCs external auditor. Petitioners sought an audit by an accounting firm of the
records of Bankard with respect to the claims of RCBC. By virtue of such requests, petitioners also sought
a rescheduling of the provisional timetable, despite their earlier assurance to the tribunal that if they
received the documents that they requested on February 9, 2005 on or before February 21, 2005, they
would abide by the provisional timetable.
Thereafter, the tribunal issued Procedural Order No. 2 dated February 18, 2005,[42] in which it
allowed the discovery and inspection of the documents requested by petitioners that were also scheduled
on February 18, 2005. The request for an audit of Bankards accounts was denied without prejudice to the
conduct of such audit during the course of the hearings. Consequently, the tribunal amended the
provisional timetable, extending the deadline for petitioners to file their brief of evidence and documents
to March 21, 2005. The date of the initial hearing, however, remained on April 11, 2005.
On February 18, 2005, petitioners were furnished the documents that they requested RCBC.
[43]
The parties also agreed to meet again on February 23, 2005 to provide petitioners with a walk-through
of Bankards Statistical Analysis System and to provide petitioners with a soft copy of all of Bankards
cardholders.[44]
During the February 23, 2005 meeting, EPCIBs counsels/representatives were accompanied to
the Bankards Credit-MIS Group. There, Bankards representative, Amor Lazaro, described and explained
to petitioners representatives the steps involved in procuring and translating raw data on customer
transactions. Lazaro explained that Bankard captures cardholder information and transactions through
encoding or electronic data capture. Thereafter, such data are transmitted to its main credit card
administration system. Such raw data are then sent to Bankards Information Technology Group. Using a
proprietary software called SAS, the raw data is then converted into SAS files which may be viewed,
handled, and converted into Excel files for reporting purposes. During the walk-through, petitioners
representatives asked questions which were answered in detail by Lazaro.
At the same time, another Bankard representative, Felix L. Sincoegue, accompanied two
auditors/representatives of petitioners to examine the journal vouchers and supporting documents of
Bankard consisting of several boxes. The auditors randomly sifted through the boxes which they had
earlier requested to be inspected.
In addition, petitioners were furnished with an electronic copy of the details of all cardholders,
including relevant data for aging of receivables for the years 2000 to 2003, as well as data containing
details of written-off accounts from 1999 to March 2000 contained in compact discs.[45]
On March 4, 2005, petitioners sent a letter[46] to the tribunal requesting for a postponement of
the April 11, 2005 hearing of the case. Petitioners claim that they could not confirm the summaries
prepared by RCBC, considering that RCBC allegedly did not cooperate in providing data that would
facilitate their verification. Petitioners specifically mentioned the following data: (1) list of names of
cardholders whose accounts are sources of data gathered or calculated in the summaries; (2) references to
the basic cardholder documents from which such data were collected; and (3) access to the underlying
cardholder documents at a time and under conditions mutually convenient to the parties. As regards the
compact discs of information provided to petitioners, it is claimed that such information could not be
accessed as the software necessary for the handling of the data could not be made immediately available to
them.
In Procedural Order No. 3 dated March 11 2005,[47] the initial hearing was moved to June 13 to
16, 2005, considering that petitioners failed to pay the advance on costs of the tribunal.
On March 23, 2005, RCBC paid the balance of the advance on costs. [48]
On April 22, 2005, petitioners sent the tribunal a letter,[49] requesting for the postponement of
the hearing scheduled on June 13 to 16, 2005 on the ground that they could not submit their witness
statements due to the volume of data that they acquired from RCBC.
In a letter dated April 25, 2005,[50] petitioners demanded from RCBC that they be allowed to
examine the journal vouchers earlier made available to them during the February 23, 2005 meeting. This
demand was answered by RCBC in a letter dated April 26, 2005,[51] stating that such demand was being
denied by virtue of Procedural Order No. 2, in which it was ruled that further requests for discovery would
not be made except with leave of the chairperson of the tribunal.
In Procedural Order No. 4,[52] the tribunal granted petitioners request for the postponement of
the hearing on June 13, 2005 and rescheduled it to November 21, 2005 in light of the pending motions
filed by EPCIB with the RTC in Makati City.
On July 29, 2005, the parties held a meeting wherein it was agreed that petitioners would be
provided with hard and soft copies of the inventory of the journal vouchers earlier presented to its
representatives, while making the journal vouchers available to petitioners for two weeks for examination
and photocopying.[53]
On September 2, 2005, petitioners applied for the postponement of the November 21, 2005
hearing due to the following: (1) petitioners had earlier filed a motion dated August 11, 2005 with the
RTC, in which the issue of whether the non-Filipino members of the tribunal were illegally practicing law
in the Philippines by hearing their case, which was still pending; and (2) the gathering and processing of
the data and documents made available by RCBC would require 26 weeks.[54]Such application was denied
by the tribunal in Procedural Order No. 5 dated September 16, 2005.[55]
On October 21, 2005, the tribunal issued Procedural Order No. 6,[56] postponing the November
21, 2005 hearing by virtue of an order issued by the RTC in Makati City directing the tribunal to reset the
hearing for April 21 and 24, 2006.
26 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Thereafter, in a letter dated January 18, 2006,[57] petitioners wrote the tribunal requesting that
RCBC be directed to: (1) provide petitioners with information identifying the journal vouchers and other
supporting documents that RCBC used to arrive at the figures set out in the summaries and other relevant
information necessary to enable them to reconstruct and/or otherwise understand the figures or amounts in
each summary; and (2) submit to petitioners the requested pieces of information as soon as these are or
have become available, or in any case not later than five days.
In response to such letter, RCBC addressed a letter dated January 31, 2006[58] to the tribunal
claiming that the pieces of information that petitioners requested are already known to petitioners
considering that RCBC merely maintained the systems that they inherited when it bought Bankard from
petitioners. RCBC added that the documents that EPCIB originally transmitted to it when RCBC bought
Bankard were all being made available to petitioners; thus, any missing supporting documents from these
files were never transmitted to them in the first place.
Later, petitioners sent to the tribunal a letter dated February 10, 2006,[59] asking that it direct
RCBC to provide petitioners with the supporting documents that RCBC mentioned in its letter
dated January 31, 2006. Petitioners wrote that should RCBC fail to present such documents, RCBCs
summaries should be excluded from the records.
In a letter dated March 10, 2006,[60] petitioners requested that they be given an additional
period of at least 47 days within which to submit their evidence-in-chief with the corresponding request
for the cancellation of the hearing on April 24, 2006. Petitioners submit that should such request be
denied, RCBCs summaries should be excluded from the records.
On April 6, 2006, petitioners filed their arbitration briefs and witness statements. By way of
reply, on April 17, 2006, RCBC submitted Volumes IV and V of its exhibits and Volume II of its evidence-
in-chief.[61]
On April 18, 2006, petitioners requested the tribunal that they be allowed to file rejoinder
briefs, or otherwise exclude RCBCs reply brief and witness statements.[62] In this request, petitioners also
requested that the hearing set for April 24, 2006 be moved. These requests were denied.
Consequently, on April 24 to 27, 2006, the arbitral tribunal conducted hearings on the case.[63]
On December 4, 2006, petitioners submitted rejoinder affidavits, raising new issues for the first
time, to which RCBC submitted Volume III of its evidence-in-chief by way of a reply.
On January 16, 2007, both parties simultaneously submitted their memoranda. On January 26,
2007, both parties simultaneously filed their reply to the others memorandum.[64]
Thus, on September 27, 2007, the Partial Award was rendered by the Tribunal.
Later, petitioners moved to vacate the said award before the RTC. Such motion was denied by
the trial court in the first assailed order dated January 8, 2008. Petitioners then moved for a
reconsideration of such order, but their motion was also denied in the second assailed order dated March
17, 2008.
The foregoing events unequivocally demonstrate ample opportunity for petitioners to verify
and examine RCBCs summaries, accounting records, and reports. The pleadings reveal that RCBC
granted petitioners requests for production of documents and accounting records. More so, they had more
than three (3) years to prepare for their defense after RCBCs submission of its brief of evidence. Finally, it
must be emphasized that petitioners had the opportunity to appeal the Partial Award to the RTC, which
they in fact did. Later, petitioners even moved for the reconsideration of the denial of their appeal. Having
been able to appeal and move for a reconsideration of the assailed rulings, petitioners cannot claim a
denial of due process.[65]
Petitioners right to due process was not breached.
 As regards petitioners claim that its right to due process was violated when they were allegedly
denied the right to cross-examine RCBCs witnesses, their claim is also bereft of merit.
Sec. 15 of RA 876 or the Arbitration Law provides that:
Section 15. Hearing by arbitrators. Arbitrators may, at the
commencement of the hearing, ask both parties for brief statements of the issues in
controversy and/or an agreed statement of facts. Thereafter the parties may offer
such evidence as they desire, and shall produce such additional evidence as the
arbitrators shall require or deem necessary to an understanding and determination of
the dispute. The arbitrators shall be the sole judge of the relevancy and
materiality of the evidence offered or produced, and shall not be bound to
conform to the Rules of Court pertaining to evidence. Arbitrators shall receive
as exhibits in evidence any document which the parties may wish to submit
and the exhibits shall be properly identified at the time of submission. All
exhibits shall remain in the custody of the Clerk of Court during the course of the
arbitration and shall be returned to the parties at the time the award is made. The
arbitrators may make an ocular inspection of any matter or premises which are in
dispute, but such inspection shall be made only in the presence of all parties to the
arbitration, unless any party who shall have received notice thereof fails to appear,
in which event such inspection shall be made in the absence of such party.
(Emphasis supplied.)
The well-settled rule is that administrative agencies exercising quasi-judicial powers shall not
be fettered by the rigid technicalities of procedure, albeit they are, at all times required, to adhere to the
basic concepts of fair play. The Court wrote in CMP Federal Security Agency, Inc. v. NLRC:
While administrative tribunals exercising quasi-judicial powers, like the
NLRC and Labor Arbiters, are free from the rigidity of certain procedural
requirements, they are nonetheless bound by law and practice to observe the
fundamental and essential requirements of due process. The standard of due
process that must be met in administrative tribunals allows a certain degree of
latitude as long as fairness is not ignored. Hence, it is not legally objectionable, for
being violative of due process, for the Labor Arbiter to resolve a case based solely
on the position papers, affidavits or documentary evidence submitted by the
parties. The affidavits of witnesses in such case may take the place of their direct
testimony.[66]
Of the same tenor is our holding in Quiambao v. Court of Appeals:
In resolving administrative cases, conduct of full-blown trial is not indispensable to
dispense justice to the parties. The requirement of notice and hearing does not
connote full adversarial proceedings. Submission of position papers may be
sufficient for as long as the parties thereto are given the opportunity to be heard. In
administrative proceedings, the essence of due process is simply an opportunity
to be heard, or an opportunity to explain ones side or opportunity to seek a
reconsideration of the action or ruling complained of. This constitutional
mandate is deemed satisfied if a person is granted an opportunity to seek
reconsideration of an action or a ruling. It does not require trial-type proceedings
similar to those in the courts of justice. Where opportunity to be heard either
through oral arguments or through pleadings is accorded, there is no denial of
procedural due process.[67] (Emphasis supplied.)
Citing Vertudes v. Buenaflor, petitioners also cry denial of due process when they
were allegedly denied the right to cross-examine the witnesses presented by RCBC. It is true that
in Vertudes, we stated: The right of a party to confront and cross-examine opposing witnesses in a judicial
27 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
litigation, be it criminal or civil in nature, or in proceedings before administrative tribunals with quasi-
judicial powers, is a fundamental right which is part of due process.[68]
It is, however, equally true that:
[T]he right is a personal one which may be waived expressly or
impliedly by conduct amounting to a renunciation of the right of cross-
examination. Thus, where a party has had the opportunity to cross-examine a
witness but failed to avail himself of it, he necessarily forfeits the right to cross-
examine and the testimony given on direct examination of the witness will be
received or allowed to remain in the record.[69] (Emphasis supplied.)
We also held in one case:
However, the right has always been understood as requiring not necessarily an
actual cross-examination but merely an opportunity to exercise the right to
cross-examine if desired. What is proscribed by statutory norm and
jurisprudential precept is the absence of the opportunity to cross-examine. The
right is a personal one and may be waived expressly or impliedly. There is an
implied waiver when the party was given the opportunity to confront and cross-
examine an opposing witness but failed to take advantage of it for reasons
attributable to himself alone. If by his actuations, the accused lost his opportunity to
cross-examine wholly or in part the witnesses against him, his right to cross-
examine is impliedly waived.[70] (Emphasis supplied.)
And later in Velez v. De Vera, the Court En Banc expounded on the above rulings, adding that
in administrative proceedings, cross-examination is not indispensable, thus:
Due process of law in administrative cases is not identical with judicial
process for a trial in court is not always essential to due process. While a day in
court is a matter of right in judicial proceedings, it is otherwise in administrative
proceedings since they rest upon different principles. The due process clause
guarantees no particular form of procedure and its requirements are not technical.
Thus, in certain proceedings of administrative character, the right to a notice or
hearing [is] not essential to due process of law. The constitutional requirement of
due process is met by a fair hearing before a regularly established administrative
agency or tribunal. It is not essential that hearings be had before the making of a
determination if thereafter, there is available trial and tribunal before which all
objections and defenses to the making of such determination may be raised and
considered. One adequate hearing is all that due process requires. What is required
for hearing may differ as the functions of the administrative bodies differ.
The right to cross-examine is not an indispensable aspect of due
process.[71] x x x (Emphasis supplied.)
Clearly, the right to cross-examine a witness, although a fundamental right of a party, may be
waived. Petitioners themselves admit having had the opportunity to cross-examine RCBCs witnesses
during the hearings before the tribunal, but declined to do so by reserving such right at a later time.
Having had the opportunity to cross-examine RCBCs witnesses, petitioners were not denied their right to
due process.
RCBC Is Not Estopped from Questioning
the Financial Condition of Bankard
On estoppel, petitioners contend that RCBC already knew the recording of the Bankard
accounts before it paid the balance of the purchase price and could no longer challenge the financial
statements of Bankard. RCBC, they claim, had full control of the operations of Bankard since June 2,
2000 and RCBCs audit team reviewed the accounts in September 2000. Thus, RCBC is now precluded
from denying the fairness and accuracy of said accounts since it did not seek price reduction under Sec.
5(h). Lastly, they asseverate that RCBC continued with Bankards accounting policies and practices and
found them to conform to the generally accepted accounting principles, contrary to RCBCs allegations.
It also bears stating that in his dissent, retired Justice Kapunan, an arbitral tribunal member,
argued that Bankards accounting practices were disclosed in the information memorandum provided to
RCBC; hence, RCBC was supposed to know such accounting practices and to have accepted their
propriety even before the execution of the SPA. He then argued that when it paid the purchase price
on December 29, 2000, RCBC could no longer claim that the accounting practices that went into the
reporting of the 1999 AFS of Bankard were not in accord with generally accepted accounting principles.
He pointed out that RCBC was bound by the audit conducted by a certain Rubio prior to the full payment
of the purchase price of Bankard. Anchored on these statements by Justice Kapunan, petitioners conclude
that RCBC is estopped from claiming that the former violated their warranties under the SPA.
Petitioners contention is not meritorious.
Art. 1431 of the Civil Code, on the subject of estoppel, provides: Through estoppel an
admission or representation is rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon.
The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith,
and justice; and its purpose is to forbid one to speak against ones own acts, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied on them.[72]
We explained the principle of estoppel in Philippine Savings Bank v. Chowking Food
Corporation:
x x x The equitable doctrine of estoppel was explained by this Court
in Caltex (Philippines), Inc. v. Court of Appeals:
Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon. A
party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them. In the law of
evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing
true, to act upon such belief, he cannot, in any litigation arising out of
such declaration, act, or omission, be permitted to falsify it.
The principle received further elaboration in Maneclang v. Baun:
In estoppel by pais, as related to the party sought to be
estopped, it is necessary that there be a concurrence of the following
requisites: (a) conduct amounting to false representation or concealment
of material facts or at least calculated to convey the impression that the
facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at least expectation that
this conduct shall be acted upon, or at least influenced by the other
party; and (c) knowledge, actual or constructive of the actual facts.
Estoppel may vary somewhat in definition, but all authorities agree
that a party invoking the doctrine must have been misled to ones prejudice.
That is the final and, in reality, most important of the elements of equitable
estoppel. It is this element that is lacking here.[73] (Emphasis supplied.)
28 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
The elements of estoppel pertaining to the party estopped are:
(1) conduct which amounts to a false representation or concealment of
material facts, or, at least, which calculated to convey the impression that the facts
are otherwise than, and inconsistent with, those which the party subsequently
attempts to assert; (2) intention, or at least expectation, that such conduct shall be
acted upon by the other party; and (3) knowledge, actual or constructive, of the
actual facts.[74]
In the case at bar, the first element of estoppel in relation to the party sought to be estopped is
not present. Petitioners claim that RCBC misrepresented itself when RCBC made it appear that they
considered petitioners to have sufficiently complied with its warranties under Sec. 5(g) and 5(h), in
relation to Sec. 7 of the SPA. Petitioners position is that RCBC was aware of the manner in which the
Bankard accounts were recorded, well before it consummated the SPA by taking delivery of the shares and
paying the outstanding 80% balance of the contract price.[75]
Petitioners, therefore, theorize that in this case, the first element of estoppel in relation to the
party sought to be estopped is that RCBC made a false representation that it considered Bankards accounts
to be in order and, thus, RCBC abandoned any claim under Sec. 5(g) and 5(h) by its inaction.
Such contention is incorrect.
It must be emphasized that it was only after a second audit that RCBC presented its claim to
petitioners for violation of Sec. 5(g), within the three (3)-year period prescribed. In other words, RCBC,
prior to such second audit, did not have full and thorough knowledge of the correctness of Bankards
accounts, in relation to Sec. 5(g). RCBC, therefore, could not have misrepresented itself considering that it
was still in the process of verifying the warranties covered under Sec. 5(g). Considering that there must be
a concurrence of the elements of estoppel for it to arise, on this ground alone such claim is already
negated. As will be shown, however, all the other elements of estoppel are likewise absent in the case at
bar.
As to the second element, in order to establish estoppel, RCBC must have intended that
petitioners would act upon its actions. This element is also missing. RCBC by its actions did not mislead
petitioners into believing that it waived any claim for violation of a warranty. The periods under Sec. 5(g)
and 5(h) were still available to RCBC.
The element that petitioners relied on the acts and conduct of RCBC is absent. The Court finds
that there was no reliance on the part of petitioners on the acts of RCBC that would lead them to believe
that the RCBC will forego the filing of a claim under Sec. 5(g). The allegation that RCBC knew that the
Bankard accounts did not comply with generally accepted accounting principles before payment and,
hence, it cannot question the financial statements of Bankard is meritless. Precisely, the SPA explicitly
provides that claims for violation of the warranties under Sec. 5(g) can still be filed within three (3) years
from the closing date. Petitioners contention that RCBC had full control of Bankard operations after
payment of the price and that an audit undertaken by the Rubio team did not find anything wrong with the
accounts could not have plausibly misled petitioners into believing that RCBC will waive its right to file a
claim under Sec. 5(g). After all, the period to file a claim under Sec. 5(g) is three (3) years under Sec. 7,
much longer than the six (6)-month period under Sec. 5(h). Petitioners are fully aware that the warranties
under Sec. 5(g) (1997 up to March 2000) are of a wider scope than that of Sec. 5(h) (AFS of 1999 and
UFS up to May 31, 2000), necessitating a longer audit period than the six (6)-month period under Sec.
5(h).
The third element of estoppel in relation to the party sought to be estopped is also absent
considering that, as stated, RCBC was still in the process of verifying the correctness of Bankards
accounts prior to presenting its claim of overvaluation to petitioners. RCBC, therefore, had no sufficient
knowledge of the correctness of Bankards accounts.
On another issue, RCBC could not have immediately changed the Bankard accounting
practices until it had conducted a more extensive and thorough audit of Bankards voluminous records and
transactions to uncover any irregularities. That would be the only logical explanation why Bankards
alleged irregular practices were maintained for more than two (2) years from closing date. The fact that
RCBC continued with the audit of Bankards AFS and records after the termination of the Rubio audit can
only send the clear message to petitioners that RCBC is still entertaining the possibility of filing a claim
under Sec. 5(g). It cannot then be said that petitioners reliance on RCBCs acts after full payment of the
price could have misled them into believing that no more claim will be presented by RCBC.
The Arbitral Tribunal explained in detail why estoppel is not present in the case at bar, thus:
10.18 The audit exercise conducted by Mr. Legaspi and Mr. Rubio was clearly not
one comprehensive enough to have discovered the problems later
unearthed by Dr. Laya and Dean Ledesma. x x x
10.19 Although the powers of the TC [Transition Committee] may have been
widely expressed in the view of Mr. Rogelio Chua, then in charge of
Bankard x x x the TC conducted meetings only to get updated on the
status and progress of Bankards operations. Commercially, one would
expect that an unpaid vendor expecting to receive 80% of a large
purchase price would not be receptive to a purchaser making vast policy
changes in the operation of the business until the purchaser has paid up
its money. It is more likely that, until the settlement date, there was a
practice of maintaining the status quo at Bankard.
10.20 But neither the Claimant nor the TC did anything, in the Tribunals view,
which would have given the Respondents the impression that they were
being relieved over the next three years of susceptibility to a claim under
clause 5(g). Maybe the TC could have been more proactive in
commissioning further or more in-depth audits but it was not. It did not
have to be. It is commercially unlikely that it have been done so, with
the necessary degree of attention to detail, within the relatively short
time between the appointment of the TC and the ultimate settlement date
of the purchase a period of some three months. An interim arrangement
was obviously sensible to enable the Claimant and its staff to become
familiar with the practices and procedures of Bankard.
10.21 The core consideration weighing with the Tribunal in assessing these claims
for estoppel is that the SPA allowed two types of claim; one within six
months under 5(h) and one within three years under 5(g). The Tribunal
has already held the present claim is not barred by clause 5(h). It must
therefore have been within the reasonable contemplation of the parties
that a 5(g) claim could surface within the three-year period and that it
could be somewhat differently assessed than the claim under 5(h). The
Tribunal cannot find estoppel by conduct either from the formation of
the TC or from the limited auditing exercise done by Mr. Rubio and Mr.
Legaspi. The onus proving estoppel is on the Respondents and it has not
been discharged.
10.22 If the parties had wished the avenues of relief for misrepresentation afforded
to the Claimant to have been restricted to a claim under Clause 5(h),
then they could have said so. The special audit may have provided an
answer to any claim based on clause 5(h) but it cannot do so in respect
of a claim based on Clause 5(g). Clause 5(g) imposed a positive
obligation on the Respondents from which they cannot be excused,
simply by reason of either the formation and conduct of the TC or of the
limited audit.
10.23 The three-year limitation period obviously contemplated that it could take
some time to ascertain whether there had been a breach of the GAAP
standards, etc. Such was the case. A six-month limitation period under
29 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
Clause 5(h), in contrast, presaged a somewhat less stringent enquiry of
the kind carried out by Mr. Rubio and Mr. Legaspi.
10.24 Clause 2(3) of the Amendment to the SPA strengthens the conclusion that the
parties were concerned only with a 5(h) claim during the TCs reign. The
focus of the audit however intense it was conducted by Mr. Rubio and
Mr. Legaspi, was on establishing possible liability under that section and
thus as a possible reduction in the price to be paid on settlement.
10.25 The fact that the purchase price was paid over in full without any deduction
in terms of clause 5(h) is not a bar to the Claimant bringing a claim
under 5(g) within the three-year period. The fact that payment was made
can be, as the Tribunal has held, a barrier to a claim for rescission
and restitution ad inegrum. A claim for estoppel needs a finding of
representation by words of conduct or a shared presumption that a right
would not be relied upon. The party relying on estoppel has to show
reliance to its detriment or that, otherwise, it would be unconscionable to
resile from the provision.
10.26 Article 1431 of the Civil Code states:
Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the
person relying thereon.
10.27 Clearly, there has to both an admission or representation by (in this case) the
Claimant, plus reliance upon it by (in this case) the Respondents. The
Tribunal cannot find as proved any admission/representation that the
Claimant was abandoning a 5(g) claim, any reliance by Respondents on
an admission, and any detriment to the Respondents such as would
entitle them to have the Claimant deprived of the benefit of clause 5(g).
These aspects of the claim of estoppel are rejected.
xxxx
10.42 The Tribunal is not the appropriate forum for deciding whether there have
been any regulatory or ethical infractions by Bankard and/or the
Claimant in setting the buy-back price. It has no bearing on whether the
Claimant must be considered as having waived its right to claim against
the Respondents.
10.43 In the Tribunals view, neither any infraction by Bankard in failing to advise
the Central Bank of the experts findings, nor a failure to put a tag on the
accounts nor to have said something to the shareholders in the buy-back
exercise operates as a technical knock-out of Claimants claim.
10.44 The Tribunal notes that the conciliation process mandated by the SPA took
most of 2003 and this may explain a part of the delay in commencing
arbitral proceedings.
10.45 Whatever the status of Mr. Rubios and Mr. Legaspis enquiries in late 2000,
the Claimant was quite entitled to commission subsequent reports from
Dr. Laya and Dr. Echanis and, on the basis of those reports, make a
timeous claim under clause 5(g) of the SPA.
10.46 In the Tribunals view, therefore, there is no merit in Respondents various
submissions that the Claimant is debarred from prosecuting its claims on
the grounds of estoppel. There is just no proof of the necessary
representation to the Respondent, nor any detriment to the Respondent
proved. The grounds of delay and laches are not substantiated.

