Supreme Court upholds validity of lease contracts over donated land

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 198075 September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,

vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in
C.A.-G.R. SP No. 116865.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the

registered owner of a parcel of land located at Km. 16, South Superhighway, Parañaque City
(subject land).3 Within the subject land are buildings and other improvements dedicated to the
business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of
herein respondent Makati Rotary Club Foundation, Incorporated by way of a conditional
donation.6 The respondent accepted the donation with all of its conditions.7 On 26 May1975, FKI
and the respondent executed a Deed of Donation8evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease the subject land back to
FKI under terms specified in their Deed of Donation.9 With the respondent’s acceptance of the
donation, a lease agreement between FKI and the respondent was, therefore, effectively
incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is ₱40,126.00
per annum .11
The Deed of Donation also stipulated that the lease over the subject property is renewable for
another period of twenty-five (25) years " upon mutual agreement" of FKI and the
respondent.12 In which case, the amount of rent shall be determined in accordance with item
2(g) of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual agreement and in case of
disagreement the matter shall be referred to a Board of three Arbitrators appointed and with
powers in accordance with the Arbitration Law of the Philippines, Republic Act 878, whose
function shall be to decide the current fair market value of the land excluding the improvements,
provided, that, any increase in the fair market value of the land shall not exceed twenty five
percent (25%) of the original value of the land donated as stated in paragraph 2(c) of this Deed.
The rental for the second 25 years shall not exceed three percent (3%) of the fair market value
of the land excluding the improvements as determined by the Board of Arbitrators. 13
In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that
reiterated the provisions of the Deed of Donation , including those relating to the lease of the
subject land.
Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed
of Donation , FKI was able to continue in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of
Donation was set to expire, or on 23 May 2000, FKI and respondent executed another contract
of lease ( 2000 Lease Contract )15covering the subject land. In this 2000 Lease Contract, FKI
and respondent agreed on a new five-year lease to take effect on the 26th of May 2000, with
annual rents ranging from ₱4,000,000 for the first year up to ₱4,900,000 for the fifth year. 16 The
2000 Lease Contract also contained an arbitration clause enforceable in the event the parties
come to disagreement about the" interpretation, application and execution" of the lease, viz :
19. Governing Law – The provisions of this 2000 Lease Contract shall be governed, interpreted
and construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract
shall be submitted to a board of three (3) arbitrators constituted in accordance with the
arbitration law of the Philippines. The decision of the majority of the arbitrators shall be binding
upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for
another five (5) years. This new lease (2005 Lease Contract )18 required FKI to pay a fixed
annual rent of ₱4,200,000.19 In addition to paying the fixed rent, however, the 2005 Lease
Contract also obligated FKI to make a yearly " donation " of money to the respondent.20 Such
donations ranged from ₱3,000,000 for the first year up to ₱3,900,000for the fifth year. 21Notably,
the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease
Contract, to wit:
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in
favor of herein petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner
executed an Assignment and Assumption of Lease and Donation25 —wherein FKI, with the
conformity of the respondent, formally assigned all of its interests and obligations under the
Amended Deed of Donation and the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the
2005 Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental
stipulations of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given
effect because they violated one of the" material conditions " of the donation of the subject land,
as stated in the Deed of Donation and Amended Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually
established not only one but two (2) lease agreements between FKI and respondent, i.e. , one
lease for the first twenty-five (25)years or from 1975 to 2000, and another lease for the next
twenty-five (25)years thereafter or from 2000 to 2025. 27 Both leases are material conditions of
the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year
lease was not fixed in the Deed of Donation and Amended Deed of Donation , both deeds
nevertheless prescribed rules and limitations by which the same may be determined. Such rules
and limitations ought to be observed in any succeeding lease agreements between petitioner
and respondent for they are, in themselves, material conditions of the donation of the subject
land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of
Donation that supposedly limits the amount of rent for the lease over the second twenty-five (25)
years to only " three percent (3%) of the fair market value of the subject land excluding the
improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease
Contract cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation
of the aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of
Donation . Consequently, petitioner insists that the amount of rent it has to pay thereon is and
must still be governed by the limitations prescribed in the Deed of Donation and Amended Deed
of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter
of its default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of
the rent and " donation " due for the year 2009. Respondent, in the same letter, further intimated
of canceling the 2005 Lease Contract should petitioner fail to settle the said
obligations.32 Petitioner received the First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement

over the rental stipulations of the 2005 Lease Contract — calling them " severely
disproportionate," "unconscionable" and "in clear violation to the nominal rentals mandated by
the Amended Deed of Donation." In lieu of the amount demanded by the respondent, which
purportedly totaled to ₱8,394,000.00, exclusive of interests, petitioner offered to pay only
₱80,502.79,35 in accordance with the rental provisions of the Deed of Donation and Amended
Deed of Donation.36Respondent refused this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease
Contract. The Second Demand Letter also contained a demand for petitioner to " immediately
vacate the leased premises " should it fail to pay such obligations within seven (7) days from its
receipt of the letter.39 The respondent warned of taking " legal steps " in the event that petitioner
failed to comply with any of the said demands.40 Petitioner received the Second Demand Letter
on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September
2009, petitioner filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the
rescission or cancellation of the Deed of Donation and Amended Deed of Donation against the
respondent. This case is currently pending before Branch 257 of the RTC, docketed as Civil
Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before
the Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to
Branch 77 and was docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it,
petitioner reiterated its objection over the rental stipulations of the 2005 Lease Contract for
being violative of the material conditions of the Deed of Donation and Amended Deed of
Donation.45 In addition to the foregoing, however, petitioner also interposed the following
defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful
detainer case in view of the insufficiency of respondent’s demand.46 The First Demand
Letter did not contain an actual demand to vacate the premises and, therefore, the
refusal to comply there with does not give rise to an action for unlawful detainer.47
2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the
same until the disagreement between the parties is first referred to arbitration pursuant
to the arbitration clause of the 2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still
would not lie as the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005
Lease Contract requiring petitioner to give yearly " donations " to respondent is a
simulation, for they are, in fact, parts of the rent. 50 Such grants were only denominated
as " donations " in the contract so that the respondent—anon-stock and non-profit
corporation—could evade payment of the taxes otherwise due thereon.51
In due course, petitioner and respondent both submitted their position papers, together with
their other documentary evidence.52 Remarkably, however, respondent failed to submit the
Second Demand Letter as part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC
refused to dismiss the action on the ground that the dispute is subject to arbitration, it
nonetheless sided with the petitioner with respect to the issues regarding the insufficiency of the
respondent’s demand and the nullity of the 2005 Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement

as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to
Branch 274 of the RTC of Parañaque City and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner
from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan
Trial Court, Branch 77, Parañaque City, is hereby reversed, judgment is thus rendered in favor
of the plaintiff-appellant and against the defendant-appellee, and ordering the latter –
(1) to vacate the lease[d] premises made subject of the case and to restore the
possession thereof to the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two
Thousand Four Hundred Thirty Six Pesos (₱9,362,436.00), penalties and net of 5%
withholding tax, for the lease period from May 25, 2009 to May 25, 2010 and such
monthly rental as will accrue during the pendency of this case;
(3) to pay attorney’s fees in the sum of ₱100,000.00 plus appearance fee of ₱3,000.00;
(4) and costs of suit.

As to the existing improvements belonging to the defendant-appellee, as these were built in
good faith, the provisions of Art. 1678of the Civil Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
1. The respondent had adequately complied with the requirement of demand as a

jurisdictional precursor to an unlawful detainer action.58 The First Demand Letter, in
substance, contains a demand for petitioner to vacate when it mentioned that it was a
notice " per Section12 of the 2005 Lease Contract."59 Moreover, the issue of sufficiency
of the respondent’s demand ought to have been laid to rest by the Second Demand
Letter which, though not submitted in evidence, was nonetheless admitted by petitioner
as containing a" demand to eject " in its Answer with Compulsory Counterclaim. 60
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract
while, at the same time, impugn such contract’s validity.61 Even assuming that it can,
petitioner still did not file a formal application before the MeTC so as to render such
arbitration clause operational.62 At any rate, the MeTC would not be precluded from
exercising its jurisdiction over an action for unlawful detainer, over which, it has
exclusive original jurisdiction.63
3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was
not able to adduce any evidence to support its allegation that the same is void.64 There
was, in this case, no evidence that respondent is guilty of any tax evasion.65
Aggrieved, the petitioner appealed to the Court of Appeals.
On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:
WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of
Parañaque City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary
Restraining Order68staying the immediate implementation of the decisions adverse to it.
OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in
overlooking the significance of the arbitration clause incorporated in the 2005 Lease Contract .
As the Court sees it, that is a fatal mistake.
For this reason, We grant the petition.
Present Dispute is Arbitrable Under the

Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner
and respondent emanates from the rental stipulations of the 2005 Lease Contract. The
respondent insists upon the enforce ability and validity of such stipulations, whereas, petitioner,
in substance, repudiates them. It is from petitioner’s apparent breach of the 2005 Lease
Contract that respondent filed the instant unlawful detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the
petitioner and respondent arose from the application or execution of the 2005 Lease Contract .
Undoubtedly, such kinds of dispute are covered by the arbitration clause of the 2005 Lease
Contract to wit:
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the "
interpretation, application or execution " of the 2005 Lease Contract ought to be submitted to
arbitration.70 To the mind of this Court, such stipulation is clear and is comprehensive enough so
as to include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contract
including the one that presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case carries with it
certain legal effects. However, before discussing what these legal effects are, We shall first deal
with the challenges posed against the application of such arbitration clause.
Challenges Against the Application of the

Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the
petitioner, as well as the MeTC, RTC and the Court of Appeals, vouched for the non-application
of the same in the instant case. A plethora of arguments was hurled in favor of bypassing
arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against
the application of the arbitration clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is non-arbitrable as it will

inevitably touch upon the issue of the validity of the 2005 Lease Contract.71 It was
submitted that one of the reasons offered by the petitioner in justifying its failure to pay
under the 2005 Lease Contract was the nullity of such contract for being contrary to law
and public policy.72 The Supreme Court, in Gonzales v. Climax Mining, Ltd.,73 held that "
the validity of contract cannot be subject of arbitration proceedings " as such questions
are " legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function ." 74
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract
while, at the same time, impugn such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the validity of
the 2005 Lease Contract , petitioner still did not file a formal application before the MeTC
so as to render such arbitration clause operational.76 Section 24 of Republic Act No.
9285 requires the party seeking arbitration to first file a " request " or an application
therefor with the court not later than the preliminary conference.77
4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR)

proceedings before the RTC.78 Hence, a further referral of the dispute to arbitration
would only be circuitous.79 Moreover, an ejectment case, in view of its summary nature,
already fulfills the prime purpose of arbitration, i.e. , to provide parties in conflict with an
expedient method for the resolution of their dispute.80 Arbitration then would no longer
be necessary in this case.81
None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the petitioner and
respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such disagreement, the validity of
the 2005 Lease Contract, or at least, of such contract’s rental stipulations would have to be
determined, the same would not render such disagreement non-arbitrable. The quotation from
Gonzales that was used to justify the contrary position was taken out of context. A rereading of
Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines
and Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical
Assistance Agreement and other mining related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud and
unconstitutionality.83 The pivotal issue that confronted the Court then was whether the PA-MGB
has jurisdiction over that particular arbitration complaint. Stated otherwise, the question was
whether the complaint for arbitration raises arbitrable issues that the PA-MGB can take
cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any
jurisdiction to take cognizance of the complaint for arbitration, this Court pointed out to the
provisions of R.A. No. 7942, or the Mining Act of 1995, which granted the PA-MGB with
exclusive original jurisdiction only over mining disputes, i.e., disputes involving " rights to mining
areas," "mineral agreements or permits," and " surface owners, occupants, claim holders or
concessionaires" requiring the technical knowledge and experience of mining authorities in
order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise
mining disputes as contemplated under R.A. No. 7942 but only issues relating to the validity of
certain mining related agreements, this Court held that such complaint could not be arbitrated
before the PA-MGB.85 It is in this context that we made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between
the parties as to some provisions of the contract between them, which needs the interpretation
and the application of that particular knowledge and expertise possessed by members of that
Panel. It is not proper when one of the parties repudiates the existence or validity of such
contract or agreement on the ground of fraud or oppression as in this case. The validity of the
contract cannot be subject of arbitration proceedings. Allegations of fraud and duress in the
execution of a contract are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function.86(Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the
ground that the issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The
real consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon
the jurisdiction of the PA-MGB as an arbitral body . Gonzales rejected the complaint for
arbitration because the issue raised therein is not a mining dispute per R.A. No. 7942 and it is
for this reason, and only for this reason, that such issue is rendered non-arbitrable before the
PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB
only to mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill
Philippines, Inc. v. San Fernando Regal Trading, Inc.88 In Cargill , this Court answered the
question of whether issues involving the rescission of a contract are arbitrable. The respondent
in Cargill argued against arbitrability, also citing therein Gonzales . After dissecting Gonzales ,
this Court ruled in favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause
is conceded, the CA's decision declining referral of the parties' dispute to arbitration is still
correct. It claims that its complaint in the RTC presents the issue of whether under the facts
alleged, it is entitled to rescind the contract with damages; and that issue constitutes a judicial
question or one that requires the exercise of judicial function and cannot be the subject of an
arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we held that a panel of
arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of the
subject contracts on the grounds of fraud and oppression attendant to the execution of the
addendum contract and the other contracts emanating from it, and that the complaint should
have been filed with the regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract
notwithstanding the fact that it assails the validity of such contract. This is due to the doctrine of
separability.91
Under the doctrine of separability, an arbitration agreement is considered as independent of the

main contract.92Being a separate contract in itself, the arbitration agreement may thus be
invoked regardless of the possible nullity or invalidity of the main contract.93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the
doctrine of separability, even the very party who repudiates the main contract may invoke its
arbitration clause.94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of
the petitioner to file a formal "request" or application therefor with the MeTC. We find that the
filing of a "request" pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an
arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is
the subject matter of an arbitration agreement shall, if at least one party so requests not later
that the pre-trial conference, or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable
of being performed. [Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of
A.M. No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special
ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration
agreement, whether contained in an arbitration clause or in a submission agreement, may
request the court to refer the parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action
is filed . - The request for referral shall be made not later than the pre-trial conference. After the
pre-trial conference, the court will only act upon the request for referral if it is made with the
agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is
filed but the parties subsequently enter into an arbitration agreement, they may request the
court to refer their dispute to arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which
shall state that the dispute is covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the
arbitration agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and
time when it would be heard. The party making the request shall serve it upon the respondent to
give him the opportunity to file a comment or opposition as provided in the immediately
succeeding Rule before the hearing. [Emphasis ours; italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a
pending action filed in violation of the arbitration agreement x x x may request the court to refer
the parties to arbitration in accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No.
9285, the Special ADR Rules clearly did not intend to limit the invocation of an arbitration
agreement in a pending suit solely via such "request." After all, non-compliance with an
arbitration agreement is a valid defense to any offending suit and, as such, may even be raised
in an answer as provided in our ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration
before the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer
with Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in
the 2005 Lease Contract96 and, more significantly, of its desire to have the same enforced in
this case.97 This act of petitioner is enough valid invocation of his right to arbitrate. Fourth . The
fact that the petitioner and respondent already under went through JDR proceedings before the
RTC, will not make the subsequent conduct of arbitration between the parties unnecessary or
circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral
evaluation which entails the submission of a dispute before a " JDR judge " who shall merely "
facilitate settlement " between the parties in conflict or make a " non-binding evaluation or
assessment of the chances of each party’s case."98 Thus in JDR, the JDR judge lacks the
authority to render a resolution of the dispute that is binding upon the parties in conflict. In
arbitration, on the other hand, the dispute is submitted to an arbitrator/s —a neutral third person
or a group of thereof— who shall have the authority to render a resolution binding upon the
parties.99
Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the
subsequent conduct of arbitration a mere surplusage. The failure of the parties in conflict to
reach an amicable settlement before the JDR may, in fact, be supplemented by their resort to
arbitration where a binding resolution to the dispute could finally be achieved. This situation
precisely finds application to the case at bench.
Neither would the summary nature of ejectment cases be a valid reason to disregard the
enforcement of the arbitration clause of the 2005 Lease Contract . Notwithstanding the
summary nature of ejectment cases, arbitration still remains relevant as it aims not only to afford
the parties an expeditious method of resolving their dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and
foremost, a product of party autonomy or the freedom of the parties to " make their own
arrangements to resolve their own disputes."100Arbitration agreements manifest not only the
desire of the parties in conflict for an expeditious resolution of their dispute. They also represent,
if not more so, the parties’ mutual aspiration to achieve such resolution outside of judicial
auspices, in a more informal and less antagonistic environment under the terms of their
choosing. Needless to state, this critical feature can never be satisfied in an ejectment case no
matter how summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of the 2005
Lease Agreement in this case, We shall now proceed with the discussion of its legal effects.
Legal Effect of the Application of the

Arbitration Clause
Since there really are no legal impediments to the application of the arbitration clause of the
2005 Contract of Lease in this case, We find that the instant unlawful detainer action was
instituted in violation of such clause. The Law, therefore, should have governed the fate of the
parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue
arising out of an agreement providing for the arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue involved in such suit or proceeding is
referable to arbitration, shall stay the action or proceeding until an arbitration has been had in
accordance with the terms of the agreement: Provided, That the applicant for the stay is not in
default in proceeding with such arbitration.[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is brought in a matter which
is the subject matter of an arbitration agreement shall, if at least one party so requests not later
that the pre-trial conference, or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void, in operative or incapable
of being performed. [Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been
stayed;101 the petitioner and the respondent should have been referred to arbitration pursuant to
the arbitration clause of the 2005 Lease Contract . The MeTC, however, did not do so in
violation of the law—which violation was, in turn, affirmed by the RTC and Court of Appeals on
appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid
all proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with
Counterclaim —the point when the petitioner and the respondent should have been referred to
arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said
point. Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated
and set aside.
The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration
clause of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about to make.
Nonetheless, this Court must make the same if only to stress the point that, in our jurisdiction,
bona fide arbitration agreements are recognized as valid;102 and that laws,103 rules and
regulations104 do exist protecting and ensuring their enforcement as a matter of state policy.
Gone should be the days when courts treat otherwise valid arbitration agreements with disdain
and hostility, if not outright " jealousy,"105 and then get away with it. Courts should instead learn
to treat alternative means of dispute resolution as effective partners in the administration of
justice and, in the case of arbitration agreements, to afford them judicial restraint. 106 Today, this
Court only performs its part in upholding a once disregarded state policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. The case is currently pending before Branch 257 of the RTC,
docketed as Civil Case No. CV 09-0346.
This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may
involve matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease
Contract. However, since the records of Civil Case No. CV 09-0346 are not before this Court,
We can never know with true certainty and only speculate. In this light, let a copy of this
Decision be also served to Branch 257of the RTC of Parañaque for its consideration and,
possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We

hereby render a Decision:
1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court,
Branch 77, of Parañaque City in relation to Civil Case No. 2009-307 after the filing by
petitioner of its Answer with Counterclaim ;
2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing
by petitioner of its Answer with Counterclaim;
3. SETTING ASIDE the following:
a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.

116865,
b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of
Parañaque City in Civil Case No. 10-0255,
c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of
Parañaque City in Civil Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to arbitration pursuant to the

arbitration clause of the 2005 Lease Contract, repeatedly included in the 2000 Lease
Contract and in the 1976 Amended Deed of Donation.
Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.
No costs. SO ORDERED.
G.R. No. 199650 June 26, 2013
J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,

vs.
UTILITY ASSURANCE CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the Decision1 dated January 27,2011 and Resolution2 dated
December 8, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112808.
The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its
Chairman, Joo Han Lee, and Martin E. Mabunay, doing business under the name and style of
Seven Shades of Blue Trading and Services, entered into a Construction Agreement3 whereby
the latter undertook to build the former's 72-room condominium/hotel (Condotel Building 25)
located at the Fairways & Bluewaters Golf & Resort in Boracay Island, Malay, Aklan. The
project, costing ₱42,000,000.00, was to be completed within one year or 365 days reckoned
from the first calendar day after signing of the Notice of Award and Notice to Proceed and
receipt of down payment (20% of contract price). The ₱8,400,000.00 down payment was fully
paid on January 14, 2008.4 Payment of the balance of the contract price will be based on actual
work finished within 15 days from receipt of the monthly progress billings. Per the agreed work
schedule, the completion date of the project was December 2008.5 Mabuhay also submitted the
required Performance Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in
the amount equivalent to 20% down payment or ₱8.4 million.
Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th
monthly progress billing sent by Mabunay. As of September 16, 2008, petitioner had paid the
total amount of ₱15,979,472.03 inclusive of the 20% down payment. However, as of said date,
Mabunay had accomplished only 27.5% of the project.7
In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by
Arch. Elwin Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were
accepted as true, accurate and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and evaluation of the project to determine the
actual percentage of accomplishment, the contracting parties, assisted by their
respective technical groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted
by Engrs. Joey Rojas and Shiela Botardo, concluded and agreed that as of 14
November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%)
complete.
2) Furthermore, the value of construction materials allocated for the completion of the
project and currently on site has been determined and agreed to be ONE MILLION
FORTY NINE THOUSAND THREE HUNDRED SIXTY FOUR PESOS AND FORTY
FIVE CENTAVOS (₱1,049,364.45)
3) The additional accomplishment of SSB, reflected in its reconciled and consolidated

8th and 9th billings, is Three point Eighty Five Percent (3.85%) with a gross value of
₱1,563,553.34 amount creditable to SSB after deducting the withholding tax is
₱1,538,424.84
4) The unrecouped amount of the down payment is ₱2,379,441.53 after deducting the
cost of materials on site and the net billable amount reflected in the reconciled and
consolidated 8th and 9th billings. The uncompleted portion of the project is 68.61% with
an estimated value per construction agreement signed is ₱27,880,419.52.9 (Emphasis
supplied.)
On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay
and respondent surety. As its demands went unheeded, petitioner filed a Request for
Arbitration10 before the Construction Industry Arbitration Commission (CIAC). Petitioner prayed
that Mabunay and respondent be ordered to pay the sums of ₱8,980,575.89 as liquidated
damages and ₱2,379,441.53 corresponding to the unrecouped down payment or overpayment
petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision
works ordered by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the
project since the 365 days period of completion started only on May 2, 2008 after clearing the
retrofitted old structure. Hence, the termination of the contract by petitioner was premature and
the filing of the complaint against him was baseless, malicious and in bad faith.
Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no
cause of action and the complaint states no cause of action against it. The CIAC denied the
motion to dismiss. Respondent’s motion for reconsideration was likewise denied.13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-

claims,14 respondent argued that the performance bond merely guaranteed the 20% down
payment and not the entire obligation of Mabunay under the Construction Agreement. Since the
value of the project’s accomplishment already exceeded the said amount, respondent’s
obligation under the performance bond had been fully extinguished. As to the claim for alleged
overpayment to Mabunay, respondent contended that it should not be credited against the 20%
down payment which was already exhausted and such application by petitioner is tantamount to
reviving an obligation that had been legally extinguished by payment. Respondent also set up a
cross-claim against Mabunay who executed in its favor an Indemnity Agreement whereby
Mabunay undertook to indemnify respondent for whatever amounts it may be adjudged liable to
pay petitioner under the surety bond.
Both petitioner and respondent submitted their respective documentary and testimonial
evidence. Mabunay failed to appear in the scheduled hearings and to present his evidence
despite due notice to his counsel of record. The CIAC thus declared that Mabunay is deemed to
have waived his right to present evidence.15
On February 2, 2010, the CIAC rendered its Decision16 and made the following award:
Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby
adjudges, orders and directs:
1. Respondents Mabunay and Utassco to jointly and severally pay claimant the
following:
a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the rate

of 6% per annum computed from the date of this decision up to the time this
decision becomes final, and 12% per annum computed from the date this
decision becomes final until fully paid, and
b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at the rate

of 6% per annum computed from the date of this decision up to the time this
decision becomes final, and 12% per annum computed from the date this
decision becomes final until fully paid.
It being understood that respondent Utassco’s liability shall in no case exceed ₱8.4
million.
2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, which is

respondent Mabunay’s share in the arbitration cost claimant had advanced, with legal
interest thereon from January 8, 2010 until fully paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent
Utassco will have paid to claimant under this decision, plus interest thereon at the rate of
12% per annum computed from the date he is notified of such payment made by
respondent Utassco to claimant until fully paid, and to pay Utassco ₱100,000.00 as
attorney’s fees.
SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of
Civil Procedure, as amended.
In the assailed decision, the CA agreed with the CIAC that the specific condition in the
Performance Bond did not clearly state the limitation of the surety’s liability. Pursuant to Article
137718 of the Civil Code, the CA said that the provision should be construed in favor of petitioner
considering that the obscurely phrased provision was drawn up by respondent and Mabunay.
Further, the appellate court stated that respondent could not possibly guarantee the down
payment because it is not Mabunay who owed the down payment to petitioner but the other way
around. Consequently, the completion by Mabunay of 31.39% of the construction would not lead
to the extinguishment of respondent’s liability. The ₱8.4 million was a limit on the amount of
respondent’s liability and not a limitation as to the obligation or undertaking it guaranteed.
However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled
petitioner to the stipulated liquidated damages and unrecouped down payment. Citing
Aerospace Chemical Industries, Inc. v. Court of Appeals,19 the appellate court said that not all
requisites in order to consider the obligor or debtor in default were present in this case. It held
that it is only from December 24, 2008 (completion date) that we should reckon default because
the Construction Agreement provided only for delay in the completion of the project and not
delay on a monthly basis using the work schedule approved by petitioner as the reference point.
Hence, petitioner’s termination of the contract was premature since the delay in this case was
merely speculative; the obligation was not yet demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed
Decision dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-
2009 is hereby REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24
November 2010 issued by the same tribunal is hereby ANNULLED and SET ASIDE.
SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while respondent filed a motion for
partial reconsideration. Both motions were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims
under the Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision.
Specifically, petitioner alleged that –
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE

ALTERNATIVE DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON
ALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS
OF JURISDICTION TO REVIEW ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL

AWARD ON AN ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED
IN THE TERMS OF REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT
ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF
AEROSPACE CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94,
WHICH HAS NOTHING TO DO WITH CONSTRUCTION AGREEMENTS.21
Our Ruling
On the procedural issues raised, we find no merit in petitioner’s contention that with the
institutionalization of alternative dispute resolution under Republic Act (R.A.) No.
9285,22 otherwise known as the Alternative Dispute Resolution Act of 2004, the CA was
divested of jurisdiction to review the decisions or awards of the CIAC. Petitioner erroneously
relied on the provision in said law allowing any party to a domestic arbitration to file in the
Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral
award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards
or decisions of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly
declares that confirmation by the RTC is not required, thus:
SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be
governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same manner as final and
executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance
with the Rules of Procedure to be promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as
provided under E.O. No. 1008. (Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over
disputes arising from, or connected with, contracts entered into by parties involved in
construction in the Philippines, whether the dispute arises before or after the completion of the
contract, or after the abandonment or breach thereof. By express provision of Section 19
thereof, the arbitral award of the CIAC is final and unappealable, except on questions of law,
which are appealable to the Supreme Court. With the amendments introduced by R.A. No. 7902
and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in
the enumeration of quasijudicial agencies whose decisions or awards may be appealed to the
CA in a petition for review under Rule 43. Such review of the CIAC award may involve either
questions of fact, of law, or of fact and law.23
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by
this Court and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded
CIAC awards from domestic arbitration awards that need to be confirmed to be executory, said
awards are therefore not covered by Rule 11 of the Special ADR Rules,24 as they continue to be
governed by EO No. 1008, as amended and the rules of procedure of the CIAC. The CIAC
Revised Rules of Procedure Governing Construction Arbitration25 provide for the manner and
mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:
SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by
any of the parties within fifteen (15) days from receipt thereof in accordance with the provisions
of Rule 43 of the Rules of Court.
As to the alleged error committed by the CA in deciding the case upon an issue not raised or
litigated before the CIAC, this assertion has no basis. Whether or not Mabunay had incurred
delay in the performance of his obligations under the Construction Agreement was the very first
issue stipulated in the Terms of Reference26 (TOR), which is distinct from the issue of the extent
of respondent’s liability under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the
liquidated damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings,
the CA opined that delay should be reckoned only after the lapse of the one-year contract
period, and consequently Mabunay’s liability for liquidated damages arises only upon the
happening of such condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason
of a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable
for the damage for not completing it within such time, unless the delay is excused or waived. 28
The Construction Agreement provides in Article 10 thereof the following conditions as to

completion time for the project
1. The CONTRACTOR shall complete the works called for under this Agreement within
ONE (1) YEAR or 365 Days reckoned from the 1st calendar day after signing of the
Notice of Award and Notice to Proceed and receipt of down payment.
2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval
by OWNER within Seven (7) days after signing of this Agreement and full payment of
20% of the agreed contract price. Said detailed work schedule shall follow the general
schedule of activities and shall serve as basis for the evaluation of the progress of work
by CONTRACTOR.29
In this jurisdiction, the following requisites must be present in order that the debtor may be in
default: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.30
In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to
perform or complete the project was not yet demandable as of November 19, 2008 when
petitioner terminated the contract, because the agreed completion date was still more than one
month away (December 24, 2008). Since the parties contemplated delay in the completion of
the entire project, the CA concluded that the failure of the contractor to catch up with schedule
of work activities did not constitute delay giving rise to the contractor’s liability for damages.
We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the
Construction Agreement. Article 1374 of the Civil Code requires that the various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense which may
result from all of them taken jointly. Here, the work schedule approved by petitioner was
intended, not only to serve as its basis for the payment of monthly progress billings, but also for
evaluation of the progress of work by the contractor. Article 13.01 (g) (iii) of the Construction
Agreement provides that the contractor shall be deemed in default if, among others, it had
delayed without justifiable cause the completion of the project "by more than thirty (30) calendar
days based on official work schedule duly approved by the OWNER."31
Records showed that as early as April 2008, or within four months after Mabunay commenced
work activities, the project was already behind schedule for reasons not attributable to
petitioner. In the succeeding months, Mabunay was still unable to catch up with his
accomplishment even as petitioner constantly advised him of the delays, as can be gleaned
from the following notices of delay sent by petitioner’s engineer and construction manager,
Engr. Sheila N. Botardo:
April 30, 2008

Seven Shades of Blue
Boracay Island
Malay, Aklan
1âwphi1
Attention : Mr. Martin Mabunay

General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay
Dear Mr. Mabunay:
This is to formalize our discussion with your Engineers during our meeting last April 23, 2008
regarding the delay in the implementation of major activities based on your submitted
construction schedule. Substantial delay was noted in concreting works that affects your roof
framing that should have been 40% completed as of this date. This delay will create major
impact on your over-all schedule as the finishing works will all be dependent on the enclosure of
the building.
In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of
critical materials on site. We would highly appreciate if you could attend our next regular
meeting so we could immediately address this matter. Thank you.
Very truly yours,
Engr. Sheila N. Botardo