In summary, the tribunal properly ruled that petitioners failed to prove that the formation of the
Transition Committee and the conduct of the audit by Rubio and Legaspi were admissions or
representations by RCBC that it would not pursue a claim under Sec. 5(g) and that petitioners relied on
such representation to their detriment. We agree with the findings of the tribunal that estoppel is not
present in the situation at bar.
Additionally, petitioners claim that in Knecht v. Court of Appeals[76] and Coca-Cola Bottlers
Philippines, Inc. v. Court of Appeals (Coca-Cola),[77] this Court ruled that the absence of the element of
reliance by a party on the representation of another does not negate the principle of estoppel. Those cases
are, however, not on all fours with and cannot be applied to this case.
In Knecht, the buyer had the opportunity of knowing the conditions of the land he was buying
early on in the transaction, but proceeded with the sale anyway. According to the Court, the buyer was
estopped from claiming that the vendor made a false representation as to the condition of the land. This is
not true in the instant case. RCBC did not conduct a due diligence audit in relation to Sec.5(g) prior to the
sale due to petitioners express representations and warranties. The examination conducted by RCBC,
through Rubio, after the execution of the SPA on June 2, 2000, was confined to finding any breach under
Sec. 5(h) for a possible reduction of the purchase price prior to the payment of its balance on December
31, 2000. Further, the parties clearly agreed under Sec. 7 of the SPA to a three (3)-year period from closing
date within which to present a claim for damages for violation of the warranties under the SPA.
Hence, Knecht is not a precedent to the case at bar.
So is Coca-Cola. As lessee, Coca-Cola Bottlers was well aware of the nature and situation of
the land relative to its intended use prior to the signing of the contract. Its subsequent assertion that the
land was not suited for the purpose it was leased was, therefore, cast aside for being unmeritorious. Such
circumstance does not obtain in the instant case. There was no prior due diligence audit conducted by
RCBC, it having relied, as earlier stated, on the warranties of petitioners with regard to the financial
condition of Bankard under Sec. 5(g). As such, Sec. 5(g) guaranteed RCBC that it could file a claim for
damages for any mistakes in the AFS and UFS of Bankard. Clearly, Coca-Cola also cannot be applied to
the instant case.
It becomes evident from all of the foregoing findings that the ICC-ICA is not guilty of any
manifest disregard of the law on estoppel. As shown above, the findings of the ICC-ICA in the Partial
Award are well-supported in law and grounded on facts. The Partial Award must be upheld.
We close this disposition with the observation that a member of the three-person arbitration
panel was selected by petitioners, while another was respondents choice. The respective interests of the
parties, therefore, are very much safeguarded in the arbitration proceedings. Any suggestion, therefore, on
the partiality of the arbitration tribunal has to be dismissed.
WHEREFORE, the instant petition is hereby DENIED. The assailed January 8,
2008 and March 17, 2008 Orders of the RTC, Branch 148 in Makati City are hereby AFFIRMED.
Costs against petitioners.
SO ORDERED.
G.R. No. 129916 March 26, 2001
MAGELLAN CAPITAL MANAGEMENT CORPORATION and MAGELLAN CAPITAL
HOLDINGS CORPORATION, petitioners,
vs.
ROLANDO M. ZOSA and HON. JOSE P. SOBERANO, JR., in his capacity as Presiding Judge of
Branch 58 of the Regional Trial Court of Cebu, 7th Judicial Region, respondents.
30 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
BUENA, J.:
Under a management agreement entered into on March 18, 1994, Magellan Capital Holdings Corporation
[MCHC] appointed Magellan Capital Management Corporation [MCMC] as manager for the operation of
its business and affairs.1 Pursuant thereto, on the same month, MCHC, MCMC, and private respondent
Rolando M. Zosa entered into an "Employment Agreement" designating Zosa as President and Chief
Executive Officer of MCHC.
Under the "Employment Agreement", the term of respondent Zosa's employment shall be co-terminous
with the management agreement, or until March 1996,2 unless sooner terminated pursuant to the
provisions of the Employment Agreement.3 The grounds for termination of employment are also provided
in the Employment Agreement.
On May 10, 1995, the majority of MCHC's Board of Directors decided not to re-elect respondent Zosa as
President and Chief Executive Officer of MCHC on account of loss of trust and confidence 4 arising from
alleged violation of the resolution issued by MCHC's board of directors and of the non-competition clause
of the Employment Agreement.5Nevertheless, respondent Zosa was elected to a new position as MCHC's
Vice-Chairman/Chairman for New Ventures Development.6
On September 26, 1995, respondent Zosa communicated his resignation for good reason from the position
of Vice-Chairman under paragraph 7 of the Employment Agreement on the ground that said position had
less responsibility and scope than President and Chief Executive Officer. He demanded that he be given
termination benefits as provided for in Section 8 (c) (i) (ii) and (iii) of the Employment Agreement.7
In a letter dated October 20, 1995, MCHC communicated its non-acceptance of respondent Zosa's
resignation for good reason, but instead informed him that the Employment Agreement is terminated for
cause, effective November 19, 1995, in accordance with Section 7 (a) (v) of the said agreement, on
account of his breach of Section 12 thereof. Respondent Zosa was further advised that he shall have no
further rights under the said Agreement or any claims against the Manager or the Corporation except the
right to receive within thirty (30) days from November 19, 1995, the amounts stated in Section 8 (a) (i) (ii)
of the Agreement.8
Disagreeing with the position taken by petitioners, respondent Zosa invoked the Arbitration Clause of
the Employment Agreement, to wit:
"23. Arbitration. In the event that any dispute, controversy or claim arises out of or under any
provisions of this Agreement, then the parties hereto agree to submit such dispute, controversy
or claim to arbitration as set forth in this Section and the determination to be made in such
arbitration shall be final and binding. Arbitration shall be effected by a panel of three
arbitrators. The Manager, Employee and Corporation shall designate one (1) arbitrator who
shall, in turn, nominate and elect who among them shall be the chairman of the committee. Any
such arbitration, including the rendering of an arbitration award, shall take place in Metro
Manila. The arbitrators shall interpret this Agreement in accordance with the substantive laws
of the Republic of the Philippines. The arbitrators shall have no power to add to, subtract from
or otherwise modify the terms of Agreement or to grant injunctive relief of any nature. Any
judgment upon the award of the arbitrators may be entered in any court having jurisdiction
thereof, with costs of the arbitration to be borne equally by the parties, except that each party
shall pay the fees and expenses of its own counsel in the arbitration."
On November 10, 1995, respondent Zosa designated his brother, Atty. Francis Zosa, as his representative
in the arbitration panel9 while MCHC designated Atty. Inigo S. Fojas10 and MCMC nominated Atty.
Enrique I. Quiason11as their respective representatives in the arbitration panel. However, instead of
submitting the dispute to arbitration, respondent Zosa, on April 17, 1996, filed an action for damages
against petitioners before the Regional Trial Court of Cebu12 to enforce his benefits under the Employment On March 21, 1997, the Court of Appeals rendered a decision, giving due course to the petition, the
Agreement. decretal portion of which reads:

On July 3, 1996, petitioners filed a motion to dismiss13 arguing that (1) the trial court has no jurisdiction
over the instant case since respondent Zosa's claims should be resolved through arbitration pursuant to
Section 23 of the Employment Agreement with petitioners; and (2) the venue is improperly laid since
respondent Zosa, like the petitioners, is a resident of Pasig City and thus, the venue of this case, granting
without admitting that the respondent has a cause of action against the petitioners cognizable by the RTC,
should be limited only to RTC-Pasig City.14
Meanwhile, respondent Zosa filed an amended complaint dated July 5, 1996.
"WHEREFORE, the petition is GIVEN DUE COURSE. The respondent court is directed to
resolve the issue on the validity or effectivity of the arbitration clause in the Employment
Agreement, and to suspend further proceedings in the trial on the merits until the said issue is
resolved. The questioned orders are set aside insofar as they contravene this Court's resolution
of the issues raised as herein pronounced.
"The petitioner is required to remit to this Court the sum of P81.80 for cost within five (5) days
from notice.

On August 1, 1996, the RTC Branch 58 of Cebu City issued an Order denying petitioners motion to "SO ORDERED."22
dismiss upon the findings that (1) the validity and legality of the arbitration provision can only be
determined after trial on the merits; and (2) the amount of damages claimed, which is over P100,000.00,
Petitioners filed a motions for partial reconsideration of the CA decision praying (1) for the dismissal of
falls within the jurisdiction of the RTC.15Petitioners filed a motion for reconsideration which was denied
the case in the trial court, on the ground of lack of jurisdiction, and (2) that the parties be directed to
by the RTC in an order dated September 5, 1996.16
submit their dispute to arbitration in accordance with the Employment Agreement dated March 1994. The
CA, in a resolution promulgated on June 20, 1997, denied the motion for partial reconsideration for lack
In the interim, on August 22, 1996, in compliance with the earlier order of the court directing petitioners to of merit.
file responsive pleading to the amended complaint, petitioners filed their Answer Ad Cautelam with
counterclaim reiterating their position that the dispute should be settled through arbitration and the court
In compliance with the CA decision, the trial court, on July 18, 1997, rendered a decision declaring the
had no jurisdiction over the nature of the action.17
"arbitration clause" in the Employment Agreement partially void and of no effect. The dispositive portion
of the decision reads:
On October 21, 1996, the trial court issued its pre-trial order declaring the pre-trial stage terminated and
setting the case for hearing. The order states:
"WHEREFORE, premises considered, judgment is hereby rendered partially declaring the
arbitration clause of the Employment Agreement void and of no effect, only insofar as it
"ISSUES: concerns the composition of the panel of arbitrators, and directing the parties to proceed to
arbitration in accordance with the Employment Agreement under the panel of three (3)
arbitrators, one for the plaintiff, one for the defendants, and the third to be chosen by both the
"The Court will only resolve one issue in so far as this case is concerned, to wit:
plaintiff and defendants. The other terms, conditions and stipulations in the arbitration clause
remain in force and effect."23
"Whether or not the Arbitration Clause contained in Sec. 23 of the Employment Agreement is
void and of no effect: and, if it is void and of no effect, whether or not the plaintiff is entitled to
In view of the trial court's decision, petitioners filed this petition for review on certiorari, under Rule 45 of
damages in accordance with his complaint and the defendants in accordance with their
the Rules of Court, assigning the following errors for the Court's resolution:
counterclaim.

"I. The trial court gravely erred when it ruled that the arbitration clause under the employment
"It is understood, that in the event the arbitration clause is valid and binding between the
agreement is partially void and of no effect, considering that:
parties, the parties shall submit their respective claim to the Arbitration Committee in
accordance with the said arbitration clause, in which event, this case shall be deemed
dismissed."18 "A. The arbitration clause in the employment agreement dated March 1994 between
respondent Zosa and defendants MCHC and MCMC is valid and binding upon the
parties thereto.
On November 18, 1996, petitioners filed their Motion Ad Cautelam for the Correction, Addition and
Clarification of the Pre-trial Order dated November 15, 1996,19 which was denied by the court in an order
dated November 28, 1996.20 "B. In view of the fact that there are three parties to the employment agreement, it is
but proper that each party be represented in the arbitration panel.
Thereafter, petitioners MCMC and MCHC filed a Motion Ad Cautelam for the parties to file their
"C. The trial court grievously erred in its conclusion that petitioners MCMC and
Memoranda to support their respective stand on the issue of the validity of the "arbitration clause"
MCHC represent the same interest.
contained in the Employment Agreement. In an order dated December 13, 1996, the trial court denied the
motion of petitioners MCMC and MCHC.
"D. Respondent Zosa is estopped from questioning the validity of the arbitration
clause, including the right of petitioner MCMC to nominate its own arbitrator, which
On January 17, 1997, petitioners MCMC and MCHC filed a petition for certiorari and prohibition under he himself has invoked.
Rule 65 of the Rules of Court with the Court of Appeals, questioning the trial court orders dated August 1,
1996, September 5, 1996, and December 13, 1996.21