Construction Manager – LMI/FEPI32
October 15, 2008
xxxx
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you have assigned on-site to
administer and supervise your contracted work. For the past two (2) weeks, your company does
not have a Technical Representative manning the jobsite considering the critical activities that
are in progress and the delays in schedule that you have already incurred. In this regard, we
would highly recommend the immediate replacement of your Project Engineer within the week.
We would highly appreciate your usual attention on this matter.
x x x x33
November 5, 2008
xxxx
Dear Mr. Mabunay,
This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30,
2008 regarding the construction of the Field Office and Stock Room for Materials intended for
Villa Beatriz use only. We understand that you have committed to complete it November 5, 2008
but as of this date there is no improvement or any ongoing construction activity on the said field
office and stockroom.
We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is
badly needed. We will highly appreciate if this matter will be given your immediate attention.
Thank you.
x x x x34
November 6, 2008
xxxx
Dear Mr. Mabunay,
We would like to call your attention regarding the decrease in your manpower assigned on site.
We have observed that for the past three (3) weeks instead of increasing your manpower to
catch up with the delay it was reduced to only 8 workers today from an average of 35 workers in
the previous months.
Please note that based on your submitted revised schedule you are already delayed by
approximately 57% and this will worsen should you not address this matter properly.
We are looking forward for [sic] your cooperation and continuous commitment in delivering this
project as per contract agreement.
x x x x35
Subsequently, a joint inspection and evaluation was conducted with the assistance of the
architects and engineers of petitioner and Mabunay and it was found that as of November 14,
2008, the project was only 31.39% complete and that the uncompleted portion was 68.61% with
an estimated value per Construction Agreement as ₱27,880,419.52. Instead of doubling his
efforts as the scheduled completion date approached, Mabunay did nothing to remedy the
delays and even reduced the deployment of workers at the project site. Neither did Mabunay, at
anytime, ask for an extension to complete the project. Thus, on November 19, 2008, petitioner
advised Mabunay of its decision to terminate the contract on account of the tremendous delay
the latter incurred. This was followed by the claim against the Performance Bond upon the
respondent on December 18, 2008.
Petitioner’s claim against the Performance Bond included the liquidated damages provided in
the Construction Agreement, as follows:
ARTICLE 12 – LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the
PROJECT within the period stipulated herein or within the period of extension granted by the
OWNER, plus One (1) Week grace period, without any justifiable reason, the CONTRACTOR
hereby agrees –
a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One
Tenth of One Percent (1/10 of 1%) of the Contract Amount for each day of delay after
any and all extensions and the One (1) week Grace Period until completed by the
CONTRACTOR.
b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted
works and/or delays shall not relieve it of the obligation to complete and finish the
construction.
Any sum which maybe payable to the OWNER for such loss may be deducted from the
amounts retained under Article 9 or retained by the OWNER when the works called for under
this Agreement have been finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the
contractors collectibles without prior consent and concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without
necessity of any further act and deed, authorizes the OWNER to deduct any amount that may
be due under Item (a) above, from any and all money or amounts due or which will become due
to the CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the
Performance Bond filed by the CONTRACTOR in this Agreement.36 (Emphasis supplied.)
Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which
provide:
ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid
in case of breach thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

equitably reduced if they are iniquitous or unconscionable.
ART. 2228. When the breach of the contract committed by the defendant is not the one
contemplated by the parties in agreeing upon the liquidated damages, the law shall determine
the measure of damages, and not the stipulation.
A stipulation for liquidated damages is attached to an obligation in order to ensure performance

and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event of
breach.37 The amount agreed upon answers for damages suffered by the owner due to delays
in the completion of the project.38 As a precondition to such award, however, there must be
proof of the fact of delay in the performance of the obligation.39
Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the
contractor to complete the project within the stipulated period or the extension granted by the
owner. However, this will not defeat petitioner’s claim for damages nor respondent’s liability
under the Performance Bond. Mabunay was clearly in default considering the dismal
percentage of his accomplishment (32.38%) of the work he contracted on account of delays in
executing the scheduled work activities and repeated failure to provide sufficient manpower to
expedite construction works. The events of default and remedies of the Owner are set forth in
Article 13, which reads:
ARTICLE 13 – DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the part of the
CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or has
suspended the progress of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project by more than
thirty (30) calendar days based on official work schedule duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the construction
works in accordance with the Agreement or is persistently or flagrantly neglecting to
carry out its obligations under the Agreement.
(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions
to the contrary, sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the
OWNER may after giving fourteen (14) calendar days notice in writing to the CONTRACTOR,
enter upon the site and expel the CONTRACTOR therefrom without voiding this Agreement, or
releasing the CONTRACTOR from any of its obligations, and liabilities under this Agreement.
Also without diminishing or affecting the rights and powers conferred on the OWNER by this
Agreement and the OWNER may himself complete the work or may employ any other
contractor to complete the work. If the OWNER shall enter and expel the CONTRACTOR under
this clause, the OWNER shall be entitled to confiscate the performance bond of the
CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses
incurred to finish the Project shall be charged to the CONTRACTOR and/or his bond. Further,
the OWNER shall not be liable to pay the CONTRACTOR until the cost of execution, damages
for the delay in the completion, if any, and all; other expenses incurred by the OWNER have
been ascertained which amount shall be deducted from any money due to the CONTRACTOR
on account of this Agreement. The CONTRACTOR will not be compensated for any loss of
profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity,
additional financing cost or overhead or opportunity losses related to the unaccomplished
portions of the work.40 (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to his failure to
substantially perform the work on account of tremendous delays in executing the scheduled
work activities. Where a party to a building construction contract fails to comply with the duty
imposed by the terms of the contract, a breach results for which an action may be maintained to
recover the damages sustained thereby, and of course, a breach occurs where the contractor
inexcusably fails to perform substantially in accordance with the terms of the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to
confiscate the Performance Bond to answer for all kinds of damages it may suffer as a result of
the contractor’s failure to complete the building. Having elected to terminate the contract and
expel the contractor from the project site under Article 13 of the said Agreement, petitioner is
clearly entitled to the proceeds of the bond as indemnification for damages it sustained due to
the breach committed by Mabunay. Such stipulation allowing the confiscation of the contractor’s
performance bond partakes of the nature of a penalty clause. A penalty clause, expressly
recognized by law, is an accessory undertaking to assume greater liability on the part of the
obligor in case of breach of an obligation. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages resulting from such
a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity
of proof on the existence and on the measure of damages caused by the breach. It is well-
settled that so long as such stipulation does not contravene law, morals, or public order, it is
strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because
by the terms of the surety bond it issued, its liability is limited to the performance by said
contractor to the extent equivalent to 20% of the down payment. It stresses that with the 32.38%
completion of the project by Mabunay, its liability was extinguished because the value of such
accomplishment already exceeded the sum equivalent to 20% down payment (₱8.4 million).
The appellate court correctly rejected this theory of respondent when it ruled that the
Performance Bond guaranteed the full and faithful compliance of Mabunay’s obligations under
the Construction Agreement, and that nowhere in law or jurisprudence does it state that the
obligation or undertaking by a surety may be apportioned.
The pertinent portions of the Performance Bond provide:
The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION
AND DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down
payment for the construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings
inside Fairways and Bluewater, Boracay Island, Malay, Aklan.
Whereas, said contract required said Principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithful performance on his part of said contract.
It is a special provision of this undertaking that the liability of the surety under this bond shall in
no case exceed the sum of ₱8,400,000.00 Philippine Currency.
Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings,
covenants, terms, conditions and agreements stipulated in said contract, then this obligation
shall be null and void; otherwise to remain in full force and effect.43 (Emphasis supplied.)
While the above condition or specific guarantee is unclear, the rest of the recitals in the bond
unequivocally declare that it secures the full and faithful performance of Mabunay’s obligations
under the Construction Agreement with petitioner. By its nature, a performance bond
guarantees that the contractor will perform the contract, and usually provides that if the
contractor defaults and fails to complete the contract, the surety can itself complete the contract
or pay damages up to the limit of the bond.44 Moreover, the rule is that if the language of the
bond is ambiguous or uncertain, it will be construed most strongly against a compensated
surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the
Project Owner, for whose benefit it was ostensibly executed.45
The imposition of interest on the claims of petitioner is likewise in order. As we held in

Commonwealth Insurance Corporation v. Court of Appeals46
Petitioner argues that it should not be made to pay interest because its issuance of the surety
bonds was made on the condition that its liability shall in no case exceed the amount of the said
bonds.
We are not persuaded. Petitioner’s argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.
and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and
more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc.,
we have sustained the principle that if a surety upon demand fails to pay, he can be held liable
for interest, even if in thus paying, its liability becomes more than the principal obligation. The
increased liability is not because of the contract but because of the default and the necessity of
judicial collection.
Petitioner’s liability under the suretyship contract is different from its liability under the
law.1âwphi1 There is no question that as a surety, petitioner should not be made to pay more
than its assumed obligation under the surety bonds. However, it is clear from the above-cited
jurisprudence that petitioner’s liability for the payment of interest is not by reason of the
suretyship agreement itself but because of the delay in the payment of its obligation under the
said agreement.47 (Emphasis supplied; citations omitted.)
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January
27, 2011 and Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No.
112808 are hereby REVERSED and SET ASIDE.
The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration
Commission Is hereby REINSTATED with the following MODIFICATIONS:
"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby
adjudges, orders and directs:
1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full
amount of the Performance Bond, ₱8,400,000.00, pursuant to Art. 13 of the Construction
Agreement dated December 24, 2007, with interest at the rate of 6% per annum
computed from the date of the filing of the complaint until the finality of this decision, and
12% per annum computed from the date this decision becomes final until fully paid; and
2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent

Utassco will have paid to claimant under this decision, plus interest thereon at the rate of
12% per annum computed from the date he is notified of such payment made by
respondent Utassco to claimant until fully paid, and to pay Utassco ₱100,000.00 as
attorney's fees.
SO ORDERED.
With the above modifications, the Writ of Execution dated November 24, 2010 issued by the
CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 91228. March 22, 1993.
PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC,
INC., respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND

DELIVERY. — We agree with the court a quo that the sales contract is comprehensive enough
to include claims for damages arising from carriage and delivery of the goods. As a general rule,
the seller has the obligation to transmit the goods to the buyer, and concomitant thereto, the
contracting of a carrier to deliver the same.
2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER

PARTIES, CONSTRUED. — American jurisprudence defines charter party as a contract by
which an entire ship or some principal part thereof is let by the owner to another person for a
specified time or use. Charter or charter parties are of two kinds. Charter of demise or bareboat
and contracts of affreightment.
3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. — Under the demise or
bareboat charter of the vessel, the charterer will generally be considered as owner for the
voyage or service stipulated. The charterer mans the vessel with his own people and becomes,
in effect, the owner pro hac vice, subject to liability to others for damages caused by negligence.
To create a demise the owner of a vessel must completely and exclusively relinquish
possession, anything short of such a complete transfer is a contract of affreightment (time or
voyage charter party) or not a charter party at all.
4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. — A contract of

affreightment is in which the owner of the vessel leases part or all of its space to haul goods for
others. It is a contract for a special service to be rendered by the owner of the vessel and under
such contract the general owner retains the possession, command and navigation of the ship,
the charterer or freighter merely having use of the space in the vessel in return for his payment
of the charter hire. If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on
the owner and the charterer is usually free from liability to third persons in respect of the ship.
5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A
VESSEL. — Responsibility to third persons for goods shipped on board a vessel follows the
vessel's possession and employment; and if possession is transferred to the charterer by virtue
of a demise, the charterer, and not the owner, is liable as carrier on the contract of affreightment
made by himself or by the master with third persons, and is answerable for loss, damage or
non-delivery of goods received for transportation. An owner who retains possession of the ship,
though the hold is the property of the charterer, remains liable as carrier and must answer for
any breach of duty as to the care, loading or unloading of the cargo.
6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED
AND RESPECTED. — Whether the liability of respondent should be based on the same
contract or that of the bill of lading, the parties are nevertheless obligated to respect the
arbitration provisions on the sales contract and/or the bill of lading. Petitioner being a signatory
and party to the sales contract cannot escape from his obligation under the arbitration clause as
stated therein. Arbitration has been held valid and constitutional. Even before the enactment of
Republic Act No. 876, this Court has countenanced the settlement of disputes through
arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of
the courts against the parties, which agreement would be void, the courts will look with favor
upon such amicable arrangements and will only interfere with great reluctance to anticipate or
nullify the action of the arbitrator. As pointed out in the case of Mindanao Portland Cement
Corp. v. McDough Construction Company of Florida 18 wherein the plaintiff sued defendant for
damages arising from a contract, the Court said: "Since there obtains herein a written provision
for arbitration as well as failure on respondent's part to comply therewith, the court a quo rightly
ordered the parties to proceed to their arbitration in accordance with the terms of their
agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the merits of the
dispute are improperly raised herein. They should be addressed to the arbitrators. This
proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the
court in this case is not to resolve the merits of the parties' claims but only to determine if they
should proceed to arbitration or not. And although it has been ruled that a privolous or patently
baseless claim should not be ordered to arbitration it is also recognized that the mere fact that a
defense exist against a claim does not make it frivolous or baseless."
7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED

THEREOF, PART OF THE RECORD. — Petitioner contend that the arbitration provision in the
bills of lading should not have been discussed as an issue in the decision of the Court of
Appeals since it was not raised as a special or affirmative defense. The three bills of lading were
attached to the complaint as Annexes "A," "B," and "C," and are therefore parts thereof and may
be considered as evidence although not introduced as such. Hence, it was then proper for the
court a quo to discuss the contents of the bills of lading, having been made part of the record.
DECISION
NOCON, J p:
This is a special civil action for certiorari and prohibition to annul and set aside the Decision of
the respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial
court and dismissing petitioner's compliant in Civil Case No. 89-47403, entitled Puromines, Inc.
v. Maritime Factors, Inc. and Philipp Brothers Oceanic, Inc.
Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines
for brevity) and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with
private respondents Philipp Brothers Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales
Contract No. S151.8.01018 provided, among others an arbitration clause which states, thus:
"9. Arbitration
"Any disputes arising under this contract shall be settled by arbitration in London in accordance
with the Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is
to appoint an Arbitrator, and should they be unable to agree, the decision of an Umpire
appointed by them to be final. The Arbitrators and Umpire are all to be commercial men and
resident in London. This submission may be made a rule of the High Court of Justice in England
by either party." 2
On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny,
USSR a shipment of 15,500 metric tons prilled Urea in bulk complete and in good order and
condition for transport to Iloilo and Manila, to be delivered to petitioner. Three bills of lading
were issued by the ship-agent in the Philippines, Maritime Factors Inc., namely: Bill of Lading
No. dated May 12, 1988 covering 10,000 metric tons for discharge Manila; Bill of Lading No. 2
of even date covering 4,000 metric tons for unloading in Iloilo City; and Bill of Lading No. 3, also
dated May 12, 1988, covering 1,500 metric tons likewise for discharged in Manila
The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good
order and condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were
discharged in Manila in bad order and condition, caked, hardened and lumpy, discolored and
contaminated with rust and dirt. Damages were valued at P683, 056. 29 including additional
discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of
carriage against Maritime Factors Inc. (which was not included as respondent in this petition) as
ship-agent in the Philippines for the owners of the vessel MV "Liliana Dimitrova," while private
respondent, Philipp Brothers Oceanic Inc., was impleaded as charterer of the said vessel and
proper party to accord petitioner complete relief. Maritime Factors, Inc. filed its Answer 5 to the
complaint, while private respondent filed a motion to dismiss, dated February 9, 1989, on the
grounds that the complaint states no cause of action; that it was prematurely filed; and that
petitioner should comply with the arbitration clause in the sales contract. 6
The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration
clause inasmuch as the cause of action did not arise from a violation of the terms of the sales
contract but rather for claims of cargo damages where there is no arbitration agreement. On
April 26, 1989, the trial court denied respondent's motion to dismiss in this wise:
"The sales contract in question states in part:
'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)
"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the
cause of action of the complaint arose from a breach of contract of carriage by the vessel
chartered by the defendant Philipp Brothers Oceanic, Inc. Thus, the aforementioned arbitration
clause cannot apply to the dispute in the present action which concerns plaintiff's claim for cargo
loss/damage arising from breach of contract of carriage.
"That the defendant is not the ship owner or common carrier and therefore plaintiff does not
have legal right against it since every action must be brought against the real party in interest
has no merit either for by the allegations in the complaint the defendant herein has been
impleaded as charterer of the vessel, hence, a proper party." 7
Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The
appellate court found that the arbitration provision in the sales contract and/or the bills of lading
is applicable in the present case. Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to
include the claim for damages arising from the carriage and delivery of the goods subject-matter
thereof.
"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state,
in part, 'any dispute arising under this Bill of Lading shall be referred to arbitration of the
Maritime Arbitration Commission at the USSR Chamber of Commerce and Industry, 6
Kuibyshevskaia Str., Moscow, USSR, in accordance with the rules of procedure of said
commission.'
Considering that the private respondent was one of the signatories to the sales contract . . . all
parties are obliged o respect the terms and conditions of the said sales contract, including the
provision thereof on 'arbitration.' "
Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this
contract" in the arbitration clause of the sales contract covers a cargo claim against the vessel
(owner and/or charterers) for breach of contract of carriage.
Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV
'Liliana Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner
further alleged that the caking and hardening, wetting and melting, and contamination by rust
and dirt of the damaged portions of the shipment were due to the improper ventilation and
inadequate storage facilities of the vessel; that the wetting of the cargo was attributable to the
failure of the crew to close the hatches before and when it rained while the shipment was being
unloaded in the Port of Manila; and that as a direct and natural consequence of the
unseaworthiness and negligence of the vessel (sic), petitioner suffered damages in the total
amount of P683, 056.29 Philippine currency." 8 (Emphasis supplied)
Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of
the complaint arose from breach of contract of carriage by the vessel that was chartered by
defendant Philipp Brothers." 9
In the present petition, petitioner argues that the sales contract does not include the contract of
carriage which is a different contract entered into by the carrier with the cargo owners. That it
was an error for the respondent court to touch upon the arbitration provision of the bills lading in
its decision inasmuch as the same was not raised as an issue by private respondent who was
not a party in the bills of lading (emphasis Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is comprehensive enough to include
claims for damages arising from carriage and delivery of the goods. As a general rule, the seller
has the obligation to transmit the goods to the buyer, and concomitant thereto, the contracting of
a carrier to deliver the same. Art. 1523 of the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send
the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not,
for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the
buyer, except in the cases provided for in article 1503, first, second and third paragraphs, or
unless a contrary intent appear.
"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on
behalf of the buyer as may be reasonable, having regard to the nature of the goods and the
other circumstances of the case. If the seller omit so to do, and the goods are lost or damaged
in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to
himself,, or may hold the seller responsible in damages."
xxx xxx xxx
The disputed sales contact provides for conditions relative to the delivery of goods, such as date
of shipment, demurrage, weight as determined by the bill of lading at load port and more
particularly the following provisions:
"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and
approximately 15,000 metric tons to Makati Agro. However, Sellers to have right to ship material
as partial shipment or co-shipment in addition to above. In the event of co-shipment to a third
party within Philippines same to be discussed with and acceptable to both Puromines and
Makati Agro.
"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first
discharge port and final survey at last discharge port. Surveyors results to be binding and final.
In the event draft survey results show a quantity less than the combined Bills of Lading quantity
for both Puromines and Makati Agro, Sellers to refund the difference. In the event that draft
survey results show a quantity in excess of combined Bills of Lading of quantity of both
Puromines and Makati Agro then Buyers to refund the difference.
"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability
to separate cargo or to deliver cargo separately or to deliver minimum/maximum quantities
stated on individual Bills of Lading. At each port vessel is to discharge in accordance with
Buyers local requirements and it is Buyer's responsibility to separate individual quantities
required by each of them at each port during or after discharged."
As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo
from the bill of lading which is the contract of affreightment together with the sales contract.
Consequently, the (petitioner) is bound by the provisions and terms of said bill of lading and of
the arbitration clause incorporated in the sales contract."
Assuming arguendo that the liability of respondent is not based on the sales contract, but rather
on the contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would,
therefore, be material to show what kind of charter party the respondent had with the shipowner
to determine respondent's liability.
American jurisprudence defines charter party as a contract by which an entire ship or some
principal part thereof is let by the owner to another person for a specified time or use. 10
Charter or charter parties are of two kinds. Charter of demise or bareboat and contracts of
affreightment.
Under the demise or bareboat charter of the vessel, the charterer will generally be considered
as owner for the voyage or service stipulated. The charterer mans the vessel with his own
people and becomes, in effect, the owner pro hac vice, subject to liability to others for damages
caused by negligence. 11 To create a demise the owner of a vessel must completely and
exclusively relinquish possession, anything short of such a complete transfer is a contract of
affreightment (time or voyage charter party) or not a charter party at all.
On the other hand, a contract of affreightment is in which the owner of the vessel leases part or
all of its space to haul goods for others. It is a contract for a special service to be rendered by
the owner of the vessel 12 and under such contract the general owner retains the possession,
command and navigation of the ship, the charterer or freighter merely having use of the space
in the vessel in return for his payment of the charter hire. 13 If the charter is a contract of
affreightment, which leaves the general owner in possession of the ship as owner for the
voyage, the rights, responsibilities of ownership rest on the owner and the charterer is usually
free from liability to third persons in respect of the ship. 14
Responsibility to third persons for goods shipped on board a vessel follows the vessel's
possession and employment; and if possession is transferred to the charterer by virtue of a
demise, the charterer, and not the owner, is liable as carrier on the contract of affreightment
made by himself or by the master with third persons, and is answerable for loss, damage or
non-delivery of goods received for transportation. An owner who retains possession of the ship,
though the hold is the property of the charterer, remains liable as carrier and must answer for
any breach of duty as to the care, loading or unloading of the cargo. 15
Assuming that in the present case, the charter party is a demise or bareboat charter, then
Philipp Brothers is liable to Puromines, Inc., subject to the terms and conditions of the sales
contract. On the other hand, if the contract between respondent and the owner of the vessel MV
"Liliana Dimitrova" was merely that of affreightment, then it cannot be held liable for the
damages caused by the breach of contract of carriage, the evidence of which is the bills of
lading
In any case, whether the liability of respondent should be based on the same contract or that of
the bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on
the sales contract and/or the bill of lading. Petitioner being a signatory and party to the sales
contract cannot escape from his obligation under the arbitration clause as stated therein.
Neither can petitioner contend that the arbitration provision in the bills of lading should not have
been discussed as an issue in the decision of the Court of Appeals since it was not raised as a
special or affirmative defense. The three bills of lading were attached to the complaint as
Annexes "A," "B," and "C," and are therefore parts thereof and may be considered as evidence
although not introduced as such. 16 Hence, it was then proper for the court a quo to discuss the
contents of the bills of lading, having been made part of the record.
Going back to the main subject of this case, arbitration has been held valid and constitutional.
Even before the enactment of Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. The rule now is that unless the agreement is such as
absolutely to close the doors of the courts against the parties, which agreement would be void,
the courts will look with favor upon such amicable arrangements and will only interfere with
great reluctance to anticipate or nullify the action of the arbitrator. 17
As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction
Company of Florida 18 wherein the plaintiff sued defendant for damages arising from a contract,
the Court said:
"Since there obtains herein a written provision for arbitration as well as failure on respondent's
part to comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration
in accordance with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's
arguments touching upon the merits of the dispute are improperly raised herein. They should be
addressed to the arbitrators. This proceeding is merely a summary remedy to enforce the
agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the
parties' claims but only to determine if they should proceed to arbitration or not. And although it
has been ruled that a frivolous or patently baseless claim should not be ordered to arbitration it
is also recognized that the mere fact that a defense exist against a claim does not make it
frivolous or baseless." 19
In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the
parties to submit their disputes to arbitration and We held as follows:
"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended
complaint are based upon the supposed violations committed by the defendants of the 'Contract
of Construction of a Building' and that 'the provisions of paragraph 15 hereof leave a very little
room for doubt that the said causes of action are embraced within the phrase 'any and all
questions, disputes or differences between the parties hereto relative to the construction of the
building,' which must be determined by arbitration of two persons and such determination by the
arbitrators shall be 'final, conclusive and binding upon both parties unless they to court, in which
the case the determination by arbitration is a condition precedent 'for taking any court action."
xxx xxx xxx
"We hold that the terms of paragraph 15 clearly express the intention of the parties that all
disputes between them should first be arbitrated before court action can be taken by the
aggrieved party." 21
Premises considered, We uphold the validity and applicability of the arbitration clause as stated
in Sales Contract No. S151.8.01018 to the present dispute.
WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 96283 February 25, 1992
CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG
KUO-CHANG, HUANG AN-CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE
B. AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and
VIRGILIO M. DEL ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail

Court of Makati [Branch 57]) and ROBLECOR PHILIPPINES, INC., respondents.
ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July 31, 1990
and August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-
1335. Respondent Court of Appeals affirmed the ruling of the trial court that herein petitioners,
after submitting themselves for arbitration and agreeing to the terms and conditions thereof,
providing that the arbitration award shall be final and unappealable, are precluded from seeking
judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for
brevity) and private respondent Roblecor Philippines, Inc. (Roblecor for short) forged a
construction agreement 1 whereby respondent contractor committed to construct and finish on
December 31, 1989, petitioner corporation's industrial/factory complex in Tanawan, Tanza,
Cavite for and in consideration of P42,000,000.00. In the event of disputes arising from the
performance of subject contract, it was stipulated therein that the issue(s) shall be submitted for
resolution before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2)
other ancillary contracts, to wit: one dated June 23, 1989, for the construction of a dormitory and
support facilities with a contract price of P3,875,285.00, to be completed on or before October
31, 1989; 2 and the other dated August 12, 1989, for the installation of electrical, water and
hydrant systems at the plant site, commanding a price of P12.1 million and requiring completion
thereof one month after civil works have been finished. 3
However, respondent Roblecor failed to complete the work despite the extension of time
allowed it by Chung Fu. Subsequently, the latter had to take over the construction when it had
become evident that Roblecor was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of

P2,370,179.23, Roblecor on May 18, 1990, filed a petition for Compulsory Arbitration with
prayer for Temporary Restraining Order before respondent Regional Trial Court, pursuant to the
arbitration clause in the construction agreement. Chung Fu moved to dismiss the petition and
further prayed for the quashing of the restraining order.
Subsequent negotiations between the parties eventually led to the formulation of an arbitration
agreement which, among others, provides:
2. The parties mutually agree that the arbitration shall proceed in accordance
with the following terms and conditions: —
xxx xxx xxx
d. The parties mutually agree that they will abide by the decision
of the arbitrator including any amount that may be awarded to
either party as compensation, consequential damage and/or
interest thereon;
e. The parties mutually agree that the decision of the arbitrator

shall be final and unappealable. Therefore, there shall be no
further judicial recourse if either party disagrees with the whole or
any part of the arbitrator's award.
f. As an exception to sub-paragraph (e) above, the parties

mutually agree that either party is entitled to seek judicial
assistance for purposes of enforcing the arbitrator's award;
xxx xxx xxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration agreement thru its Order of May 30,
1990. Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent
contractor, the sum of P16,108,801.00. He further declared the award as final and
unappealable, pursuant to the Arbitration Agreement precluding judicial review of the award.
Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung
Fu moved to remand the case for further hearing and asked for a reconsideration of the
judgment award claiming that Arbitrator Asuncion committed twelve (12) instances of grave
error by disregarding the provisions of the parties' contract.
Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek
reconsideration therefrom but to no avail. The trial court granted Roblecor's Motion for
Confirmation of Award and accordingly, entered judgment in conformity therewith. Moreover, it
granted the motion for the issuance of a writ of execution filed by respondent.
Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On
October 22,1990 the assailed resolution was issued. The respondent appellate court concurred
with the findings and conclusions of respondent trial court resolving that Chung Fu and its
officers, as signatories to the Arbitration Agreement are bound to observe the stipulations
thereof providing for the finality of the award and precluding any appeal therefrom.
A motion for reconsideration of said resolution was filed by petitioner, but it was similarly denied
by respondent Court of Appeals thru its questioned resolution of December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
Respondents Court of Appeals and trial Judge gravely abused their discretion
and/or exceeded their jurisdiction, as well as denied due process and substantial
justice to petitioners, — (a) by refusing to exercise their judicial authority and
legal duty to review the arbitration award, and (b) by declaring that petitioners are
estopped from questioning the arbitration award allegedly in view of the
stipulations in the parties' arbitration agreement that "the decision of the arbitrator
shall be final and unappealable" and that "there shall be no further judicial
recourse if either party disagrees with the whole or any part of the arbitrator's
award."
Second
Respondent Court of Appeals and trial Judge gravely abused their discretion
and/or exceeded their jurisdiction, as well as denied due process and substantial
justice to petitioner, by not vacating and annulling the award dated 30 June 1990
of the Arbitrator, on the ground that the Arbitrator grossly departed from the
terms of the parties' contracts and misapplied the law, and thereby exceeded the
authority and power delegated to him. (Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of
dispute settlement.
Because conflict is inherent in human society, much effort has been expended by men and
institutions in devising ways of resolving the same. With the progress of civilization, physical
combat has been ruled out and instead, more specific means have been evolved, such as
recourse to the good offices of a disinterested third party, whether this be a court or a private
individual or individuals.
Legal history discloses that "the early judges called upon to solve private conflicts were primarily
the arbiters, persons not specially trained but in whose morality, probity and good sense the
parties in conflict reposed full trust. Thus, in Republican Rome, arbiter and judge (judex) were
synonymous. The magistrate or praetor, after noting down the conflicting claims of litigants, and
clarifying the issues, referred them for decision to a private person designated by the parties, by
common agreement, or selected by them from an apposite listing (the album judicium) or else
by having the arbiter chosen by lot. The judges proper, as specially trained state officials
endowed with own power and jurisdiction, and taking cognizance of litigations from beginning to
end, only appeared under the Empire, by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been an accepted alternative to
litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines,
it was nonetheless recognized in the Spanish Civil Code; specifically, the provisions on
compromises made applicable to arbitrations under Articles 1820 and 1821.7 Although said
provisions were repealed by implication with the repeal of the Spanish Law of Civil
Procedure, 8 these and additional ones were reinstated in the present Civil Code. 9
Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103 (1936) provided for compulsory arbitration as the
state policy to be administered by the Court of Industrial Relations, in time such a modality gave
way to voluntary arbitration. While not completely supplanting compulsory arbitration which until
today is practiced by government officials, the Industrial Peace Act which was passed in 1953
as Republic Act No. 875, favored the policy of free collective bargaining, in general, and resort
to grievance procedure, in particular, as the preferred mode of settling disputes in industry. It
was accepted and enunciated more explicitly in the Labor Code, which was passed on
November 1, 1974 as Presidential Decree No. 442, with the amendments later introduced by
Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations, arbitration was

gaining wide acceptance. A consensual process, it was preferred to orders imposed by
government upon the disputants. Moreover, court litigations tended to be time-consuming,
costly, and inflexible due to their scrupulous observance of the due process of law doctrine and
their strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the courts toward arbitration

agreements is slowly crystallizing into definite and workable form. . . . The rule
now is that unless the agreement is such as absolutely to close the doors of the
courts against the parties, which agreement would be void, the courts will look
with favor upon such amicable arrangements and will only with great reluctance
interfere to anticipate or nullify the action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged
when Republic Act No. 876 (1953), otherwise known as the Arbitration Law, was passed. "Said
Act was obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that
"the provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in
force." 11
In recognition of the pressing need for an arbitral machinery for the early and expeditious
settlement of disputes in the construction industry, a Construction Industry Arbitration
Commission (CIAC) was created by Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes via a
particular mode, it is the regular courts that remain the fora to resolve such matters. However,
the parties may opt for recourse to third parties, exercising their basic freedom to "establish
such stipulation, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or public policy." 12 In such a case,
resort to the arbitration process may be spelled out by them in a contract in anticipation of
disputes that may arise between them. Or this may be stipulated in a submission agreement
when they are actually confronted by a dispute. Whatever be the case, such recourse to an
extrajudicial means of settlement is not intended to completely deprive the courts of jurisdiction.
In fact, the early cases on arbitration carefully spelled out the prevailing doctrine at the time,
thus: ". . . a clause in a contract providing that all matters in dispute between the parties shall be
referred to arbitrators and to them alone is contrary to public policy and cannot oust the courts
of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing
dispute to one is valid. Being part of a contract between the parties, it is binding and enforceable
in court in case one of them neglects, fails or refuses to arbitrate. Going a step further, in the
event that they declare their intention to refer their differences to arbitration first before taking
court action, this constitutes a condition precedent, such that where a suit has been instituted
prematurely, the court shall suspend the same and the parties shall be directed forthwith to
proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not been selected by the
parties. 15
Under present law, may the parties who agree to submit their disputes to arbitration further
provide that the arbitrators' award shall be final, unappealable and executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
Any stipulation that the arbitrators' award or decision shall be final is valid,
without prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be
final and inappealable except on questions of law which shall be appealable to the Supreme
Court." 16
Under the original Labor Code, voluntary arbitration awards or decisions were final,
unappealable and executory. "However, voluntary arbitration awards or decisions on money
claims, involving an amount exceeding One Hundred Thousand Pesos (P100,000.00) or forty-
percent (40%) of the paid-up capital of the respondent employer, whichever is lower, maybe
appealed to the National Labor Relations Commission on any of the following grounds: (a)
abuse of discretion; and (b) gross incompetence." 17 It is to be noted that the appeal in the
instances cited were to be made to the National Labor Relations Commission and not to the
courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary
arbitrator is now mandated to render an award or decision within twenty (20) calendar days from
the date of submission of the dispute and such decision shall be final and executory after ten
(10) calendar days from receipt of the copy of the award or decision by the parties. 18
Where the parties agree that the decision of the arbitrator shall be final and unappealable as in
the instant case, the pivotal inquiry is whether subject arbitration award is indeed beyond the
ambit of the court's power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of
the arbitrators' award is not absolute and without exceptions. Where the conditions described in
Articles 2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the
arbitrators' award may be annulled or rescinded. 19 Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating, modifying or rescinding an arbitrator's
award. 20 Thus, if and when the factual circumstances referred to in the above-cited provisions
are present, judicial review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to
determine whether it is in accordance with law or within the scope of his authority? How may the
power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is
to be borne in mind, however, that this action will lie only where a grave abuse of discretion or
an act without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown.
For "the writ of certiorari is an extra-ordinary remedy and that certiorari jurisdiction is not to be
equated with appellate jurisdiction. In a special civil action of certiorari, the Court will not engage
in a review of the facts found nor even of the law as interpreted or applied by the arbitrator
unless the supposed errors of fact or of law are so patent and gross and prejudicial as to
amount to a grave abuse of discretion or an exces de pouvoir on the part of the arbitrator." 21
Even decisions of administrative agencies which are declared "final" by law are not exempt from
judicial review when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al. v.
Flerida Ruth P. Romero, et al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making "final" the decisions of certain

administrative agencies, we have taken cognizance of petitions questioning
these decisions where want of jurisdiction, grave abuse of discretion, violation of
due process, denial of substantial justice or erroneous interpretation of the
lawwere brought to our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a
quasi-judicial capacity. 24 It stands to reason, therefore, that their decisions should not be
beyond the scope of the power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of
which allege error on the part of the arbitrator in granting compensation for various items which
apparently are disputed by said petitioners:
1. The Honorable Arbitrator committed grave error in failing to apply the terms
and conditions of the Construction Agreement, Dormitory Contract and Electrical
Contract, and in using instead the "practices" in the construction industry;
2. The Honorable Arbitrator committed grave error in granting extra

compensation to Roblecor for loss of productivity due to adverse weather
conditions;

compensation to Roblecor for loss due to delayed payment of progress billings;

compensation to Roblecor for loss of productivity due to the cement crisis;

compensation to Roblecor for losses allegedly sustained on account of the
failed coup d'état;
6. The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing the alleged unpaid billings of Chung Fu;

amount representing the alleged extended overhead expenses;

amount representing expenses for change order for site development outside the
area of responsibility of Roblecor;

cost of warehouse No. 2;
10. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct change in dimension;
11. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct plastering; and
12. The Honorable Arbitrator committed grave error in awarding to Roblecor

attorney's fees.
After closely studying the list of errors, as well as petitioners' discussion of the same in their
Motion to Remand Case For Further Hearing and Reconsideration and Opposition to Motion for
Confirmation of Award, we find that petitioners have amply made out a case where the voluntary
arbitrator failed to apply the terms and provisions of the Construction Agreement which forms
part of the law applicable as between the parties, thus committing a grave abuse of discretion.
Furthermore, in granting unjustified extra compensation to respondent for several items, he
exceeded his powers — all of which would have constituted ground for vacating the award
under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case, despite prima
facie showing of the existence of grounds warranting judicial review, effectively deprived
petitioners of their opportunity to prove or substantiate their allegations. In so doing, the trial
court itself committed grave abuse of discretion. Likewise, the appellate court, in not giving due
course to the petition, committed grave abuse of discretion. Respondent courts should not shirk
from exercising their power to review, where under the applicable laws and jurisprudence, such
power may be rightfully exercised; more so where the objections raised against an arbitration
award may properly constitute grounds for annulling, vacating or modifying said award under
the laws on arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
October 22, 1990 and December 3, 1990 as well as the Orders of respondent Regional Trial
Court dated July 31, 1990 and August 23, 1990, including the writ of execution issued pursuant
thereto, are hereby SET ASIDE. Accordingly, this case is REMANDED to the court of origin for
further hearing on this matter. All incidents arising therefrom are reverted to the status quo
ante until such time as the trial court shall have passed upon the merits of this case. No costs.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
[G.R. No. 139273. November 28, 2000]