31 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
 "II. In any event, the trial court acted without jurisdiction in hearing the case below,
considering that it has no jurisdiction over the nature of the action or suit since controversies in
the election or appointment of officers or managers of a corporation, such as the action brought
by respondent Zosa, fall within the original and exclusive jurisdiction of the Securities and
Exchange Commission.
"III. Contrary to respondent Zosa's allegation, the issue of the trial court's jurisdiction over the
case below has not yet been resolved with finality considering that petitioners have expressly
reserved their right to raise said issue in the instant petition. Moreover, the principle of the law
of the case is not applicable in the instant case.
"IV. Contrary to respondent Zosa's allegation, petitioners MCMC and MCHC are not guilty of
forum shopping.
"V. Contrary to respondent Zosa's allegation, the instant petition for review involves only
questions of law and not of fact."24
We rule against the petitioners.
It is error for the petitioners to claim that the case should fall under the jurisdiction of the Securities and
Exchange Commission [SEC, for brevity]. The controversy does not in anyway involve the
election/appointment of officers of petitioner MCHC, as claimed by petitioners in their assignment of
errors. Respondent Zosa's amended complaint focuses heavily on the illegality of the Employment
Agreement's "Arbitration Clause" initially invoked by him in seeking his termination benefits under
Section 8 of the employment contract. And under Republic Act No. 876, otherwise known as the
"Arbitration Law," it is the regional trial court which exercises jurisdiction over questions relating to
arbitration. We thus advert to the following discussions made by the Court of Appeals, speaking thru
Justice Minerva P. Gonzaga-Reyes,25 in C.A.-G.R. S.P. No. 43059, viz.
"As regards the fourth assigned error, asserting that jurisdiction lies with the SEC, which is
raised for the first time in this petition, suffice it to state that the Amended Complaint squarely
put in issue the question whether the Arbitration Clause is valid and effective between the
parties. Although the controversy which spawned the action concerns the validity of the
termination of the service of a corporate officer, the issue on the validity and effectivity of the
arbitration clause is determinable by the regular courts, and do not fall within the exclusive and
original jurisdiction of the SEC.
"The determination and validity of the agreement is not a matter intrinsically connected with
the regulation and internal affairs of corporations (see Pereyra vs. IAC, 181 SCRA 244; Sales
vs. SEC, 169 SCRA 121); it is rather an ordinary case to be decided in accordance with the
general laws, and do not require any particular expertise or training to interpret and apply
(Viray vs. CA, 191 SCRA 308)."26
Furthermore, the decision of the Court of Appeals in CA-G.R. SP No. 43059 affirming the trial court's
assumption of jurisdiction over the case has become the "law of the case" which now binds the petitioners.
The "law of the case" doctrine has been defined as "a term applied to an established rule that when an
appellate court passes on a question and remands the cause to the lower court for further proceedings, the
question there settled becomes the law of the case upon subsequent appeal."27 To note, the CA's decision
in CA-G.R. SP No. 43059 has already attained finality as evidenced by a Resolution of this Court ordering
entry of judgment of said case, to wit:
"ENTRY OF JUDGMENT
32 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
This is to certify that on September 8, 1997 a decision/resolution rendered in the above-entitled
case was filed in this Office, the dispositive part of which reads as follows:
'G.R. No. 129615. (Magellan Capital Management Corporation, et al. vs. Court of
Appeals, Rolando Zosa, et al.). Considering the petitioner's manifestation dated
August 11, 1997 and withdrawal of intention to file petition for review on certiorari,
the Court Resolved to DECLARE THIS CASE TERMINATED and DIRECT the
Clerk of Court to INFORM the parties that the judgment sought to be reviewed has
become final and executory, no appeal therefore having been timely perfected.'
and that the same has, on September 17, 1997, become final and executory and is hereby
recorded in the Book of Entries of Judgments."28
Petitioners, therefore, are barred from challenging anew, through another remedial measure and in any
other forum, the authority of the regional trial court to resolve the validity of the arbitration clause, lest
they be truly guilty of forum-shopping which the courts consistently consider as a contumacious practice
that derails the orderly administration of justice.
Equally unavailing for the petitioners is the review by this Court, via the instant petition, of the factual
findings made by the trial court that the composition of the panel of arbitrators would, in all probability,
work injustice to respondent Zosa. We have repeatedly stressed that the jurisdiction of this Court in a
petition for review on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only
errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence
on record, or the assailed judgment is based on misapprehension of facts.29
Even if procedural rules are disregarded, and a scrutiny of the merits of the case is undertaken, this Court
finds the trial court's observations on why the composition of the panel of arbitrators should be voided,
incisively correct so as to merit our approval. Thus,
"From the memoranda of both sides, the Court is of the view that the defendants [petitioner]
MCMC and MCHC represent the same interest. There is no quarrel that both defendants are
entirely two different corporations with personalities distinct and separate from each other and
that a corporation has a personality distinct and separate from those persons composing the
corporation as well as from that of any other legal entity to which it may be related.
"But as the defendants [herein petitioner] represent the same interest, it could never be
expected, in the arbitration proceedings, that they would not protect and preserve their own
interest, much less, would both or either favor the interest of the plaintiff. The arbitration law,
as all other laws, is intended for the good and welfare of everybody. In fact, what is being
challenged by the plaintiff herein is not the law itself but the provision of the Employment
Agreement based on the said law, which is the arbitration clause but only as regards the
composition of the panel of arbitrators. The arbitration clause in question provides, thus:
'In the event that any dispute, controversy or claim arise out of or under any
provisions of this Agreement, then the parties hereto agree to submit such dispute,
controversy or claim to arbitration as set forth in this Section and the determination
to be made in such arbitration shall be final and binding. Arbitration shall be
effected by a panel of three arbitrators. The Manager, Employee, and
Corporationshall designate one (1) arbitrator who shall, in turn, nominate and elect
as who among them shall be the chairman of the committee. Any such arbitration,
including the rendering of an arbitration award, shall take place in Metro Manila.
The arbitrators shall interpret this Agreement in accordance with the substantive
laws of the Republic of the Philippines. The arbitrators shall have no power to add
to, subtract from or otherwise modify the terms of this Agreement or to grant
 injunctive relief of any nature. Any judgment upon the award of the arbitrators may
be entered in any court having jurisdiction thereof, with costs of the arbitration to be
borne equally by the parties, except that each party shall pay the fees and expenses
of its own counsel in the arbitration.' (Emphasis supplied).
"From the foregoing arbitration clause, it appears that the two (2) defendants [petitioners]
(MCMC and MCHC) have one (1) arbitrator each to compose the panel of three (3) arbitrators.
As the defendant MCMC is the Manager of defendant MCHC, its decision or vote in the
arbitration proceeding would naturally and certainly be in favor of its employer and the
defendant MCHC would have to protect and preserve its own interest; hence, the two (2) votes
of both defendants (MCMC and MCHC) would certainly be against the lone arbitrator for the
plaintiff [herein defendant]. Hence, apparently, plaintiff [defendant] would never get or receive
justice and fairness in the arbitration proceedings from the panel of arbitrators as provided in
the aforequoted arbitration clause. In fairness and justice to the plaintiff [defendant], the two
defendants (MCMC and MCHC) [herein petitioners] which represent the same interest should
be considered as one and should be entitled to only one arbitrator to represent them in the
arbitration proceedings. Accordingly, the arbitration clause, insofar as the composition of the
panel of arbitrators is concerned should be declared void and of no effect, because the law says,
"Any clause giving one of the parties power to choose more arbitrators than the other is void
and of no effect" (Article 2045, Civil Code).
"The dispute or controversy between the defendants (MCMC and MCHC) [herein petitioners]
and the plaintiff [herein defendant] should be settled in the arbitration proceeding in
accordance with the Employment Agreement, but under the panel of three (3) arbitrators, one
(1) arbitrator to represent the plaintiff, one (1) arbitrator to represent both defendants (MCMC
and MCHC) [herein petitioners] and the third arbitrator to be chosen by the plaintiff [defendant
Zosa] and defendants [petitioners].
"xxx xxx xxx"30
In this connection, petitioners' attempt to put respondent in estoppel in assailing the arbitration clause must
be struck down. For one, this issue of estoppel, as likewise noted by the Court of Appeals, found its way
for the first time only on appeal. Well-settled is the rule that issues not raised below cannot be resolved on
review in higher courts.31 Secondly, employment agreements such as the one at bar are usually contracts of
adhesion. Any ambiguity in its provisions is generally resolved against the party who drafted the
document. Thus, in the relatively recent case of Phil. Federation of Credit Cooperatives, Inc. (PFCCI)
and Fr. Benedicto Jayoma vs. NLRC and Victoria Abril,32 we had the occasion to stress that "where a
contract of employment, being a contract of adhesion, is ambiguous, any ambiguity therein should be
construed strictly against the party who prepared it." And, finally, respondent Zosa never submitted
himself to arbitration proceedings (as there was none yet) before bewailing the composition of the panel of
arbitrators. He in fact, lost no time in assailing the "arbitration clause" upon realizing the inequities that
may mar the arbitration proceedings if the existing line-up of arbitrators remained unchecked.
We need only to emphasize in closing that arbitration proceedings are designed to level the playing field
among the parties in pursuit of a mutually acceptable solution to their conflicting claims. Any arrangement
or scheme that would give undue advantage to a party in the negotiating table is anathema to the very
purpose of arbitration and should, therefore, be resisted.
WHEREFORE, premises considered, the petition is hereby DISMISSED and the decision of the trial court
dated July 18, 1997 is AFFIRMED.
SO ORDERED.
[G.R. No. 161957. February 28, 2005]
33 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
JORGE GONZALES and PANEL OF ARBITRATORS, petitioners, vs. CLIMAX MINING LTD.,
CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING
INC., respondents.
DECISION
TINGA, J.:
Petitioner Jorge Gonzales, as claimowner of mineral deposits located within the Addendum Area of
Influence in Didipio, in the provinces of Quirino and Nueva Vizcaya, entered into a co-production, joint
venture and/or production-sharing letter-agreement designated as the May 14, 1987 Letter of Intent with
Geophilippines, Inc, and Inmex Ltd. Under the agreement, petitioner, as claimowner, granted to
Geophilippines, Inc. and Inmex Ltd. collectively, the exclusive right to explore and survey the mining
claims for a period of thirty-six (36) months within which the latter could decide to take an operating
agreement on the mining claims and/or develop, operate, mine and otherwise exploit the mining claims
and market any and all minerals that may be derived therefrom.
On 28 February 1989, the parties to the May 14, 1987 Letter of Intent renegotiated the same into
the February 28, 1989 Agreement whereby the exploration of the mining claims was extended for another
period of three years.
On 9 March 1991, petitioner Gonzales, Arimco Mining Corporation, Geophilippines Inc., Inmex
Ltd., and Aumex Philippines, Inc. signed a document designated as the Addendum to the May 14, 1987
Letter of Intent and February 28, 1989 Agreement with Express Adhesion Thereto (hereafter,
the Addendum Contract).[1] Under the Addendum Contract, Arimco Mining Corporation would apply to
the Government of the Philippines for permission to mine the claims as the Governments contractor under
a Financial and Technical Assistance Agreement (FTAA). On 20 June 1994, Arimco Mining Corporation
obtained the FTAA[2] and carried out work under the FTAA.
Respondents executed the Operating and Financial Accommodation Contract[3] (between Climax-
Arimco Mining Corporation and Climax Mining Ltd., as first parties, and Australasian Philippines Mining
Inc., as second party) dated 23 December 1996 and Assignment, Accession Agreement[4] (between Climax-
Arimco Mining Corporation and Australasian Philippines Mining Inc.) dated 3 December 1996.
Respondent Climax Mining Corporation (Climax) and respondent Australasian Philippines Mining Inc.
(APMI) entered into a Memorandum of Agreement[5] dated 1 June 1991 whereby the former transferred its
FTAA to the latter.
On 8 November 1999, petitioner Gonzales filed before the Panel of Arbitrators, Region II, Mines
and Geosciences Bureau of the Department of Environment and Natural Resources, against respondents
Climax-Arimco Mining Corporation (Climax-Arimco), Climax, and APMI,[6] a Complaint[7] seeking the
declaration of nullity or termination of the Addendum Contract, the FTAA, the Operating and Financial
Accommodation Contract, the Assignment, Accession Agreement, and the Memorandum of
Agreement. Petitioner Gonzales prayed for an unspecified amount of actual and exemplary damages plus
attorneys fees and for the issuance of a temporary restraining order and/or writ of preliminary injunction
to restrain or enjoin respondents from further implementing the questioned agreements. He sought said
releifs on the grounds of FRAUD, OPPRESSION and/or VIOLATION of Section 2, Article XII of the
CONSTITUTION perpetrated by these foreign RESPONDENTS, conspiring and confederating with one
another and with each other.[8]
On 21 February 2001, the Panel of Arbitrators dismissed the Complaint for lack of jurisdiction.
Petitioner moved for reconsideration and this was granted on 18 October 2001, the Panel believing that the
case involved a dispute involving rights to mining areas and a dispute involving surface owners, occupants
and claim owners/concessionaires. According to the Panel, although the issue raised in
the Complaint appeared to be purely civil in nature and should be within the jurisdiction of the regular
courts, a ruling on the validity of the assailed contracts would result to the grant or denial of mining rights
over the properties; therefore, the question on the validity of the contract amounts to a mining conflict or
dispute. Hence, the Panel granted the Motion for Reconsideration with regard to the issues of nullity,
termination, withdrawal or damages, but with regard to the constitutionality of the Addendum
Agreement and FTAA, it held that it had no jurisdiction.[9]
Respondents filed their motion for reconsideration but this was denied on 25 June 2002. The Panel
of Arbitrators maintained that there was a mining dispute between the parties since the subject matter of
the Complaint arose from contracts between the parties which involve the exploration and exploitation of
minerals over the disputed area.[10]
Respondents assailed the orders of the Panel of Arbitrators via a petition for certiorari before the
Court of Appeals.
On 30 July 2003, the Court of Appeals granted the petition, declaring that the Panel of Arbitrators
did not have jurisdiction over the complaint filed by petitioner.[11] The jurisdiction of the Panel of
Arbitrators, said the Court of Appeals, is limited only to the resolution of mining disputes, defined as those
which raise a question of fact or matter requiring the technical knowledge and experience of mining
authorities. It was found that the complaint alleged fraud, oppression and violation of the Constitution,
which called for the interpretation and application of laws, and did not involve any mining dispute. The
Court of Appeals also observed that there were no averments relating to particular acts constituting fraud
and oppression. It added that since the Addendum Contract was executed in 1991, the action to annul it
should have been brought not later than 1995, as the prescriptive period for an action for annulment is four
years from the time of the discovery of the fraud.[12] When petitioner filed his complaint before the Panel
in 1999, his action had already prescribed. Also, the Court of Appeals noted that fraud and duress only
make a contract voidable,[13] not inexistent, hence the contract remains valid until annulled. The Court of
Appeals was of the opinion that the petition should have been settled through arbitration under Republic
Act No. 876 (The Arbitration Law) as stated in Clause 19.1 of the Addendum Contract. The Court of
Appeals therefore declared as invalid the orders dated 18 October 2001 and 25 June 2002 issued by the
Panel of Arbitrators. On 28 January 2004, the Court of Appeals denied petitioners motion for
reconsideration for lack of merit.[14]
Petitioner filed on 22 March 2004 this Petition for Review on Certiorari Under Rule 45 assailing
the decision and resolution of the Court of Appeals. Petitioner raises the following issues:
A.
PROCEDURAL GROUND
THE HONORABLE COURT OF APPEALS SHOULD HAVE SUMMARILY DISMISSED
RESPONDENTS PETITION A QUO FOR FAILURE TO COMPLY WITH PROCEDURAL
REQUIREMENTS.
i.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO DESPITE
RESPONDENTS FAILURE TO COMPLY WITH THE RULES ON DISCLOSURE IN THE
VERIFICATION AND CERTIFICATION PORTION OF THEIR PETITION A QUO.
ii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO FILED BY
RESPONDENT CLIMAX DESPITE THE LACK OF THE REQUISITE AUTHORITY TO FILE THE
PETITION A QUO.
B.
34 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
SUBSTANTIVE GROUND
THE HONORABLE COURT OF APPEALS ERRED IN GRANTING THE PETITION A QUO FILED
BY RESPONDENTS AND IN DENYING MOTION FOR RECONSIDERATION FILED BY
PETITIONER FOR UTTER LACK OF BASIS IN FACT AND IN LAW.
i.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER CEDED HIS CLAIMS
OVER THE MINERAL DEPOSITS LOCATED WITHIN THE ADDENDUM AREA OF INFLUENCE.
ii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE PANEL OF ARBITRATORS IS
BEREFT OF JURISDICTION OVER THE SUBJECT MATTER OF CASE NO. 058.
iii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE COMPLAINT FILED BY THE
PETITIONER FAILED TO ALLEGE ULTIMATE FACTS OR PARTICULARS OF FRAUD.
iv.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER AND RESPONDENTS
SHOULD SUBMIT TO ARBITRATION UNDER R.A. 876.
v.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE ACTION TO DECLARE THE
NULLITY OF THE ADDENDUM CONTRACT, FTAA, OFAC AND AAAA ON THE GROUND OF
FRAUD HAS PRESCRIBED.
The issues for resolution in this petition for review are:
(a) Whether there was forum-shopping on the part of respondents for their failure to disclose to
this Court their filing of a Petition to Compel for Arbitration before the Regional Trial Court of Makati
City, Branch 148, which is currently pending.
(b) Whether counsel for respondent Climax had authority to file the petition for certiorari before
the Court of Appeals considering that the signor of the petition for certioraris Verification and
Certification of Non-forum Shopping was not authorized to sign the same in behalf of respondent
Climax.
(c) Whether the complaint filed by petitioner raises a mining dispute over which the Panel of
Arbitrators has jurisdiction, or a judicial question which should properly be brought before the regular
courts.
 (d) Whether the dispute between the parties should be brought for arbitration under Rep. Act No.
876.
Let us deal first with procedural matters.
Petitioner claims that respondents are guilty of forum-shopping for failing to disclose before this
Court that they had filed a Petition to Compel for Arbitration before the RTC of Makati City. However, it
cannot be determined from petitioners mere allegations in the Petition that the Petition to Compel for
Arbitration instituted by respondent Climax-Arimco, involves related causes of action and the grant of the
same or substantially the same reliefs as those involved in the instant case. Petitioner did not attach copies
of the Petition to Compel for Arbitration or any order or resolution of the RTC of Makati City related to
that case.
Furthermore, it can be gleaned from the nature of the two actions that the issues in the case before
the RTC of Makati City and in the petition for certiorari before the Court of Appeals are different. A
petition for certiorari raises the issue of whether or not there was grave abuse of discretion, while
the Petition to Compel for Arbitration seeks the implementation of the arbitration clause in the agreement
between the parties.
Petitioner next alleges that there was no authority granted by respondent Climax to the law firm of
Sycip Salazar Hernandez & Gatmaitan to file the petition before the Court of Appeals. There is allegedly
no Secretarys Certificate from respondent Climax attached to the petition. The Verification and
Certification only contains a statement made by one Marianne M. Manzanas that she is also the authorized
representative of [respondent Climax] without presenting further proof of such authority. Hence, it is
argued that as to respondent Climax, the petition filed before the Court of Appeals is an unauthorized act
and the assailed orders of the Panel of Arbitrators have become final.
Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit, together with the
petition, a sworn certification of non-forum shopping, and failure to comply with this requirement is
sufficient ground for dismissal of the petition. The requirement that petitioner should sign the certificate of
non-forum shopping applies even to corporations, the Rules of Court making no distinction between
natural and juridical persons. The signatory in the case of the corporation should be a duly authorized
director or officer of the corporation who has knowledge of the matter being certified.[15] If, as in this case,
the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the
certification against forum-shopping is necessary. A certification not signed by a duly authorized person
renders the petition subject to dismissal.[16]
On this point, we have to agree with petitioner. There appears to be no subsequent compliance with
the requirement to attach a board resolution authorizing the signor Marianne M. Manzanas to file the
petition in behalf of respondent Climax. Respondent also failed to refute this in its Comment.[17] However,
this latter issue becomes irrelevant in the light of our decision to deny this petition for review for lack of
jurisdiction by the Panel of Arbitrators over the complaint filed by petitioner, as will be discussed below.
We now come to the meat of the case which revolves mainly around the question of jurisdiction by
the Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over the complaint for declaration
of nullity and/or termination of the subject contracts on the ground of fraud, oppression and violation of
the Constitution? This issue may be distilled into the more basic question of whether the Complaint raises
a mining dispute or a judicial question.
A judicial question is a question that is proper for determination by the courts, as opposed to a moot
question or one properly decided by the executive or legislative branch.[18] A judicial question is raised
when the determination of the question involves the exercise of a judicial function; that is, the question
involves the determination of what the law is and what the legal rights of the parties are with respect to the
matter in controversy.[19]
On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b) mineral
agreements, FTAAs, or permits, and (c) surface owners, occupants and claimholders/concessionaires.
[20]
Under Republic Act No. 7942 (otherwise known as the Philippine Mining Act of 1995), the Panel of
Arbitrators has exclusive and original jurisdiction to hear and decide these mining disputes.[21] The Court
of Appeals, in its questioned decision, correctly stated that the Panels jurisdiction is limited only to those
35 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
mining disputes which raise questions of fact or matters requiring the application of technological
knowledge and experience.[22]
In Pearson v. Intermediate Appellate Court,[23] this Court observed that the trend has been to make
the adjudication of mining cases a purely administrative matter.[24]Decisions[25] of the Supreme Court on
mining disputes have recognized a distinction between (1) the primary powers granted by pertinent
provisions of law to the then Secretary of Agriculture and Natural Resources (and the bureau directors) of
an executive or administrative nature, such as granting of license, permits, lease and contracts, or
approving, rejecting, reinstating or canceling applications, or deciding conflicting applications, and (2)
controversies or disagreements of civil or contractual nature between litigants which are questions of a
judicial nature that may be adjudicated only by the courts of justice. This distinction is carried on even in
Rep. Act No. 7942.
The Complaint charged respondents with disregarding and ignoring the provisions of
the Addendum Contract, violating the purpose and spirit of the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement, and acting in a fraudulent and oppressive manner against
petitioner and practicing fraud and deception against the Government.[26]Petitioner alleged in
his Complaint that under the original agreements (the May 14, 1987 Letter of Intent and February 28,
1989 Agreement) respondent Climax-Arimco had committed to complete the Bankable Feasibility Study
by 28 February 1992, but the same was not accomplished. Instead, respondent Climax-Arimco, through
false and insidious representations and machinations by alleging technical and financial capacity, induced
petitioner to enter into the Addendum Contract and the FTAA in order to repeatedly extend the option
period within which to conduct the feasibility study. In essence, petitioner alleges that respondents,
conspiring and confederating with one another, misrepresented under the Addendum Contract and FTAA
that respondent Climax-Arimco possessed financial and technical capacity to put the project into
commercial production, when in truth it had no such qualification whatsoever to do so. By so doing,
respondents have allegedly caused damage not only to petitioner but also to the Republic of the
Philippines.[27]
It is apparent that the Panel of Arbitrators is bereft of jurisdiction over the Complaint filed by
petitioner. The basic issue in petitioners Complaint is the presence of fraud or misrepresentation allegedly
attendant to the execution of the Addendum Contract and the other contracts emanating from it, such that
the contracts are rendered invalid and not binding upon the parties. It avers that petitioner was misled by
respondents into agreeing to the Addendum Contract. This constitutes fraud which vitiated petitioners
consent, and under Article 1390 of the Civil Code, is one of the grounds for the annulment of a voidable
contract. Voidable or annullable contracts, before they are set aside, are existent, valid, and binding, and
are effective and obligatory between the parties.[28] They can be ratified.[29]
Petitioner insists that the Complaint is actually one for the declaration of nullity of void contracts.
He argues that respondents, by their lack of financial and technical competence to carry out the mining
project, do not qualify to enter into a co-production, joint venture or production sharing agreement with
the Government, in circumvention of and in patent violation of the spirit and purpose of the Constitution,
particularly Section 2, Article XII thereof. Petitioner relies on the Civil Code for support:[30]
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;
....
(7) Those expressly prohibited or declared void by law.
....
Petitioner asserts that for circumventing and being in patent violation of the Constitution, the Addendum WHEREFORE, in view of the foregoing, the Petition for Review on Certiorari Under Rule 45 is
Contract, the FTAA and the other contracts are void contracts. As such, they do not produce any effect and DENIED. The Orders dated 18 October 2001 and 25 June 2002 of the Panel of Arbitrators are SET
cannot be ratified. ASIDE. Costs against petitioner Jorge Gonzales.

However, whether the case involves void or voidable contracts is still a judicial question. It may, in SO ORDERED.
some instances, involve questions of fact especially with regard to the determination of the circumstances
of the execution of the contracts. But the resolution of the validity or voidness of the contracts remains a
legal or judicial question as it requires the exercise of judicial function. It requires the ascertainment of ABS-CBN BROADCASTING G.R. No. 169332
what laws are applicable to the dispute, the interpretation and application of those laws, and the rendering
of a judgment based thereon. Clearly, the dispute is not a mining conflict. It is essentially judicial. The CORPORATION,
complaint was not merely for the determination of rights under the mining contracts since the very validity Petitioner, Present:
of those contracts is put in issue. PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
The Complaint is not about a dispute involving rights to mining areas, nor is it a dispute involving - v e r s u s - CORONA,
claimholders or concessionaires. The main question raised was the validity of the Addendum Contract, the AZCUNA and
FTAA and the subsequent contracts. The question as to the rights of petitioner or respondents to the LEONARDO-DE CASTRO, JJ.
mining area pursuant to these contracts, as well as the question of whether or not petitioner had ceded his WORLD INTERACTIVE
mining claims in favor of respondents by way of execution of the questioned contracts, is merely corollary NETWORK SYSTEMS (WINS)
to the main issue, and may not be resolved without first determining the main issue. JAPAN CO., LTD.,
Respondent. Promulgated:
The Complaint is also not what is contemplated by Rep. Act No. 7942 when it says the dispute February 11, 2008
should involve FTAAs. The Complaint is not exclusively within the jurisdiction of the Panel of Arbitrators
just because, or for as long as, the dispute involves an FTAA. The Complaint raised the issue of the x--------------------------------------------------x
constitutionality of the FTAA, which is definitely a judicial question. The question of constitutionality is
exclusively within the jurisdiction of the courts to resolve as this would clearly involve the exercise of DECISION
judicial power. The Panel of Arbitrators does not have jurisdiction over such an issue since it does not
involve the application of technical knowledge and expertise relating to mining. This the Panel of CORONA, J.:
Arbitrators has even conceded in its Orders dated 18 October 2001 and 25 June 2002. At this juncture, it is
worthy of note that in a case,[31] which was resolved only on 1 December 2004, this Court upheld the This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside the February
validity of the FTAA entered into by the Republic of the Philippines and WMC (Philippines), Inc. and 16, 2005 decision[1] and August 16, 2005 resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No.
constitutionality of Rep. Act No. 7942 and DENR Administrative Order 96-40.[32] In fact, the Court took 81940.
the case on an original petition, recognizing the exceptional character of the situation and the paramount
public interest involved, as well as the necessity for a ruling to put an end to the uncertainties plaguing the On September 27, 1999, petitioner ABS-CBN Broadcasting Corporation entered into a licensing
mining industry and the affected communities as a result of doubts case upon the constitutionality and agreement with respondent World Interactive Network Systems (WINS) Japan Co., Ltd., a foreign
validity of the Mining Act, the subject FTAA and future FTAAs, and the need to avert a multiplicity of corporation licensed under the laws of Japan. Under the agreement, respondent was granted the exclusive
suits.[33] 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
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the
to respondent which the latter received through its decoders and distributed to its subscribers.
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
A dispute arose between the parties when petitioner accused respondent of inserting nine episodes of
when one of the parties repudiates the existence or validity of such contract or agreement on the ground of
WINS WEEKLY, a weekly 35-minute community news program for Filipinos in Japan, into the TFC
fraud or oppression as in this case. The validity of the contract cannot be subject of arbitration
programming from March to May 2002.[3] Petitioner claimed that these were unauthorized insertions
proceedings. Allegations of fraud and duress in the execution of a contract are matters within the
constituting a material breach of their agreement. Consequently, on May 9, 2002,[4] petitioner notified
jurisdiction of the ordinary courts of law. These questions are legal in nature and require the application
respondent of its intention to terminate the agreement effective June 10, 2002.
and interpretation of laws and jurisprudence which is necessarily a judicial function.

Petitioner also disagrees with the Court of Appeals ruling that the case should be brought for
arbitration under Rep. Act 876, pursuant to the arbitration clause in the Addendum Contract which states
that [a]ll disputes arising out of or in connection with the Contract, which cannot be settled amicably
among the Parties, shall finally be settled under R.A. 876. He points out that respondents Climax and
APMI are not parties to the Addendum Contract and are thus not bound by the arbitration clause in said
contract.
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]

We agree that the case should not be brought under the ambit of the Arbitration Law, but for a The parties appointed Professor Alfredo F. Tadiar to act as sole arbitrator. They stipulated on the following
different reason. The question of validity of the contract containing the agreement to submit to arbitration issues in their terms of reference (TOR)[6]:
will affect the applicability of the arbitration clause itself. A party cannot rely on the contract and claim
rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are 1. Was the broadcast of WINS WEEKLY by the claimant duly authorized by
enjoined from taking inconsistent positions. As previously discussed, the complaint should have been filed the respondent [herein petitioner]?
before the regular courts as it involved issues which are judicial in nature.