CALIFORNIA AND HAWAIIAN SUGAR COMPANY; PACIFIC GULF MARINE, INC.; and C.F.
SHARP & COMPANY, petitioners, vs. PIONEER INSURANCE AND SURETY
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the pre-1997 Rules of Court, a preliminary hearing on affirmative defenses may be
allowed when a motion to dismiss has not been filed or when, having been filed, it has not been
denied unconditionally. Hence, if its resolution has merely been deferred, the grounds it invokes
may still be raised as affirmative defenses, and a preliminary hearing thereon allowed.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the January 21, 1999 Decision of the Court of Appeals[1] (CA) in CA-GR SP No. 33723, as well
as the July 6, 1999 CA Resolution[2] denying reconsideration. The challenged Decision, which
sustained the Orders[3]of the Regional Trial Court of Makati City, disposed as follows:
WHEREFORE, [there being] no grave abuse of discretion on the part of public respondent, the
instant petition is hereby DISMISSED.[4](emphasis in the original)
The Facts
The facts, as summarized by the CA, are as follows:
On November 27, 1990, the vessel MV SUGAR ISLANDER arrived at the port of Manila
carrying a cargo of soybean meal in bulk consigned to several consignees, one of which was
the Metro Manila Feed Millers Association (Metro for [b]revity). Discharging of cargo from vessel
to barges commenced on November 30, 1990. From the barges, the cargo was allegedly
offloaded, rebagged and reloaded on consignees delivery trucks. Respondent, however, claims
that when the cargo [was] weighed on a licensed truck scale a shortage of 255.051 metric tons
valued at P1,621,171.16 was discovered. The above-mentioned shipment was insured with
private respondent against all risk in the amount of P19,976,404.00. Due to the alleged refusal
of petitioners to settle their respective liabilities, respondent, as insurer, paid the consignee
Metro Manila Feed Millers Association. On March 26, 1992, as alleged subrogee of Metro,
private respondent filed a complaint for damages against herein petitioners. Within the
reglementary period to file an Answer, petitioners filed a Motion to Dismiss the complaint on the
ground that respondents claim is premature, the same being arbitrable. Private respondent filed
its Opposition thereto and petitioners filed their Reply to Opposition.
On November 11, 1992, [the RTC] issued an Order deferring the hearing on the Motion to
Dismiss until the trial and directing petitioners to file their Answer. Petitioners then moved to
reconsider said Order which was, however, denied by [the RTC] on the ground that the reason
relied upon by herein petitioners in its Motion to Dismiss and Motion for Reconsideration [was] a
matter of defense which they must prove with their evidence.
On August 20, 1993, petitioners filed their Answer with Counterclaim and Crossclaim alleging
therein that plaintiff, herein respondent, did not comply with the arbitration clause of the charter
party; hence, the complaint was allegedly prematurely filed. The trial court set the case for pre-
trial on November 26, 1993.
On November 15 and 16, 1993, petitioners filed a Motion to Defer Pre-Trial and Motion to Set
for Preliminary Hearing the Affirmative Defense of Lack of Cause of Action for Failure to comply
with Arbitration Clause, respectively. Private respondent did not file an Opposition to the said
Motion to Set for Preliminary Hearing. On December 28, 1993, [the RTC] issued an Order
denying the Motion to Set for Preliminary Hearing.On February 2, 1994 petitioners filed a Motion
for Reconsideration of the Order dated December 28, 1993. On February 11, 1994, [the RTC]
issued an Order denying petitioners Motion for Reconsideration. Hence, the instant petition.[5]
Ruling of the Court of Appeals
Affirming the trial court, the CA held that petitioners cannot rely on Section 5, Rule 16[6] of the
pre-1997 Rules of Court,[7] because a Motion to Dismiss had previously been filed. Further, it ruled
that the arbitration clause provided in the charter party did not bind respondent. It reasoned as
follows:
Petitioners argue that [the RTC] committed grave abuse of discretion amounting to lack or
excess of jurisdiction in denying the preliminary hearing of the affirmative defense of lack of
cause of action for failure to comply with the arbitration clause.
Petitioners, in so filing the Motion to Set for Preliminary Hearing the Affirmative Defense of Lack
of Cause of Action for Failure to Comply with Arbitration Clause, premised their alleged right to
a preliminary hearing on the provision of Section 5, Rule 16 of the Old Rules of Court which
provide[s]:
Sec. 5. Pleading grounds as affirmative defenses. Any of the grounds for dismissal provided for
in this rule, except improper venue, may be pleaded as an affirmative defense and a preliminary
hearing may be had thereon as if a motion to dismiss had been filed.
Petitioners reliance on said provision is misplaced. The above-mentioned provision

contemplates a situation where no motion to dismiss is filed. If a motion to dismiss has been
filed, as in the case at bar, Section 5, Rule 16 of the Old Rules of Court will not come into
play.Furthermore, the same provision gives the judge discretion whether to set for preliminary
hearing the grounds for affirmative defenses.Respondent judge deferred the hearing and
determination of the Motion to Dismiss until the trial since the ground relied upon by petitioners
therein did not appear to be indubitable. Petitioners then filed their Answer as ordered by the
Court again raising as an affirmative defense lack of cause of action for failure to comply with
[the] arbitration clause, praying for the dismissal of the complaint against them, and filing
afterwards a Motion to Set for Preliminary Hearing the Affirmative Defense of lack of Cause of
Action. In effect, petitioners are asking the trial court to set aside its Order denying the Motion to
Dismiss and Order denying the Motion for Reconsideration thereof.
Petitioners cannot do this.
The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and
interpose as defense or defenses, the objection or objections raised by him in said motion to
dismiss, then proceed to trial and, in case of adverse decision, to elevate the entire case by
appeal in due course. Petitioners could also resort to the extraordinary legal remedies of
certiorari, prohibition and mandamus to question the denial of the motion to dismiss. As
correctly ruled by the trial court in its Order dated June 30, 1993, denying the Motion for
Reconsideration of the Order dated November 11, 1992 (denying the Motion to Dismiss) the
ground relied upon by petitioners is a matter of defense which petitioners must prove with their
evidence at the trial.
Petitioners in asking the lower court to set the case for preliminary hearing further argue that
this would give the court and the parties a shorter time to resolve the matter and the case
without a full blown trial. However, petitioners fail to realize that they themselves are delaying
the determination and resolution of the issues involved by resorting to an improper remedy.
On the issue raised by petitioners that private respondents claim is premature for failure to
comply with [the] arbitration clause, we hold that the right of the respondent as subrogee, in
filing the complaint against herein petitions is not dependent upon the charter party relied upon
by petitioners; nor does it grow out of any privity contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by respondent as insurer to the
insured. This was the pronouncement by the Supreme Court in the case of Pan Malayan
Insurance Corp. vs. Court of Appeals 184 SCRA 54, to wit:
Payment by the insurer to the insured operates as an equitable assignment to the former of all
the remedies which the latter may have against the third party whose negligence or wrongful
(sic) caused the loss. The right of subrogation is not dependent upon, nor does it grow out of,
any privity contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer.[8]
Hence, this recourse.[9]
The Issues
In their Memorandum, petitioners submit the following issues for our consideration:[10]
1. Whether or not insurer, as subrogee of the consignee, is bound by the charter party which is
incorporated and referred to in the bill of lading.
2. Whether or not the motion to dismiss should be granted on the ground that a condition
precedent has not been complied with, based on the arbitration clause incorporated in the bill of
lading.
3. Whether or not the Court of Appeals erred in holding that the trial court did not commit grave
abuse of discretion in denying petitioners motion for preliminary hearing.
4. Whether or not the trial court can defer the resolution of a motion to dismiss on the ground
that the ground relied upon is indubitable.
5. Whether or not the petitioners have resorted to an improper remedy which makes them
responsible for delaying the case.
In the main, the two principal matters before us are: (1) the denial of petitioners Motion for
Preliminary Hearing and (2) the propriety of the CA ruling regarding the arbitration clause.
The Courts Ruling
The Petition is meritorious.
First Issue: Preliminary Hearing of Affirmative Defense
At the outset, we must emphasize that the crux of the present controversy is the trial courts
Order denying petitioners Motion to Set for Preliminary Hearing the affirmative defense of lack of
cause of action. Not questioned here is the said courts Order holding in abeyance the hearing of
petitioners Motion to Dismiss.
Affirmative Defense May Be Raised
Still in effect when the case was before the trial court, Section 5, Rule 16 of the pre-1997
Rules of Court, reads:
Sec. 5. Pleading grounds as affirmative defenses. - Any of the grounds for dismissal provided
for in this Rule, except improper venue, may be pleaded as an affirmative defense, and a
preliminary hearing may be had thereon as if a motion to dismiss had been filed.
Respondent argues that the above provision cannot be applied, because petitioners have
already filed a Motion to Dismiss.
We disagree. Respondent relies on the amendments introduced in the 1997 Rules on Civil
Procedure ("1997 Rules), but ignores equally relevant provisions thereof, as well as the clear
intendment of the pre-1997 Rules. True, Section 6, Rule 16 of the 1997 Rules,[11] specifically
provides that a preliminary hearing on the affirmative defenses may be allowed only when no
motion to dismiss has been filed. Section 6, however, must be viewed in the light of Section 3 of
the same Rule,[12] which requires courts to resolve a motion to dismiss and prohibits them from
deferring its resolution on the ground of indubitability. Clearly then, Section 6 disallows a
preliminary hearing of affirmative defenses once a motion to dismiss has been filed because such
defense should have already been resolved. In the present case, however, the trial court did not
categorically resolve petitioners Motion to Dismiss, but merely deferred resolution thereof. [13]
Indeed, the present Rules are consistent with Section 5, Rule 16 of the pre-1997 Rules of
Court, because both presuppose that no motion to dismiss had been filed; or in the case of the
pre-1997 Rules, if one has been filed, it has not been unconditionally denied.[14] Hence, the
ground invoked may still be pleaded as an affirmative defense even if the defendants Motion to
Dismiss has been filed but not definitely resolved, or if it has been deferred as it could be under
the pre-1997 Rules.[15]
Denial of the Motion for a Preliminary Hearing Was a Grave Abuse of Discretion
The more crucial question that we must settle here is whether the trial court committed grave
abuse of discretion when it denied petitioners Motion for a Preliminary Hearing on their affirmative
defense of lack of cause of action. Undeniably, a preliminary hearing is not mandatory, but subject
to the discretion of the trial court.[16] In the light of the circumstances in this case, though, we find
that the lower court committed grave abuse of discretion in refusing to grant the Motion.
We note that the trial court deferred the resolution of petitioners Motion to Dismiss because
of a single issue. It was apparently unsure whether the charter party that the bill of lading referred
to was indeed the Baltimore Berth Grain Charter Party submitted by petitioners.
Considering that there was only one question, which may even be deemed to be the very
touchstone of the whole case, the trial court had no cogent reason to deny the Motion for
Preliminary Hearing. Indeed, it committed grave abuse of discretion when it denied a preliminary
hearing on a simple issue of fact that could have possibly settled the entire case. Verily, where a
preliminary hearing appears to suffice, there is no reason to go on to trial. One reason why
dockets of trial courts are clogged is the unreasonable refusal to use a process or procedure, like
a motion to dismiss, which is designed to abbreviate the resolution of a case.
Second Issue: The Arbitration Clause
The CA also erred when it held that the arbitration clause was not binding on respondent. We
reiterate that the crux of this case is whether the trial court committed grave abuse of discretion
in denying the aforecited Motion. There was neither need nor reason to rule on the applicability
of the arbitration clause.
Be that as it may, we find the CAs reasoning on this point faulty. Citing Pan Malayan
Insurance Corporation v. CA,[17] it ruled that the right of respondent insurance company as
subrogee was not based on the charter party or any other contract; rather, it accrued upon the
payment of the insurance claim by private respondent to the insured consignee. There was
nothing in Pan Malayan, however, that prohibited the applicability of the arbitration clause to the
subrogee. That case merely discussed, inter alia, the accrual of the right of subrogation and the
legal basis therefor.[18] This issue is completely different from that of the consequences of such
subrogation; that is, the rights that the insurer acquires from the insured upon payment of the
indemnity.
WHEREFORE, the Petition is GRANTED and the appealed Decision is
hereby REVERSED. The case is REMANDED to the trial court for preliminary hearing on
petitioners affirmative defense. No costs.
SO ORDERED.
Melo, (Chairman), Vitug, and Gonzaga-Reyes, JJ., concur.
THIRD DIVISION
[G.R. No. 121171. December 29, 1998]
ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS, JESUS S.

CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE MIGUEL
CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M.
ANTONIO, as Minority Stock Holders of Marinduque Mining and Industrial
Corporation, respondents.
DECISION
KAPUNAN, J.:
The petition for review on certiorari before us seeks us to reverse and set aside the decision
of the Court of Appeals which denied due course to the petition for certiorari filed by the Asset
Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62, Makati
City. The Makati RTCs order upheld and confirmed the award made by the Arbitration Committee
in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the Government,
represented by herein petitioner APT for damages in the amount of P2.5 BILLION (or
approximately P4.5 BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for exercising
its legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the
latters failure to pay its overdue and unpaid obligation of P22 billion to the Philippine National
Bank (PNB) and the Development Bank of the Philippines (DBP).
The antecedent facts of the case
The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1828, as amended by Republic Acts No.
2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3, 1968,
whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board, granted
MMIC the exclusive right to explore, develop and exploit nickel, cobalt and other minerals in the
Surigao mineral reservation.[1] MMIC is a domestic corporation engaged in mining with
respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of MMIC
debenture and extension of guarantees. Further, the Philippine Government obtained a firm,
commitment from the DBP and/or other government financing institutions to subscribed in MMIC
and issue guarantee/s for foreign loans or deferred payment arrangements secured from the US
Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100 Million.[2]
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the Government
extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement [3] whereby
MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees,
over all MMICs assets, subject of real estate and chattel mortgage executed by the mortgagor,
and additional assets described and identified, including assets of whatever kind, nature or
description, which the mortgagor may acquire whether in substitution of, in replenishment, or in
addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly
includes the event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage
Trust Agreement when due.[4]
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared in default,
the procedure therefor, waiver of period to foreclose, authority of Trustee before, during and after
foreclosure, including taking possession of the mortgaged properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC
invariably committed to pay either on demand or under certain terms the loans and
accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had reached
tremendous proportions, and MMIC was having a difficult time meeting its financial
obligations. MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as of
August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total
Government exposure of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred Thirty-
Seven Thousand Seven Hundred Seventy and 05/100 (P22,668,537,770.05), Philippine
Currency.[6] Thus, a financial restructuring plan (FRP) designed to reduce MMIC' interest expense
through debt conversion to equity was drafted by the Sycip Gorres Velayo accounting firm.[7] On
April 30, 1984, the FRP was approved by the Board of Directors of the MMIC. [8] However, the
proposed FRP had never been formally adopted, approved or ratified by either PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP and PNB
to MMIC had become overdue and since any restructuring program relative to the loans was no
longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and
PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose
the mortgages in accordance with the Mortgage Trust Agreement.[10]
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT).[11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC,
filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment
of Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil Case No.
9900, prayed that the court: (1) annul the foreclosure, restore the foreclosed assets to MMIC, and
require the banks to account for their use and operation in the interim; (2) direct the banks to
honor and perform their commitments under the alleged FRP; and (3) pay moral and exemplary
damages, attorneys fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNBs interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
Compromise and Arbitration Agreement, stipulating, inter alia:
NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual
covenants contain herein, the parties agreed as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their respective claims
from the Trial Court and to resolve their dispute through arbitration by praying to the Trial Court
to issue a Compromise Judgment based on this Compromise and Arbitration Agreement.
In withdrawing their dispute form the court and in choosing to resolve it through arbitration, the
parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC accounts,
APT shall likewise succeed to the rights and obligations of PNB and DBP in respect of the
controversy subject of Civil Case No. 9900 to be transferred to arbitration and any arbitral
award/order against either PNB and/or DBP shall be the responsibility of, be discharged by and
be enforceable against APT, the partied having agreed to drop PNB and DBP from the
arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No.
9900 shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement,
be transferred and reduced to pure pecuniary/money claims with the parties waiving and
foregoing all other forms of reliefs which they prayed for or should have payed for in Civil Case
No. 9900.[13]
The Compromise and Arbitration Agreement limited the issues to the following:
5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether
PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the
MMIC or its directors; (b) Whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.[14]
This agreement was presented for approval to the trial court. On October 14, 1992, the Makati
RTC, Branch 62, issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as party defendant.
2. Approving the Compromise and Arbitration Agreement dated October 6, 1992,

attached as Annex C of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this case
into pure money claims; and
4. The Complaint is hereby DISMISSED.[15]
The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal
Elma as Members. On November 24, 1993, after conducting several hearings, the Arbitration
Committee rendered a majority decision in favor of MMIC, the pertinent portions of which read as
follows:
Since, as this Committee finds, there is no foreclosure at all was not legally and validly done,
the Committee holds and so declares that the loans of PNB and DBP to MMIC, for the payment
and recovery of which the void foreclosure sales were undertaken, continue to remain
outstanding and unpaid. Defendant APT as the successor-in-interest of PNB and DBP to the
said loans is therefore entitled and retains the right, to collect the same from MMIC pursuant to
and based on the loan documents signed by MMIC, subject to the legal and valid defenses that
the latter may duly and seasonably interpose. Such loans shall, however, be reduced by the
amount which APT may have realized from the sale of the seized assets of MMIC which by
agreement should no longer be returned even if the foreclosure were found to be null and void.
The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B; Exhibits
100; and also Exhibit ZZZ) as their exhibits would show that the total outstanding obligation due
to DBP and PNB as of the date of foreclosure is P22,668,537,770.05, more or less.
Therefore, defendant APT can, and is still entitled to, collect the outstanding obligations of
MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less, with interest thereon
as stipulated in the loan documents from the date of foreclosure up to the time they are fully
paid less the proportionate liability of DBP as owner of 87% of the total capitalization of MMIC
under the FRP. Simply put, DBP shall share in the award of damages to, and in obligations of
MMIC in proportion to its 87% equity in the total capital stock of MMIC.
x x x.
As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to 87%. So
pursuant to the above provision of the Compromise and Arbitration Agreement, the 87% equity
of DBP is hereby deducted from the actual damages of P19,486,118,654.00 resulting in the net
actual damages of P2,531,635,425.02 plus interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except
the DBP, the sum of P2,531,635,425.02 with interest thereon at the legal rate of six per cent
(6%) per annum reckoned from August 3, 9, and 24, 1984, pari passu, as and for actual
damages. Payment of these actual damages shall be offset by APT from the outstanding and
unpaid loans of the MMIC with DBP and PNB, which have not been converted into
equity. Should there be any balance due to the MMIC after the offsetting, the same shall be
satisfied from the funds representing the purchase price of the sale of the shares of Island
Cement Corporation in the amount of P503,000,000.00 held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would
supercede [sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except
the DBP, the sum of P13,000,000.00 as and for moral and exemplary damages. Payment of
these moral and exemplary damages shall be offset by APT from the outstanding and unpaid
loans of MMIC with DBP and PNB, which have not been converted into equity. Should there be
any balance due to MMIC after the offsetting, the same shall be satisfied from the funds
representing the purchase price of the sale of the shares of Island Cement Corporation in the
of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated April 22, 1988
or to such subsequent escrow agreement that would supercede [sic] it pursuant to paragraph
(9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant to the
supercede it, pursuant to paragraph (9) of the Compromise and Arbitration Agreement, as and
for moral damages; and
4. Ordering the defendant to pay arbitration costs.
This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.[16]
Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award.Petitioner countered with an Opposition
and Motion to Vacate Judgment raising the following grounds:
1. The plaintiffs Application/Motion is improperly filed with this branch of the Court, considering
that the said motion is neither a part nor the continuation of the proceedings in Civil Case No.
9900 which was dismissed upon motion of the parties. In fact, the defendants in the said Civil
Case No. 9900 were the Development Bank of the Philippines and the Philippine National Bank
(PNB);
2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission shall be
deemed a special proceedings and a party to the controversy which was arbitrated may apply to
the court having jurisdiction, (not necessarily with this Honorable Court) for an order confirming
the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the plaintiffs
filing the derivative suit and (2) the regularity of the foreclosure proceedings. The arbitration
award sought to be confirmed herein far exceeded the issues submitted and even granted moral
damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award where
the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual final and
definite award upon the subject matter submitted to them was not made.[17]
Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984, arguing
that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave the way for the
submission of the controversy to arbitration, and operated simply as a mere suspension of the
proceedings. They denied that the Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise and
Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration Committee
promulgated on November 24, 1993, as affirmed in a Resolution dated July 26, 1994, and finally
settled and clarified in the Separate Opinion dated September 2, 1994 of Committee Member
Elma, and the pertinent provisions of RA 876,also known as the Arbitration Law, this Court
GRANTS PLAINTIFFS APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD,
AND JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation (MMIC,
except the DBP, the sum of P3,811,757,425.00, as and for actual damages, which shall be
partially satisfied from the funds held under escrow in the amount of P503,000,000.00 pursuant
to the Escrow Agreement dated April 22, 1988. The Balance of the award, after the escrow
funds are fully applied, shall be executed against the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of P13,000,000.00 as
and moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00 as and
for moral damages; and
(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of the
Compromise and Arbitration Agreement, and the final edict of the Arbitration Committees
decision, and with this Courts Confirmation, the issuance of the Arbitration Committees Award
shall henceforth be final and executory.
SO ORDERED.[18]
On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court declared that
considering that the defendant APT through counsel, officially and actually received a copy of the
Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by
law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of any
court in all cases, and by necessary implication for the filling of a motion for reconsideration
thereof.
On February 7, 1995, petitioner received private respondents motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with
temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and
declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995
for having been issued without or in excess of jurisdiction and/or with grave abuse of
discretion.[19] As ground therefor, petitioner alleged that:
I
THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS,
HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD CONSIDERING
THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.
II
THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE QUESTIONED ORDERS
CONFIRMING THE ARBITRAL AWARD AND DENYING THE MOTION FOR
RECONSIDERATION OF ORDER OF AWARD.
III
THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT
OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE COUNTING OF
THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM THE DATE OF
SERVICE OF THE COURTS COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF
A XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSELS COPY
THEREOF.[20]
On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and
dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors.
ASSIGNMENT OF ERRORS
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI REGIONAL
TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY DISMISSED CIVIL CASE NO.
9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL AWARD UNDER THE
SAME CIVIL CASE AND IN NOT RULING THAT THE APPLICATION FOR
CONFIRMATION SHOULD HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF
AMONG THE DIFFERENT BRANCHES OF THE RTC.
II
THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS

ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN PETITIONER
QUESTIONED THE JURISDICTION OF THE RTC-MAKATI, BRANCH 62 AND AT THE
SAME TIME MOVED TO VACATE THE ARBITRAL AWARD.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL
COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE RESPONDENTS
MOTION/PETITION FOR CONFIRMATION OF ARBITRATION AWARD AND/OR
SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.
IV
THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS PETITION
FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER CONFIRMING THE
AWARD
THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN
TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]
The petition is impressed with merit.

I
The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award
The use of the term dismissed is not a mere semantic imperfection. The dispositive portion
of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion without
trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
Admittedly the correct procedure was for the parties to go back to the court where the case
was pending to have the award confirmed by said court.However, Branch 62 made
the fatal mistake of issuing a final order dismissing the case. While Branch 62 should have merely
suspended the case and not dismissed it,[24] neither of the parties questioned said
dismissal. Thus, both parties as well as said court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged
with the knowledge that the case was merely stayed until arbitration finished, as again, the order
of Branch 62 in very clear terms stated that the complaint was dismissed. By its own action,
Branch 62 had lost jurisdiction over the vase. It could not have validly reacquired jurisdiction over
the said case on mere motion of one of the parties. The Rules of Court is specific on how a new
case may be initiated and such is not done by mere motion in a particular branch of the
RTC. Consequently, as there was no pending action to speak of, the petition to confirm the arbitral
award should have been filed as a new case and raffled accordingly to one of the branches of the
Regional Trial Court.
II
Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.
The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the
RTC to confirm the arbitral award because it sought affirmative relief in said court by asking that
the arbitral award be vacated.
The rule is that Where the court itself clearly has no jurisdiction over the subject matter or the
nature of the action, the invocation of this defense may de done at any time. It is neither for the
courts nor for the parties to violate or disregard that rule, let alone to confer that jurisdiction, this
matter being legislative in character.[25] As a rule the, neither waiver nor estoppel shall apply to
confer jurisdiction upon a court barring highly meritorious and exceptional circumstances.[26] One
such exception was enunciated in Tijam vs. Sibonghanoy,[27] where it was held that after
voluntarily submitting a cause and encountering an adverse decision on the merits, it is too late
for the loser to question the jurisdiction or power of the court."
Petitioners situation is different because from the outset, it has consistently held the position
that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot
be said that it was estopped from questioning the RTCs jurisdiction. Petitioners prayer for the
setting aside of the arbitral award was not inconsistent with its disavowal of the courts jurisdiction.
III
Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.
The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts denial
of APTs motion for reconsideration of the trial courts order confirming the arbitral award, on the
ground that said motion was filed beyond the 15-day reglementary period; consequently, the
petition for certioraricould not be resorted to as substitute to the lost right of appeal.
We do not agree.
Section 29 of Republic Act No. 876,[28] provides that:
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 certiorariproceedings, but such appeals shall be
limited to question of law. x x x.
The aforequoted provision, however, does not preclude a party aggrieved by the arbitral
award from resorting to the extraordinary remedy of certiorariunder Rule 65 of the Rules of Court
where, as in this case, the Regional Trial Court to which the award was submitted for confirmation
has acted without jurisdiction, or with grave abuse of discretion and there is no appeal, nor any
plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising judicial functions,
has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion and
there is no appeal, nor any plain, speedy, and adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court alleging the facts with
certainty and praying that judgment be rendered annulling or modifying the proceedings, as the
law requires, of such tribunal, board or officer.
In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being from the pleadings and the evidence that the trial court lacked jurisdiction
and/or committed grave abuse of discretion in taking cognizance of private respondent motion to
confirm the arbitral award and, worse, in confirming said award which is grossly and patently not
in accord with the arbitration agreement, as will be hereinafter demonstrated.
IV
The nature and limits of the Arbitrators powers.
As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either
as to the law or as to the facts.[29] Courts are without power to amend or overrule merely because
of disagreement with matters of law or facts determined by the arbitrators.[30] They will not review
the findings of law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an award the
commencement, not the end, of litigation.[31] Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made.[32] Judicial review of an arbitration is, thus, more limited than judicial review
of a trial.[33]
Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators
cannot resolve issues beyond the scope of the submission agreement.[34] The parties to such an
agreement are bound by the arbitrators award only to the extent and in the manner prescribed by
the contract and only if the award is rendered in conformity thereto.[35] Thus, Sections 24 and 25
of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038,[36] 2039[37] and 2040[38] of the Civil Code
applicable to compromises and arbitration are attendant, the arbitration award may also be
annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:
x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators
awards is not absolute and without exceptions. Where the conditions described in Articles 2038,
2039, and 2040 applicable to both compromises and arbitration are obtaining, the arbitrators'
award may be annulled or rescinded. Additionally, under Sections 24 and 25, of the Arbitration
Law, there are grounds for vacating, modifying or rescinding an arbitrators award.Thus, if and
when the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.
Accordingly, Section 20 of R.A. 876 provides:
SEC. 20. Form and contents of award. The award must be made in writing and signed and
acknowledged by a majority of the arbitrators, if more than one; and by the sole arbitrator, if
there is only one. Each party shall be furnished with a copy of the award. The arbitrators in their
award may grant any remedy or relief which they deem just and equitable and within the scope
of the agreement of the parties, which shall include, but not be limited to, the specific
performance of a contract.
xxx
The arbitrators shall have the power to decide only those matters which have been submitted to
them. The terms of the award shall be confined to such disputes. (Underscoring ours).
xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:
SEC. 24. Grounds for vacating award. In any one of the following cases, the court must make
an order vacating the award upon the petition of any party to the controversy when such party
proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy;
that one or more of the arbitrators was disqualified to act as such under section nine hereof, and
willfully refrained from disclosing such disqualifications or any other misbehavior by which the
rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual,
final and definite award upon the subject matter submitted to them was not
made. (Underscoring ours).
xxx.
Section 25 which enumerates the grounds for modifying the award provides:
SEC. 25. Grounds for modifying or correcting award In anyone of the following cases, the court
must make an order modifying or correcting the award, upon the application of any party to the
controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not affecting the
merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the controversy,
and if it had been a commissioners report, the defect could have been amended or disregarded
by the court.
x x x.
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. [40] In the same
manner, an award must be vacated if it was made in manifest disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the arbitrators
came out with an award in excess of their powers and palpably devoid of factual and legal basis.
V
There was no financial structuring program; foreclosure of mortgage was fully justified.
The point need not be belabored that PNB and DBP had the legitimate right to foreclose of
the mortgages of MMIC whose obligations were past due.The foreclosure was not a wrongful act
of the banks and, therefore, could not be the basis of any award of damages. There was no
financial restructuring agreement to speak of that could have constituted an impediment to the
exercise of the banks right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote
a separate opinion:
1. The various loans and advances made by DBP and PNB to MMIC have become overdue and
remain unpaid. The fact that a FRP was drawn up is enough to establish that MMIC has not
been complying with the terms of the loan agreement. Restructuring simply connotes that the
obligations are past due that is why it is restructurable;
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only means
that MMIC had been informed or notified that its obligations were past due and that foreclosure
is forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the FRP or
proceeding with the foreclosure. Cabarrus, who filed this case supposedly in behalf of MMIC
should have insisted on the FRP. Yet Cabarrus himself opposed the FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but with
honest and sincere belief that foreclosure was the only alternative; a decision further explained
by Dr. Placido Mapa who testified that foreclosure was, in the judgment of PNB, the best move
to save MMIC itself.
Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh. 37-
A for the respondent, may I know from you, Dr. Mapa what you meant by that the decision
to foreclose was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty considerations
of the information that we have received, and listening to the prospects which reported to
us that we had assumed would be the premises of the financial rehabilitation plan was not
materialized nor expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was referring
to the decision to foreclose, was premised upon the known fact that the rehabilitation plan
earlier approved by the stockholders was no longer feasible, just what is meant by no
longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan possible,
was not anymore expected to be forthcoming because it will result in a short fall compared
to the prices that were actually taking place in the market.
Q : And I supposed that was you were referring to when you stated that the production targets
and assumed prices of MMICs products, among other projections, used in the financial
reorganization program that will make it viable were not met nor expected to be met?
A : Yes.
xxx
Which brings me to my last point in this separate opinion. Was PNB and DBP absolutely
unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC accounts in
PNB-DBP were past due. The drawing up of the FRP is the best proof of this. When MMIC
adopted a restructuring program for its loan, it only meant that these loans were already due
and unpaid. If these loans were restructurable because they were already due and unpaid, they
are likewise forecloseable. The option is with the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is legally binding and implementable. It must be
pointed that said FRP will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the lenders and the borrowers. As in
all other contracts, there must therefore be a meeting of minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by the PLAINTIFFS showing
that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine
of promissory estoppel to support its allegation in this regard.[42]
Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No.
385, which took effect on January 31, 1974. The decree requires government financial institutions
to foreclose collaterals for loans where the arrearages amount to 20% of the total outstanding
obligations. The pertinent provisions of said decree read as follows:
SEC. 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60)
days from the issuance of this Decree to foreclose the collaterals and/or securities for any loan,
credit, accommodations, and/or guarantees granted by them whenever the arrearages on such
account, including accrued interest and other charges, amount to at least twenty percent (20%)
of the total outstanding obligations, including interest and other charges, as appearing in the
books of account and/or related records of the financial institutions concerned. This shall be
without prejudice to the exercise by the government financial institutions of such rights and/or
remedies available to them under their respective contracts with their debtor, including the right
to foreclosure on loans, credits, accommodations and/or guarantees on which the arrearages
are less than twenty percent (20%).
SEC. 2. No restraining order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by the borrower(s) or any third party or parties,
except after due hearing in which it is established by the borrower and admitted by the
government financial institution concerned that twenty percent (20%) of the outstanding
arrearages has been paid after the filing of foreclosure proceedings.(Underscoring supplied.)
Private respondents thesis that the foreclosure proceedings were null and void because of
lack of publication in the newspaper is nothing more than a mere unsubstantiated allegation not
borne out by the evidence. In any case, a disputable presumption exists in favor of petitioner that
official duty has been regularly performed and ordinary course of business has been followed.[43]
VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the
facts of the case, the arbitrators in making the award went beyond the arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for
judgment in their favor:
1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of MMIC
null and void and directing said defendants to restore the foreclosed assets to the possession of
MMIC, to render an accounting of their use and/or operation of said assets and to indemnify
MMIC for the loss occasioned by its dispossession or the deterioration thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments under the
financial reorganization plan which was approved at the annual stockholders meeting of MMIC
on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs actual
damages consisting of the loss of value of their investment amounting to not less
than P80,000,000.00, the damnum emerges and lucrum cessans in such amount as may be
establish during the trial, moral damages in such amount as this Honorable Court may deem
just and equitable in the premises, exemplary damages in such amount as this Honorable Court
may consider appropriate for the purpose of setting an example for the public good, attorneys
fees and litigation expenses in such amounts as may be proven during the trial, and the costs
legally taxable in this litigation.
Further, Plaintiffs pray for such other reliefs as may be just and equitable in the premises. [44]
Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties
clearly and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative
suit in behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of the
MMIC assets were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to render
its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six
(6) months from the date of its constitution.
In the event the committee finds that PLAINTIFFS have the personality to file this suit and extra-
judicial foreclosure of the MMIC assets wrongful, it shall make an award in favor of the
PLAINTIFFS (excluding DBP), in an amount as may be established or warranted by the
evidence which shall be payable in Philippine Pesos at the time of the award. Such award shall
be paid by the APT or its successor-in-interest within sixty (60) days from the date of the award
in accordance with the provisions of par. 9 hereunder. x x x. The PLAINTIFFS remedies under
this Section shall be in addition to other remedies that may be available to the PLAINTIFFS, all
such remedies being cumulative and not exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to
sue and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in
favor of APT based on the counterclaims of DBP and PNB in an amount as may be established
or warranted by the evidence. This decision of the arbitration committee in favor of APT shall
likewise finally settle all issues regarding the foreclosure of the MMIC assets so that the funds
held in escrow mentioned in par. 9 hereunder will thus be released in full in favor of APT.[46]
The clear and explicit terms of the submission notwithstanding, the Arbitration Committee
clearly exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid
the FRP; (b) in awarding damages to MMIC which was not a party to the derivative suit; and (c)
in awarding moral damages to Jesus S. Cabarrus, Sr.
The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.
The Arbitration Committee went beyond its mandate and thus acted in excess of its powers
when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the
validity of the foreclosure and to transform the reliefs prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of
the parties thereto.[47] The contract must bind both contracting parties.[48] Private respondents
even by their own admission recognized that the FRP had yet not been carried out and that the
loans of MMIC had not yet been converted into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective, but also
converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]
The Arbitration Committee ruled that there was a commitment to carry out the FRP[51] on the
ground of promissory estoppel.
Similarly, the principle of promissory estoppel applies in the present case considering as we
observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the FRP
constituted a way out for MMIC. The Committee believes that although the DBP did not formally
agree (assuming that the board and stockholders approvals were not formal enough), it is
bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs equity (at that
time) and as MMICs creditor-the DBP can not validly renege on its commitments simply
because at the same time, it held interest against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being carried out although
apparently, it would supposedly fall short of its targets. Assuming that the FRP would fail to
meet its targets, the DBP-and so this Committee holds-can not, in any event, brook any denial
that it was bound to begin with, and the fact is that adequate or not (the FRP), the government
is still bound by virtue of its acts.
The FRP, of course, did not itself promise a resounding success, although it raised DBPs equity
in MMIC to 87%. It is not excuse, however, for the government to deny its commitments.[52]
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can hardly find application here. The nearest that there
can be said of any estoppel being present in this case is the fact that the board of MMIC was, at
the time the FRP was adopted, mostly composed of PNB and DBP representatives. But those
representatives, singly or collectively, are not themselves PNB or DBP. They are individuals
with personalities separate and distinct from the banks they represent. PNB and DBP have
different boards with different members who may have different decisions. It is unfair to impose
upon them the decision of the board of another company and thus pin them down on the
equitable principle of estoppel. Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely separate, distinct
and autonomous legal entities like PNB and DBP with thousands of stockholders will be
suppressed and rendered nugatory.[53]
As a rule, a corporation exercises its powers, including the power to enter into contracts,
through its board of directors. While a corporation may appoint agents to enter into a contract in
its behalf, the agent, should not exceed his authority.[54] In the case at bar, there was no showing
that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into a
debt-for-equity swap. And if they had such authority, there was no showing that the banks, through
their board of directors, had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article 2217
of the Civil Code, moral damages include besmirched reputation which a corporation may possibly
suffer. A corporation whose overdue and unpaid debts to the Government alone reached a
tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to brag
about. As Atty. Sison in his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a corporation for
besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application
in this case. It must be pointed out that when the supposed wrongful act of foreclosure was
done, MMICs credit reputation was no longer a desirable one. The company then was already
suffering from serious financial crisis which definitely projects an image not compatible with
good and wholesome reputation. So it could not be said that there was a reputation besmirches
by the act of foreclosure.[55]
The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.
Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been
impleaded as a party. It was not joined as a party plaintiff or party defendant at any stage of the
proceedings. As it is, the award of damages to MMIC, which was not a party before the Arbitration
Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while
the stockholder filing suit for the corporations behalf is only nominal party. The corporation should
be included as a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation

wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. x x x.[56]
It is a condition sine qua non that the corporation be impleaded as a party because-
x x x. Not only is the corporation an indispensible party, but it is also the present rule that it must
be served with process. The reason given is that the judgment must be made binding upon the
corporation and in order that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of action. In other words the
corporations must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata against it.[57]
The reasons given for not allowing direct individual suit are:
(1) x x x the universally recognized doctrine that a stockholder in a corporation has no title legal
or equitable to the corporate property; that both of these are in the corporation itself for the
benefit of the stockholders. In other words, to allow shareholders to sue separately would
conflict with the separate corporate entity principle;
(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. Santos, that the stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the corporation and the liquidation
of its debts and liabilities, something which cannot be legally done in view of section 16 of the
Corporation Law xxx;
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.[58]
If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its individual
stockholders or members. DBPs alleged equity, even if it were indeed 87%, did not give it
ownership over any corporate property, including the monetary award, its right over said corporate
property being a mere expectancy or inchoate right.[59]Notably, the stipulation even had the effect
of prejudicing the other creditors of MMIC.
The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.
It is perplexing how the Arbitration Committee can in one breath rule that the case before it
is a derivative suit, in which the aggrieved party or the real party in interest is supposedly the
MMIC, and at the same time award moral damages to an individual stockholder, to wit:
WHEREFORE, premises considered, judgment is hereby rendered:
xxx.
3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant to the
supersede it, pursuant to paragraph (9), Compromise and Arbitration Agreement, as and for
moral damages; x x x[60]
The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the
government were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the
majority stockholder. It then acknowledge that Cabarrus had already recovered said assets in the
RTC, but that he won no more than actual damages. While the Committee cannot possibly speak
for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account
of that specific foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus,
Sr., may be awarded in this proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the
majority stockholder, having been ventilated in a complaint he previously filed with the RTC, from
which he obtained actual damages, he was barred res judicata from filing a similar case in another
court, this time asking for moral damages which he failed to get from the earlier case. [62] Worse,
private respondents violated the rule against non-forum shopping.
It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the corporation. Another reason is
that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in
the appropriation by, and the distribution to, him part of the corporations assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. The Arbitration
Committee, therefore, passed upon matters not submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee
exceeded the authority granted to it by the parties Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in this case
is the wrong committed on the corporation (MMIC) for the alleged illegal foreclosure of its
assets. By agreeing to this stipulation, PLAINTIFFS themselves (Cabarrus, et al.) admit that the
cause of action pertains only to the corporation (MMIC) and that they are filing this for and in
behalf of MMIC.
Perforce this has to be so because it is the basic rule in Corporation Law that the shareholders
have no title, legal or equitable to the property which is owned by the corporation (13 Am. Jur.
165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6 SCRA 373,
the rule has been reiterated that a stockholder is not the co-owner of corporate property. Since
the property or assets foreclosed belongs [sic] to MMIC, the wrong committed, if any, is done
against the corporation. There is therefore no direct injury or direct violation of the rights of
Cabarrus et al. There is no way, legal or equitable, by which Cabarrus et al. could recover
damages in their personal capacities even assuming or just because the foreclosure is improper
or invalid. The Compromise and Arbitration Agreement itself and the elementary principles of
Corporation Law say so. Therefore, I am constrained to dissent from the award of moral
damages to Cabarrus.[64]
From the foregoing discussions, it is evident that, not only did the arbitration committee
exceed its powers or so imperfectly execute them, but also, its findings and conclusions are
palpably devoid of any factual basis and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised and
extensively discussed the issues on the merits. Such being the case, there is sufficient basis for
us to resolve the controversy between the parties anchored on the records and the pleadings
before us.[65]
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January
19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee
is hereby VACATED.
SO ORDERED
EN BANC
[G.R. No. 155001. May 5, 2003]
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL

ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V.
DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO,
BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION
(MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION
(PALEA), petitioners, vs.PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC.,
MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS
CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES
AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES
CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and
MIASCOR LOGISTICS CORPORATION, petitioners-in-intervention,
[G.R. No. 155547. May 5, 2003]
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G.

JARAULA, petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC.,
MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS
AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of
the Department of Transportation and Communications, and SECRETARY SIMEON
A. DATUMANONG, in his capacity as Head of the Department of Public Works and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON
VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN
CAST ABAYON, and BENASING O. MACARANBON, respondents-intervenors,
[G.R. No. 155661. May 5, 2003]
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V.

GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN
RONALD SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON and
SAMAHANG MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP), petitioners,
vs.PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION
AND COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in his capacity as
Head of the Department of Transportation and Communications, respondents.
DECISION
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule
65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority
(MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary
from implementing the following agreements executed by the Philippine Government through the
DOTC and the MIAA and the Philippine International Air Terminals Co., Inc. (PIATCO): (1) the
Concession Agreement signed on July 12, 1997, (2) the Amended and Restated Concession
Agreement dated November 26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second Supplement to the Amended and
Restated Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the
Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the PIATCO
Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a
comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the
present airport can cope with the traffic development up to the year 2010. The study consisted of
two parts: first, traffic forecasts, capacity of existing facilities, NAIA future requirements, proposed
master plans and development plans; and second, presentation of the preliminary design of the
passenger terminal building. The ADP submitted a Draft Final Report to the DOTC in December
1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun,
Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V.
Ramos to explore the possibility of investing in the construction and operation of a new
international airport terminal. To signify their commitment to pursue the project, they formed the
Asias Emerging Dragon Corp. (AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III)
under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718
(BOT Law).[1]
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the
Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III
project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to
the National Economic and Development Authority (NEDA). A revised proposal, however, was
forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA
Investment Coordinating Council (NEDA ICC) Technical Board favorably endorsed the project to
the ICC Cabinet Committee which approved the same, subject to certain conditions, on January
19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which approved the
NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers
of an invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to
submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first
envelope should contain the Prequalification Documents, the second envelope the Technical
Proposal, and the third envelope the Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were permitted
to obtain the Request for Proposal Documents beginning June 28, 1996, upon submission of a
written application and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must
have adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be
evaluated based on its ability to provide a minimum amount of equity to the project, and its
capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid
conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid
Documents. The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial
proposal an additional percentage of gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal
amount, but payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing requirement for
the detailed engineering, design, construction, and/or operation and maintenance phases of the
project as the case may be. For purposes of pre-qualification, this capability shall be measured
in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the minimum
amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or the
members of the consortium are banking with them, that the project proponent and/or the
members are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents compliance with the minimum
technical and financial requirements provided in the Bid Documents and the IRR of the BOT
Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponents proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications
were made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules
and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment submitted by
the challengers would be revealed to AEDC, and that the challengers technical and financial
proposals would remain confidential. The PBAC also clarified that the list of revenue sources
contained in Annex 4.2a of the Bid Documents was merely indicative and that other revenue
sources may be included by the proponent, subject to approval by DOTC/MIAA. Furthermore, the
PBAC clarified that only those fees and charges denominated as Public Utility Fees would be
subject to regulation, and those charges which would be actually deemed Public Utility Fees could
still be revised, depending on the outcome of PBACs query on the matter with the Department of
Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos queries and the PBACs
responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement
as prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each
member company is so structured to meet the requirements and needs of their current
respective business undertaking/activities. In order to comply with this equity requirement,
Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint
Venture to just execute an agreement that embodies a commitment to infuse the required
capital in case the project is awarded to the Joint Venture instead of increasing each
corporations current authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in ones financial capability at the time of

prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that present
financial capability. However, total financial capability of all member companies of the
Consortium, to be established by submitting the respective companies audited financial
statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension of a
Performance Security to the joint venture in the event that the Concessions Agreement (sic) is
awarded to them. However, Paircargo is being required to submit a copy of the draft concession
as one of the documentary requirements. Therefore, Paircargo is requesting that theyd (sic) be
furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the
soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any material
changes would be made known to prospective challengers through bid bulletins. However, a
final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing
Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp.
(Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to the
PBAC. On September 23, 1996, the PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium.On the following day, September 24,
1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards
the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount
that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for

prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in
the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the
issues raised by the latter, and that based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that the challenger, Paircargo, had
prequalified to undertake the project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo
Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos
financial capability, in view of the restrictions imposed by Section 21-B of the General Banking
Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial
Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that it
be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation
report where each of the issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the
Paircargo Consortium containing their respective financial proposals. Both proponents offered to
build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and
to pay the government: 5% share in gross revenues for the first five years of operation, 7.5%
share in gross revenues for the next ten years of operation, and 10% share in gross revenues for
the last ten years of operation, in accordance with the Bid Documents. However, in addition to the
foregoing, AEDC offered to pay the government a total of P135 million as guaranteed payment
for 27 years while Paircargo Consortium offered to pay the government a total of P17.75 billion
for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted
by the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs
failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine International
Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated
its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass
approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration
of Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his
capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on
a no-objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted the
agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and
PIATCO, through its President, Henry T. Go, signed the Concession Agreement for the Build-
Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal
III (1997 Concession Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees, rentals and other
charges in accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-five (25)
years commencing from the in-service date, and may be renewed at the option of the Government
for a period not exceeding twenty-five (25) years. At the end of the concession period, PIATCO
shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that
were amended by the ARCA were: Sec. 1.11 pertaining to the definition of certificate of
completion; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the
exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the assignment by
Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing with the proceeds
of Concessionaires insurance; Sec. 5.10 with respect to the temporary take-over of operations by
GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied on the
Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and
charges; the entire Article VIII concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy
arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The
First Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000;
and the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining Revenues or
Gross Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient
funds for the upkeep, maintenance, repair and/or replacement of all airport facilities and
equipment which are owned or operated by MIAA; and further providing additional special
obligations on the part of GRP aside from those already enumerated in Sec. 2.05 of the
ARCA. The First Supplement also provided a stipulation as regards the construction of a surface
road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing
Runway 13/31; the swapping of obligations between GRP and PIATCO regarding the
improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of
the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an
introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of
Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal,
demolition or disposal of subterranean structures uncovered or discovered at the site of the
construction of the terminal by the Concessionaire. It defined the scope of works; it provided for
the procedure for the demolition of the said structures and the consideration for the same which
the GRP shall pay PIATCO; it provided for time extensions, incremental and consequential costs
and losses consequent to the existence of such structures; and it provided for some additional
obligations on the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards
the construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing, and other
services, to several international airlines at the NAIA. Some of these service providers are the
Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group. Miascor,
DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant players in the
industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming
that they stand to lose their employment upon the implementation of the questioned agreements,
filed before this Court a petition for prohibition to enjoin the enforcement of said agreements. [2]
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed
a motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino
Jaraula filed a similar petition with this Court.[3]
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the
legality of the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr.,
Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as
Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of the
assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace,
stated that she will not honor (PIATCO) contracts which the Executive Branchs legal offices have
concluded (as) null and void.[5]
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27,
2002. The Office of the Solicitor General and the Office of the Government Corporate Counsel
filed their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument,
the Court then resolved in open court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral arguments within 30 days and to
explore the possibility of arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and that
judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the
Supplements thereto void for being contrary to the Constitution, the BOT Law and its
Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce,
International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of
the ICC against the Government of the Republic of the Philippines acting through the DOTC and
MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues
made difficult by their intersecting legal and economic implications. The Court is aware of the far
reaching fall out effects of the ruling which it makes today. For more than a century and whenever
the exigencies of the times demand it, this Court has never shirked from its solemn duty to
dispense justice and resolve actual controversies involving rights which are legally demandable
and enforceable, and to determine whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction.[6] To be sure, this Court will not begin to do otherwise
today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they
allege will bar the resolution of the instant controversy.
Petitioners Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service providers[7] having
separate concession contracts with MIAA and continuing service agreements with various
international airlines to provide in-flight catering, passenger handling, ramp and ground support,
aircraft maintenance and provisions, cargo handling and warehousing and other services. Also
included as petitioners are labor unions MIASCOR Workers Union-National Labor Union and
Philippine Airlines Employees Association. These petitioners filed the instant action for prohibition
as taxpayers and as parties whose rights and interests stand to be violated by the implementation
of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo handling and warehousing and
other services to several international airlines at the Ninoy Aquino International Airport.
Petitioners-Intervenors allege that as tax-paying international airline and airport-related service
operators, each one of them stands to be irreparably injured by the implementation of the PIATCO
Contracts. Each of the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they allege are being
interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa
sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive
bargaining agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on
the nullity of the contracts entered into by the Government and PIATCO regarding the build-
operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers and persons who
have a legitimate interest to protect in the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations
which directly contravene numerous provisions of the Constitution, specific provisions of the BOT
Law and its Implementing Rules and Regulations, and public policy. Petitioners contend that the
DOTC and the MIAA, by entering into said contracts, have committed grave abuse of discretion
amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition,
there being no plain, speedy or adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the
ARCA which grant PIATCO the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international airports already existing at the time
of the execution of the agreement. The contracts further provide that upon the commencement of
operations at the NAIA IPT III, the Government shall cause the closure of Ninoy Aquino
International Airport Passenger Terminals I and II as international passenger terminals. With
respect to existing concession agreements between MIAA and international airport service
providers regarding certain services or operations, the 1997 Concession Agreement and the
ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT
III and PIATCO is under no obligation to permit such carry over except through a separate
agreement duly entered into with PIATCO.[8]
With respect to the petitioning service providers and their employees, upon the
commencement of operations of the NAIA IPT III, they allege that they will be effectively barred
from providing international airline airport services at the NAIA Terminals I and II as all
international airlines and passengers will be diverted to the NAIA IPT III. The petitioning service
providers will thus be compelled to contract with PIATCO alone for such services, with no
assurance that subsisting contracts with MIAA and other international airlines will be respected.
Petitioning service providers stress that despite the very competitive market, the substantial
capital investments required and the high rate of fees, they entered into their respective contracts
with the MIAA with the understanding that the said contracts will be in force for the stipulated
period, and thereafter, renewed so as to allow each of the petitioning service providers to recoup
their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA
on the other hand allege that with the closure of the NAIA Terminals I and II as international
passenger terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have alleged such a personal stake
in the outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions.[9] Accordingly, it has been held that the interest of a person assailing the
constitutionality of a statute must be direct and personal. He must be able to show, not only that
the law or any government act is invalid, but also that he sustained or is in imminent danger of
sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby
in some indefinite way. It must appear that the person complaining has been or is about to be
denied some right or privilege to which he is lawfully entitled or that he is about to be subjected
to some burdens or penalties by reason of the statute or act complained of.[10]
We hold that petitioners have the requisite standing. In the above-mentioned cases,
petitioners have a direct and substantial interest to protect by reason of the implementation of the
PIATCO Contracts. They stand to lose their source of livelihood, a property right which is
zealously protected by the Constitution. Moreover, subsisting concession agreements between
MIAA and petitioners-intervenors and service contracts between international airlines and
petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III
under the PIATCO Contracts. The financial prejudice brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer
on them the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO Contracts, because the contracts
compel the Government and/or the House of Representatives to appropriate funds necessary to
comply with the provisions therein.[11] They cite provisions of the PIATCO Contracts which require
disbursement of unappropriated amounts in compliance with the contractual obligations of the
Government. They allege that the Government obligations in the PIATCO Contracts which compel
government expenditure without appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall be paid out of the treasury except
in pursuance of an appropriation made by law.[12]
Standing is a peculiar concept in constitutional law because in some cases, suits are not
brought by parties who have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the public
interest. Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of
Imus[13] and Gonzales v. Raquiza[14] whereinthis Court held that appropriation must be made
only on amounts immediately demandable, public interest demands that we take a more
liberal view in determining whether the petitioners suing as legislators, taxpayers and
citizens have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,[15] this
Court held [i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers,
members of Congress, and even association of planters, and non-profit civic organizations were
allowed to initiate and prosecute actions before this Court to question the constitutionality or
validity of laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court) is not
devoid of discretion as to whether or not it should be entertained.[17] As such . . . even if, strictly
speaking, they [the petitioners] are not covered by the definition, it is still within the wide discretion
of the Court to waive the requirement and so remove the impediment to its addressing and
resolving the serious constitutional questions raised.[18] In view of the serious legal questions
involved and their impact on public interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO
alleges that submission of this controversy to this Court at the first instance is a violation of the
rule on hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this
Court with respect to a special civil action for prohibition and hence, following the rule on hierarchy
of courts, resort must first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the view
that the crux of the instant controversy involves significant legal questions. The facts necessary
to resolve these legal questions are well established and, hence, need not be determined by a
trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over
the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained
in the appropriate courts or where exceptional and compelling circumstances justify
availment of a remedy within and calling for the exercise of this Courts primary
jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in the cases at bar that call for
the relaxation of the rule. Both petitioners and respondents agree that these cases are
of transcendental importance as they involve the construction and operation of the countrys
premier international airport. Moreover, the crucial issues submitted for resolution are of first
impression and they entail the proper legal interpretation of key provisions of the Constitution, the
BOT Law and its Implementing Rules and Regulations. Thus, considering the nature of the
controversy before the Court, procedural bars may be lowered to give way for the speedy
disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this
Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the
arbitration clause in the Distributorship Agreement in question is valid and the dispute between
the parties is arbitrable, this Court affirmed the trial courts decision denying petitioners Motion to
Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court
held that as contracts produce legal effect between the parties, their assigns and heirs, only the
parties to the Distributorship Agreement are bound by its terms, including the arbitration clause
stipulated therein. This Court ruled that arbitration proceedings could be called for but only with
respect to the parties to the contract in question. Considering that there are parties to the case
who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties thereto,
this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that to
tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one
hand and trial for the others on the other hand would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay.[22] Thus, we ruled that the interest of
justice would best be served if the trial court hears and adjudicates the case in a single and
complete proceeding.
It is established that petitioners in the present cases who have presented legitimate
interests in the resolution of the controversy are not parties to the PIATCO Contracts.
Accordingly, they cannot be bound by the arbitration clause provided for in the ARCA and hence,
cannot be compelled to submit to arbitration proceedings. A speedy and decisive resolution of
all the critical issues in the present controversy, including those raised by petitioners,
cannot be made before an arbitral tribunal. The object of arbitration is precisely to allow an
expeditious determination of a dispute. This objective would not be met if this Court were to allow
the parties to settle the cases by arbitration as there are certain issues involving non-parties to
the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a
duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial capability required under the BOT Law and the Bid
Documents. They allege that in computing the ability of the Paircargo Consortium to meet the
minimum equity requirements for the project, the entire net worth of Security Bank, a member
of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14,
1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium
is found to have a combined net worth of P3,900,000,000.00, sufficient to meet the equity
requirements of the project. The said Memorandum was in response to a letter from Mr. Antonio
Henson of AEDC to President Fidel V. Ramos questioning the financial capability of the Paircargo
Consortium on the ground that it does not have the financial resources to put up the required
minimum equity of P2,700,000,000.00. This contention is based on the restriction under R.A. No.
337, as amended or the General Banking Act that a commercial bank cannot invest in any single
enterprise in an amount more than 15% of its net worth. In the said Memorandum, Undersecretary
Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial
capability will be evaluated based on total financial capability of all the member companies of
the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined
net worth of P3,926,421,242.00 that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To impose that as a requirement
now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial capability.
As stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the amount of
the money to be used to answer the required thirty percent (30%) equity of the challenger but
rather to be used in establishing if there is enough basis to believe that the challenger can
comply with the required 30% equity. In fact, proof of sufficient equity is required as one of the
conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for pre-qualification
(Section 5.4 of the same document).[23]
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall
be awarded to the bidder who, having satisfied the minimum financial, technical,
organizational and legal standards required by the law, has submitted the lowest bid and most
favorable terms of the project.[24] Further, the 1994 Implementing Rules and Regulations of the
BOT Law provide:
Section 5.4 Pre-qualification Requirements.
c. Financial Capability: The project proponent must have adequate capability to sustain the
financing requirements for the detailed engineering design, construction and/or operation and
maintenance phases of the project, as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of (i) proof of the ability of the project proponent
and/or the consortium to provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project proponent and/or
members of the consortium are banking with them, that they are in good financial
standing, and that they have adequate resources. The government agency/LGU concerned
shall determine on a project-to-project basis and before pre-qualification, the minimum amount
of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996
amending the financial capability requirements for pre-qualification of the project proponent as
follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent to the minimum
technical and financial requirements provided in the Bid Documents and in the IRR of the BOT
Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be based shall
be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in
Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio
of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project
financing should not exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any
challenger to the unsolicited proposal of AEDC has to show that it possesses the
requisite financial capability to undertake the project in the minimum amount of 30% of the
project cost through (i) proof of the ability to provide a minimum amount of equity to the project,
and (ii) a letter testimonial from reputable banks attesting that the project proponent or members
of the consortium are banking with them, that they are in good financial standing, and that they
have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the
PBAC that it had the ability to provide the minimum equity for the project in the amount of at
least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net
worth of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial Statements
as of 1995 indicate that it has approximately P26,735,700.00 to invest as its equity for the
project.[27] Security Banks Audited Financial Statements as of 1995 show that it has a net worth
equivalent to its capital funds in the amount of P3,523,504,377.00.[28]
We agree with public respondents that with respect to Security Bank, the entire amount of
its net worth could not be invested in a single undertaking or enterprise, whether allied or non-
allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the
Monetary Board, whenever it shall deem appropriate and necessary to further national
development objectives or support national priority projects, may authorize a commercial
bank, a bank authorized to provide commercial banking services, as well as a
government-owned and controlled bank, to operate under an expanded commercial
banking authority and by virtue thereof exercise, in addition to powers authorized for
commercial banks, the powers of an Investment House as provided in Presidential
Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of
the equity in a financial intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the total investment in equities shall
not exceed fifty percent (50%) of the net worth of the bank; (b) the equity investment in any
one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the
net worth of the bank; (c) the equity investment of the bank, or of its wholly or majority-owned
subsidiary, in a single non-allied undertakingshall not exceed thirty-five percent (35%) of the
total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in
thatenterprise; and (d) the equity investment in other banks shall be deducted from the investing
bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions
shall also apply regarding equity investments of banks.
a. In any single enterprise. The equity investments of banks in any single enterprise shall not
exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in
Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo
Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net worth
therefore of the Paircargo Consortium, after considering the maximum amounts that may be
validly invested by each of its members is P558,384,871.55 or only 6.08% of the project
cost,[29] an amount substantially less than the prescribed minimum equity investment required for
the project in the amount of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest
opportunity, the ability of the bidder to undertake the project. Thus, with respect to the bidders
financial capacity at the pre-qualification stage, the law requires the government agency to
examine and determine the ability of the bidder to fund the entire cost of the project by
considering the maximum amounts that each bidder may invest in the project at the time
of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the
minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio
prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should
determine the maximum amounts that each member of the consortium may commit for the
construction, operation and maintenance of the NAIA IPT III project at the time of pre-
qualification. With respect to Security Bank, the maximum amount which may be invested by
it would only be 15% of its net worth in view of the restrictions imposed by the General Banking
Act. Disregarding the investment ceilings provided by applicable law would not result in a proper
evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and
purposes, such ceiling or legal restriction determines the true maximum amount which a bidder
may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the project
requires an evaluation of the financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the bidder. The PBAC should not be
allowed to speculate on the future financial ability of the bidder to undertake the project on the
basis of documents submitted. This would open doors to abuse and defeat the very purpose of a
public bidding. This is especially true in the case at bar which involves the investment of billions
of pesos by the project proponent. The relevant government authority is duty-bound to ensure
that the awardee of the contract possesses the minimum required financial capability to complete
the project. To allow the PBAC to estimate the bidders future financial capability would not
secure the viability and integrity of the project. A restrictive and conservative application of the
rules and procedures of public bidding is necessary not only to protect the impartiality and
regularity of the proceedings but also to ensure the financial and technical reliability of the project.
It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the foundation of a
fair and competitive public bidding would be defeated. Strict observance of the rules,
regulations, and guidelines of the bidding process is the only safeguard to a fair, honest
and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may invest in the project at the time
the bids are submitted falls short of the minimum amounts required to be put up by the bidder,
said bidder should be properly disqualified. Considering that at the pre-qualification stage, the
maximum amounts which the Paircargo Consortium may invest in the project fell short of the
minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a
qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as
the legal effects of the disqualification of respondent PIATCOs predecessor would come into play
and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of
the project, the Court feels that it is necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid
as it contains provisions that substantially depart from the draft Concession Agreement included
in the Bid Documents. They maintain that a substantial departure from the draft Concession
Agreement is a violation of public policy and renders the 1997 Concession Agreement null and
void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents
is intended to be a draft, i.e., subject to change, alteration or modification, and that this intention
was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention
is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponents proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the
best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law,
competition requires, not only `bidding upon a common standard, a common basis, upon the
same thing, the same subject matter, the same undertaking,' but also that it be legitimate, fair
and honest; and not designed to injure or defraud the government.[31]
An essential element of a publicly bidded contract is that all bidders must be on equal footing.
Not simply in terms of application of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded upon. Each bidder must
be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to
later include or modify certain provisions in the contract awarded such that the contract is altered
in any material respect, then the essence of fair competition in the public bidding is destroyed. A
public bidding would indeed be a farce if after the contract is awarded, the winning bidder may
modify the contract and include provisions which are favorable to it that were not previously made
available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The
specifications should, accordingly, operate equally or indiscriminately upon all bidders.[32]
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a contract
for public work to the lowest responsible bidder, the proposals and specifications therefore must
be so framed as to permit free and full competition. Nor can they enter into a contract with
the best bidder containing substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which the bids were invited.[33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted above,
the PBAC also clarified that [s]aid amendments shall only cover items that would not
materially affect the preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or
material amendments that would alter the basic parameters of the contract and would
constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence,
the determination of whether or not a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the contract, when taken as a whole, would
contain substantially different terms and conditions that would have the effect of altering the
technical and/or financial proposals previously submitted by other bidders. The alterations and
modifications in the contract executed between the government and the winning bidder must be
such as to render such executed contract to be an entirely different contract from the one that
was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through public
bidding, when such subsequent amendment was made without a new public bidding, is null and
void:
The Court agrees with the contention of counsel for the plaintiffs that the due execution of a
contract after public bidding is a limitation upon the right of the contracting parties to alter or
amend it without another public bidding, for otherwise what would a public bidding be good
for if after the execution of a contract after public bidding, the contracting parties may
alter or amend the contract, or even cancel it, at their will? Public biddings are held for the
protection of the public, and to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the best terms is awarded the
contract subject of the bid, and it is obvious that such protection and best possible
advantages to the public will disappear if the parties to a contract executed after public
bidding may alter or amend it without another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the
same agreement that was offered for public bidding, i.e., the draft Concession Agreement
attached to the Bid Documents? A close comparison of the draft Concession Agreement attached
to the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in
at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession
Agreement and the 1997 Concession Agreement may be classified into three distinct categories:
(1) fees which are subject to periodic adjustment of once every two years in accordance with a
prescribed parametric formula and adjustments are made effective only upon written approval by
MIAA; (2) fees other than those included in the first category which maybe adjusted by PIATCO
whenever it deems necessary without need for consent of DOTC/MIAA; and (3) new fees and
charges that may be imposed by PIATCO which have not been previously imposed or collected
at the Ninoy Aquino International Airport Passenger Terminal I, pursuant to Administrative Order
No. 1, Series of 1993, as amended. The glaring distinctions between the draft Concession
Agreement and the 1997 Concession Agreement lie in the types of fees included in each category
and the extent of the supervision and regulation which MIAA is allowed to exercise in relation
thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval by
MIAA, the draft Concession Agreement includes the following:[36]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective
upon MIAA approval are classified as Public Utility Revenues and include:[37]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in the second category identified above. Under the 1997
Concession Agreement, fees which PIATCO may adjust whenever it deems necessary without
need for consent of DOTC/MIAA are Non-Public Utility Revenues and is defined as all other
income not classified as Public Utility Revenues derived from operations of the Terminal and the
Terminal Complex.[38] Thus, under the 1997 Concession Agreement, groundhandling fees, rentals
from airline offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right
to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be
imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective only
upon written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking
fees, aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter
rentals and porterage fees shall be allowed only once every two years and in accordance with
the Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made
effective only after the written express approval of the MIAA. Provided, further, that such
approval of the MIAA, shall be contingent only on the conformity of the adjustments with the
above said parametric formula. The first adjustment shall be made prior to the In-Service Date
of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions the
lobby and vehicular parking fees and other new fees and charges as contemplated in
paragraph 2 of Section 6.01 if in its judgment the users of the airport shall be deprived of
a free option for the services they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-
Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of
services. While the vehicular parking fee, porterage fee and greeter/well wisher fee
constitute Non-Public Utility Revenues of Concessionaire, GRP may intervene and
require Concessionaire to explain and justify the fee it may set from time to time, if in the
reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable
deprivation of End Users of such services.[40]
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain
and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee
is subject to MIAA regulation and approval under the second paragraph of Section 6.03 thereof
while porterage fee is covered by the first paragraph of the same provision. There is an obvious
relaxation of the extent of control and regulation by MIAA with respect to the particular fees that
may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been
previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I,
under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to regulate
the same under the same conditions that MIAA may regulate fees under the first category, i.e.,
periodic adjustment of once every two years in accordance with a prescribed parametric formula
and effective only upon written approval by MIAA. However, under the 1997 Concession
Agreement, adjustment of fees under the third category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was
included within the category of Public Utility Revenues under the 1997 Concession Agreement.
This classification is significant because under the 1997 Concession Agreement, Public Utility
Revenues are subject to an Interim Adjustment of fees upon the occurrence of certain
extraordinary events specified in the agreement.[42] However, under the draft Concession
Agreement, terminal fees are not included in the types of fees that may be subject to Interim
Adjustment.[43]
Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal
fees, are denominated in US Dollars[44] while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating that
Public Utility Revenues will be paid to PIATCO in US Dollars while payments by PIATCO to the
Government are in Philippine currency under the 1997 Concession Agreement, PIATCO is able
to enjoy the benefits of depreciations of the Philippine Peso, while being effectively insulated from
the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments that substantially distinguish the
draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more favorable terms than what was
available to other bidders at the time the contract was bidded out. It is not very difficult to
see that the changes in the 1997 Concession Agreement translate to direct and concrete
financial advantages for PIATCO which were not available at the time the contract was offered
for bidding. It cannot be denied that under the 1997 Concession Agreement only Public Utility
Revenues are subject to MIAA regulation. Adjustments of all other fees imposed and
collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees,
under the 1997 Concession Agreement, the same is further subject to Interim Adjustments not
previously stipulated in the draft Concession Agreement. Finally, the change in the currency
stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal
fees, gives PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to
creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not result
in the assumption by the Government of these liabilities. In fact, nowhere in the said contract does
default of PIATCOs loans figure in the agreement. Such default does not directly result in any
concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default has resulted in the acceleration of the payment due date of the Attendant Liability prior to
its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform
GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of
the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if
qualified, to be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and conditions of this
Agreement; Provided that if at the end of the 180-day period GRP shall not have served the
Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to take over
the operation of the Development Facility. If the concession company should elect to designate
an operator for the Development Facility, the concession company shall in good faith identify
and designate a qualified operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company, acting in good faith and with
due diligence, is unable to designate a qualified operator within the aforesaid period, then GRP
shall at the end of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
The term Attendant Liabilities under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books
of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated
fees, charges, surcharges, indemnities, reimbursements and other related expenses, and
further including amounts owed by Concessionaire to its suppliers, contractors and sub-
contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of Attendant
Liabilities, default by PIATCO of its loans used to finance the NAIA IPT III project triggers
the occurrence of certain events that leads to the assumption by the Government of the
liability for the loans. Only in one instance may the Government escape the assumption of
PIATCOs liabilities, i.e., when the Government so elects and allows a qualified operator to take
over as Concessionaire. However, this circumstance is dependent on the existence and
availability of a qualified operator who is willing to take over the rights and obligations of
PIATCO under the contract, a circumstance that is not entirely within the control of the
Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section
4.04 of the 1997 Concession Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not made available in the draft
Concession Agreement. Section 4.04 is an important amendment to the 1997 Concession
Agreement because it grants PIATCO a financial advantage or benefit which was not
previously made available during the bidding process. This financial advantage is a
significant modification that translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the
draft Concession Agreement is subject to amendment because the Bid Documents permit
financing or borrowing. They claim that it was the lenders who proposed the amendments to the
draft Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow
the project proponent or the winning bidder to obtain financing for the project, especially in this
case which involves the construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would involve a substantial
amount of investment. It is therefore inevitable for the awardee of the contract to seek alternate
sources of funds to support the project. Be that as it may, this Court maintains that amendments
to the contract bidded upon should always conform to the general policy on public bidding if such
procedure is to be faithful to its real nature and purpose. By its very nature and characteristic,
competitive public bidding aims to protect the public interest by giving the public the best possible
advantages through open competition.[45] It has been held that the three principles in public
bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis for the exact
comparison of bids. A regulation of the matter which excludes any of these factors destroys the
distinctive character of the system and thwarts the purpose of its adoption.[46] These are the basic
parameters which every awardee of a contract bidded out must conform to, requirements of
financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the
contract signed by the government and the contract-awardee is an entirely different contract from
the contract bidded, courts should not hesitate to strike down said contract in its entirety for
violation of public policy on public bidding. A strict adherence on the principles, rules and
regulations on public bidding must be sustained if only to preserve the integrity and the faith of
the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for public service
and for furnishing supplies and other materials. It aims to secure for the government the lowest
possible price under the most favorable terms and conditions, to curtail favoritism in the award of
government contracts and avoid suspicion of anomalies and it places all bidders in equal
footing.[47] Any government action which permits any substantial variance between the
conditions under which the bids are invited and the contract executed after the award
thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were
made on the 1997 Concession Agreement renders the same null and void for being contrary
to public policy. These amendments convert the 1997 Concession Agreement to an entirely
different agreement from the contract bidded out or the draft Concession Agreement. It is not
difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA
regulation or control and the extent thereof and (2) the assumption by the Government, under
certain conditions, of the liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available during the bidding
process. These amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The amendments
discussed above present new terms and conditions which provide financial benefit to PIATCO
which may have altered the technical and financial parameters of other bidders had they known
that such terms were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession
Agreement provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and
the default resulted in the acceleration of the payment duedate of the Attendant Liability prior to
its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform
GRP in writing of such default. GRP shall within one hundred eighty (180) days from receipt of
the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors,
if qualified to be substituted as concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and conditions of this
Agreement; Provided, that if at the end of the 180-day period GRP shall not have served the
Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to
have elected to take over the Development Facility with the concomitant assumption of
Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and designate a
qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of
GRPs written notice. If the concession company, acting in good faith and with due diligence, is
unable to designate a qualified operator within the aforesaid period, then GRP shall at the end
of the 180-day period take over the Development Facility and assume Attendant Liabilities.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated
fees, charges, surcharges, indemnities, reimbursements and other related expenses, and
further including amounts owed by Concessionaire to its suppliers, contractors and sub-
contractors.[48]
It is clear from the above-quoted provisions that Government, in the event that PIATCO
defaults in its loan obligations, is obligated to pay all amounts recorded and from time to time
outstanding from the books of PIATCO which the latter owes to its creditors. [49] These amounts
include all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses.[50]This obligation of the Government to pay
PIATCOs creditors upon PIATCOs default would arise if the Government opts to take over NAIA
IPT III. It should be noted, however, that even if the Government chooses the second option,
which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the Government is still at a risk
of being liable to PIATCOs creditors should the latter be unable to designate a qualified operator
within the prescribed period.[51] In effect, whatever option the Government chooses to take in
the event of PIATCOs failure to fulfill its loan obligations, the Government is still at a risk
of assuming PIATCOs outstanding loans. This is due to the fact that the Government would
only be free from assuming PIATCOs debts if the unpaid creditors would be able to designate a
qualified operator within the period provided for in the contract. Thus, the Governments
assumption of liability is virtually out of its control. The Government under the circumstances
provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and
willingness of a qualified operator. The above contractual provisions constitute a direct
government guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds
to construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these
projects. The BOT law allows the private sector to participate, and is in fact encouraged to do so
by way of incentives, such as minimizing the unstable flow of returns,[52] provided that the
government would not have to unnecessarily expend scarcely available funds for the project
itself. As such, direct guarantee, subsidy and equity by the government in these projects are
strictly prohibited.[53] This is but logical for if the government would in the end still be at a
risk of paying the debts incurred by the private entity in the BOT projects, then the purpose
of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the government or any of its agencies
or local government units assume responsibility for the repayment of debt directly incurred
by the project proponent in implementing the project in case of a loan default.
Clearly by providing that the Government assumes the attendant liabilities, which consists of
PIATCOs unpaid debts, the 1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It
is of no moment that the relevant sections are subsumed under the title of assignment. The
provisions providing for direct government guarantee which is prohibited by law is clear from the
terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
.
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter
into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders
(which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such
form as may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia,
to the following parameters:
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the
Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate
the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and
without prejudice to any other rights of the Senior Lenders or any Senior Lenders agent may
have (including without limitation under security interests granted in favor of the Senior
Lenders), to either in good faith identify and designate a nominee which is qualified under sub-
clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3] or transfer the
Concessionaires [PIATCO] rights and obligations under this Agreement to a transferee which is
qualified under sub-clause (viii) below;
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to
designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior
Lenders within one hundred eighty (180) days after giving GRP notice as referred to
respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith
to enter into any other arrangement relating to the Development Facility [NAIA Terminal 3]
(other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the
following one hundred eighty (180) days. If no agreement relating to the Development Facility
[NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-day period,
then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by
the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination
payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter
defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant
Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed
terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant
hereto;
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from
time to time owed or which may become owing by Concessionaire [PIATCO] to Senior
Lenders or any other persons or entities who have provided, loaned, or advanced funds
or provided financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal
3], including, without limitation, all principal, interest, associated fees, charges,
reimbursements, and other related expenses (including the fees, charges and expenses of
any agents or trustees of such persons or entities), whether payable at maturity, by acceleration
or otherwise, and further including amounts owed by Concessionaire [PIATCO] to its
professional consultants and advisers, suppliers, contractors and sub-contractors.[54]
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill
its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and
enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who will take the place of PIATCO. If the Senior Lenders
and the Government are unable to enter into an agreement after the prescribed period, the
Government must then pay PIATCO, upon transfer of NAIA IPT III to the Government, termination
payment equal to the appraised value of the project or the value of the attendant liabilities
whichever is greater. Attendant liabilities as defined in the ARCA includes all amounts owed or
thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO has
defaulted in its loan obligations but to all other persons who may have loaned, advanced funds or
provided any other type of financial facilities to PIATCO for NAIA IPT III. The amount of PIATCOs
debt that the Government would have to pay as a result of PIATCOs default in its loan obligations
-- in case no qualified nominee or transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the Government and the Senior
Lenders -- includes, but is not limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or
otherwise.[55]
It is clear from the foregoing that the ARCA provides for a direct guarantee by the
government to pay PIATCOs loans not only to its Senior Lenders but all other entities who
provided PIATCO funds or services upon PIATCOs default in its loan obligation with its
Senior Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters
obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or
transferee does not detract from the fact that, should the conditions as stated in the contract occur,
the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its
lenders in connection with NAIA IPT III.Worse, the conditions that would make the Government
liable for PIATCOs debts is triggered by PIATCOs own default of its loan obligations to its Senior
Lenders to which loan contracts the Government was never a party to. The Government was not
even given an option as to what course of action it should take in case PIATCO defaulted in the
payment of its senior loans. The Government, upon PIATCOs default, would be merely notified
by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a
qualified nominee or transferee. Should the Senior Lenders fail to make such an appointment, the
Government is then automatically obligated to directly deal and negotiate with the Senior Lenders
regarding NAIA IPT III. The only way the Government would not be liable for PIATCOs debt is for
a qualified nominee or transferee to be appointed in place of PIATCO to continue the construction,
operation and maintenance of NAIA IPT III. This pre-condition, however, will not take the contract
out of the ambit of a direct guarantee by the government as the existence, availability and
willingness of a qualified nominee or transferee is totally out of the governments control. As
such the Government is virtually at the mercy of PIATCO (that it would not default on its loan
obligations to its Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee
or transferee or agree to some other arrangement with the Government) and the existence of a
qualified nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT
III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the
Government to pay for all loans, advances and obligations arising out of financial facilities
extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in
its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or
transferee. This in effect would make the Government liable for PIATCOs loans should the
conditions as set forth in the ARCA arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for
a BOT project may be accepted, the following conditions must first be met: (1) the project involves
a new concept in technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the government agency or local
government unit has invited by publication other interested parties to a public bidding and
conducted the same.[56] The failure to meet any of the above conditions will result in the denial of
the proposal. It is further provided that the presence of direct government guarantee, subsidy or
equity will necessarily disqualify a proposal from being treated and accepted as an unsolicited
proposal.[57] The BOT Law clearly and strictly prohibits direct government guarantee, subsidy and
equity in unsolicited proposals that the mere inclusion of a provision to that effect is fatal and is
sufficient to deny the proposal. It stands to reason therefore that if a proposal can be denied by
reason of the existence of direct government guarantee, then its inclusion in the contract executed
after the said proposal has been accepted is likewise sufficient to invalidate the contract itself. A
prohibited provision, the inclusion of which would result in the denial of a proposal cannot, and
should not, be allowed to later on be inserted in the contract resulting from the said proposal. The
basic rules of justice and fair play alone militate against such an occurrence and must not,
therefore, be countenanced particularly in this instance where the government is exposed to the
risk of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be
done directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the
clear statutory prohibition against a direct government guarantee would not only make a
mockery of what the BOT Law seeks to prevent -- which is to expose the government to
the risk of incurring a monetary obligation resulting from a contract of loan between the
project proponent and its lenders and to which the Government is not a party to -- but
would also render the BOT Law useless for what it seeks to achieve - to make use of the
resources of the private sector in the financing, operation and maintenance of
infrastructure and development projects[59] which are necessary for national growth and
development but which the government, unfortunately, could ill-afford to finance at this
point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the State may,
during the emergency and under reasonable terms prescribed by it, temporarily take over or
direct the operation of any privately owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in
the exercise of its police power, to temporarily take over the operation of any business affected
with public interest. In the 1986 Constitutional Commission, the term national emergency was
defined to include threat from external aggression, calamities or national disasters, but not strikes
unless it is of such proportion that would paralyze government service.[60] The duration of the
emergency itself is the determining factor as to how long the temporary takeover by the
government would last.[61] The temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as there is no transfer
of ownership, whether permanent or temporary. The private entity-owner affected by the
temporary takeover cannot, likewise, claim just compensation for the use of the said business
and its properties as the temporary takeover by the government is in exercise of its police
power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any notice,
notification, or declaration concerning or relating to acquisition, seizure or appropriation by GRP
in times of war or national emergency, GRP shall, by written notice to Concessionaire,
immediately take over the operations of the Terminal and/or the Terminal Complex. During such
take over by GRP, the Concession Period shall be suspended; provided, that upon termination
of war, hostilities or national emergency, the operations shall be returned to Concessionaire, at
which time, the Concession period shall commence to run again. Concessionaire shall be
entitled to reasonable compensation for the duration of the temporary take over by GRP,
which compensation shall take into account the reasonable cost for the use of the
Terminal and/or Terminal Complex, (which is in the amount at least equal to the debt
service requirements of Concessionaire, if the temporary take over should occur at the time
when Concessionaire is still servicing debts owed to project lenders), any loss or damage to the
Development Facility, and other consequential damages. If the parties cannot agree on the
reasonable compensation of Concessionaire, or on the liability of GRP as aforesaid, the matter
shall be resolved in accordance with Section 10.01 [Arbitration]. Any amount determined to be
payable by GRP to Concessionaire shall be offset from the amount next payable by
Concessionaire to GRP.[62]
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional

provision on temporary government takeover and obligate the government to pay
reasonable cost for the use of the Terminal and/or Terminal Complex.[63] Article XII, section
17 of the 1987 Constitution envisions a situation wherein the exigencies of the times necessitate
the government to temporarily take over or direct the operation of any privately owned public utility
or business affected with public interest. It is the welfare and interest of the public which is the
paramount consideration in determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising its police
power. Police power is the most essential, insistent, and illimitable of powers. [64] Its exercise
therefore must not be unreasonably hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its exercise. [65] Thus, requiring the
government to pay reasonable compensation for the reasonable use of the property pursuant to
the operation of the business contravenes the Constitution.
V
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture
a particular article, or control the sale of a particular commodity.[66] The 1987 Constitution
strictly regulates monopolies, whether private or public, and even provides for their prohibition
if public interest so requires.Article XII, Section 19 of the 1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to
exist to aid the government in carrying on an enterprise or to aid in the performance of various
services and functions in the interest of the public.[67] Nonetheless, a determination must first
be made as to whether public interest requires a monopoly. As monopolies are subject to abuses
that can inflict severe prejudice to the public, they are subject to a higher level of State regulation
than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is
granted the exclusive right to operate a commercial international passenger terminal within the
Island of Luzon at the NAIA IPT III.[68] This is with the exception of already existing international
airports in Luzon such as those located in the Subic Bay Freeport Special Economic Zone
(SBFSEZ), Clark Special Economic Zone (CSEZ) and in Laoag City.[69] As such, upon
commencement of PIATCOs operation of NAIA IPT III, Terminals 1 and 2 of NAIA would cease
to function as international passenger terminals. This, however, does not prevent MIAA to use
Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may deem
appropriate except those activities that would compete with NAIA IPT III in the latters operation
as an international passenger terminal.[70] The right granted to PIATCO to exclusively operate
NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date[71] and
renewable for another twenty-five (25) years at the option of the government.[72] Both the 1997
Concession Agreement and the ARCA further provide that, in view of the exclusive right
granted to PIATCO, the concession contracts of the service providers currently servicing
Terminals 1 and 2 would no longer be renewed and those concession contracts whose
expiration are subsequent to the In-Service Date would cease to be effective on the said
date.[73]
The operation of an international passenger airport terminal is no doubt an undertaking
imbued with public interest. In entering into a BuildOperate-and-Transfer contract for the
construction, operation and maintenance of NAIA IPT III, the government has determined that
public interest would be served better if private sector resources were used in its construction and
an exclusive right to operate be granted to the private entity undertaking the said project, in this
case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation
and supervision by the Government through the MIAA, which is the government agency
authorized to operate the NAIA complex, as well as DOTC, the department to which MIAA is
attached.[74]
This is in accord with the Constitutional mandate that a monopoly which is not prohibited
must be regulated.[75] While it is the declared policy of the BOT Law to encourage private sector
participation by providing a climate of minimum government regulations, [76] the same does not
mean that Government must completely surrender its sovereign power to protect public interest
in the operation of a public utility as a monopoly. The operation of said public utility can not be
done in an arbitrary manner to the detriment of the public which it seeks to serve. The right granted
to the public utility may be exclusive but the exercise of the right cannot run riot. Thus, while
PIATCO may be authorized to exclusively operate NAIA IPT III as an international passenger
terminal, the Government, through the MIAA, has the right and the duty to ensure that it is done
in accord with public interest. PIATCOs right to operate NAIA IPT III cannot also violate the rights
of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
(e) GRP confirms that certain concession agreements relative to certain services and
operations currently being undertaken at the Ninoy Aquino International Airport passenger
Terminal I have a validity period extending beyond the In-Service Date. GRP through
DOTC/MIAA, confirms that these services and operations shall not be carried over to the
Terminal and the Concessionaire is under no legal obligation to permit such carry-
over except through a separate agreement duly entered into with Concessionaire. In the event
Concessionaire becomes involved in any litigation initiated by any such concessionaire or
operator, GRP undertakes and hereby holds Concessionaire free and harmless on full
indemnity basis from and against any loss and/or any liability resulting from any such litigation,
including the cost of litigation and the reasonable fees paid or payable to Concessionaires
counsel of choice, all such amounts shall be fully deductible by way of an offset from any
amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-
intervention for G.R. No. 155001 stated that there are two service providers whose contracts are
still existing and whose validity extends beyond the In-Service Date. One contract remains valid
until 2008 and the other until 2010.[77]
We hold that while the service providers presently operating at NAIA Terminal 1 do not have
an absolute right for the renewal or the extension of their respective contracts, those contracts
whose duration extends beyond NAIA IPT IIIs In-Service-Date should not be unduly
prejudiced. These contracts must be respected not just by the parties thereto but also by third
parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate, cannot require
the Government to break its contractual obligations to the service providers. In contrast to the
arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v.
Lazaro[78] whose contracts consist of temporary hold-over permits, the affected service providers
in the cases at bar, have a valid and binding contract with the Government, through MIAA, whose
period of effectivity, as well as the other terms and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions
of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its
right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary
government agency tasked with the job,[79] it is MIAAs responsibility to ensure that whoever by
contract is given the right to operate NAIA IPT III will do so within the bounds of the law and with
due regard to the rights of third parties and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the NAIA IPT III is null and void.
Further, considering that the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997 Concession Agreement
into an entirely different agreement from the contract bidded upon, the 1997 Concession
Agreement is similarly null and void for being contrary to public policy. The provisions
under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement and
Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a direct government
guarantee expressly prohibited by, among others, the BOT Law and its Implementing Rules and
Regulations are also null and void. The Supplements, being accessory contracts to the ARCA,
are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, and Carpio-Morales, JJ., concur.
Vitug, J., see separate (dissenting) opinion.
Panganiban, J., please see separate opinion.
Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs.
Carpio, J., no part.
Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 107918 June 14, 1994
ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, HON. MARINA L. BUZON, as Presiding Judge of RTC,
Quezon City, MM, Br. 91, VISITACION SERRA FLORES RTC, Quezon City, MM, Br. 91, MA.
ASUNCION FLORES, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO., SECURITY BANK & TRUST CO. and CITYTRUST BANKING
CORPORATION, respondents.
Soluta, Leonidas, Marifosque, Balce, Santiago & Aguila Law Office for petitioner.
Rector Law Office for respondent Flores.
Balgos and Perez Law Office for respondent PCIB.
Dumaraos, Oracion, Panganiban & Associates for respondent FEBTC.
Cauton, Banares, Carpio, Ishiwata and Associates for respondent SBTC.
Gonzaga, Soneja and Gale Law Offices for respondent Citytrust.
KAPUNAN, J.:
This is a petition for review on certiorari seeking the reversal of the decision of the Court of
Appeals on November 18, 1992 affirming in toto the Order of the Regional Trial Court of Quezon
City, Branch 91 dismissing the petitioner’s third-party complaint against private respondent
banks for lack of jurisdiction.
The facts of the case, as found by both the trial court and the Court of Appeals are undisputed:
In a complaint for Violation of the Negotiable Instrument Law and Damages,

plaintiffs 1 seek the recovery of the amount of P900,913.60 which defendant
bank 2 charged against their current account by virtue of the sixteen (16) checks
drawn by them despite the apparent alterations therein with respect to the name
of the payee, that is, the name Filipinas Shell was erased and substituted with
Ever Trading and DBL Trading by their supervisor Jeremias Cabrera, without
their knowledge and consent.
Answering the complaint, defendant bank claimed that the subject checks
appeared to have been regularly issued and free from any irregularity which
would excite or arouse any suspicion or warrant their dishonor when the same
were negotiated and honored by it; that it observed and exercised the required
diligence, care and the prescribed standard verification procedures before finally
accepting and honoring the subject checks and that the proximate cause of
plaintiffs’ loss, if any, was their own laxity, negligence and lack of control, due
care and diligence in the conduct of their business affairs.
With leave of court, defendant bank filed a Third-Party Complaint against

Philippine Commercial International Bank, Far East Bank & Trust Company,
Security Bank and Trust Company and Citytrust Banking Corporation for
reimbursement, contribution, indemnity from said third-party defendants for being
the collecting banks of the subject checks and by virtue of their bank guarantee
for all checks sent for clearing to the Philippine Clearing House Corporation
(PCHC), as provided for in Section 17, (PCHC), as provided for in Section 17,
PCHC Clearing House Rules and Regulations.
In its Answer to the Third-Party Complaint, Citytrust Banking Corporation averred

that the subject checks appeared to be complete and regular on their face with
no indication that an original payee’s name was erased and superimposed with
another; that plaintiffs’ fault and negligence in failing to examine their monthly
bank statements, together with the returned checks and their own check stubs,
put them under estoppel and cannot recover the proceeds of the checks against
it, an innocent third-party, and plaintiff must suffer the loss as their negligence
was the proximate cause thereof; and that third party plaintiff is barred from
recovering from it base on the provisions of Sections 20 and 21 of the Philippine
Clearing Rules and Regulations.
Philippine Commercial International Bank alleged that the subject check was
complete and regular on its face and was paid by it only upon presentment to the
drawee bank for clearing who, upon examination thereof, found the same to be
complete and regular on its face; that it was only after said check was cleared by
third-party plaintiff for payment that it allowed the payee to withdraw the proceeds
of the check from its account; that the cause of action of the third-party plaintiff is
barred by estoppel and/or laches for its failure to return the check to it within the
period provided for under Clearing House Rules and Regulations; that this Court
has no jurisdiction over the suit as it and third-party plaintiff are members of the
Philippine Clearing House and bound by the Rules and Regulations thereof
providing for arbitration.
A Motion To Dismiss was filed by Security Bank and Trust Company on the
grounds that third-party plaintiff failed to resort to arbitration as provided for in
Section 36 of the Clearing House Rules and Regulations of the Philippine
Clearing House Corporation, and that it was released from any liability with the
acceptance by third-party plaintiff of the subject check.
The record does not show of any Answer to the Third-Party Complaint having
been filed by Far East Bank & Trust Company, although a "Reply To FEBTC
Answer" was filed by third-party plaintiff.
On the other hand, third-party plaintiff maintains that this Court has jurisdiction
over the suit as the provisions of the Clearing House Rules and Regulations are
applicable only if the suit or action is between participating member banks,
whereas the plaintiffs are private persons and the third-party complaint between
participating member banks is only a consequence of the original action initiated
by the plaintiffs. 3
The trial court dismissed the third-party complaint for lack of jurisdiction citing Section 36 of the
Clearing House Rules and Regulations of the PCHC providing for settlement of disputes and
controversies involving any check or item cleared through the body with the PCHC. It ruled —
citing the Arbitration Rules of Procedure — that the decision or award of the PCHC through its
arbitration committee/arbitrator is appealable only on questions of law to any of the Regional
Trial Courts in the National Capital Region where the head office of any of the parties is
located. 4
On the plaintiffs’ contention that jurisdiction vests with the court only if the suit or action is
between participating member banks without the involvement of private parties the trial court
held:
The third-party complaint concerning a dispute or controversy among clearing

participants involving the subject checks cleared through PCHC is actually
independent of, separate and distinct from the plaintiff’s complaint. . . .
xxx xxx xxx
As the plaintiffs are not parties to the third party complaint, the provisions of the
clearing house rules and regulations on arbitration are, therefore, applicable to
Third-Party plaintiff and third party defendant. Consequently this court has no
jurisdiction over the third party complaint. 5
After the trial court denied plaintiffs Motion for Reconsideration, 6 petitioner appealed to the
Court of Appeals which promulgated the challenged decision on November 18, 1992 dismissing
the petition for lack of merit.
Undaunted, petitioner is now before this Court seeking a review of respondent court’s decision
on a lone assignment of error:
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER DRAWEE BANK’S THIRD PARTY COMPLAINT AGAINST
PRIVATE RESPONDENT COLLECTING BANKS FALL WITHIN THE
JURISDICTION OF THE PCHC AND NOT THE REGULAR COURT.
We find no merit in the petition.
The Clearing House Rules and Regulations on Arbitration of the Philippine Clearing House
Corporation are clearly applicable to petitioner and private respondents, third party plaintiff and
defendants, respectively, in the court below. Petitioner Associated Bank’s third party complaint
in the trial court was one for reimbursement, contribution and indemnity against the Philippine
Commercial and Industrial Bank (PCIB), the Far East Bank and Trust, Co. (FEBTC), Security
Bank and Trust Co. (SBTC), and the CityTrust Banking Corporation (CTBC), in connection with
petitioner’s having honored sixteen checks which said respondent banks supposedly endorsed
to the former for collection in 1989. Under the rules and regulations of the Philippine Clearing
House Corporation (PCHC), the mere act of participation of the parties concerned in its
operations in effect amounts to a manifestation of agreement by the parties to abide by its rules
and regulations. 7 As a consequence of such participation, a party cannot invoke the jurisdiction
of the courts over disputes and controversies which fall under the PCHC Rules and Regulations
without first going through the arbitration processes laid out by the body. Since claims relating to
the regularity of checks cleared by banking institutions are among those claims which should
first be submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated
Bank, having voluntarily bound itself to abide by such rules and regulations, is estopped from
seeking relief from the Regional Trial Court on the coattails of a private claim and in the guise of
a third party complaint without first having obtained a decision adverse to its claim from the said
body. It cannot bypass the arbitration process on the basis of its averment that its third party
complaint is inextricably linked to the original complaint in the Regional Trial Court.
Under its Articles of Incorporation, the PCHC provides "an effective, convenient, efficient,
economical and relevant exchange and facilitate service limited to check processing and sorting
by way of assisting member banks, entities in clearing checks and other clearing items as
defined and existing in future Central Bank of the Philippines Circulars, memoranda, circular
letters rules and regulations and policies in pursuance of Section 107 of RA 265." Pursuant to its
function involving the clearing of checks and other clearing items, the PCHC has adopted rules
and regulations designed to provide member banks with a procedure whereby disputes
involving the clearance of checks and other negotiable instruments undergo a process of
arbitration prior to submission to the courts below. This procedure not only ensures a uniformity
of rulings relating to factual disputes involving checks and other negotiable instruments but also
provides a mechanism for settling minor disputes among participating and member banks which
would otherwise go directly to the trial courts. While the PCHC Rules and Regulations allow
appeal to the Regional Trial Courts only on questions of law, this does not preclude our lower
courts from dealing with questions of fact already decided by the PCHC arbitration when
warranted and appropriate.
In Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation 8 this Court
had the occasion to rule on the validity of these rules as well as the jurisdiction of the PCHC as
a forum for resolving disputes and controversies involving checks and other clearing items when
it held that "the participation of two banks. . . in the Clearing Operations of the PCHC (was) a
manifestation of its submission to its jurisdiction." 9
The applicable PCHC provisions on the question of jurisdiction provide:
Sec. 3 — AGREEMENT TO THESE RULES
It is the general agreement and understanding, that any participant in the PCHC
MICR clearing operations, by the mere act of participation, thereby manifests its
agreement to these Rules and Regulations, and its subsequent amendments.
xxx xxx xxx
Sec. 36 — ARBITRATION
36.1 Any dispute or controversy between two or more clearing participants
involving any check/item cleared thru PCHC shall be submitted to the Arbitration
Committee, upon written complaint of any involved participant by filing the same
with the PCHC serving the same upon the other party or parties, who shall within
fifteen (15) days after receipt thereof, file with the Arbitration Committee its
written answer to such written complaint and also within the same period serve
the same upon the complaining participant. This period of fifteen (15) days may
be extended by the Committee not more than once for another period of fifteen
(15) days, but upon agreement in writing of the complaining party, said extension
may be for such period as the latter may agree to.
Section 36.6 is even more emphatic:
36.6 The fact that a bank participates in the clearing operations of PCHC shall be
deemed its written and subscribed consent to the binding effect of this arbitration
agreement as if it had done so in accordance with Section 4 of the Republic Act
No. 876 otherwise known as the Arbitration Law.
Thus, not only do the parties manifest by mere participation their consent to these rules, but
such participation is deemed (their) written and subscribed consent to the binding effect of
arbitration agreements under the PCHC rules. Moreover, a participant subject to the Clearing
House Rules and Regulations of the PCHC may go on appeal to any of the Regional Trial
Courts in the National Capital Region where the head office of any of the parties is located only
after a decision or award has been rendered by the arbitration committee or arbitrator on
questions of law. 10
Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to the
arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to do
so. The jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is
particularly applicable to all the parties in the third party complaint under their obligation to first
seek redress of their disputes and grievances with the PCHC before going to the trial court.
Finally, the contention that the third party complaint should not have been dismissed for being a
necessary and inseparable offshoot of the main case over which the court a quo had already
exercised jurisdiction misses the fundamental point about such pleading. A third party complaint
is a mere procedural device which under the Rules of Court is allowed only with the court’s
permission. It is an action "actually independent of, separate and distinct from the plaintiffs’
complaint" (s)uch that, were it not for the Rules of Court, it would be necessary to file the action
separately from the original complaint by the defendant against the third party. 11
IN VIEW OF THE FOREGOING, the petition is DENIED for lack of merit. With costs against
petitioner.
SO ORDERED.
Cruz, Davide, Jr. and Bellosillo, JJ., concur.
Quiazon, J., took no part.
SECOND DIVISION
[G.R. NO. 135362. December 13, 1999]
HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself and as legal
guardian of the minor FABRICE CYRILL D. SALAS, MA. CRISTINA S. LESACA, and
KARINA TERESA D. SALAS, petitioners, vs.LAPERAL REALTY CORPORATION,
ROCKWAY REAL ESTATE CORPORATION, SOUTH RIDGE VILLAGE, INC.,
MAHARAMI DEVELOPMENT CORPORATION, Spouses THELMA D. ABRAJANO and
GREGORIO ABRAJANO, OSCAR DACILLO, Spouses VIRGINIA D. LAVA and RODEL
LAVA, EDUARDO A. VACUNA, FLORANTE DE LA CRUZ, JESUS VICENTE B.
CAPELLAN, and the REGISTER OF DEEDS FOR LIPA CITY, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Order[1] of Branch 85 of the Regional Trial
Court of Lipa City[2] dismissing petitioners complaint[3] for rescission of several sale transactions
involving land owned by Augusto L. Salas, Jr., their predecessor-in-interest, on the ground that
they failed to first resort to arbitration.
Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas spanning
1,484,354 square meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement[4] (hereinafter referred to
as the Agreement) with respondent Laperal Realty Corporation (hereinafter referred to as Laperal
Realty) to render and provide complete (horizontal) construction services on his land.
On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of
respondent Laperal Realty to exercise general control, supervision and management of the sale
of his land, for cash or on installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva
Ecija. He never returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati City a
verified petition for the declaration of presumptive death of her husband, Salas, Jr., who had then
been missing for more than seven (7) years. It was granted on December 12, 1996.[5]
Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold subdivided
portions thereof to respondents Rockway Real Estate Corporation and South Ridge Village, Inc.
on February 22, 1990; to respondent spouses Abrajano and Lava and Oscar Dacillo on June 27,
1991; and to respondents Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capalan on
June 4, 1996 (all of whom are hereinafter referred to as respondent lot buyers).
On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court of Lipa
City a Complaint[6] for declaration of nullity of sale, reconveyance, cancellation of contract,
accounting and damages against herein respondents which was docketed as Civil Case No. 98-
0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to Dismiss [7]on the ground that
petitioners failed to submit their grievance to arbitration as required under Article VI of the
Agreement which provides:
ARTICLE VI. ARBITRATION.
All cases of dispute between CONTRACTOR and OWNERS representative shall be referred to
the committee represented by:
a. One representative of the OWNER;

b. One representative of the CONTRACTOR;
c. One representative acceptable to both OWNER and CONTRACTOR.[8]
On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed a Joint
Answer with Counterclaim and Crossclaim[9] praying for dismissal of petitioners Complaint for the
same reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing petitioners
Complaint for non-compliance with the foregoing arbitration clause.
Hence this petition.
Petitioners argue, thus:
The petitioners causes of action did not emanate from the Owner-Contractor Agreement.
The petitioners causes of action for cancellation of contract and accounting are covered by the
exception under the Arbitration Law.
Failure to arbitrate is not a ground for dismissal.[10]
In a catena of cases[11] inspired by Justice Malcolms provocative dissent in Vega v. San

Carlos Milling Co.[12], this Court has recognized arbitration agreements as valid, binding,
enforceable and not contrary to public policy so much so that when there obtains a written
provision for arbitration which is not complied with, the trial court should suspend the proceedings
and order the parties to proceed to arbitration in accordance with the terms of their
agreement[13] Arbitration is the wave of the future in dispute resolution.[14] To brush aside a
contractual agreement calling for arbitration in case of disagreement between parties would be a
step backward.[15]
Nonetheless, we grant the petition.
A submission to arbitration is a contract.[16] As such, the Agreement, containing the stipulation
on arbitration, binds the parties thereto, as well as their assigns and heirs. [17] But only
they. Petitioners, as heirs of Salas, Jr., and respondent Laperal Realty are certainly bound by the
Agreement. If respondent Laperal Realty, had assigned its rights under the Agreement to a third
party, making the former, the assignor, and the latter, the assignee, such assignee would also be
bound by the arbitration provision since assignment involves such transfer of rights as to vest in
the assignee the power to enforce them to the same extent as the assignor could have enforced
them against the debtor[18] or in this case, against the heirs of the original party to the
Agreement. However, respondents Rockway Real Estate Corporation, South Ridge Village, Inc.,
Maharami Development Corporation, spouses Abrajano, spouses Lava, Oscar Dacillo, Eduardo
Vacuna, Florante de la Cruz and Jesus Vicente Capellan are not assignees of the rights of
respondent Laperal Realty under the Agreement to develop Salas, Jr.s land and sell the
same. They are, rather, buyers of the land that respondent Laperal Realty was given the authority
to develop and sell under the Agreement. As such, they are not assigns contemplated in Art.
1311 of the New Civil Code which provides that contracts take effect only between the parties,
their assigns and heirs.
Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of Salas,
Jr.s land when respondent Laperal Realty subdivided it and sold portions thereof to respondent
lot buyers. Thus, they instituted action[19]against both respondent Laperal Realty and respondent
lot buyers for rescission of the sale transactions and reconveyance to them of the subdivided
lots. They argue that rescission, being their cause of action, falls under the exception clause in
Sec. 2 of Republic Act No. 876 which provides that such submission [to] or contract [of arbitration]
shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract.
The petitioners contention is without merit. For while rescission, as a general rule, is an
arbitrable issue,[20] they impleaded in the suit for rescission the respondent lot buyers who are
neither parties to the Agreement nor the latters assigns or heirs. Consequently, the right to
arbitrate as provided in Article VI of the Agreement was never vested in respondent lot buyers.
Respondent Laperal Realty, as a contracting party to the Agreement, has the right to compel
petitioners to first arbitrate before seeking judicial relief.However, to split the proceedings into
arbitration for respondent Laperal Realty and trial for the respondent lot buyers, or to hold trial in
abeyance pending arbitration between petitioners and respondent Laperal Realty, would in effect
result in multiplicity of suits, duplicitous procedure and unnecessary delay. On the other hand, it
would be in the interest of justice if the trial court hears the complaint against all herein
respondents and adjudicates petitioners rights as against theirs in a single and complete
proceeding.
WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19, 1998
of Branch 85 of the Regional Trial Court of Lipa City is hereby NULLIFIED and SET ASIDE. Said
court is hereby ordered to proceed with the hearing of Civil Case No. 98-0047.
Costs against private respondents.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.
SECOND DIVISION
[G.R. No. 155651. July 28, 2005]
COCA-COLA BOTTLERS PHILIPPINES, INC., SALES FORCE UNION-PTGWO-