36 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
 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.[7] 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]
On February 16, 2005, the CA rendered the assailed decision dismissing ABS-CBNs 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.
37 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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 arbitrators 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 Appeals[10] 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:
 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
38 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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)
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 certiorari[17] 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 Company[19] 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 petitioners 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 arbitrators
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 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.
[G.R. No. 141833. March 26, 2003]
39 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
LM POWER ENGINEERING CORPORATION, petitioner, vs. CAPITOL INDUSTRIAL
CONSTRUCTION GROUPS, INC., respondent.
DECISION
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation, negotiation and
conciliation -- are encouraged by the Supreme Court. By enabling parties to resolve their disputes
amicably, they provide solutions that are less time-consuming, less tedious, less confrontational, and more
productive of goodwill and lasting relationships.[1]
The Case
Before us is a Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court, seeking to
set aside the January 28, 2000 Decision of the Court of Appeals[3] (CA) in CA-GR CV No. 54232. The
dispositive portion of the Decision reads as follows:
WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are ORDERED
to present their dispute to arbitration in accordance with their Sub-contract Agreement.The surety bond
posted by [respondent] is [d]ischarged.[4]
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol
Industrial Construction Groups Inc. entered into a Subcontract Agreement involving electrical work at the
Third Port of Zamboanga.[5]
On April 25, 1985, respondent took over some of the work contracted to petitioner.[6] Allegedly, the
latter had failed to finish it because of its inability to procure materials. [7]
Upon completing its task under the Contract, petitioner billed respondent in the amount
of P6,711,813.90.[8] Contesting the accuracy of the amount of advances and billable accomplishments
listed by the former, the latter refused to pay. Respondent also took refuge in the termination clause of the
Agreement.[9] That clause allowed it to set off the cost of the work that petitioner had failed to undertake --
due to termination or take-over -- against the amount it owed the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati (Branch 141)
a Complaint[10] for the collection of the amount representing the alleged balance due it under the
Subcontract. Instead of submitting an Answer, respondent filed a Motion to Dismiss,[11] alleging that the
Complaint was premature, because there was no prior recourse to arbitration.
In its Order[12] dated September 15, 1987, the RTC denied the Motion on the ground that the dispute
did not involve the interpretation or the implementation of the Agreement and was, therefore, not covered
by the arbitral clause.[13]
After trial on the merits, the RTC[14] ruled that the take-over of some work items by respondent was
not equivalent to a termination, but a mere modification, of the Subcontract. The latter was ordered to give
full payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The
appellate court held as arbitrable the issue of whether respondents take-over of some work items had been
intended to be a termination of the original contract under Letter K of the Subcontract. It ruled likewise on
two other issues: whether petitioner was liable under the warranty clause of the Agreement, and whether it
should reimburse respondent for the work the latter had taken over.[15]
 Hence, this Petition.[16]
The Issues
In its Memorandum, petitioner raises the following issues for the Courts consideration:
A WORK within the period set forth in Annex C hereof. NO time extension shall be granted by
Whether or not there exist[s] a controversy/dispute between petitioner and respondent regarding the
interpretation and implementation of the Sub-Contract Agreement dated February 22, 1983 that requires
prior recourse to voluntary arbitration;
B
In the affirmative, whether or not the requirements provided in Article III [1] of CIAC Arbitration Rules
regarding request for arbitration ha[ve] been complied with[.][17]
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the implementation of the
Agreement. Thus, without having to resort to prior arbitration, it is entitled to collect the value of the
services it rendered through an ordinary action for the collection of a sum of money from respondent. On
the other hand, the latter contends that there is a need for prior arbitration as provided in the
Agreement. This is because there are some disparities between the parties positions regarding the extent of
the work done, the amount of advances and billable accomplishments, and the set off of expenses incurred
by respondent in its take-over of petitioners work.
We side with respondent. Essentially, the dispute arose from the parties ncongruent positions on
whether certain provisions of their Agreement could be applied to the facts.The instant case involves
technical discrepancies that are better left to an arbitral body that has expertise in those areas. In any
event, the inclusion of an arbitration clause in a contract does not ipso facto divest the courts of
jurisdiction to pass upon the findings of arbitral bodies, because the awards are still judicially reviewable
under certain conditions.[18]
In the case before us, the Subcontract has the following arbitral clause:
6. The Parties hereto agree that any dispute or conflict as regards to interpretation and
implementation of this Agreement which cannot be settled between [respondent] and
[petitioner] amicably shall be settled by means of arbitration x x x.[19]
Clearly, the resolution of the dispute between the parties herein requires a referral to the provisions
of their Agreement. Within the scope of the arbitration clause are discrepancies as to the amount of
advances and billable accomplishments, the application of the provision on termination, and the
consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they differ on the following questions:
(1) Did a take-over/termination occur? (2) May the expenses incurred by respondent in the take-over be
set off against the amounts it owed petitioner? (3) How much were the advances and billable
accomplishments?
40 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
The resolution of the foregoing issues lies in the interpretation of the provisions of the
Agreement. According to respondent, the take-over was caused by petitioners delay in completing the
work. Such delay was in violation of the provision in the Agreement as to time schedule:
G. TIME SCHEDULE
[Petitioner] shall adhere strictly to the schedule related to the WORK and complete the
[respondent] to [petitioner] unless a corresponding time extension is granted by [the Ministry
of Public Works and Highways] to the CONSORTIUM.[20]
Because of the delay, respondent alleges that it took over some of the work contracted to petitioner,
pursuant to the following provision in the Agreement:
K. TERMINATION OF AGREEMENT
[Respondent] has the right to terminate and/or take over this Agreement for any of the
following causes:
xxxxxxxxx
6. If despite previous warnings by [respondent], [petitioner] does not execute the
WORK in accordance with this Agreement, or persistently or flagrantly neglects to
carry out [its] obligations under this Agreement.[21]
Supposedly, as a result of the take-over, respondent incurred expenses in excess of the contracted
price. It sought to set off those expenses against the amount claimed by petitioner for the work the latter
accomplished, pursuant to the following provision:
If the total direct and indirect cost of completing the remaining part of the WORK exceed the sum which
would have been payable to [petitioner] had it completed the WORK, the amount of such excess [may be]
claimed by [respondent] from either of the following:
1. Any amount due [petitioner] from [respondent] at the time of the termination of this Agreement.[22]
The issue as to the correct amount of petitioners advances and billable accomplishments involves
an evaluation of the manner in which the parties completed the work, the extent to which they did it, and
the expenses each of them incurred in connection therewith. Arbitrators also need to look into the
computation of foreign and local costs of materials, foreign and local advances, retention fees and letters
of credit, and taxes and duties as set forth in the Agreement. These data can be gathered from a review of
the Agreement, pertinent portions of which are reproduced hereunder:
C. CONTRACT PRICE AND TERMS OF PAYMENT
xxxxxxxxx
All progress payments to be made by [respondent] to [petitioner] shall be subject to a
retention sum of ten percent (10%) of the value of the approved quantities. Any claims by
[respondent] on [petitioner] may be deducted by [respondent] from the progress payments
and/or retained amount. Any excess from the retained amount after deducting [respondents]
claims shall be released by [respondent] to [petitioner] after the issuance of [the Ministry of
Public Works and Highways] of the Certificate of Completion and final acceptance of the
WORK by [the Ministry of Public Works and Highways].
xxxxxxxxx
D. IMPORTED MATERIALS AND EQUIPMENT
 [Respondent shall open the letters of credit for the importation of equipment and materials
listed in Annex E hereof after the drawings, brochures, and other technical data of each
items in the list have been formally approved by [the Ministry of Public Works and
Highways]. However, petitioner will still be fully responsible for all imported materials and
equipment.
future controversy to arbitration, it is not necessary for the parties to enter into a submission agreement
before the claimant may invoke the jurisdiction of CIAC.
The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91 and 3-93.
[31]

All expenses incurred by [respondent], both in foreign and local currencies in connection
with the opening of the letters of credit shall be deducted from the Contract Prices.
xxxxxxxxx
N. OTHER CONDITIONS
xxxxxxxxx
2. All customs duties, import duties, contractors taxes, income taxes, and other taxes that
may be required by any government agencies in connection with this Agreement shall be for
the sole account of [petitioner].[23]
Being an inexpensive, speedy and amicable method of settling disputes,[24] arbitration -- along with
mediation, conciliation and negotiation -- is encouraged by the Supreme Court. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. [25] It
is thus regarded as the wave of the future in international civil and commercial disputes.[26] Brushing aside
a contractual agreement calling for arbitration between the parties would be a step backward. [27]
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods,
courts should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation
that covers the asserted dispute, an order to arbitrate should be granted.[28] Any doubt should be resolved in
favor of arbitration.[29]
Second Issue:
Prior Request for Arbitration
The difference in the two provisions was clearly explained in China Chang Jiang Energy
Corporation (Philippines) v. Rosal Infrastructure Builders et al.[32] (an extended unsigned Resolution) and
reiterated in National Irrigation Administration v. Court of Appeals,[33] from which we quote thus:
Under the present Rules of Procedure, for a particular construction contract to fall within the jurisdiction
of CIAC, it is merely required that the parties agree to submit the same to voluntary arbitration Unlike in
the original version of Section 1, as applied in the Tesco case, the law as it now stands does not provide
that the parties should agree to submit disputes arising from their agreement specifically to the CIAC for
the latter to acquire jurisdiction over the same. Rather, it is plain and clear that as long as the parties agree
to submit to voluntary arbitration, regardless of what forum they may choose, their agreement will fall
within the jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties
will not be precluded from electing to submit their dispute before the CIAC because this right has been
vested upon each party by law, i.e., E.O. No. 1008.[34]
Clearly, there is no more need to file a request with the CIAC in order to vest it with jurisdiction to
decide a construction dispute.
The arbitral clause in the Agreement is a commitment on the part of the parties to submit to
arbitration the disputes covered therein. Because that clause is binding, they are expected to abide by it in
good faith.[35] And because it covers the dispute between the parties in the present case, either of them may
compel the other to arbitrate.[36]
Since petitioner has already filed a Complaint with the RTC without prior recourse to arbitration, the
proper procedure to enable the CIAC to decide on the dispute is to request the stay or suspension of such action,
as provided under RA 876 [the Arbitration Law].[37]
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal SO ORDERED.
request for arbitration with the Construction Industry Arbitration Commission (CIAC) precluded the latter
from acquiring jurisdiction over the question. To bolster its position, petitioner even cites our ruling
in Tesco Services Incorporated v. Vera.[30] We are not persuaded.

Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration indeed
required the submission of a request for arbitration, as follows:

SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to have recourse
to arbitration by the Construction Industry Arbitration Commission (CIAC) shall submit its Request for
Arbitration in sufficient copies to the Secretariat of the CIAC; PROVIDED, that in the case of government
construction contracts, all administrative remedies available to the parties must have been exhausted
within 90 days from the time the dispute arose.

Tesco was promulgated by this Court, using the foregoing provision as reference.

On the other hand, Section 1 of Article III of the new Rules of Procedure Governing Construction
Arbitration has dispensed with this requirement and recourse to the CIAC may now be availed of
whenever a contract contains a clause for the submission of a future controversy to arbitration, in this
wise:

SECTION 1. Submission to CIAC Jurisdiction An arbitration clause in a construction contract or a

submission to arbitration of a construction dispute shall be deemed an agreement to submit an existing or
future controversy to CIAC jurisdiction, notwithstanding the reference to a different arbitration institution
or arbitral body in such contract or submission. When a contract contains a clause for the submission of a

41 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
KOREA TECHNOLOGIES CO., G.R. No. 143581
LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in civil and
commercial disputes. Arbitration along with mediation, conciliation, and negotiation, being inexpensive,
speedy and less hostile methods have long been favored by this Court. The petition before us puts at issue
an arbitration clause in a contract mutually agreed upon by the parties stipulating that they would submit
themselves to arbitration in a foreign country. Regrettably, instead of hastening the resolution of their
dispute, the parties wittingly or unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged
in the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants, while
private respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby KOGIES would set
up an LPG Cylinder Manufacturing Plant in Carmona, Cavite.The contract was executed in
the Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment for Contract No. KLP-
970301 dated March 5, 1997[2]amending the terms of payment. The contract and its amendment stipulated
that KOGIES will ship the machinery and facilities necessary for manufacturing LPG cylinders for which
PGSMC would pay USD 1,224,000. KOGIES would install and initiate the operation of the plant for
which PGSMC bound itself to pay USD 306,000 upon the plants production of the 11-kg. LPG cylinder
samples. Thus, the total contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease[3] with Worth Properties, Inc.
(Worth) for use of Worths 5,079-square meter property with a 4,032-square meter warehouse building to
house the LPG manufacturing plant. The monthly rental was PhP 322,560 commencing on January 1,
1998 with a 10% annual increment clause. Subsequently, the machineries, equipment, and facilities for the
manufacture of LPG cylinders were shipped, delivered, and installed in the Carmona plant. PGSMC paid
KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January 22, 1998, after the
installation of the plant, the initial operation could not be conducted as PGSMC encountered financial
difficulties affecting the supply of materials, thus forcing the parties to agree that KOGIES would be
deemed to have completely complied with the terms and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial operation of the plant,
PGSMC issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998 for PhP
4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998 for PhP 4,500,000.[5]
42 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
When KOGIES deposited the checks, these were dishonored for the reason PAYMENT
STOPPED. Thus, on May 8, 1998, KOGIES sent a demand letter[6] to PGSMC threatening criminal action
for violation of Batas Pambansa Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs
President faxed a letter dated May 7, 1998 to KOGIES President who was then staying at
a Makati City hotel. She complained that not only did KOGIES deliver a different brand of hydraulic
press from that agreed upon but it had not delivered several equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded
but the payments were stopped for reasons previously made known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract
dated March 5, 1997 on the ground that KOGIES had altered the quantity and lowered the quality of the
machineries and equipment it delivered to PGSMC, and that PGSMC would dismantle and transfer the
machineries, equipment, and facilities installed in the Carmona plant. Five days later, PGSMC filed before
the Office of the Public Prosecutor an Affidavit-Complaint for Estafadocketed as I.S. No. 98-03813
against Mr. Dae Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not
unilaterally rescind their contract nor dismantle and transfer the machineries and equipment on mere
imagined violations by KOGIES. It also insisted that their disputes should be settled by arbitration as
agreed upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1,
1998 letter threatening that the machineries, equipment, and facilities installed in the plant would be
dismantled and transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an Application for
Arbitration before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15
of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case
No. 98-117[8] against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted a
temporary restraining order (TRO) on July 4, 1998, which was subsequently extended until July 22,
1998. In its complaint, KOGIES alleged that PGSMC had initially admitted that the checks that were
stopped were not funded but later on claimed that it stopped payment of the checks for the reason that
their value was not received as the former allegedly breached their contract by altering the quantity and
lowering the quality of the machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22, 1998
Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as amended, by
unilaterally rescinding the contract without resorting to arbitration. KOGIES also asked that PGSMC be
restrained from dismantling and transferring the machinery and equipment installed in the plant which the
latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not
entitled to the TRO since Art. 15, the arbitration clause, was null and void for being against public policy
as it ousts the local courts of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim[9] asserting that it
had the full right to dismantle and transfer the machineries and equipment because it had paid for them in
full as stipulated in the contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the
checks for failing to completely install and make the plant operational; and that KOGIES was liable for
damages amounting to PhP 4,500,000 for altering the quantity and lowering the quality of the machineries
and equipment. Moreover, PGSMC averred that it has already paid PhP 2,257,920 in rent (covering
January to July 1998) to Worth and it was not willing to further shoulder the cost of renting the premises
of the plant considering that the LPG cylinder manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order
denying the application for a writ of preliminary injunction, reasoning that PGSMC had paid KOGIES
USD 1,224,000, the value of the machineries and equipment as shown in the contract such that KOGIES
no longer had proprietary rights over them. And finally, the RTC held that Art. 15 of the Contract as
amended was invalid as it tended to oust the trial court or any other court jurisdiction over any dispute that
may arise between the parties. KOGIES prayer for an injunctive writ was denied.[10] The dispositive
portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this Court believes and so
holds that no cogent reason exists for this Court to grant the writ of preliminary
injunction to restrain and refrain defendant from dismantling the machineries and
facilities at the lot and building of Worth Properties, Incorporated at Carmona,
Cavite and transfer the same to another site: and therefore denies plaintiffs
application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to Counterclaim. [11] KOGIES
denied it had altered the quantity and lowered the quality of the machinery, equipment, and facilities it
delivered to the plant. It claimed that it had performed all the undertakings under the contract and had
already produced certified samples of LPG cylinders. It averred that whatever was unfinished was
PGSMCs fault since it failed to procure raw materials due to lack of funds. KOGIES, relying on Chung
Fu Industries (Phils.), Inc. v. Court of Appeals,[12] insisted that the arbitration clause was without question
valid.
After KOGIES filed a Supplemental Memorandum with Motion to Dismiss[13] answering
PGSMCs memorandum of July 22, 1998 and seeking dismissal of PGSMCs counterclaims, KOGIES, on
August 4, 1998, filed its Motion for Reconsideration[14] of the July 23, 1998 Order denying its application
for an injunctive writ claiming that the contract was not merely for machinery and facilities worth USD
1,224,000 but was for the sale of an LPG manufacturing plant consisting of supply of all the machinery
and facilities and transfer of technology for a total contract price of USD 1,530,000 such that the
dismantling and transfer of the machinery and facilities would result in the dismantling and transfer of the
very plant itself to the great prejudice of KOGIES as the still unpaid owner/seller of the plant. Moreover,
KOGIES points out that the arbitration clause under Art. 15 of the Contract as amended was a valid
arbitration stipulation under Art. 2044 of the Civil Code and as held by this Court in Chung Fu Industries
(Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things[16] to determine whether there
was indeed alteration of the quantity and lowering of quality of the machineries and equipment, and
whether these were properly installed. KOGIES opposed the motion positing that the queries and issues
raised in the motion for inspection fell under the coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion for
inspection; (2) denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order; and (3)
denying KOGIES motion to dismiss PGSMCs compulsory counterclaims as these counterclaims fell
within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration [17] of the September
21, 1998 RTC Order granting inspection of the plant and denying dismissal of PGSMCs compulsory
counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998
urgent motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for
certiorari[18] docketed as CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and September
21, 1998 RTC Orders and praying for the issuance of writs of prohibition, mandamus, and preliminary
injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and transferring the machineries
and equipment in the Carmona plant, and to direct the RTC to enforce the specific agreement on
arbitration to resolve the dispute.
43 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for
reconsideration and directed the Branch Sheriff to proceed with the inspection of the machineries and
equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249 informing
the CA about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the writs of
prohibition, mandamus and preliminary injunction which was not acted upon by the CA. KOGIES
asserted that the Branch Sheriff did not have the technical expertise to ascertain whether or not the
machineries and equipment conformed to the specifications in the contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding that the
enumerated machineries and equipment were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the RTC Orders and
dismissing the petition for certiorari filed by KOGIES. The CA found that the RTC did not gravely abuse
its discretion in issuing the assailed July 23, 1998 and September 21, 1998 Orders. Moreover, the CA
reasoned that KOGIES contention that the total contract price for USD 1,530,000 was for the whole plant
and had not been fully paid was contrary to the finding of the RTC that PGSMC fully paid the price of
USD 1,224,000, which was for all the machineries and equipment. According to the CA, this
determination by the RTC was a factual finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the lower court that an
arbitration clause which provided for a final determination of the legal rights of the parties to the contract
by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum
shopping by PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones and payment
of docket fees was not required since the Answer with counterclaim was not an initiatory pleading. For the
same reason, the CA said a certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since
KOGIES did not wait for the resolution of its urgent motion for reconsideration of the September 21, 1998
RTC Order which was the plain, speedy, and adequate remedy available. According to the CA, the RTC
must be given the opportunity to correct any alleged error it has committed, and that since the assailed
orders were interlocutory, these cannot be the subject of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT BEYOND THE
AMBIT OF A PETITION FOR CERTIORARI INTENDED ONLY FOR
CORRECTION OF ERRORS OF JURISDICTION OR GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION,
AND CONCLUDING THAT THE TRIAL COURTS FINDING ON THE SAME
QUESTION WAS IMPROPERLY RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN
ARTICLE 15 OF THE CONTRACT BETWEEN THE PARTIES FOR BEING
CONTRARY TO PUBLIC POLICY AND FOR OUSTING THE COURTS OF
JURISDICTION;
 c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO
BE ALL COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET
FEES AND CERTIFICATION OF NON-FORUM SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY
WITHOUT WAITING FOR THE RESOLUTION OF THE MOTION FOR
RECONSIDERATION OF THE ORDER DATED SEPTEMBER 21, 1998 OR
WITHOUT GIVING THE TRIAL COURT AN OPPORTUNITY TO CORRECT
ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY IN
NATURE;
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR
IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE SAME FOR
ALLEGEDLY WITHOUT MERIT.[23]
The Courts Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid
docket fees and filed a certificate of non-forum shopping, and that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer with
Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997 Revised
Rules of Civil Procedure, the rule that was effective at the time the Answer with Counterclaim was
filed. Sec. 8 on existing counterclaim or cross-claim states, A compulsory counterclaim or a cross-claim
that a defending party has at the time he files his answer shall be contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims against
KOGIES, it was not liable to pay filing fees for said counterclaims being compulsory in nature. We stress,
however, that effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC,
docket fees are now required to be paid in compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an
initiatory pleading which requires a certification against forum shopping under Sec. 5[24] of Rule 7, 1997
Revised Rules of Civil Procedure. It is a responsive pleading, hence, the courts a quo did not commit
reversible error in denying KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition are neither
the remedies to question the propriety of an interlocutory order of the trial court.[26] The CA erred on its
reliance on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case which was not
assailable in an action for certiorari since the denial of a motion to quash required the accused to plead and
to continue with the trial, and whatever objections the accused had in his motion to quash can then be used
44 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
as part of his defense and subsequently can be raised as errors on his appeal if the judgment of the trial
court is adverse to him. The general rule is that interlocutory orders cannot be challenged by an appeal.
[27]
Thus, in Yamaoka v. Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse
judgment on the merits, incorporating in said appeal the grounds for assailing the
interlocutory orders. Allowing appeals from interlocutory orders would result in the
sorry spectacle of a case being subject of a counterproductive ping-pong to and
from the appellate court as often as a trial court is perceived to have made an error
in any of its interlocutory rulings. However, where the assailed interlocutory order
was issued with grave abuse of discretion or patently erroneous and the remedy of
appeal would not afford adequate and expeditious relief, the Court allows certiorari
as a mode of redress.[28]
Also, appeals from interlocutory orders would open the floodgates to endless occasions for
dilatory motions. Thus, where the interlocutory order was issued without or in excess of jurisdiction or
with grave abuse of discretion, the remedy is certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction
in the issuance of the two assailed orders coupled with the fact that there is no plain, speedy, and adequate
remedy in the ordinary course of law amply provides the basis for allowing the resort to a petition for
certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition for
certiorari. Note that KOGIES motion for reconsideration of the July 23, 1998 RTC Order which denied the
issuance of the injunctive writ had already been denied. Thus, KOGIES only remedy was to assail the
RTCs interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the September 21, 1998
RTC Order relating to the inspection of things, and the allowance of the compulsory counterclaims has not
yet been resolved, the circumstances in this case would allow an exception to the rule that before certiorari
may be availed of, the petitioner must have filed a motion for reconsideration and said motion should have
been first resolved by the court a quo. The reason behind the rule is to enable the lower court, in the first
instance, to pass upon and correct its mistakes without the intervention of the higher court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant,
equipment, and facilities when he is not competent and knowledgeable on said matters is evidently flawed
and devoid of any legal support. Moreover, there is an urgent necessity to resolve the issue on the
dismantling of the facilities and any further delay would prejudice the interests of KOGIES. Indeed, there
is real and imminent threat of irreparable destruction or substantial damage to KOGIES equipment and
machineries. We find the resort to certiorari based on the gravely abusive orders of the trial court sans the
ruling on the October 2, 1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It
provides:
Article 15. Arbitration.All disputes, controversies, or differences which
may arise between the parties, out of or in relation to or in connection with this
Contract or for the breach thereof, shall finally be settled by arbitration in Seoul,
Korea in accordance with the Commercial Arbitration Rules of the Korean
Commercial Arbitration Board. The award rendered by the arbitration(s) shall
be final and binding upon both parties concerned. (Emphasis supplied.)
 Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the contract is made
governs. Lex loci contractus. The contract in this case was perfected here in the Philippines. Therefore,
our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually
agreed arbitral clause or the finality and binding effect of an arbitral award. Art. 2044 provides, Any
stipulation that the arbitrators award or decision shall be final, is valid, without prejudice to Articles
2038, 2039 and 2040. (Emphasis supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a compromise or an
arbitral award, as applied to Art. 2044 pursuant to Art. 2043,[34] may be voided, rescinded, or annulled, but
these would not denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been
shown to be contrary to any law, or against morals, good customs, public order, or public policy. There has
been no showing that the parties have not dealt with each other on equal footing. We find no reason why
the arbitration clause should not be respected and complied with by both parties. In Gonzales v. Climax
Mining Ltd.,[35] we held that submission to arbitration is a contract and that a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitration is a contract.[36] Again in Del
Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he provision to submit to
arbitration any dispute arising therefrom and the relationship of the parties is part of that contract and is
itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in
accordance with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and
binding, is not contrary to public policy. This Court has sanctioned the validity of arbitration clauses in
a catena of cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this
Court had occasion to rule that an arbitration clause to resolve differences and breaches of mutually agreed
contractual terms is valid. In BF Corporation v. Court of Appeals, we held that [i]n this jurisdiction,
arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of Republic
Act No. 876, this Court has countenanced the settlement of disputes through arbitration. Republic Act No.
876 was adopted to supplement the New Civil Codes provisions on arbitration.[39] And in LM Power
Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong with mediation, conciliation and negotiationis encouraged
by the Supreme Court.Aside from unclogging judicial dockets, arbitration also
hastens the resolution of disputes, especially of the commercial kind. It is thus
regarded as the wave of the future in international civil and commercial
disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative
dispute resolution methods, courts should liberally construe arbitration clauses.
Provided such clause is susceptible of an interpretation that covers the asserted
dispute, an order to arbitrate should be granted. Any doubt should be resolved in
favor of arbitration.[40]
Having said that the instant arbitration clause is not against public policy, we come to the
question on what governs an arbitration clause specifying that in case of any dispute arising from the
contract, an arbitral panel will be constituted in a foreign country and the arbitration rules of the foreign
country would govern and its award shall be final and binding.
45 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising
from contractual relations. In case a foreign arbitral body is chosen by the parties, the arbitration rules of
our domestic arbitration bodies would not be applied. As signatory to the Arbitration Rules of the
UNCITRAL Model Law on International Commercial Arbitration[41] of the United Nations Commission
on International Trade Law (UNCITRAL) in the New York Convention on June 21, 1985,
the Philippines committed itself to be bound by the Model Law. We have even incorporated the Model
Law in Republic Act No. (RA) 9285, otherwise known as the Alternative Dispute Resolution Act of
2004 entitled An Act to Institutionalize the Use of an Alternative Dispute Resolution System in the
Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other
Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent
provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial
Arbitration.International commercial arbitration shall be governed by the Model
Law on International Commercial Arbitration (the Model Law) adopted by the
United Nations Commission on International Trade Law on June 21, 1985 (United
Nations Document A/40/17) and recommended for enactment by the General
Assembly in Resolution No. 40/72 approved on December 11, 1985, copy of which
is hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model Law,
regard shall be had to its international origin and to the need for uniformity in its
interpretation and resort may be made to the travaux preparatories and the report of
the Secretary General of the United Nations Commission on International Trade
Law dated March 25, 1985 entitled, International Commercial Arbitration:
Analytical Commentary on Draft Trade identified by reference number A/CN.
9/264.
While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since it is a
procedural law which has a retroactive effect. Likewise, KOGIES filed its application for arbitration
before the KCAB on July 1, 1998 and it is still pending because no arbitral award has yet been
rendered. Thus, RA 9285 is applicable to the instant case. Well-settled is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at the time of their passage, and are
deemed retroactive in that sense and to that extent. As a general rule, the retroactive application of
procedural laws does not violate any personal rights because no vested right has yet attached nor arisen
from them.[42]
Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model
Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of
arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an action is
brought in a matter which is the subject matter of an arbitration agreement shall, if
at least one party so requests not later than the pre-trial conference, or upon the
request of both parties thereafter, refer the parties to arbitration unless it finds that
 the arbitration agreement is null and void, inoperative or incapable of being
performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be
final and binding are not immediately enforceable or cannot be implemented immediately. Sec. 35[43] of
the UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a
competent court for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285 incorporated these provisos to Secs. 42,
43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed
with the Regional Trial Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide that the
party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the
award or agreement is not made in any of the official languages, the party shall
supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration
award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not
Covered by the New York Convention.The recognition and enforcement of foreign
arbitral awards not covered by the New York Convention shall be done in
accordance with procedural rules to be promulgated by the Supreme Court. The
Court may, on grounds of comity and reciprocity, recognize and enforce a non-
convention award as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral award
when confirmed by a court of a foreign country, shall be recognized and enforced as
a foreign arbitral award and not as a judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial Court,
shall be enforced in the same manner as final and executory decisions of courts of
law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside, correction or
modification of an arbitral award, and any application with a court for arbitration
assistance and supervision shall be deemed as special proceedings and shall be filed
with the Regional Trial Court (i) where arbitration proceedings are conducted; (ii)
where the asset to be attached or levied upon, or the act to be enjoined is located;
(iii) where any of the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the applicant.
46 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
SEC. 48. Notice of Proceeding to Parties.In a special proceeding for
recognition and enforcement of an arbitral award, the Court shall send notice to the
parties at their address of record in the arbitration, or if any part cannot be served
notice at such address, at such partys last known address. The notice shall be sent al
least fifteen (15) days before the date set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a
judgment of a foreign court but as a foreign arbitral award, and when confirmed, are enforced as final and
executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is similar to
judgments or awards given by some of our quasi-judicial bodies, like the National Labor Relations
Commission and Mines Adjudication Board, whose final judgments are stipulated to be final and binding,
but not immediately executory in the sense that they may still be judicially reviewed, upon the instance of
any party. Therefore, the final foreign arbitral awards are similarly situated in that they need first to be
confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific
authority and jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided under
Art. 34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed
with the Regional Trial Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide that the
party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the
award or agreement is not made in any of the official languages, the party shall
supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration
award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an award
has been made, the Regional Trial Court may, if it considers it proper, vacate its
decision and may also, on the application of the party claiming recognition or
enforcement of the award, order the party to provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign
arbitration proceeding may oppose an application for recognition and enforcement
of the arbitral award in accordance with the procedures and rules to be promulgated
by the Supreme Court only on those grounds enumerated under Article V of the
New York Convention. Any other ground raised shall be disregarded by the
Regional Trial Court.
Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually
agreed upon by the parties, still the foreign arbitral award is subject to judicial review by the RTC which
can set aside, reject, or vacate it. In this sense, what this Court held in Chung Fu Industries (Phils.), Inc.
relied upon by KOGIES is applicable insofar as the foreign arbitral awards, while final and binding, do not
oust courts of jurisdiction since these arbitral awards are not absolute and without exceptions as they are
still judicially reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether
domestic or foreign, are subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards
The differences between a final arbitral award from an international or foreign arbitral tribunal
and an award given by a local arbitral tribunal are the specific grounds or conditions that vest jurisdiction
over our courts to review the awards.
For foreign or international arbitral awards which must first be confirmed by the RTC, the
grounds for setting aside, rejecting or vacating the award by the RTC are provided under Art. 34(2) of the
UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC pursuant to Sec.
23 of RA 876[44] and shall be recognized as final and executory decisions of the RTC, [45] they may only be
assailed before the RTC and vacated on the grounds provided under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party
in cases where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of
the Regional Trial Court confirming, vacating, setting aside, modifying or
correcting an arbitral award may be appealed to the Court of Appeals in accordance
with the rules and procedure to be promulgated by the Supreme Court.
The losing party who appeals from the judgment of the court confirming
an arbitral award shall be required by the appellate court to post a counterbond
executed in favor of the prevailing party equal to the amount of the award in
accordance with the rules to be promulgated by the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court through a
petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign
arbitration as it bound itself through the subject contract. While it may have misgivings on the foreign
arbitration done in Korea by the KCAB, it has available remedies under RA 9285. Its interests are duly
protected by the law which requires that the arbitral award that may be rendered by KCAB must be
confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an arbitration clause,
stipulating that the arbitral award is final and binding, does not oust our courts of jurisdiction as the
international arbitral award, the award of which is not absolute and without exceptions, is still judicially
reviewable under certain conditions provided for by the UNCITRAL Model Law on ICA as applied and
incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which provides that the
parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and binding on the
parties, and not contrary to public policy; consequently, being bound to the contract of arbitration, a party
47 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
may not unilaterally rescind or terminate the contract for whatever cause without first resorting to
arbitration.
What this Court held in University of the Philippines v. De Los Angeles[47] and reiterated in
succeeding cases,[48] that the act of treating a contract as rescinded on account of infractions by the other
contracting party is valid albeit provisional as it can be judicially assailed, is not applicable to the instant
case on account of a valid stipulation on arbitration. Where an arbitration clause in a contract is availing,
neither of the parties can unilaterally treat the contract as rescinded since whatever infractions or breaches
by a party or differences arising from the contract must be brought first and resolved by arbitration, and
not through an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on whether the equipment
and machineries delivered and installed were properly installed and operational in the plant in Carmona,
Cavite; the ownership of equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact that PGSMC could not
supply the raw materials required to produce the sample LPG cylinders, are matters proper for
arbitration. Indeed, we note that on July 1, 1998, KOGIES instituted an Application for Arbitration before
the KCAB in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is incumbent upon
PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion for
Inspection of Things on September 21, 1998, as the subject matter of the motion is under the primary
jurisdiction of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the
inspection made on October 28, 1998, as ordered by the trial court on October 19, 1998, is of no worth as
said Sheriff is not technically competent to ascertain the actual status of the equipment and machineries as
installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the
grant of the inspection of the equipment and machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price of USD
1,530,000 was for the whole plant and its installation is beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for certiorari.[49] Whether or not
there was full payment for the machineries and equipment and installation is indeed a factual issue
prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the RTC in resolving the
issue on the ownership of the plant when it is the arbitral body (KCAB) and not the RTC which has
jurisdiction and authority over the said issue. The RTCs determination of such factual issue constitutes
grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for
PGSMC to dismantle and transfer the equipment and machineries, we find it to be in order considering the
factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries might well
be under the primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of RA 9285 has
jurisdiction to hear and grant interim measures to protect vested rights of the parties. Sec. 28 pertinently
provides:
 SEC. 28. Grant of interim Measure of Protection.(a) It is not
incompatible with an arbitration agreement for a party to request, before
constitution of the tribunal, from a Court to grant such measure. After
constitution of the arbitral tribunal and during arbitral proceedings, a request for an
interim measure of protection, or modification thereof, may be made with the
arbitral or to the extent that the arbitral tribunal has no power to act or is
unable to act effectivity, the request may be made with the Court. The arbitral
tribunal is deemed constituted when the sole arbitrator or the third arbitrator, who
has been nominated, has accepted the nomination and written communication of
said nomination and acceptance has been received by the party making the request.
(b) The following rules on interim or provisional relief shall be
observed:
Any party may request that provisional relief be granted against the
adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon the
provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal as the case may be
and the party against whom the relief is sought, describing in appropriate detail the
precise relief, the party against whom the relief is requested, the grounds for the
relief, and the evidence supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in implementing
or enforcing an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for all
damages resulting from noncompliance, including all expenses, and reasonable
attorney's fees, paid in obtaining the orders judicial enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of an
award or in another form, by which, at any time prior to the issuance of the award
by which the dispute is finally decided, the arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely to
cause, current or imminent harm or prejudice to the arbitral process itself;
48 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
(c) Provide a means of preserving assets out of which a subsequent award may be
satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution of the
dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue
interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in
relation to arbitration proceedings, irrespective of whether their place is in the
territory of this State, as it has in relation to proceedings in courts. The court shall
exercise such power in accordance with its own procedures in consideration of the
specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were
explicit that even the pendency of an arbitral proceeding does not foreclose resort to the courts for
provisional reliefs. We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not foreclose
resort to the courts for provisional reliefs. The Rules of the ICC, which governs the
parties arbitral dispute, allows the application of a party to a judicial authority for
interim or conservatory measures. Likewise, Section 14 of Republic Act (R.A.) No.
876 (The Arbitration Law) recognizes the rights of any party to petition the court to
take measures to safeguard and/or conserve any matter which is the subject of the
dispute in arbitration. In addition, R.A. 9285, otherwise known as the Alternative
Dispute Resolution Act of 2004, allows the filing of provisional or interim measures
with the regular courts whenever the arbitral tribunal has no power to act or to act
effectively.[50]
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of
protection.
Secondly, considering that the equipment and machineries are in the possession of PGSMC, it
has the right to protect and preserve the equipment and machineries in the best way it can. Considering
that the LPG plant was non-operational, PGSMC has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the better way to make good use of them
which is ineluctably within the management discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment and machineries in
Worths property is not to the best interest of PGSMC due to the prohibitive rent while the LPG plant as
set-up is not operational. PGSMC was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone
without considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the
preservation or transfer of the equipment and machineries as an interim measure, yet on hindsight, the July
23, 1998 Order of the RTC allowing the transfer of the equipment and machineries given the non-
recognition by the lower courts of the arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.
 CHINA NATIONAL MACHINERY & EQUIPMENT CORP. G.R. No. 185572
(GROUP),
Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount Petitioner,
based on the contract. Moreover, KOGIES is amply protected by the arbitral action it has instituted Present:
before the KCAB, the award of which can be enforced in our jurisdiction through the RTC. Besides,
by our decision, PGSMC is compelled to submit to arbitr versus CORONA, C.J.,
CARPIO,
ation pursuant to the valid arbitration clause of its contract with KOGIES. VELASCO, JR.,
HON. CESAR D. SANTAMARIA, in his official capacity as LEONARDO-DE CASTRO,
PGSMC to preserve the subject equipment and machineries Presiding Judge of Branch 145, Regional Trial Court of Makati BRION,
City, HERMINIO HARRY L. ROQUE, JR., JOEL R. PERALTA,
Finally, while PGSMC may have been granted the right to dismantle and transfer the BUTUYAN, ROGER R. RAYEL, ROMEL R. BAGARES, BERSAMIN,
subject equipment and machineries, it does not have the right to convey or dispose of the same CHRISTOPHER FRANCISCO C. BOLASTIG, LEAGUE OF DEL CASTILLO,
considering the pending arbitral proceedings to settle the differences of the parties. PGSMC URBAN POOR FOR ACTION (LUPA), KILUSAN NG ABAD,
therefore must preserve and maintain the subject equipment and machineries with the diligence of a MARALITA SA MEYCAUAYAN (KMM-LUPA CHAPTER), VILLARAMA, JR.,
good father of a family[51] until final resolution of the arbitral proceedings and enforcement of the DANILO M. CALDERON, VICENTE C. ALBAN, MERLYN M. PEREZ,
award, if any. VAAL, LOLITA S. QUINONES, RICARDO D. LANOZO, JR., MENDOZA,
CONCHITA G. GOZO, MA. TERESA D. ZEPEDA, JOSEFINA SERENO,
A. LANOZO, and SERGIO C. LEGASPI, JR., KALIPUNAN NG REYES, and
DAMAYANG MAHIHIRAP (KADAMAY), EDY CLERIGO, PERLAS-BERNABE, JJ.
WHEREFORE, this petition is PARTLY GRANTED, in that: RAMMIL DINGAL, NELSON B. TERRADO, CARMEN
DEUNIDA, and EDUARDO LEGSON,
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET Respondents.
ASIDE;