BALAIS, petitioner, vs. COCA-COLA BOTTLERS, PHILIPPINES, INC., respondent.
DECISION
CHICO-NAZARIO, J.:
This is a petition for review on certiorari seeking the reversal of the Court of Appeals
Decision[1] and Resolution[2] dated 22 May 2002 and 03 October 2002, respectively, affirming the
21 January 2001 Decision of the panel of voluntary arbitrators (Panel) of the National Conciliation
Mediation Board (NCMB) for the reason that the Panel decision had already attained finality.
The following is a narration by the Court of Appeals of the undisputed facts:
The Coca-Cola Bottlers Philippines, Inc. Sales Force Union-PTGWO is a legitimate labor
organization duly registered with the Department of Labor and Employment, and is the sole and
exclusive bargaining representative of all regular route salesmen, regular relief route salesmen,
regular lead helpers, regular relief lead helpers, regular route helpers, regular relief route
helpers and order-taker collectors who are assigned in various sales offices specified in the
parties collective bargaining agreement. On the other hand, the respondent company is a
domestic corporation duly organized and existing under the laws of the Philippines and is
engaged in the manufacture and distribution of its soft drink products.
In January 1989, the UNION filed a Notice of Strike with the National Conciliation and Mediation
Board raising certain issues for conciliation. As a result of said dispute, the UNION staged a
strike.
Subsequently, the Board succeeded in making the parties agree to a voluntary settlement of the
case via a Memorandum of Agreement signed by them on February 9, 1989. Among others, the
petitioner and the respondent agreed, as follows:
...
1. Christmas Bonus
The Company shall grant to all those covered by the Bargaining Unit represented by the Union
an amount equivalent to fifty (50%) percent of their average commission for the last six (6)
months.
The union hereby acknowledges that the granting of a Christmas bonus is purely a
Management prerogative and as such, in determining the amount thereof the same is solely a
discretion of Management. The parties however agree that henceforth whenever Management
exercises this prerogative, the same shall include the average commission for the last six (6)
months prior to the grant.
Since then, the management granted to each covered employee every December of the year a
certain percentage of his basic pay and an amount equivalent to fifty (50%) percent of his
average commission for the last six months prior to the grant. However, in December 1999, the
respondent granted a fixed amount of P4,000.00 only, eliminating thereby the said 50%
employees average commission for the last six months for members of the union. Thus,
claiming the same as violation of the MOA, the union submitted its grievance to the respondent.
No settlement was reached, hence, the case was then referred to a Panel of Voluntary
Arbitrators.
Petitioner claimed that the MOA establishes the companys obligation to pay additionally 50% of
the average commission whenever it decides to grant a bonus and that the fixed amount of
P4,000.00 granted in December 1999, although denominated as ex-gratia was actually a
Christmas bonus. In support of its stand, the Union submitted sample payslips for the prior
years wherein the company granted a performance grant or one time grant computed as a
percentage of the employees basic salary. An illustrative example was that given to Jose
Manalusan. His payslip dated December 6, 1996 shows his basic rate at P5,080.00 and an item
SPL GRNT in the amount of P4,786.41. On top of the payslip (sic) appear the words 80%
performance grant. According to the Union, this amount of P4,786. is P722.41 more than 80%
of Manalusans then basic rate (80% of P5,080.00 being PhP4,064.00). Thus, the Union
concludes that the difference of P722.41 represents additional 50% of average commission. In
sum, the Union asseverates that the grant of the additional 50% of the average commission has
become a practice since 1989 and has ripened into a contractual obligation.
On the other hand, the respondent company countered that in 1999 it suffered its worst financial
performance in its history; that its sales volume was twenty percent (20%) behind plan and ten
percent (10%) below the sales in 1998, as a result, it suffered an abnormal loss of Two Billion
Five Hundred Million Pesos (P2,500,000,000.00); that faced with tremendous losses, the
management decided not to grant bonuses to its employees in 1999; that through Memorandum
99010 dated December 14, 1999, its President, Mr. Peter Baker explained to the employees the
companys financial situation and the decision not to grant bonuses; that in the same memo
however, the company granted a special ex gratia payment of Four Thousand Pesos
(P4,000.00) to all its permanent employees, . . .
During the past year (sic) we have suffered greatly as a result of a number of internal and
external issues including the effect of the general economic pressures in the Philippines.
Our sales volume in 1999 is approximately 20% behind the plan and 10% below last year. This
together with lower than expected prices and increased costs will result in a financial
performance which is undoubtedly the worst in our history.
The Coca-cola Amatil Board has announced that it expects an abnormal loss of PhP2.5 Billion
(AUD100 million) before tax at CCBPI in 1999 and that reported on-going results will be below
everyones expectations.
In these circumstances the CCBPI Executive Committee has decided that the CCBPI is not able
to pay bonuses to any staff in 1999. As your new president, it disappoints me greatly to have to
inform you of this situation.
Our situation has been discussed with the CCA Board and they are understanding of the
difficulties we face a (sic) present and grateful of the efforts of our associates at all levels.
Furthermore, the management of CCA has agreed to make a special Ex Gratia payment
PhP4,000.00 to all permanent employees of CCBPI. Our hope that [t]his will assist in some way
to allow you and your families to enjoy the festive season.
In denying the claim of the Union for the payment of the additional 50% of the average
commission for the last six months, the respondent argues that the said MOA is not applicable
since the company did not grant Christmas bonus in 1999.
After hearing and the submission of evidence and position papers, the Arbitration Panel
composed of Apron Mangabat and Noel Sanchez, as chairman and member, respectively,
denied petitioners claim and declared that the P4,000.00 given as ex gratia is not a bonus, while
Arnel Dolendo, another member dissented. The dispositive portion of the decision reads as
follows:
WHEREFORE, judgment is hereby rendered declaring that the special Ex Gratia payment of
P4,000.00 made pursuant to the Memo of Mr. Peter Baker dated December 14, 1999 was not a
Christmas bonus and therefore, the claim of the Union for an additional 50% of average
commission on top of said P4,000.00 is hereby denied.[3]
A copy of this Decision dated 21 January 2001 was received by petitioners counsel on 20
February 2001. Said Decision was signed only by the Chairman of the Panel, Mr. Apron
Mangabat, and one of its members, Atty. Noel Sanchez. As to the third member, Atty. Arnel
Dolendo, instead of a signature on top of his printed name, the following notation appears:
Dissented during deliberation.
Will file a separate opinion.
No separate opinion, however, was attached to the Decision as received by petitioner, through its
counsel. Thus, on 22 February 2001 (two days after receipt of the Decision), petitioner filed an
Urgent Ex-Parte Manifestation with Motion where it essentially questioned the validity of the
decision, opining that the Panels decision without such dissenting and separate opinion attached
thereto makes the decision incomplete and prematurely issued. It consequently prayed that the
questioned Decision be held in abeyance and for the Panel to immediately issue an order to the
effect that the prescriptive period available to any of the parties to seek any legal remedy or relief
be suspended in the meantime.
The Panel did not directly act on this motion. Instead, on 02 March 2001, petitioner received
a Notice of Transmittal from the NCMB furnishing it a copy of Atty. Dolendos separate opinion
together with the 21 January 2001 Decision. Thus, on 12 March 2001, petitioner filed a motion for
reconsideration of the 21 January 2001 Decision.
On 30 May 2001, the Panel denied petitioners motion for reconsideration. A copy of the Order
of denial was received by petitioner on 09 July 2001. By virtue thereof, petitioner filed a Petition
for Review before the Court of Appeals on 24 July 2001.
In dealing with the controversy, the Court of Appeals adopted a two-tiered approach. First, it
held that contrary to the view of the Panel, the P4,000.00 special ex gratia payment is a Christmas
bonus, hence, petitioners members are entitled to the additional 50% average commission for the
last six months prior to the grant pursuant to the Memorandum of Agreement entered into between
petitioner and respondent Coca-Cola Bottlers Philippines, Inc. This notwithstanding, the Court of
Appeals dismissed the petition on the ground that petitioners motion for reconsideration dated 12
March 2001 of the Decision of the Panel that was originally received on 20 February 2001 was
filed out of time; hence, the said Decision already became final and executory after ten (10)
calendar days from receipt of the copy of the Decision by the parties pursuant to Article 262-A of
the Labor Code. The Court of Appeals ratiocinated thus:
On the matter of procedure, Article 262-A of the Labor Code governs. It provides that the award
or decision of the Voluntary Arbitrator or panel of Voluntary Arbitrators shall be final and
executory after ten (10) calendar days from receipt of the copy of the award or decision by the
parties. Moreover, Section 6, Rule VII of the NCMB Procedural Guidelines in the Conduct of
Voluntary Arbitration Proceedings, dated July 28, 1989, states categorically, to wit:
Section 6. Finality of Award or Decisions. Awards or decisions of voluntary arbitrator become

final and executory after ten (10) calendar days from receipt of copies of the award or decision
by the parties.
The above-mentioned rule makes the voluntary arbitrators award final and executory after ten
calendar days from receipt of a copy of the decision or award by the parties. Presumably, the
decision may still be reconsidered by the Voluntary Arbitrator on the basis of a motion for
reconsideration seasonably filed during that period. Thus, the seasonable filing of a motion for
reconsideration following the receipt by the petitioner of a copy of the decision or award of the
panel of Voluntary Arbitrators, is a mandatory requirement to forestall the finality of such
decision or award. In the case at bar however, the petitioner filed on March 12, 2001 a motion
for reconsideration of the arbitrators decision, which it received on February 20, 2001. Without
doubt at the time the said motion was filed, which was beyond the reglementary period of ten
(10) days, the decision had already become final and executory. It is a hornbook rule that once
a judgment has become final and executory, it may no longer be modified in any respect, even if
the modification is meant to be an erroneous conclusion of fact or law, and regardless of
whether the modification is attempted to be made by the court rendering it or by the highest
court of the land, as what remains to be done is the purely ministerial enforcement or execution
of the judgment.
The doctrine of finality of judgment is grounded on fundamental considerations of public policy

and sound practice that at the risk of occasional errors, the judgment of adjudicating bodies
must become final and executory on some definite date fixed by law. In the more recent case of
DBP v. NLRC, the Supreme Court reiterated that the doctrine of immutability of final judgment is
adhered to by necessity notwithstanding occasional errors that may result thereby, since
litigations must somehow come to an end for otherwise, it would be even more intolerable than
the wrong and injustice it is designed to correct.
And, acting on petitioners motion for reconsideration, the Court of Appeals held:
We cannot simply yield to the submission of the petitioner that the decision of the panel of
Voluntary Arbitrators had not yet became final and executory. It is not correct to say that March
2, 2001, the date when the petitioner union received the January 21, 2001 decision of the panel
of Voluntary Arbitrators together with the dissenting opinion of Voluntary Arbitrator Arnel
Dolendo should be considered as the reckoning date for purposes of filing a motion for
reconsideration. The absence of the dissenting opinion in the copy of the assailed decision duly
received by the petitioner on February 20, 2001 did not make the said decision incomplete, for it
disposed of all the issues of the case validly raised. Well settled is the rule that a dissenting
opinion, as it is, is a mere expression of the individual view of the dissenting justice from the
conclusion held by the majority of the court and therefore, not binding. It is the dispositive
portion of the decision or the fallo, which contains the final and actual adjudication of the rights
of the parties that constitutes the judgment of the court. Hence, to forestall the finality of the
arbitrators award, petitioner should have filed a motion for reconsideration within the
reglementary period of ten (10) days, without waiting for the dissenting opinion of Voluntary
Arbitrator Dolendo. Thus, the filing of the motion for reconsideration of the arbitrators award only
on March 12, 2001 was way beyond the ten (10) day reglementary period and had the effect of
rendering the panel of Voluntary Arbitrators decision final and executory. Certainly, in allowing
the arbitrators award to lapse into finality on the flimsy excuse that it has to receive the
dissenting opinion of Arnel Dolendo does not find support in law. Finality of judgment becomes
a fact when the reglementary period to appeal lapses, and no appeal is perfected within such
period. It is a jurisdictional event which can not be made to depend on the convenience of a
party.[4]
From this aspect of the Court of Appeals Decision and Resolution, petitioner now comes
before us for redress, assigning as sole issue the following:
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT

DISMISSED THE PETITION ON MERE TECHNICALITY CONTRARY TO SETTLED
JURISPRUDENCE, AFTER FAVORABLY RULING ON THE MERITS IN FAVOR OF
PETITIONER
The resolution of the present controversy hinges for the most part on the correct disposition
of petitioners argument that the Panels Decision sans the dissenting opinion of one of its members
was irregularly issued; hence, did not toll the running of the prescriptive period within which to file
a motion for reconsideration. To sustain petitioners argument would mean that the subject
Decision could still be reviewed by the Court of Appeals. A contrary resolution would stamp the
subject decision with finality rendering it impervious to review pursuant to the doctrine of finality
of judgments.
Rule VII, Section 1 of the Procedural Guidelines in the Conduct of Voluntary Arbitration
Proceedings provides the key. Therein, what constitutes the voluntary arbitrators decision (and,
by extension, that of the Panel of voluntary arbitrators) is defined with precision, to wit:
Section 1. Decision Award. -- The final arbitral disposition of issue/s submitted to voluntary
arbitration is the Decision. The disposition may take the form of a dismissal of a claim or grant of
specific remedy, either by way of prohibition of particular acts or specific performance of
particular acts. In the latter case the decision is called an Award.
In herein case, the Decision of the Panel was in the form of a dismissal of petitioners complaint.
Naturally, this dismissal was contained in the main decision and not in the dissenting opinion.
Thus, under Section 6, Rule VII of the same guidelines implementing Article 262-A of the Labor
Code, this Decision, as a matter of course, would become final and executory after ten (10)
calendar days from receipt of copies of the decision by the parties even without receipt of the
dissenting opinion unless, in the meantime, a motion for reconsideration[5] or a petition for review
to the Court of Appeals under Rule 43 of the Rules of Court[6] is filed within the same 10-day
period. As correctly pointed out by the Court of Appeals, a dissenting opinion is not binding on
the parties as it is a mere expression of the individual view of the dissenting member from the
conclusion held by the majority of the Court, following our ruling in Garcia v. Perez[7] as reiterated
in National Union of Workers in Hotels, Restaurants and Allied Industries v. NLRC.[8]
Prescinding from the foregoing, the Court of Appeals correctly dismissed the petition before
it as it no longer had any appellate jurisdiction to alter or nullify the decision of the Panel.[9] The
Panels Decision had become final and executory, hence, unchallengeable.
We are not unmindful that in labor disputes, social justice exhorts courts to lean backwards
in favor of the working class. Corollary thereto, it is doctrinal that in labor disputes, rules of
procedure cannot be applied in a rigid and technical sense.[10] Thus, in appropriate cases, we
have not hesitated to relax matters of procedure in the interest of substantial justice.[11] As applied
herein, however, our hands are tied by the fact that the case had already attained finality long
before it got here. As we declared in Nacuray v. National Labor Relations Commission[12] --
. . . Nothing is more settled in law than that when a judgment becomes final and executory it
becomes immutable and unalterable. The same may no longer be modified in any respect, even
if the modification is meant to correct what is perceived to be an erroneous conclusion of fact or
law, and whether made by the highest court of the land. The reason is grounded on the
fundamental considerations of public policy and sound practice that, at the risk of occasional
error, the judgments or orders of courts must be final at some definite date fixed by law.
WHEREFORE, premises considered, the Court of Appeals Decision dated 22 May 2002 and
its Resolution dated 03 October 2002 are hereby AFFIRMED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
THIRD DIVISION
[G.R. No. 127004. March 11, 1999]
NATIONAL STEEL CORPORATION, petitioner, vs. THE REGIONAL TRIAL COURT OF

LANAO DEL NORTE, BRANCH 2, ILIGAN CITY and E. WILLKOM ENTERPRISES,
INC., respondents.
DECISION
PURISIMA, J.:
Before the Court is a Petition for Certiorari with Prayer for Preliminary Injunction & Temporary
Restraining Order under Rule 65 of the Revised Rules of Court assailing the decision of the
Regional Trial Court of Lanao del Norte, Branch 2, Iligan City, on the following consolidated cases
:
(a) Special Proceeding Case No. 2206 entitled National Steel Corporation vs E. Willkom
Enterprise Inc to Vacate Arbitrators Award; and;
(b) Civil Case No. 2198 entitled to E. Willkom Enterprises Inc. vs National Steel
Corporation for Sum of Money with application for Confirmation of Arbitrators Award.
The facts as found below are, as follows:
"xxx On Nov. 18, 1992, petitioner-defendant Edward Wilkom Enterprises Inc. (EWEI for brevity)
together with one Ramiro Construction and respondent-petitioner National Steel Corporation
(NSC for short) executed a contract whereby the former jointly undertook the Contract for Site
Development (Exhs. "3" & "D") for the latter's Integrated Iron and Steel Mills Complex to be
established at Iligan City.
Sometime in the year 1983, the services of Ramiro Construction was terminated and on March
7, 1983, petitioner-defendant EWEI took over Ramiro's contractual obligation. Due to this and to
other causes deemed sufficient by EWEI, extensions of time for the termination of the project,
initially agreed to be finished on July 17, 1983, were granted by NSC.
Differences later arose, Plaintiff-defendant EWEI filed Civil Case No. 1615 before the Regional
Trial Court of Lanao del Norte, Branch 06, (Exhs. "A" and "1") praying essentially for the
payments of P458,381.001 with interest from the time of delay; the price adjustment as provided
by PD 1594; and exemplary damages in the amount of P50,000.00 and attorney's fees.
Defendant-petitioner NSC filed an answer with counterclaim to plaintiff's complaints on May 18,
1990.
On August 21, 1990, the Honorable Court through Presiding Judge Valario M. Salazar upon
joint motion of both parties had issued an order (Exhs. "C" and "3") dismissing the said
complaint and counterclaim x x x in view of the desire of both parties to implement Sec. 19 of
the contract, providing for a resolution of any conflict by arbitration x x x . ( underscoring
supplied).
In accordance with the aforesaid order, and pursuant to Sec. 19 of the Contract for Site
Development (id) the herein parties constituted an Arbitration Board composed of the following:
(a) Engr. Pafnucio M. Mejia as Chairman, who was nominated by the two arbitrators
earlier nominated by EWEI and NSC with an Oath of Office (Exh. "E");
(b) Engr. Eutaquio 0. Lagapa, Jr., member, who was nominated by EWEI with an oath
office (Exh. "F")
(c) Engr. Gil A. Aberilia, a member who was nominated by NSC, with an Oath of Office
(Exh. "G").
After series of hearings, the Arbitrators rendered the decision (Exh. "H" & "4") which is the
subject matter of these present causes of action, both initiated separately by the herein
contending parties, substantial portion of which directs NSC to pay EWEI, as follows:
(a) P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate
of 1-1/4% per month from January 1, 1985 to actual date of payment;
(b) P1,335,514.20 representing price escalation adjustment under PD No. 1594, with
interest thereon at the rate of 1-1/4 % per month from January 1, 1985 to actual date
of payment;
(c) P50,000 as and for exemplary damages;
(d) P350,000 as and for attorney's fees.; and
(e) P35,000.00 as and for cost of arbitration."[1]
The Regional Trial Court of Lanao del Norte Branch 2, Iligan City through Judge Maximo B.
Ratunil, rendered judgment as follows:
(1) In Civil Case No. 11-2198, declaring the award of the Board of Arbitrators, dated April
21, 1992 to be duly AFFIRMED and CONFIRMED "en toto" ; that an entry of judgment
be entered therewith pursuant to Republic Act No. 876 (the Arbitration Law); and costs
against respondent National Steel Corporation.
(2) In Special Proceeding No. 11-2206, ordering the petition to vacate the aforesaid
award be DISMISSED.
SO ORDERED.[2] "
With the denial on October 18, 1996 of its Motion for Reconsideration, the National Steel
Corporation (NSC) has come to this court via the present petition.
After deliberating on the petition as well as the comment and reply thereon, the court gave
due course to the petition and considered the case ripe for decision.
The pivot of inquiry here is whether or not the lower court acted with grave abuse of
discretion in not vacating the arbitrator's award.
A stipulation to refer all future disputes or to submit an ongoing dispute to an arbitrator is
valid. Republic Act 876, otherwise known as the Arbitration Law, was enacted by Congress since
there was a growing need for a law regulating arbitration in general.
The parties in the present case, upon entering into a Contract for Site Development, mutually
agreed that any dispute arising from the said contract shall be submitted for arbitration. Explicit is
Paragraph 19 of subject contract, which reads:
"Paragraph 19. ARBITRATION. All disputes questions or differences which may at any time
arise between the parties hereto in connection with or relating to this Agreement or the subject
matter hereof, including questions of interpretation or construction, shall be referred to an
Arbitration Board composed of three (3) arbitrators, one to be appointed by each party, and the
third, to be appointed by the two (2) arbitrators. The appointment of arbitrators and procedure
for arbitration shall be governed by the provisions of the Arbitration Law (Republic Act No.
876). The Board shall apply Philippine Law in adjudicating the dispute. The decision of a
majority of the members of the Arbitration Board shall be valid, binding, final and conclusive
upon the parties, and from which there will be no appeal, subject to the provisions on vacating,
modifying, or correcting an award under the said Republic Act No. 876.[3]
Thereunder, if a dispute should arise from the contract, the Arbitration Board shall assume
jurisdiction and conduct hearings. After the Board comes up with a decision, the parties may
immediately implement the same by treating it as an amicable settlement. However, if one of the
parties refuses to comply or is dissatisfied with the decision, he may file a Petition to Vacate the
Arbitrator's decision before the trial court. On the other hand, the winning party may ask the trial
court's confirmation to have such decision enforced.
It should be stressed that voluntary arbitrators, by the nature of their functions, act in a quasi-
judicial capacity.[4] As a rule, findings of facts by quasi-judicial bodies, which have acquired
expertise because their jurisdiction is confined to specific matters, are accorded not only respect
but even finality if they are supported by substantial evidence,[5] even if not overwhelming or
preponderant.[6] As the petitioner has availed of Rule 65, the Court will not review the facts found
nor even of the law as interpreted or applied by the arbitrator unless the supposed errors of facts
or of law are so patent and gross and prejudicial as to amount to a grave abuse of discretion or
an excess de pouvoir on the part of the arbitrators.[7]
Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the
performance of official functions is presumed and the complaining party has the burden of proving
the existence of any of the grounds for vacating the award, as provided for by Sections 24 of the
Arbitration Law, to wit:
"Sec. 24 GROUNDS FOR VACATING THE 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;
(b) That there was evident partiality or corruption in the arbitrators of 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
wilfully refrained from disclosing such disqualification 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. xxx"
The grounds relied upon by the petitioner were the following (a) That there was evident
partiality in the assailed decision of the Arbitrators in favor of the respondent; and (b) That there
was mistaken appreciation of the facts and application of the law by the Arbitrators. These were
the very same grounds alleged by NSC before the trial court in their Petition to Vacate the
Arbitration Award and which petitioner is reiterating in this petition under scrutiny.
Petitioner's allegation that there was evident partiality is untenable. It is anemic of evidentiary
support.
In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of
the Board of Arbitrators, this Court ruled that the fact that a party was disadvantaged by the
decision of the Arbitration Committee does not prove evident partiality. Proofs other than mere
inference are needed to establish evident partiality. Here, petitioner merely averred evident
partiality without any proof to back it up. Petitioner was never deprived of the right to present
evidence nor was there any showing that the Board showed signs of any bias in favor of EWEI. As
correctly found by the trial court:
"Thirdly, this Court cannot find its way to support NSC's contention that there was evident
partiality in the assailed Award of the Arbitrator in favor of the respondent because the
conclusion of the Board, which the Court found to be well-founded, is fully supported by
substantial evidence, as follows:
"xxx The testimonies of witnesses from both parties were heard to clarify facts and to
threash (sic) out the dispute in the hearings. Upon motion by NSC counsel, the hearing
of testimony from witnesses was terminated on 22 January 1992. To end the
testimonies in the hearing both litigant parties upon query by Arbitrator-Chairman
freely declared that there has been no partiality in the manner the Arbitrators
conducted the hearing, that there has been no instance, where Arbitrators refused to
postpone requested or to hear/accept evidence pertinent and material to the
dispute. xxx (underscoring supplied)
Parentethically, and in the light of the record above-mentioned, this Court hereby holds that the
Board of Arbitrators did not commit any 'evident partiality' imputed by petitioner NSC. Above all,
this Court must sustain the said decision for it is a well settled rule that the actual findings of an
administrative body should be affirmed if there is substantial evidence to support them and the
conclusions stated in the decision are not clearly against the law and jurisprudence similar to
the instant case. Henceforth, every reasonable intendment will be indulged to give effect such
proceedings and in favor of the regulatory and integrity of the arbitrators act. (Corpus Juris, Vol.
5, p. 20)"[8]
Indeed, the allegation of evident partiality is not well-taken because the petitioner failed to
substantiate the same.
Anent the issue of mistaken appreciation of facts and law of the case, the petitioner theorizes
that the awards made by the Board were unsubstantiated and the same were a plain
misapplication of the law and even contrary to jurisprudence. To have a clearer understanding of
the petition, this Court will try to discuss individually the awards made by the Board, and determine
if there was grave abuse of discretion on the part of the trial court when it adopted such awards in
toto.
I. P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1 1/4% per month from January 1, 1985 to actual date
of payment;
Petitioner seeks to bar payment of the said amount to EWEI. Since the latter failed to
complete the works as agreed upon, NSC had the right to withhold such amount. The same will
be used to cover the cost differential paid to another contractor who finished the work allegedly
left uncompleted by EWEI. Said work cost NSC P1,225,000, and should be made chargeable to
EWEI's receivables on Final Billing No. 16 issued to NSC.
The query here therefore is whether there was failure on the part of EWEI to complete the
work agreed upon. This will determine whether Final Billing No. 16 can be made chargeable to
the cost differential paid by NSC to another contractor.
After a series of hearings, the Board of Arbitrators concluded that the work was completed
by EWEI. As correctly stated:
"To authenticate the extent of unfinished work, quantity, unit cost differential and amount, NSC
was required to submit copies of payment vouchers and/or job awards extended to the other
contractor engaged to complete the works. The best efforts by NSC despite the multiplicity of
accounting/auditing/engineering records required in a corporate complex failed to produce
documentary proofs from their Iligan or Makati office despite repeated requests. NSC failed to
substantiate such allusion of completion by another contractor three unfinished items of works,
actual quantities accomplished and unit cost differential paid chargeable against EWEI.
xxx xxx xxx
The latest evaluation on record of the items of work completed by EWEI under the contract is
drawn from the NSC report (Exhibit "11-d") dated 12 November 1985 submitted with the EWEI
Billing No. 16-Final in the course of processing claim on items of work accomplished. There is
no such report or mention of unfinished work of 90,000 MT of dumped riprap, 100,000 cu. m. of
site grading and 300,000 cu. m. of spreading common excavated materials in the EWEI contract
alluded to by the NSC as unfinished work otherwise EWEI Billing No. 16-Final would not have
passed processing for payment unless there is really no such unfinished work NSC evaluation
report with no adverse findings of unfinished work consider the contract as completed.
To affirm the work items, quantity, unit cost differential and amount of unfinished work left
behind by EWEI, NSC in serving notice of contract termination to EWEI should have instead
specifically cited these obligations in detail for EWEI to perform/comply within 30 days, such
failure to perform/comply should have constituted as an event in default that would have justified
termination of contract of NSC with EWEI. If at all, this unfinished work may be additional/extra
work awarded in 1984 to another contractor at prices higher than the unit price tendered by
EWEI in 1982 and/or the discrepancy between actual quantities of work accomplished per plans
versus estimated quantities of work covered by separate contract as expansion of the original
project."
xxx xxx xxx
IN VIEW OF THE FOREGOING, THE SO-CALLED UNFINISHED WORKS IN THE CONTRACT

BY EWEI ALLUDED TO BY NSC IS NOT CONSIDERED AN OBLIGATION TO
PERFORM/COMPLY THUS ABSOLVING EWEI OF ANY FAILURE TO PERFORM/COMPLY
AND THEREFORE CANNOT BE AVAILED OF AS A RIGHT OR REMEDY BY NSC TO
RECOVER UNIT DIFFERENTIAL COST FROM EWEI FOR THE SAME UNSUBSTANTIATED
WORK DONE BY ANOTHER CONTRACTOR." (ANNEX "C" ARBITRATION, page 86-88 of
Rollo.)
Furthermore, under the contract sued upon, it is clear that should the Owner feel that the
work agreed upon was not completed by the contractor, it is incumbent upon the OWNER to send
to CONTRACTOR a letter within seven (7) days after completion of the inspection to specify the
objections thereto[9]NSC failed to comply with such requirement, and therefore it would be unfair
to refuse payment to EWEI, considering that the latter had faithfully submitted Final Billing No.16
believing that its work had been completed because NSC did not call its attention to any
objectionable aspect of their project.
But, what cannot be upheld is the Board's imposition of a 1-1/4% interest per month from
January 1, 1985 to actual date of payment. There is nothing in the said contract to justify or
authorize such an award. The trial court should have therefore disregarded the same and instead,
applied the legal rate of 6% per annum, from Jan. 1, 1985 until this decision becomes final and
executory. This is so because the legal rate of interest on monetary obligations not arising from
loans or forebearance of credits or goods is 6%[10] per annum in the absence of any stipulation to
the contrary.
(II) Price escalation with the interest rate of 1-1/4% per month from 1 January 1985 to actual date of payment.
Petitioner contends that EWEI is not entitled to price escalation absent any stipulation to that
effect in the contract under which, the contract price is fixed, citing Paragraph 2 thereof, which
stipulates:
2. CONTRACT PRICE -
xxx xxx
The applicable unit prices above fixed are based on the assumption that the disposal areas for
cleared, grubbed materials, debris, excess filling materials and other matters that are to be
disposed of or are within the boundary limits of the site, as designated in Annex A hereof. In the
event that disposal areas fixed and designated in Annex A are diverted and transferred to such
other areas as would be outside the limits of the site as would require additional costs to the
contractor, then Owner shall be liable for such additional hauling costs of P1.45/km/m3." (Annex
"A", Contract for Site Development, page 55 of Rollo)
The phrase "prices above fixed" means that the contract price of the work shall be that agreed
upon by the parties at the time of the execution of the contract, which is the law between them
provided it is not contrary to law, morals, good customs, public order, or public policy. (Article
1306, New Civil Code). It cannot be inferred therefrom, however, that the parties are prohibited
from imposing future increases or price escalation. It is a cardinal rule in the interpretation of
contracts that "if the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control."[11]
But price escalation is expressly allowed under Presidential Decree 1594, which law allows
price escalation in all contracts involving government projects including contracts entered into by
government entities and instrumentalities and Government Owned or Controlled Corporations
(GOCCs). It is a basic rule in contracts that the law is deemed written into the contract between
the parties. And when there is no prohibitory clause on price escalation, the Court will allow
payment therefor. Thus, petitioner cannot rely on the case of Llama Development Corporation vs.
Court of Appeals and National Steel Corporation, GR 88093, Resolution, Third Division, 20
Sept 1989. It is not applicable here since in that case, the contract explicitly provided that
the contract price stipulated was fixed, inclusive of all costs and not subject to escalation,
(emphasis supplied). This, in effect, waived the provisions of PD 1594. The case under scrutiny
is different as the disputed contract does not contain a similar provision.
In a vain attempt to evade said law's application, they would like the Court to believe that it is
an acquired asset corporation and not a government owned or controlled corporation so that they
are not within the coverage of PD 1594. Whether NSC is an asset-acquired corporation or a
government owned or controlled corporation is of no moment. It is not determinative of the pivot
of inquiry. It bears emphasizing that during the hearings conducted by the Board of Arbitrators,
there was presented documentary evidence to show that NSC, despite its being allegedly an
asset acquired corporation, allowed price escalation to another contractor, Geo Transport and
Construction, Inc. (GTCI). As said in the decision of the Board of Arbitrators:
"On the other hand, there was documentary evidence presented that NSC granted Geo
Transport and Construction, Inc. (GTCI), the other favored contractor working side by side with
EWEI on the site development project during the same period the GTCE was granted upon
request and paid by NSC an actual sum of P6.9 million as price adjustment compensation even
without the benefit of escalation provision in the contract but allowed in accordance with PD NO.
1594 enforceable among government controlled or owned corporation. The statement is
embodied in an affidavit (Exhibit "111-h") submitted by affiant Jose M. Mesina, Asst. to the
President and Legal Counsel of GTCI, submitted to the Arbitrators upon solicitation of EWEI,
copy to NSC, on 3 October 1991.NSC did not assail the affidavit upon receipt of such document
as evidence until the hearing of 19 December 1991 when the affidavit was branded by NSC
counsel as incorrect and hearsay. Within 7 days reglamentary period after receipt of affidavit in
3 October 1991, the NSC had the recourse to contest the affidavit even preferably charge the
affiant for slander if NSC could disprove the statements as untrue."[12]
If Petitioner seeks to refute such evidence, it should have done so before the Board of
Arbitrators, during the hearings. To raise the issue now is futile.
However, the same line of reasoning with respect to the first award should be used in
disregarding the interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly
applied to the price escalation to be computed from Jan. 1, 1985 until this decision becomes final
and executory.
(III) The award of P50,000 as exemplary damages and P350,000 as attorney's fees;
The exemplary damages and attorneys fees awarded by the Board of Arbitrators should be
deleted in light of the circumstances surrounding the case.
The requirements for an award of exemplary damages, are: (1) they may be imposed by way
of example in addition to compensatory damages, and only after the claimants right to them has
been established; (2) that they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be awarded to the claimant; (3)
the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.[13]
EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it refused
payment of the Final Billing No. 16. The belief that the work was never completed by EWEI and
that it (NSC) had the right to make it chargeable to the cost differential paid by the latter to another
contractor was neither wanton nor done in evident bad faith. The payment of legal rate of interest
will suffice to compensate EWEI of whatever prejudice it suffered by reason of the delay caused
by NSC.
As regards the award of attorney's fees, award for attorney's fees without justification is a
"conclusion without a premise, its basis being improperly left to speculation and
conjencture.[14] The "fixed counsel's fee" of P350,000 should be disallowed. The trial court acted
with grave abuse of discretion when it adopted the same in toto.
WHEREFORE, the awards made by the Board of Arbitrators which the trial court adopted in
its decision of July 31,1996, are modified, thus:
(1) The award of P474,780.23 for Billing No. 16-Final and P1,335,514.20 for price
adjustment shall be paid with legal interest of six (6 %) percent per annum, from
January 1, 1985 until this decision shall have become final and executory;
(2) The award of P50,000 for exemplary damages and attorney's fees of P350,000 are
deleted; and
(3) The cost of arbitration of P35,000 to supplement arbitration agreement has to be
paid.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
[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.:
This Petition for Review on certiorari assails the 17 July 1998 Decision[1] 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 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 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.
Mendoza, Buena, and De Leon, Jr., JJ., concur.
Quisumbing, J., no part, related to counsel of a party.
SECOND DIVISION
[G.R. No. 114323. July 23, 1998]
OIL AND NATURAL GAS COMMISSION, petitioner, vs. COURT OF APPEALS and PACIFIC
CEMENT COMPANY, INC. respondents.
DECISION
MARTINEZ, J.:
This proceeding involves the enforcement of a foreign judgment rendered by the Civil Judge
of Dehra Dun, India in favor of the petitioner, OIL AND NATURAL GAS COMMISSION and against
the private respondent, PACIFIC CEMENT COMPANY, INCORPORATED.
The petitioner is a foreign corporation owned and controlled by the Government of India while
the private respondent is a private corporation duly organized and existing under the laws of the
Philippines. The present conflict between the petitioner and the private respondent has its roots
in a contract entered into by and between both parties on February 26, 1983 whereby the private
respondent undertook to supply the petitioner FOUR THOUSAND THREE HUNDRED (4,300)
metric tons of oil well cement. In consideration therefor, the petitioner bound itself to pay the
private respondent the amount of FOUR HUNDRED SEVENTY-SEVEN THOUSAND THREE
HUNDRED U.S. DOLLARS ($477,300.00) by opening an irrevocable, divisible, and confirmed
letter of credit in favor of the latter. The oil well cement was loaded on board the ship MV
SURUTANA NAVA at the port of Surigao City, Philippines for delivery at Bombay and Calcutta,
India. However, due to a dispute between the shipowner and the private respondent, the cargo
was held up in Bangkok and did not reach its point of destination. Notwithstanding the fact that
the private respondent had already received payment and despite several demands made by the
petitioner, the private respondent failed to deliver the oil well cement. Thereafter, negotiations
ensued between the parties and they agreed that the private respondent will replace the entire
4,300 metric tons of oil well cement with Class G cement cost free at the petitioners designated
port. However, upon inspection, the Class G cement did not conform to the petitioners
specifications. The petitioner then informed the private respondent that it was referring its claim
to an arbitrator pursuant to Clause 16 of their contract which stipulates:
Except where otherwise provided in the supply order/contract all questions and disputes,
relating to the meaning of the specification designs, drawings and instructions herein before
mentioned and as to quality of workmanship of the items ordered or as to any other question,
claim, right or thing whatsoever, in any way arising out of or relating to the supply order/contract
design, drawing, specification, instruction or these conditions or otherwise concerning the
materials or the execution or failure to execute the same during stipulated/extended period or
after the completion/abandonment thereof shall be referred to the sole arbitration of the persons
appointed by Member of the Commission at the time of dispute. It will be no objection to any
such appointment that the arbitrator so appointed is a Commission employer (sic) that he had to
deal with the matter to which the supply or contract relates and that in the course of his duties
as Commissions employee he had expressed views on all or any of the matter in dispute or
difference.
The arbitrator to whom the matter is originally referred being transferred or vacating his office or
being unable to act for any reason the Member of the Commission shall appoint another person
to act as arbitrator in acordance with the terms of the contract/supply order. Such person shall
be entitled to proceed with reference from the stage at which it was left by his predecessor.
Subject as aforesaid the provisions of the Arbitration Act, 1940, or any Statutary modification or
re-enactment there of and the rules made there under and for the time being in force shall apply
to the arbitration proceedings under this clause.
The arbitrator may with the consent of parties enlarge the time, from time to time, to make and
publish the award.
The venue for arbitration shall be at Dehra dun.[1]
On July 23, 1988, the chosen arbitrator, one Shri N.N. Malhotra, resolved the dispute in
petitioners favor setting forth the arbitral award as follows:
NOW THEREFORE after considering all facts of the case, the evidence, oral and documentarys
adduced by the claimant and carefully examining the various written statements, submissions,
letters, telexes, etc. sent by the respondent, and the oral arguments addressed by the counsel
for the claimants, I, N.N. Malhotra, Sole Arbitrator, appointed under clause 16 of the supply
order dated 26.2.1983, according to which the parties, i.e. M/S Oil and Natural Gas Commission
and the Pacific Cement Co., Inc. can refer the dispute to the sole arbitration under the provision
of the Arbitration Act. 1940, do hereby award and direct as follows:-
The Respondent will pay the following to the claimant :-
1. Amount received by the Respondent