(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117
are REVERSED and SET ASIDE;

(3) The parties are hereby ORDERED to submit themselves to the arbitration of their Promulgated:
dispute and differences arising from the subject Contract before the KCAB; and
February 7, 2012
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and
machineries, if it had not done so, and ORDERED to preserve and maintain them until the finality of
whatever arbitral award is given in the arbitration proceedings.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
No pronouncement as to costs.
DECISION
SO ORDERED.
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 CAG.R. SP No. 103351. [1]

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).[2]

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 Buyers Credit to the Philippine government to finance the Northrail
Project.[3] The Chinese government designated EXIM Bank as the lender, while the Philippine government
named the DOF as the borrower.[4] 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.[5]

49 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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 CNMEGs designation as
the Prime Contractor for the Northrail Project.[6]
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).[7] The contract price for the Northrail Project was pegged at USD 421,050,000.[8]
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). [9] In the Loan
Agreement, EXIM Bank agreed to extend Preferential Buyers 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.[10]
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.[13] On 29 March 2006, CNMEG filed an Urgent Motion for Reconsideration of this
Order.[14] 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.[15]
On 15 May 2007, RTC Br. 145 issued an Omnibus Order denying CNMEGs Motion to Dismiss
and setting the case for summary hearing to determine whether the injunctive reliefs prayed for should be
issued.[16] CNMEG then filed a Motion for Reconsideration,[17] which was denied by the trial court in an
Order 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.[19]
In the assailed Decision dated 30 September 2008, the appellate court dismissed the Petition for
Certiorari.[20] 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: [23]
Whether or not petitioner CNMEG is an agent of the sovereign
Peoples 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.
50 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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,[24] 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 contracts. It does not
apply where the contract relates to the exercise of its sovereign functions.[28]
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:[29]
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 Employers personnel;
AND WHEREAS the Loan Agreement of the Preferential Buyers 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]
51 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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 CNMEGs
proposal to undertake a Feasibility Study (the Study) at no cost to
NORTHRAIL CORP.;
WHEREAS, the NORTHRAIL CORP. also welcomes CNMEGs
interest in undertaking the Project with Suppliers 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 CNMEGs 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
CNMEGs 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
 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 Peoples
Republic of China which initiated our Governments involvement in the
Project.
3. Among the various state corporations of the Peoples
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 latters
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 Borrowers 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.)
52 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
(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 Peoples
Republic of Chinaas 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 Peoples Republic of
China and the appointment of the Borrowers Chinese Process Agent is legal, valid,
binding and enforceable and any judgment obtained in the Peoples 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 use (as
distinguished from patrimonial assets or assets dedicated to commercial use).[37]
Thus, despite petitioners 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. Wangs 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 Courts ruling in Deutsche Gesellschaft Fr Technische Zusammenarbeit (GTZ)
[40]
v. CA must be examined. In Deutsche Gesellschaft, Germanyand the Philippines entered into a Technical
Cooperation Agreement, pursuant to which both signed an arrangement promoting the Social Health
InsuranceNetworking 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 Germanys 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 FederalRepublics 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
suit. The distinction lies in whether the agency is incorporated or unincorporated.
53 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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 Courts 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.
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.
54 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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 petitioners 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 DFAs competence and authority
to provide such necessary determination, to wit:
The DFAs 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 Courts
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 GTZs 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 GTZs claim
of States 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 GTZs claim, or that the OSG had solicited the DFAs
views on the issue. The arguments raised by the OSG are virtually the same as the
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 Peoples 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 CNMEGs 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
55 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )
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.
The Contract Agreement was not concluded between the Philippines and China, but between
Northrail and CNMEG.[51] By the terms of the Contract Agreement, Northrail is a government-owned or
-controlled corporation, while CNMEG is a corporation duly organized and created under the laws of the
Peoples 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,[54] 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. CNMEGs 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.

No pronouncement on costs of suit.

SO ORDERED.

56 | A R B I T R A T I O N ( A s s i g n m e n t # 2 )