against the letter of credit No. 11/19
dated 28.2.1983 - - - US $ 477,300.00
2. Re-imbursement of expenditure incurred

by the claimant on the inspection teams
visit to Philippines in August 1985 - - - US$ 3,881.00
3. L. C. Establishment charges incurred

by the claimant - - - US $ 1,252.82
4. Loss of interest suffered by claimant

from 21.6.83 to 23.7.88 - - - US $ 417,169.95
Total amount of award - - - US $ 899,603.77
In addition to the above, the respondent would also be liable to pay to the claimant the interest
at the rate of 6% on the above amount, with effect from 24.7.1988 upto the actual date of
payment by the Respondent in full settlement of the claim as awarded or the date of the decree,
whichever is earlier.
I determine the cost at Rs. 70,000/- equivalent to US $5,000 towards the expenses on
Arbitration, legal expenses, stamps duly incurred by the claimant. The cost will be shared by the
parties in equal proportion.
Pronounced at Dehra Dun to-day, the 23rd of July 1988.[2]
To enable the petitioner to execute the above award in its favor, it filed a Petition before the Court
of the Civil Judge in Dehra Dun, India (hereinafter referred to as the foreign court for brevity),
praying that the decision of the arbitrator be made the Rule of Court in India. The foreign court
issued notices to the private respondent for filing objections to the petition. The private respondent
complied and sent its objections dated January 16, 1989. Subsequently, the said court directed
the private respondent to pay the filing fees in order that the latters objections could be given
consideration. Instead of paying the required filing fees, the private respondent sent the following
communication addressed to the Civil Judge of Dehra Dun:
The Civil Judge
Dehra Dun (U.P.) India
Re: Misc. Case No. 5 of 1989
M/S Pacific Cement Co.,
Inc. vs. ONGC Case
Sir:
1. We received your letter dated 28 April 1989 only last 18 May 1989.
2. Please inform us how much is the court fee to be paid. Your letter did not mention the
amount to be paid.
3. Kindly give us 15 days from receipt of your letter advising us how much to pay to
comply with the same.
Thank you for your kind consideration.

Pacific Cement Co., Inc.
By:
Jose Cortes, Jr.
President"[3]
Without responding to the above communication, the foreign court refused to admit the
private respondents objections for failure to pay the required filing fees, and thereafter issued an
Order on February 7, 1990, to wit:
ORDER
Since objections filed by defendant have been rejected through Misc. Suit No. 5 on 7.2.90,
therefore, award should be made Rule of the Court.
ORDER
Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the basis of conditions of
award decree is passed. Award Paper No. 3/B-1 shall be a part of the decree. The plaintiff shall
also be entitled to get from defendant (US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand
six hundred and three point seventy seven only) alongwith 9% interest per annum till the last
date of realisation.[4]
Despite notice sent to the private respondent of the foregoing order and several demands by
the petitioner for compliance therewith, the private respondent refused to pay the amount
adjudged by the foreign court as owing to the petitioner. Accordingly, the petitioner filed a
complaint with Branch 30 of the Regional Trial Court (RTC) of Surigao City for the enforcement
of the aforementioned judgment of the foreign court. The private respondent moved to dismiss
the complaint on the following grounds: (1) plaintiffs lack of legal capacity to sue; (2) lack of cause
of action; and (3) plaintiffs claim or demand has been waived, abandoned, or otherwise
extinguished. The petitioner filed its opposition to the said motion to dismiss, and the private
respondent, its rejoinder thereto. On January 3, 1992, the RTC issued an order upholding the
petitioners legal capacity to sue, albeit dismissing the complaint for lack of a valid cause of action.
The RTC held that the rule prohibiting foreign corporations transacting business in the Philippines
without a license from maintaining a suit in Philippine courts admits of an exception, that is, when
the foreign corporation is suing on an isolated transaction as in this case.[5] Anent the issue of the
sufficiency of the petitioners cause of action, however, the RTC found the referral of the dispute
between the parties to the arbitrator under Clause 16 of their contract erroneous. According to the
RTC,
[a] perusal of the above-quoted clause (Clause 16) readily shows that the matter covered by its
terms is limited to ALL QUESTIONS AND DISPUTES, RELATING TO THE MEANING OF THE
SPECIFICATION, DESIGNS, DRAWINGS AND INSTRUCTIONS HEREIN BEFORE
MENTIONED and as to the QUALITY OF WORKMANSHIP OF THE ITEMS ORDERED or as to
any other questions, claim, right or thing whatsoever, but qualified to IN ANY WAY ARISING OR
RELATING TO THE SUPPLY ORDER/CONTRACT, DESIGN, DRAWING, SPECIFICATION,
etc., repeating the enumeration in the opening sentence of the clause.
The court is inclined to go along with the observation of the defendant that the breach,
consisting of the non-delivery of the purchased materials, should have been properly litigated
before a court of law, pursuant to Clause No. 15 of the Contract/Supply Order, herein quoted, to
wit:
JURISDICTION
All questions, disputes and differences, arising under out of or in connection with this supply
order, shall be subject to the EXCLUSIVE JURISDICTION OF THE COURT, within the local
limits of whose jurisdiction and the place from which this supply order is situated.[6]
The RTC characterized the erroneous submission of the dispute to the arbitrator as a mistake of
law or fact amounting to want of jurisdiction. Consequently, the proceedings had before the
arbitrator were null and void and the foreign court had therefore, adopted no legal award which
could be the source of an enforceable right.[7]
The petitioner then appealed to the respondent Court of Appeals which affirmed the dismissal
of the complaint. In its decision, the appellate court concurred with the RTCs ruling that the
arbitrator did not have jurisdiction over the dispute between the parties, thus, the foreign court
could not validly adopt the arbitrators award. In addition, the appellate court observed that the full
text of the judgment of the foreign court contains the dispositive portion only and indicates no
findings of fact and law as basis for the award. Hence, the said judgment cannot be enforced by
any Philippine court as it would violate the constitutional provision that no decision shall be
rendered by any court without expressing therein clearly and distinctly the facts and the law on
which it is based.[8] The appellate court ruled further that the dismissal of the private respondents
objections for non-payment of the required legal fees, without the foreign court first replying to the
private respondents query as to the amount of legal fees to be paid, constituted want of notice or
violation of due process. Lastly, it pointed out that the arbitration proceeding was defective
because the arbitrator was appointed solely by the petitioner, and the fact that the arbitrator was
a former employee of the latter gives rise to a presumed bias on his part in favor of the petitioner. [9]
A subsequent motion for reconsideration by the petitioner of the appellate courts decision
was denied, thus, this petition for review on certiorari citing the following as grounds in support
thereof:
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE LOWER

COURTS ORDER OF DISMISSAL SINCE:
A. THE NON-DELIVERY OF THE CARGO WAS A MATTER PROPERLY COGNIZABLE

BY THE PROVISIONS OF CLAUSE 16 OF THE CONTRACT;
B. THE JUDGMENT OF THE CIVIL COURT OF DEHRADUN, INDIA WAS AN
AFFIRMATION OF THE FACTUAL AND LEGAL FINDINGS OF THE ARBITRATOR AND
THEREFORE ENFORCEABLE IN THIS JURISDICTION;
C. EVIDENCE MUST BE RECEIVED TO REPEL THE EFFECT OF A PRESUMPTIVE
RIGHT UNDER A FOREIGN JUDGMENT.[10]
The threshold issue is whether or not the arbitrator had jurisdiction over the dispute between
the petitioner and the private respondent under Clause 16 of the contract. To reiterate, Clause 16
provides as follows:
Except where otherwise provided in the supply order/contract all questions and disputes,
relating to the meaning of the specification designs, drawings and instructions herein before
mentioned and as to quality of workmanship of the items ordered or as to any other question,
claim, right or thing whatsoever, in any way arising out of or relating to the supply order/contract
design, drawing, specification, instruction or these conditions or otherwise concerning the
materials or the execution or failure to execute the same during stipulated/extended period or
after the completion/abandonment thereof shall be referred to the sole arbitration of the persons
appointed by Member of the Commission at the time of dispute. It will be no objection to any
such appointment that the arbitrator so appointed is a Commission employer (sic) that he had to
deal with the matter to which the supply or contract relates and that in the course of his duties
as Commissions employee he had expressed views on all or any of the matter in dispute or
difference.[11]
The dispute between the parties had its origin in the non-delivery of the 4,300 metric tons of
oil well cement to the petitioner. The primary question that may be posed, therefore, is whether
or not the non-delivery of the said cargo is a proper subject for arbitration under the above-quoted
Clause 16. The petitioner contends that the same was a matter within the purview of Clause 16,
particularly the phrase, x x x or as to any other questions, claim, right or thing whatsoever, in any
way arising or relating to the supply order/contract, design, drawing, specification, instruction x x
x.[12] It is argued that the foregoing phrase allows considerable latitude so as to include non-
delivery of the cargo which was a claim, right or thing relating to the supply order/contract. The
contention is bereft of merit. First of all, the petitioner has misquoted the said phrase, shrewdly
inserting a comma between the words supply order/contract and design where none actually
exists. An accurate reproduction of the phrase reads, x x x or as to any other question, claim, right
or thing whatsoever, in any way arising out of or relating to the supply order/contract design,
drawing, specification, instruction or these conditions x x x. The absence of a comma between
the words supply order/contract and design indicates that the former cannot be taken separately
but should be viewed in conjunction with the words design, drawing, specification, instruction or
these conditions. It is thus clear that to fall within the purview of this phrase, the claim, right or
thing whatsoever must arise out of or relate to the design, drawing, specification, or instruction of
the supply order/contract. The petitioner also insists that the non-delivery of the cargo is not only
covered by the foregoing phrase but also by the phrase, x x x or otherwise concerning the
materials or the execution or failure to execute the same during the stipulated/extended period or
after completion/abandonment thereof x x x.
The doctrine of noscitur a sociis, although a rule in the construction of statutes, is equally
applicable in the ascertainment of the meaning and scope of vague contractual stipulations, such
as the aforementioned phrase. According to the maxim noscitur a sociis, where a particular word
or phrase is ambiguous in itself or is equally susceptible of various meanings, its correct
construction may be made clear and specific by considering the company of the words in which
it is found or with which it is associated, or stated differently, its obscurity or doubt may be
reviewed by reference to associated words.[13] A close examination of Clause 16 reveals that it
covers three matters which may be submitted to arbitration namely,
(1) all questions and disputes, relating to the meaning of the specification designs,
drawings and instructions herein before mentioned and as to quality of workmanship
of the items ordered; or
(2) any other question, claim, right or thing whatsoever, in any way arising out of or
relating to the supply order/contract design, drawing, specification, instruction or
these conditions; or
(3) otherwise concerning the materials or the execution or failure to execute the same
during stipulated/extended period or after the completion/abandonment thereof.
The first and second categories unmistakably refer to questions and disputes relating to the
design, drawing, instructions, specifications or quality of the materials of the supply/order contract.
In the third category, the clause, execution or failure to execute the same, may be read as
execution or failure to execute the supply order/contract. But in accordance with the doctrine
of noscitur a sociis, this reference to the supply order/contract must be construed in the light of
the preceding words with which it is associated, meaning to say, as being limited only to the
design, drawing, instructions, specifications or quality of the materials of the supply order/contract.
The non-delivery of the oil well cement is definitely not in the nature of a dispute arising from the
failure to execute the supply order/contract design, drawing, instructions, specifications or quality
of the materials. That Clause 16 should pertain only to matters involving the technical aspects of
the contract is but a logical inference considering that the underlying purpose of a referral to
arbitration is for such technical matters to be deliberated upon by a person possessed with the
required skill and expertise which may be otherwise absent in the regular courts.
This Court agrees with the appellate court in its ruling that the non-delivery of the oil well
cement is a matter properly cognizable by the regular courts as stipulated by the parties in Clause
15 of their contract:
All questions, disputes and differences, arising under out of or in connection with this supply
order, shall be subject to the exclusive jurisdiction of the court, within the local limits of whose
jurisdiction and the place from which this supply order is situated.[14]
The following fundamental principles in the interpretation of contracts and other instruments
served as our guide in arriving at the foregoing conclusion:
"ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual."[15]
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.[16]
Sec. 11. Instrument construed so as to give effect to all provisions. In the construction of an
instrument, where there are several provisions or particulars, such a construction is, if possible,
to be adopted as will give effect to all.[17]
Thus, this Court has held that as in statutes, the provisions of a contract should not be read
in isolation from the rest of the instrument but, on the contrary, interpreted in the light of the other
related provisions.[18] The whole and every part of a contract must be considered in fixing the
meaning of any of its parts and in order to produce a harmonious whole. Equally applicable is the
canon of construction that in interpreting a statute (or a contract as in this case), care should be
taken that every part thereof be given effect, on the theory that it was enacted as an integrated
measure and not as a hodge-podge of conflicting provisions. The rule is that a construction that
would render a provision inoperative should be avoided; instead, apparently inconsistent
provisions should be reconciled whenever possible as parts of a coordinated and harmonious
whole.[19]
The petitioners interpretation that Clause 16 is of such latitude as to contemplate even the
non-delivery of the oil well cement would in effect render Clause 15 a mere superfluity. A perusal
of Clause 16 shows that the parties did not intend arbitration to be the sole means of settling
disputes. This is manifest from Clause 16 itself which is prefixed with the proviso, Except where
otherwise provided in the supply order/contract x x x, thus indicating that the jurisdiction of the
arbitrator is not all encompassing, and admits of exceptions as may be provided elsewhere in the
supply order/contract. We believe that the correct interpretation to give effect to both stipulations
in the contract is for Clause 16 to be confined to all claims or disputes arising from or relating to
the design, drawing, instructions, specifications or quality of the materials of the supply
order/contract, and for Clause 15 to cover all other claims or disputes.
The petitioner then asseverates that granting, for the sake of argument, that the non-delivery
of the oil well cement is not a proper subject for arbitration, the failure of the replacement cement
to conform to the specifications of the contract is a matter clearly falling within the ambit of Clause
16. In this contention, we find merit. When the 4,300 metric tons of oil well cement were not
delivered to the petitioner, an agreement was forged between the latter and the private
respondent that Class G cement would be delivered to the petitioner as replacement. Upon
inspection, however, the replacement cement was rejected as it did not conform to the
specifications of the contract. Only after this latter circumstance was the matter brought before
the arbitrator. Undoubtedly, what was referred to arbitration was no longer the mere non-delivery
of the cargo at the first instance but also the failure of the replacement cargo to conform to the
specifications of the contract, a matter clearly within the coverage of Clause 16.
The private respondent posits that it was under no legal obligation to make replacement and
that it undertook the latter only in the spirit of liberality and to foster good business
relationship.[20] Hence, the undertaking to deliver the replacement cement and its subsequent
failure to conform to specifications are not anymore subject of the supply order/contract or any of
the provisions thereof. We disagree.
As per Clause 7 of the supply order/contract, the private respondent undertook to deliver the
4,300 metric tons of oil well cement at BOMBAY (INDIA) 2181 MT and CALCUTTA 2119
MT.[21] The failure of the private respondent to deliver the cargo to the designated places remains
undisputed. Likewise, the fact that the petitioner had already paid for the cost of the cement is not
contested by the private respondent. The private respondent claims, however, that it never
benefited from the transaction as it was not able to recover the cargo that was unloaded at the
port of Bangkok.[22] First of all, whether or not the private respondent was able to recover the
cargo is immaterial to its subsisting duty to make good its promise to deliver the cargo at the
stipulated place of delivery. Secondly, we find it difficult to believe this representation. In its
Memorandum filed before this Court, the private respondent asserted that the Civil Court of
Bangkok had already ruled that the non-delivery of the cargo was due solely to the fault of the
carrier.[23] It is, therefore, but logical to assume that the necessary consequence of this finding is
the eventual recovery by the private respondent of the cargo or the value thereof. What inspires
credulity is not that the replacement was done in the spirit of liberality but that it was undertaken
precisely because of the private respondents recognition of its duty to do so under the supply
order/contract, Clause 16 of which remains in force and effect until the full execution thereof.
We now go to the issue of whether or not the judgment of the foreign court is enforceable in
this jurisdiction in view of the private respondents allegation that it is bereft of any statement of
facts and law upon which the award in favor of the petitioner was based. The pertinent portion of
the judgment of the foreign court reads:
ORDER
Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the basis of conditions of
award decree is passed. Award Paper No. 3/B-1 shall be a part of the decree. The plaintiff shall
also be entitled to get from defendant ( US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand
six hundred and three point seventy seven only) alongwith 9% interest per annum till the last
date of realisation.[24]
As specified in the order of the Civil Judge of Dehra Dun, Award Paper No. 3/B-1 shall be a
part of the decree. This is a categorical declaration that the foreign court adopted the findings of
facts and law of the arbitrator as contained in the latters Award Paper. Award Paper No. 3/B-1,
contains an exhaustive discussion of the respective claims and defenses of the parties, and the
arbitrators evaluation of the same. Inasmuch as the foregoing is deemed to have been
incorporated into the foreign courts judgment the appellate court was in error when it described
the latter to be a simplistic decision containing literally, only the dispositive portion.[25]
The constitutional mandate that no decision shall be rendered by any court without
expressing therein clearly and distinctly the facts and the law on which it is based does not
preclude the validity of memorandum decisions which adopt by reference the findings of fact and
conclusions of law contained in the decisions of inferior tribunals. In Francisco v. Permskul,[26] this
Court held that the following memorandum decision of the Regional Trial Court of Makati did not
transgress the requirements of Section 14, Article VIII of the Constitution:
MEMORANDUM DECISION
After a careful perusal, evaluation and study of the records of this case, this Court hereby
adopts by reference the findings of fact and conclusions of law contained in the decision of the
Metropolitan Trial Court of Makati, Metro Manila, Branch 63 and finds that there is no cogent
reason to disturb the same.
WHEREFORE, judgment appealed from is hereby affirmed in toto.[27] (Underscoring supplied.)
This Court had occasion to make a similar pronouncement in the earlier case of Romero v. Court
of Appeals,[28] where the assailed decision of the Court of Appeals adopted the findings and
disposition of the Court of Agrarian Relations in this wise:
We have, therefore, carefully reviewed the evidence and made a re-assessment of the same,
and We are persuaded, nay compelled, to affirm the correctness of the trial courts factual
findings and the soundness of its conclusion. For judicial convenience and expediency,
therefore, We hereby adopt by way of reference, the findings of facts and conclusions of the
court a quo spread in its decision, as integral part of this Our decision.[29] (Underscoring
supplied)
Hence, even in this jurisdiction, incorporation by reference is allowed if only to avoid the
cumbersome reproduction of the decision of the lower courts, or portions thereof, in the decision
of the higher court.[30] This is particularly true when the decision sought to be incorporated is a
lengthy and thorough discussion of the facts and conclusions arrived at, as in this case, where
Award Paper No. 3/B-1 consists of eighteen (18) single spaced pages.
Furthermore, the recognition to be accorded a foreign judgment is not necessarily affected
by the fact that the procedure in the courts of the country in which such judgment was rendered
differs from that of the courts of the country in which the judgment is relied on.[31] This Court has
held that matters of remedy and procedure are governed by the lex fori or the internal law of the
forum.[32] Thus, if under the procedural rules of the Civil Court of Dehra Dun, India, a valid
judgment may be rendered by adopting the arbitrators findings, then the same must be accorded
respect. In the same vein, if the procedure in the foreign court mandates that an Order of the
Court becomes final and executory upon failure to pay the necessary docket fees, then the courts
in this jurisdiction cannot invalidate the order of the foreign court simply because our rules provide
otherwise.
The private respondent claims that its right to due process had been blatantly violated, first
by reason of the fact that the foreign court never answered its queries as to the amount of docket
fees to be paid then refused to admit its objections for failure to pay the same, and second,
because of the presumed bias on the part of the arbitrator who was a former employee of the
petitioner.
Time and again this Court has held that the essence of due process is to be found in the
reasonable opportunity to be heard and submit any evidence one may have in support of ones
defense[33] or stated otherwise, what is repugnant to due process is the denial of opportunity to
be heard.[34] Thus, there is no violation of due process even if no hearing was conducted, where
the party was given a chance to explain his side of the controversy and he waived his right to do
so.[35]
In the instant case, the private respondent does not deny the fact that it was notified by the
foreign court to file its objections to the petition, and subsequently, to pay legal fees in order for
its objections to be given consideration. Instead of paying the legal fees, however, the private
respondent sent a communication to the foreign court inquiring about the correct amount of fees
to be paid. On the pretext that it was yet awaiting the foreign courts reply, almost a year passed
without the private respondent paying the legal fees. Thus, on February 2, 1990, the foreign court
rejected the objections of the private respondent and proceeded to adjudicate upon the petitioners
claims. We cannot subscribe to the private respondents claim that the foreign court violated its
right to due process when it failed to reply to its queries nor when the latter rejected its objections
for a clearly meritorious ground. The private respondent was afforded sufficient opportunity to be
heard. It was not incumbent upon the foreign court to reply to the private respondents written
communication. On the contrary, a genuine concern for its cause should have prompted the
private respondent to ascertain with all due diligence the correct amount of legal fees to be paid.
The private respondent did not act with prudence and diligence thus its plea that they were not
accorded the right to procedural due process cannot elicit either approval or sympathy from this
Court.[36]
The private respondent bewails the presumed bias on the part of the arbitrator who was a
former employee of the petitioner. This point deserves scant consideration in view of the following
stipulation in the contract:
x x x. It will be no objection to any such appointment that the arbitrator so appointed is a
Commission employer (sic) that he had to deal with the matter to which the supply or contract
relates and that in the course of his duties as Commissions employee he had expressed views
on all or any of the matter in dispute or difference.[37] (Underscoring supplied.)
Finally, we reiterate hereunder our pronouncement in the case of Northwest Orient Airlines,
Inc. v. Court of Appeals[38] that:
A foreign judgment is presumed to be valid and binding in the country from which it comes, until
the contrary is shown. It is also proper to presume the regularity of the proceedings and the
giving of due notice therein.
Under Section 50, Rule 39 of the Rules of Court, a judgment in an action in personam of a
tribunal of a foreign country having jurisdiction to pronounce the same is presumptive evidence
of a right as between the parties and their successors-in-interest by a subsequent title. The
judgment may, however, be assailed by evidence of want of jurisdiction, want of notice to the
party, collusion, fraud, or clear mistake of law or fact. Also, under Section 3 of Rule 131, a court,
whether of the Philippines or elsewhere, enjoys the presumption that it was acting in the lawful
exercise of jurisdiction and has regularly performed its official duty.[39]
Consequently, the party attacking a foreign judgment, the private respondent herein, had the
burden of overcoming the presumption of its validity which it failed to do in the instant case.
The foreign judgment being valid, there is nothing else left to be done than to order its
enforcement, despite the fact that the petitioner merely prays for the remand of the case to the
RTC for further proceedings. As this Court has ruled on the validity and enforceability of the said
foreign judgment in this jurisdiction, further proceedings in the RTC for the reception of evidence
to prove otherwise are no longer necessary.
WHEREFORE, the instant petition is GRANTED, and the assailed decision of the Court of
Appeals sustaining the trial courts dismissal of the OIL AND NATURAL GAS COMMISSIONs
complaint in Civil Case No. 4006 before Branch 30 of the RTC of Surigao City is REVERSED,
and another in its stead is hereby rendered ORDERING private respondent PACIFIC CEMENT
COMPANY, INC. to pay to petitioner the amounts adjudged in the foreign judgment subject of
said case.
SO ORDERED.
Regalado, (Chairman), Melo, and Puno, JJ., concur.
Mendoza, J., no part, having taken part in the consideration of this case below.

Supreme Court
Manila
FIRST DIVISION
DEPARTMENT OF FOREIGN AFFAIRS and G.R. No. 176657

BANGKO SENTRAL NG PILIPINAS,
Petitioners,
Present:
- versus - CORONA, C.J.,

Chairperson,
VELASCO, JR.,
HON. FRANCO T. FALCON, IN HIS LEONARDO-DE CASTRO,
CAPACITY AS THE PRESIDING JUDGE OF DEL CASTILLO, and
BRANCH 71 OF THE REGIONAL TRIAL PEREZ, JJ.
COURT IN PASIG CITY and BCA
INTERNATIONAL CORPORATION,
Respondents. Promulgated:
September 1, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Certiorari and prohibition under Rule 65 of the Rules of Court
with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary
injunction filed by petitioners Department of Foreign Affairs (DFA) and Bangko Sentral ng Pilipinas
(BSP). Petitioners pray that the Court declare as null and void the Order[1] dated February 14,
2007 of respondent Judge Franco T. Falcon (Judge Falcon) in Civil Case No. 71079, which
granted the application for preliminary injunction filed by respondent BCA International
Corporation (BCA). Likewise, petitioners seek to prevent respondent Judge Falcon from
implementing the corresponding Writ of Preliminary Injunction dated February 23, 2007 [2] issued
pursuant to the aforesaid Order.
The facts of this case, as culled from the records, are as follows:
Being a member state of the International Civil Aviation Organization (ICAO), [3] the Philippines
has to comply with the commitments and standards set forth in ICAO Document No. 9303[4] which
requires the ICAO member states to issue machine readable travel documents (MRTDs) [5] by
April 2010.
Thus, in line with the DFAs mandate to improve the passport and visa issuance system, as well
as the storage and retrieval of its related application records, and pursuant to our governments
ICAO commitments, the DFA secured the approval of the President of the Philippines, as
Chairman of the Board of the National Economic and Development Authority (NEDA), for the
implementation of the Machine Readable Passport and Visa Project (the MRP/V Project) under
the Build-Operate-and-Transfer (BOT) scheme, provided for by Republic Act No. 6957, as
amended by Republic Act No. 7718 (the BOT Law), and its Implementing Rules and Regulations
(IRR). Thus, a Pre-qualification, Bids and Awards Committee (PBAC) published an invitation to
pre-qualify and bid for the supply of the needed machine readable passports and visas, and
conducted the public bidding for the MRP/V Project on January 10, 2000.Several bidders
responded and BCA was among those that pre-qualified and submitted its technical and financial
proposals. On June 29, 2000, the PBAC found BCAs bid to be the sole complying bid; hence, it
permitted the DFA to engage in direct negotiations with BCA. On even date, the PBAC
recommended to the DFA Secretary the award of the MRP/V Project to BCA on a BOT
arrangement.
In compliance with the Notice of Award dated September 29, 2000 and Section 11.3, Rule 11 of
the IRR of the BOT Law,[6] BCA incorporated a project company, the Philippine Passport
Corporation (PPC) to undertake and implement the MRP/V Project.
On February 8, 2001, a Build-Operate-Transfer Agreement[7] (BOT Agreement) between the DFA

and PPC was signed by DFA Acting Secretary Lauro L. Baja, Jr. and PPC President Bonifacio
Sumbilla. Under the BOT Agreement, the MRP/V Project was defined as follows:
Section 1.02 MRP/V Project refers to all the activities and services
undertaken in the fulfillment of the Machine Readable Passport and Visa Project
as defined in the Request for Proposals (RFP), a copy of which is hereto attached
as Annex A, including but not limited to project financing, systems development,
installation and maintenance in the Philippines and Foreign Service Posts (FSPs),
training of DFA personnel, provision of all project consumables (related to the
production of passports and visas, such as printer supplies, etc.), scanning of
application and citizenship documents, creation of data bases, issuance of
machine readable passports and visas, and site preparation in the Central Facility
and Regional Consular Offices (RCOs) nationwide.[8]
On April 5, 2002, former DFA Secretary Teofisto T. Guingona and Bonifacio Sumbilla, this
time as BCA President, signed an Amended BOT Agreement[9] in order to reflect the change in
the designation of the parties and to harmonize Section 11.3 with Section 11.8[10] of the IRR of
the BOT Law. The Amended BOT Agreement was entered into by the DFA and BCA with the
conformity of PPC.
The two BOT Agreements (the original version signed on February 8, 2001 and the
amended version signed April 5, 2002) contain substantially the same provisions except for seven
additional paragraphs in the whereas clauses and two new provisions Section 9.05 on
Performance and Warranty Securities and Section 20.15 on Miscellaneous Provisions. The two
additional provisions are quoted below:
Section 9.05. The PPC has posted in favor of the DFA the performance
security required for Phase 1 of the MRP/V Project and shall be deemed, for all
intents and purposes, to be full compliance by BCA with the provisions of this
Article 9.
xxxx
Section 20.15 It is clearly and expressly understood that BCA may assign,
cede and transfer all of its rights and obligations under this Amended BOT
Agreement to PPC, as fully as if PPC is the original signatory to this Amended BOT
Agreement, provided however that BCA shall nonetheless be jointly and severally
liable with PPC for the performance of all the obligations and liabilities under this
Amended BOT Agreement.[11]
Also modified in the Amended BOT Agreement was the Project Completion date of the
MRP/V Project which set the completion of the implementation phase of the project within 18 to
23 months from the date of effectivity of the Amended BOT Agreement as opposed to the previous
period found in the original BOT Agreement which set the completion within 18 to 23 months from
receipt of the NTP (Notice to Proceed) in accordance with the Project Master Plan.
On April 12, 2002, an Assignment Agreement[12] was executed by BCA and PPC, whereby
BCA assigned and ceded its rights, title, interest and benefits arising from the Amended BOT
Agreement to PPC.
As set out in Article 8 of the original and the Amended BOT Agreement, the MRP/V Project
was divided into six phases:
Phase 1. Project Planning Phase The Project Proponent [BCA] shall

prepare detailed plans and specifications in accordance with Annex A of this
[Amended] BOT Agreement within three (3) months from issuance of the NTP
(Notice to Proceed) [from the date of effectivity of this Amended BOT
Agreement]. This phase shall be considered complete upon the review,
acceptance and approval by the DFA of these plans and the resulting Master Plan,
including the Master Schedule, the business process specifications, the
acceptance criteria, among other plans.
xxxx
The DFA must approve all detailed plans as a condition precedent to the issuance
of the CA [Certificate of Acceptance] for Phase 1.
Phase 2. Implementation of the MRP/V Project at the Central

Facility Within six (6) months from issuance of the CA for Phase 1, the PROJECT
PROPONENT [BCA] shall complete the implementation of the MRP/V Project in
the DFA Central Facility, and establish the network design between the DFA
Central Facility, the ten (10) RCOs [Regional Consular Offices] and the eighty (80)
FSPs [Foreign Service Posts].
xxxx
Phase 3. Implementation of the MRP/V Project at the Regional

Consular Offices This phase represents the replication of the systems as
approved from the Central Facility to the RCOs throughout the country, as
identified in the RFP [Request for Proposal]. The approved systems are those
implemented, evaluated, and finally approved by DFA as described in Phase
1. The Project Proponent [BCA] will be permitted to begin site preparation and the
scanning and database building operations in all offices as soon as the plans are
agreed upon and accepted. This includes site preparation and database building
operations in these Phase-3 offices.
Within six (6) months from issuance of CA for Phase 2, the Project Proponent
[BCA] shall complete site preparation and implementation of the approved systems
in the ten (10) RCOs, including a fully functional network connection between all
equipment at the Central Facility and the RCOs.
Phase 4. Full Implementation, including all Foreign Service

Posts Within three (3) to eight (8) months from issuance of the CA for Phase-3,
the Project Proponent [BCA] shall complete all preparations and fully implement
the approved systems in the eighty (80) FSPs, including a fully functional network
connection between all equipment at the Central Facility and the FSPs. Upon
satisfactory completion of Phase 4, a CA shall be issued by the DFA.
Phase 5. In Service Phase Operation and maintenance of the complete

MRP/V Facility to provide machine readable passports and visas in all designated
locations around the world.
Phase 6. Transition/Turnover Transition/Turnover to the DFA of all

operations and equipment, to include an orderly transfer of ownership of all
hardware, application system software and its source code and/or licenses
(subject to Section 5.02 [H]), peripherals, leasehold improvements, physical and
computer security improvements, Automated Fingerprint Identification Systems,
and all other MRP/V facilities shall commence at least six (6) months prior to the
end of the [Amended] BOT Agreement. The transition will include the training of
DFA personnel who will be taking over the responsibilities of system operation and
maintenance from the Project Proponent [BCA]. The Project Proponent [BCA] shall
bear all costs related to this transfer.[13] (Words in brackets appear in the Amended
BOT Agreement)
To place matters in the proper perspective, it should be pointed out that both the DFA and
BCA impute breach of the Amended BOT Agreement against each other.
According to the DFA, delays in the completion of the phases permeated the MRP/V
Project due to the submission of deficient documents as well as intervening issues regarding
BCA/PPCs supposed financial incapacity to fully implement the project.
On the other hand, BCA contends that the DFA failed to perform its reciprocal obligation
to issue to BCA a Certificate of Acceptance of Phase 1 within 14 working days of operation
purportedly required by Section 14.04 of the Amended BOT Agreement. BCA bewailed that it took
almost three years for the DFA to issue the said Certificate allegedly because every appointee to
the position of DFA Secretary wanted to review the award of the project to BCA. BCA further
alleged that it was the DFAs refusal to approve the location of the DFA Central Facility which
prevented BCA from proceeding with Phase 2 of the MRP/V Project.
Later, the DFA sought the opinion of the Department of Finance (DOF) and the
Department of Justice (DOJ) regarding the appropriate legal actions in connection with BCAs
alleged delays in the completion of the MRP/V Project. In a Letter dated February 21, 2005,[14] the
DOJ opined that the DFA should issue a final demand upon BCA to make good on its obligations,
specifically on the warranties and responsibilities regarding the necessary capitalization and the
required financing to carry out the MRP/V Project. The DOJ used as basis for said
recommendation, the Letter dated April 19, 2004[15] of DOF Secretary Juanita Amatong to then
DFA Secretary Delia Albert stating, among others, that BCA may not be able to infuse more capital
into PPC to use for the completion of the MRP/V Project.
Thus, on February 22, 2005, DFA sent a letter[16] to BCA, through its project company
PPC, invoking BCAs financial warranty under Section 5.02(A) of the Amended BOT
Agreement.[17] The DFA required BCA to submit (a) proof of adequate capitalization (i.e., full or
substantial payment of stock subscriptions); (b) a bank guarantee indicating the availability of a
credit facility of P700 million; and (c) audited financial statements for the years 2001 to 2004.
In reply to DFAs letter, BCA, through PPC, informed the former of its position that its financial
capacity was already passed upon during the prequalification process and that the Amended BOT
Agreement did not call for any additional financial requirements for the implementation of the
MRP/V Project. Nonetheless, BCA submitted its financial statements for the years 2001 and 2002
and requested for additional time within which to comply with the other financial requirements
which the DFA insisted on.[18]
According to the DFA, BCAs financial warranty is a continuing warranty which requires
that it shall have the necessary capitalization to finance the MRP/V Project in its entirety and not
on a per phase basis as BCA contends. Only upon sufficient proof of its financial capability to
complete and implement the whole project will the DFAs obligation to choose and approve the
location of its Central Facility arise. The DFA asserted that its approval of a Central Facility site
was not ministerial and upon its review, BCAs proposed site for the Central Facility was
purportedly unacceptable in terms of security and facilities. Moreover, the DFA allegedly received
conflicting official letters and notices[19] from BCA and PPC regarding the true ownership and
control of PPC. The DFA implied that the disputes among the shareholders of PPC and between
PPC and BCA appeared to be part of the reason for the hampered implementation of the MRP/V
Project.
BCA, in turn, submitted various letters and documents to prove its financial capability to complete
the MRP/V Project.[20] However, the DFA claimed these documents were unsatisfactory or of
dubious authenticity. Then on August 1, 2005, BCA terminated its Assignment Agreement with
PPC and notified the DFA that it would directly implement the MRP/V Project. [21] BCA further
claims that the termination of the Assignment Agreement was upon the instance, or with the
conformity, of the DFA, a claim which the DFA disputed.
On December 9, 2005, the DFA sent a Notice of Termination[22] to BCA and PPC due to
their alleged failure to submit proof of financial capability to complete the entire MRP/V Project in
accordance with the financial warranty under Section 5.02(A) of the Amended BOT
Agreement. The Notice states:
After a careful evaluation and consideration of the matter, including the

reasons cited in your letters dated March 3, May 3, and June 20, 2005, and upon
the recommendation of the Office of the Solicitor General (OSG), the Department
is of the view that your continuing default in complying with the requisite bank
guarantee and/or credit facility, despite repeated notice and demand, is legally
unjustified.
In light of the foregoing considerations and upon the instruction of the

Secretary of Foreign Affairs, the Department hereby formally TERMINATE (sic)
the Subject Amended BOT Agreement dated 5 April 2005 (sic)[23] effective 09
December 2005. Further, and as a consequence of this termination, the
Department formally DEMAND (sic) that you pay within ten (10) days from receipt
hereof, liquidated damages equivalent to the corresponding performance security
bond that you had posted for the MRP/V Project.
Please be guided accordingly.
On December 14, 2005, BCA sent a letter[24] to the DFA demanding that it immediately reconsider
and revoke its previous notice of termination, otherwise, BCA would be compelled to declare the
DFA in default pursuant to the Amended BOT Agreement. When the DFA failed to respond to
said letter, BCA issued its own Notice of Default dated December 22, 2005[25] against the DFA,
stating that if the default is not remedied within 90 days, BCA will be constrained to terminate the
MRP/V Project and hold the DFA liable for damages.
BCAs request for mutual discussion under Section 19.01 of the Amended BOT Agreement[26] was
purportedly ignored by the DFA and left the dispute unresolved through amicable means within
90 days. Consequently, BCA filed its Request for Arbitration dated April 7, 2006[27] with the
Philippine Dispute Resolution Center, Inc. (PDRCI), pursuant to Section 19.02 of the Amended
BOT Agreement which provides:
Section 19.02 Failure to Settle Amicably If the Dispute cannot be settled

amicably within ninety (90) days by mutual discussion as contemplated under
Section 19.01 herein, the Dispute shall be settled with finality by an arbitrage
tribunal operating under International Law, hereinafter referred to as the Tribunal,
under the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by
the United Nations General Assembly on December 15, 1976, and
entitled Arbitration Rules on the United Nations Commission on the International
Trade Law.The DFA and the BCA undertake to abide by and implement the
arbitration award. The place of arbitration shall be Pasay City, Philippines, or such
other place as may mutually be agreed upon by both parties. The arbitration
proceeding shall be conducted in the English language.[28]
As alleged in BCAs Request for Arbitration, PDRCI is a non-stock, non-profit organization

composed of independent arbitrators who operate under its own Administrative Guidelines and
Rules of Arbitration as well as under the United Nations Commission on the International Trade
Law (UNCITRAL) Model Law on International Commercial Arbitration and other applicable laws
and rules.According to BCA, PDRCI can act as an arbitration center from whose pool of accredited
arbitrators both the DFA and BCA may select their own nominee to become a member of the
arbitral tribunal which will render the arbitration award.
BCAs Request for Arbitration filed with the PDRCI sought the following reliefs:
1. A judgment nullifying and setting aside the Notice of Termination dated

December 9, 2005 of Respondent [DFA], including its demand to Claimant [BCA]
to pay liquidated damages equivalent to the corresponding performance security
bond posted by Claimant [BCA];
2. A judgment (a) confirming the Notice of Default dated December 22,

2005 issued by Claimant [BCA] to Respondent [DFA]; and (b) ordering
Respondent [DFA] to perform its obligation under the Amended BOT Agreement
dated April 5, 2002 by approving the site of the Central Facility at the Star Mall
Complex on Shaw Boulevard, Mandaluyong City, within five days from receipt of
the Arbitral Award; and
3. A judgment ordering respondent [DFA] to pay damages to Claimant

[BCA], reasonably estimated at P50,000,000.00 as of this date, representing lost
business opportunities; financing fees, costs and commissions; travel expenses;
legal fees and expenses; and costs of arbitration, including the fees of the
arbitrator/s.[29]
PDRCI, through a letter dated April 26, 2006,[30] invited the DFA to submit its Answer to
the Request for Arbitration within 30 days from receipt of said letter and also requested both the
DFA and BCA to nominate their chosen arbitrator within the same period of time.
Initially, the DFA, through a letter dated May 22, 2006,[31] requested for an extension of time to file
its answer, without prejudice to jurisdictional and other defenses and objections available to it
under the law. Subsequently, however, in a letter dated May 29, 2006,[32] the DFA declined the
request for arbitration before the PDRCI. While it expressed its willingness to resort to arbitration,
the DFA pointed out that under Section 19.02 of the Amended BOT Agreement, there is no
mention of a specific body or institution that was previously authorized by the parties to settle their
dispute. The DFA further claimed that the arbitration of the dispute should be had before an ad
hoc arbitration body, and not before the PDRCI which has as its accredited arbitrators, two of
BCAs counsels of record.Likewise, the DFA insisted that PPC, allegedly an indispensable party
in the instant case, should also participate in the arbitration.
The DFA then sought the opinion of the DOJ on the Notice of Termination dated December 9,
2005 that it sent to BCA with regard to the MRP/V Project.
In DOJ Opinion No. 35 (2006) dated May 31, 2006,[33] the DOJ concurred with the steps taken by
the DFA, stating that there was basis in law and in fact for the termination of the MRP/V
Project. Moreover, the DOJ recommended the immediate implementation of the project
(presumably by a different contractor) at the soonest possible time.
Thereafter, the DFA and the BSP entered into a Memorandum of Agreement for the latter to
provide the former passports compliant with international standards. The BSP then solicited bids
for the supply, delivery, installation and commissioning of a system for the production of Electronic
Passport Booklets or e-Passports.[34]
For BCA, the BSPs invitation to bid for the supply and purchase of e-Passports (the e-Passport
Project) would only further delay the arbitration it requested from the DFA. Moreover, this new e-
Passport Project by the BSP and the DFA would render BCAs remedies moot inasmuch as the
e-Passport Project would then be replacing the MRP/V Project which BCA was carrying out for
the DFA.
Thus, BCA filed a Petition for Interim Relief [35] under Section 28 of the Alternative Dispute
Resolution Act of 2004 (R.A. No. 9285),[36] with the Regional Trial Court (RTC) of Pasig City,
Branch 71, presided over by respondent Judge Falcon. In that RTC petition, BCA prayed for the
following:
WHEREFORE, BCA respectfully prays that this Honorable Court, before the
constitution of the arbitral tribunal in PDRCI Case No. 30-2006/BGF, grant
petitioner interim relief in the following manner:
(a) upon filing of this Petition, immediately issue an order temporarily restraining
Respondents [DFA and BSP], their agents, representatives, awardees, suppliers
and assigns (i) from awarding a new contract to implement the Project, or any
similar electronic passport or visa project; or (ii) if such contract has been awarded,
from implementing such Project or similar projects until further orders from this
Honorable Court;
(b) after notice and hearing, issue a writ of preliminary injunction ordering
Respondents [DFA and BSP], their agents, representatives, awardees, suppliers
and assigns to desist (i) from awarding a new contract to implement the Project or
any similar electronic passport or visa project; or (ii) if such contract has been
awarded, from implementing such Project or similar projects, and to maintain
the status quo antepending the resolution on the merits of BCAs Request for
Arbitration; and
(c) render judgment affirming the interim relief granted to BCA until the dispute
between the parties shall have been resolved with finality.
BCA also prays for such other relief, just and equitable under the premises.[37]
BCA alleged, in support for its application for a Temporary Restraining Order (TRO), that unless
the DFA and the BSP were immediately restrained, they would proceed to undertake the project
together with a third party to defeat the reliefs BCA sought in its Request for Arbitration, thus
causing BCA to suffer grave and irreparable injury from the loss of substantial investments in
connection with the implementation of the MRP/V Project.
Thereafter, the DFA filed an Opposition (to the Application for Temporary Restraining Order
and/or Writ of Preliminary Injunction) dated January 18, 2007,[38] alleging that BCA has no cause
of action against it as the contract between them is for machine readable passports and visas
which is not the same as the contract it has with the BSP for the supply of electronic
passports. The DFA also pointed out that the Filipino people and the governments international
standing would suffer great damage if a TRO would be issued to stop the e-Passport Project. The
DFA mainly anchored its opposition on Republic Act No. 8975, which prohibits trial courts from
issuing a TRO, preliminary injunction or mandatory injunction against the bidding or awarding of
a contract or project of the national government.
On January 23, 2007, after summarily hearing the parties oral arguments on BCAs application for
the issuance of a TRO, the trial court ordered the issuance of a TRO restraining the DFA and the
BSP, their agents, representatives, awardees, suppliers and assigns from awarding a new
contract to implement the Project or any similar electronic passport or visa project, or if such
contract has been awarded, from implementing such or similar projects.[39] The trial court also set
for hearing BCAs application for preliminary injunction.
Consequently, the DFA filed a Motion for Reconsideration[40] of the January 23, 2007 Order. The
BSP, in turn, also sought to lift the TRO and to dismiss the petition. In its Urgent Omnibus Motion
dated February 1, 2007,[41] the BSP asserted that BCA is not entitled to an injunction, as it does
not have a clear right which ought to be protected, and that the trial court has no jurisdiction to
enjoin the implementation of the e-Passport Project which, the BSP alleged, is a national
government project under Republic Act No. 8975.
In the hearings set for BCAs application for preliminary injunction, BCA presented as witnesses,
Mr. Bonifacio Sumbilla, its President, Mr. Celestino Mercader, Jr. from the Independent
Verification and Validation Contractor commissioned by the DFA under the Amended BOT
Agreement, and DFA Assistant Secretary Domingo Lucenario, Jr. as adverse party witness.
The DFA and the BSP did not present any witness during the hearings for BCAs application for
preliminary injunction. According to the DFA and the BSP, the trial court did not have any
jurisdiction over the case considering that BCA did not pay the correct docket fees and that only
the Supreme Court could issue a TRO on the bidding for a national government project like the
e-Passport Project pursuant to the provisions of Republic Act No. 8975. Under Section 3 of
Republic Act No. 8975, the RTC could only issue a TRO against a national government project if
it involves a matter of extreme urgency involving a constitutional issue, such that unless a TRO
is issued, grave injustice and irreparable injury will arise.
Thereafter, BCA filed an Omnibus Comment [on Opposition and Supplemental Opposition (To
the Application for Temporary Restraining Order and/or Writ of Preliminary Injunction)] and
Opposition [to Motion for Reconsideration (To the Temporary Restraining Order dated January
23, 2007)] and Urgent Omnibus Motion [(i) To Lift Temporary Restraining Order; and (ii) To
Dismiss the Petition] dated January 31, 2007.[42] The DFA and the BSP filed their separate Replies
(to BCAs Omnibus Comment) dated February 9, 2007[43] and February 13, 2007,[44] respectively.
On February 14, 2007, the trial court issued an Order granting BCAs application for preliminary
injunction, to wit:
WHEREFORE, in view of the above, the court resolves that it has

jurisdiction over the instant petition and to issue the provisional remedy prayed for,
and therefore, hereby GRANTS petitioners [BCAs] application for preliminary
injunction. Accordingly, upon posting a bond in the amount of Ten Million Pesos
(P10,000,000.00), let a writ of preliminary injunction issue ordering respondents
[DFA and BSP], their agents, representatives, awardees, suppliers and assigns to
desist (i) from awarding a new contract to implement the project or any similar
electronic passport or visa project or (ii) if such contract has been awarded from
implementing such project or similar projects.
The motion to dismiss is denied for lack of merit. The motions for
reconsideration and to lift temporary restraining Order are now moot and academic
by reason of the expiration of the TRO.[45]
On February 16, 2007, BCA filed an Amended Petition,[46] wherein paragraphs 3.3(b) and 4.3
were modified to add language to the effect that unless petitioners were enjoined from awarding
the e-Passport Project, BCA would be deprived of its constitutionally-protected right to perform its
contractual obligations under the original and amended BOT Agreements without due process of
law.Subsequently, on February 26, 2007, the DFA and the BSP received the Writ of Preliminary
Injunction dated February 23, 2007.
Hence, on March 2, 2007, the DFA and the BSP filed the instant Petition for Certiorari[47] and
prohibition under Rule 65 of the Rules of Court with a prayer for the issuance of a temporary
restraining order and/or a writ of preliminary injunction, imputing grave abuse of discretion on the
trial court when it granted interim relief to BCA and issued the assailed Order dated February 14,
2007 and the writ of preliminary injunction dated February 23, 2007.
The DFA and the BSP later filed an Urgent Motion for Issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction dated March 5, 2007.[48]
On March 12, 2007, the Court required BCA to file its comment on the said petition within ten
days from notice and granted the Office of the Solicitor Generals urgent motion for issuance of a
TRO and/or writ of preliminary injunction,[49] thus:
After deliberating on the petition for certiorari and prohibition with temporary
restraining order and/or writ of preliminary injunction assailing the Order dated 14
February 2007 of the Regional Trial Court, Branch 71, Pasig City, in Civil Case No.
71079, the Court, without necessarily giving due course thereto, resolves to require
respondents to COMMENT thereon (not to file a motion to dismiss) within ten (10)
days from notice.
The Court further resolves to GRANT the Office of the Solicitor Generals
urgent motion for issuance of a temporary restraining order and/or writ of
preliminary injunction dated 05 March 2007 and ISSUE a TEMPORARY
RESTRAINING ORDER, as prayed for, enjoining respondents from implementing
the assailed Order dated 14 February 2007 and the Writ of Preliminary Injunction
dated 23 February 2007, issued by respondent Judge Franco T. Falcon in Civil
Case No. 71079 entitled BCA International Corporation vs. Department of Foreign
Affairs and Bangko Sentral ng Pilipinas, and from conducting further proceedings
in said case until further orders from this Court.
BCA filed on April 2, 2007 its Comment with Urgent Motion to Lift TRO,[50] to which the DFA and
the BSP filed their Reply dated August 14, 2007.[51]
In a Resolution dated June 4, 2007,[52] the Court denied BCAs motion to lift TRO. BCA filed
another Urgent Omnibus Motion dated August 17, 2007, for the reconsideration of the Resolution
dated June 4, 2007, praying that the TRO issued on March 12, 2007 be lifted and that the petition
be denied.
In a Resolution dated September 10, 2007,[53] the Court denied BCAs Urgent Omnibus Motion
and gave due course to the instant petition. The parties were directed to file their respective
memoranda within 30 days from notice of the Courts September 10, 2007 Resolution.
Petitioners DFA and BSP submit the following issues for our consideration:
ISSUES
WHETHER OR NOT THE RESPONDENT JUDGE GRAVELY ABUSED HIS

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN
HE ISSUED THE ASSAILED ORDER, WHICH EFFECTIVELY ENJOINED THE
IMPLEMENTATION OF THE E-PASSPORT PROJECT -- A NATIONAL
GOVERNMENT PROJECT UNDER REPUBLIC ACT NO. 8975.
II
WHETHER OR NOT THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE

OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
GRANTING RESPONDENT BCAS INTERIM RELIEF INASMUCH AS:
(I) RESPONDENT BCA HAS NOT ESTABLISHED A

CLEAR RIGHT THAT CAN BE PROTECTED BY AN
INJUNCTION; AND
(II) RESPONDENT BCA HAS NOT SHOWN THAT IT WILL

SUSTAIN GRAVE AND IRREPARABLE INJURY THAT
MUST BE PROTECTED BY AN INJUNCTION. ON THE
CONTRARY, IT IS THE FILIPINO PEOPLE, WHO
PETITIONERS PROTECT, THAT WILL SUSTAIN
SERIOUS AND SEVERE INJURY BY THE
INJUNCTION.[54]
At the outset, we dispose of the procedural objections of BCA to the petition, to wit: (a)
petitioners did not follow the hierarchy of courts by filing their petition directly with this Court,
without filing a motion for reconsideration with the RTC and without filing a petition first with the
Court of Appeals; (b) the person who verified the petition for the DFA did not have personal
knowledge of the facts of the case and whose appointment to his position was highly irregular;
and (c) the verification by the Assistant Governor and General Counsel of the BSP of only selected
paragraphs of the petition was with the purported intent to mislead this Court.
Although the direct filing of petitions for certiorari with the Supreme Court is discouraged
when litigants may still resort to remedies with the lower courts, we have in the past overlooked
the failure of a party to strictly adhere to the hierarchy of courts on highly meritorious
grounds. Most recently, we relaxed the rule on court hierarchy in the case of Roque, Jr. v.
Commission on Elections,[55] wherein we held:
The policy on the hierarchy of courts, which petitioners indeed failed to

observe, is not an iron-clad rule. For indeed the Court has full discretionary
power to take cognizance and assume jurisdiction of special civil actions
for certiorari and mandamus filed directly with it for exceptionally compelling
reasons or if warranted by the nature of the issues clearly and specifically
raised in the petition.[56] (Emphases ours.)
The Court deems it proper to adopt a similarly liberal attitude in the present case in consideration
of the transcendental importance of an issue raised herein. This is the first time that the Court is
confronted with the question of whether an information and communication technology project,
which does not conform to our traditional notion of the term infrastructure, is covered by the
prohibition on the issuance of court injunctions found in Republic Act No. 8975, which is entitled
An Act to Ensure the Expeditious Implementation and Completion of Government Infrastructure
Projects by Prohibiting Lower Courts from Issuing Temporary Restraining Orders, Preliminary
Injunctions or Preliminary Mandatory Injunctions, Providing Penalties for Violations Thereof, and
for Other Purposes. Taking into account the current trend of computerization and modernization
of administrative and service systems of government offices, departments and agencies, the
resolution of this issue for the guidance of the bench and bar, as well as the general public, is
both timely and imperative.
Anent BCAs claim that Mr. Edsel T. Custodio (who verified the Petition on behalf of the
DFA) did not have personal knowledge of the facts of the case and was appointed to his position
as Acting Secretary under purportedly irregular circumstances, we find that BCA failed to
sufficiently prove such allegations. In any event, we have previously held that [d]epending on the
nature of the allegations in the petition, the verification may be based either purely on personal
knowledge, or entirely on authentic records, or on both sources. [57] The alleged lack of personal
knowledge of Mr. Custodio (which, as we already stated, BCA failed to prove) would not
necessarily render the verification defective for he could have verified the petition purely on the
basis of authentic records.
As for the assertion that the partial verification of Assistant Governor and General Counsel
Juan de Zuniga, Jr. was for the purpose of misleading this Court, BCA likewise failed to adduce
evidence on this point. Good faith is always presumed. Paragraph 3 of Mr. Zunigas verification
indicates that his partial verification is due to the fact that he is verifying only the allegations in the
petition peculiar to the BSP. We see no reason to doubt that this is the true reason for his partial
or selective verification.
In sum, BCA failed to successfully rebut the presumption that the official acts (of Mr.
Custodio and Mr. Zuniga) were done in good faith and in the regular performance of official
duty.[58] Even assuming the verifications of the petition suffered from some defect, we have time
and again ruled that [t]he ends of justice are better served when cases are determined on the
merits after all parties are given full opportunity to ventilate their causes and defenses rather than
on technicality or some procedural imperfections.[59] In other words, the Court may suspend or
even disregard rules when the demands of justice so require.[60]
We now come to the substantive issues involved in this case.
On whether the trial court had jurisdiction to issue a writ

of preliminary injunction in the present case
In their petition, the DFA and the BSP argue that respondent Judge Falcon gravely abused
his discretion amounting to lack or excess of jurisdiction when he issued the assailed orders,
which effectively enjoined the bidding and/or implementation of the e-Passport Project. According
to petitioners, this violated the clear prohibition under Republic Act No. 8975 regarding the
issuance of TROs and preliminary injunctions against national government projects, such as the
e-Passport Project.
The prohibition invoked by petitioners is found in Section 3 of Republic Act No. 8975,
which reads:
Section 3. Prohibition on the Issuance of Temporary Restraining Orders,

Preliminary Injunctions and Preliminary Mandatory Injunctions. No court, except
the Supreme Court, shall issue any temporary restraining order, preliminary
injunction or preliminary mandatory injunction against the government, or any of
its subdivisions, officials or any person or entity, whether public or private, acting
under the governments direction, to restrain, prohibit or compel the following acts:
(a) Acquisition, clearance and development of the right-of-way and/or

site or location of any national government project;
(b) Bidding or awarding of contract/project of the national government

as defined under Section 2 hereof;
(c) Commencement, prosecution, execution, implementation,

operation of any such contract or project;
(d) Termination or rescission of any such contract/project; and
(e) The undertaking or authorization of any other lawful activity

necessary for such contract/project.
This prohibition shall apply in all cases, disputes or controversies instituted by a

private party, including but not limited to cases filed by bidders or those claiming
to have rights through such bidders involving such contract/project. This prohibition
shall not apply when the matter is of extreme urgency involving a constitutional
issue, such that unless a temporary restraining order is issued, grave injustice and
irreparable injury will arise. The applicant shall file a bond, in an amount to be fixed
by the court, which bond shall accrue in favor of the government if the court should
finally decide that the applicant was not entitled to the relief sought.
If after due hearing the court finds that the award of the contract is null and void,
the court may, if appropriate under the circumstances, award the contract to the
qualified and winning bidder or order a rebidding of the same, without prejudice to
any liability that the guilty party may incur under existing laws.
From the foregoing, it is indubitable that no court, aside from the Supreme Court, may
enjoin a national government project unless the matter is one of extreme urgency involving a
constitutional issue such that unless the act complained of is enjoined, grave injustice or
irreparable injury would arise.
What then are the national government projects over which the lower courts are without
jurisdiction to issue the injunctive relief as mandated by Republic Act No. 8975?
Section 2(a) of Republic Act No. 8975 provides:
Section 2. Definition of Terms.
(a) National government projects shall refer to all current and future
national government infrastructure, engineering works and service contracts,
including projects undertaken by government-owned and -controlled corporations,
all projects covered by Republic Act No. 6975, as amended by Republic Act No.
7718, otherwise known as the Build-Operate-and-Transfer Law, and other related
and necessary activities, such as site acquisition, supply and/or installation of
equipment and materials, implementation, construction, completion, operation,
maintenance, improvement, repair and rehabilitation, regardless of the source of
funding.
As petitioners themselves pointed out, there are three types of national government
projects enumerated in Section 2(a), to wit:
(a) current and future national government infrastructure projects,

engineering works and service contracts, including projects undertaken
by government-owned and controlled corporations;
(b) all projects covered by R.A. No. 6975, as amended by R.A. No.
7718, or the Build-Operate-and-Transfer ( BOT) Law; and
(c) other related and necessary activities, such as site acquisition,

supply and/or installation of equipment and materials, implementation,
construction, completion, operation, maintenance, improvement repair and
rehabilitation, regardless of the source of funding.
Under Section 2(a) of the BOT Law as amended by Republic Act No. 7718,[61] private
sector infrastructure or development projects are those normally financed and operated
by the public sector but which will now be wholly or partly implemented by the private
sector, including but not limited to, power plants, highways, ports, airports, canals, dams,
hydropower projects, water supply, irrigation, telecommunications, railroads and railways,
transport systems, land reclamation projects, industrial estates or townships, housing,
government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste
management, information technology networks and database infrastructure, education and
health facilities, sewerage, drainage, dredging, and other infrastructure and development projects
as may be authorized by the appropriate agency.
In contrast, Republic Act No. 9184,[62] also known as the Government Procurement Reform Act,
defines infrastructure projects in Section 5(k) thereof in this manner:
(k) Infrastructure Projects - include the construction, improvement,

rehabilitation, demolition, repair, restoration or maintenance of roads and bridges,
railways, airports, seaports, communication facilities, civil works components of
information technology projects, irrigation, flood control and drainage, water
supply, sanitation, sewerage and solid waste management systems, shore
protection, energy/power and electrification facilities, national buildings, school
buildings, hospital buildings and other related construction projects of the
government. (Emphasis supplied.)
In the present petition, the DFA and the BSP contend that the bidding for the supply,
delivery, installation and commissioning of a system for the production of Electronic Passport
Booklets, is a national government project within the definition of Section 2 of Republic Act No.
8975. Petitioners also point to the Senate deliberations on Senate Bill No. 2038[63] (later Republic
Act No. 8975) which allegedly show the legislatives intent to expand the scope and definition of
national government projects to cover not only the infrastructure projects enumerated in
Presidential Decree No. 1818, but also future projects that may likewise be considered national
government infrastructure projects, like the e-Passport Project, to wit:
Senator Cayetano. x x x Mr. President, the present bill, the Senate Bill No. 2038,
is actually an improvement of P.D. No. 1818 and definitely not a repudiation of
what I have earlier said, as my good friend clearly stated. But this is really an effort
to improve both the scope and definition of the term government projects and to
ensure that lower court judges obey and observe this prohibition on the issuance
of TROs on infrastructure projects of the government.
xxxx
Senator Cayetano. That is why, Mr. President, I did try to explain why I would
accept the proposed amendment, meaning the totality of the repeal of P.D. 1818
which is not found in the original version of the bill, because of my earlier
explanation that the definition of the term government infrastructure project covers
all of those enumerated in Section 1 of P.D. No. 1818. And the reason for that, as
we know, is we do not know what else could be considered government
infrastructure project in the next 10 or 20 years.
x x x So, using the Latin maxim of expression unius est exclusion alterius, which
means what is expressly mentioned is tantamount to an express exclusion of the
others, that is the reason we did not include particularly an enumeration of certain
activities of the government found in Section 1 of P.D. No. 1818. Because to do
that, it may be a good excuse for a brilliant lawyer to say Well, you know, since it
does not cover this particular activity, ergo, the Regional Trial Court may issue
TRO.
Using the foregoing discussions to establish that the intent of the framers of the law was to
broaden the scope and definition of national government projects and national infrastructure
projects, the DFA and the BSP submit that the said scope and definition had since evolved to
include the e-Passport Project. They assert that the concept of infrastructure must now refer to
any and all elements that provide support, framework, or structure for a given system or
organization, including information technology, such as the e-Passport Project.
Interestingly, petitioners represented to the trial court that the e-Passport Project is a BOT project
but in their petition with this Court, petitioners simply claim that the e-Passport Project is a national
government project under Section 2 of Republic Act No. 8975. This circumstance is significant,
since relying on the claim that the e-Passport Project is a BOT project, the trial court ruled in this
wise:
The prohibition against issuance of TRO and/or writ of preliminary injunction under
RA 8975 applies only to national government infrastructure project covered
by the BOT Law, (RA 8975, Sec 3[b] in relation to Sec. 2).
The national government projects covered under the BOT are enumerated
under Sec. 2 of RA6957, as amended, otherwise known as the BOT Law. Notably,
it includes information technology networks and database infrastructure.
In relation to information technology projects, infrastructure projects refer

to the civil works components thereof. (R.A. No. 9184 [2003],
Sec. 5[c]{sic}).[64]
Respondent BSPs request for bid, for the supply, delivery, installation and
commissioning of a system for the production of Electronic Passport Booklets
appears to be beyond the scope of the term civil works. Respondents did not
present evidence to prove otherwise.[65](Emphases ours.)
From the foregoing, it can be gleaned that the trial court accepted BCAs reasoning that, assuming
the e-Passport Project is a project under the BOT Law, Section 2 of the BOT Law must be read
in conjunction with Section 5(c) of Republic Act No. 9184 or the Government Procurement Reform
Act to the effect that only the civil works component of information technology projects are to be
considered infrastructure. Thus, only said civil works component of an information technology
project cannot be the subject of a TRO or writ of injunction issued by a lower court.
Although the Court finds that the trial court had jurisdiction to issue the writ of preliminary
injunction, we cannot uphold the theory of BCA and the trial court that the definition of the term
infrastructure project in Republic Act No. 9184 should be applied to the BOT Law.
Section 5 of Republic Act No. 9184 prefaces the definition of the terms therein, including the term
infrastructure project, with the following phrase: For purposes of this Act, the following terms or
words and phrases shall mean or be understood as follows x x x.
This Court has stated that the definition of a term in a statute is not conclusive as to the meaning
of the same term as used elsewhere.[66] This is evident when the legislative definition is expressly
made for the purposes of the statute containing such definition.[67]
There is no legal or rational basis to apply the definition of the term infrastructure project in one
statute to another statute enacted years before and which already defined the types of projects it
covers. Rather, a reading of the two statutes involved will readily show that there is a legislative
intent to treat information technology projects differently under the BOT Law and the Government
Procurement Reform Act.
In the BOT Law as amended by Republic Act No. 7718, the national infrastructure and
development projects covered by said law are enumerated in Section 2(a) as follows:
SEC. 2. Definition of Terms. - The following terms used in this Act shall
have the meanings stated below:
(a) Private sector infrastructure or development

projects - The general description of infrastructure or development
projects normally financed and operated by the public sector but
which will now be wholly or partly implemented by the private
sector, including but not limited to, power plants, highways, ports,
airports, canals, dams, hydropower projects, water supply,
irrigation, telecommunications, railroads and railways, transport
systems, land reclamation projects, industrial estates of townships,
housing, government buildings, tourism projects, markets,
slaughterhouses, warehouses, solid waste
management, information technology networks and database
infrastructure, education and health facilities, sewerage, drainage,
dredging, and other infrastructure and development projects as may
be authorized by the appropriate agency pursuant to this Act. Such
projects shall be undertaken through contractual arrangements as
defined hereunder and such other variations as may be approved
by the President of the Philippines.
For the construction stage of these infrastructure projects,

the project proponent may obtain financing from foreign and/or
domestic sources and/or engage the services of a foreign and/or
Filipino contractor: Provided, That, in case an infrastructure or a
development facility's operation requires a public utility franchise,
the facility operator must be a Filipino or if a corporation, it must be
duly registered with the Securities and Exchange Commission and
owned up to at least sixty percent (60%) by Filipinos: Provided,
further, That in the case of foreign contractors, Filipino labor shall
be employed or hired in the different phases of construction where
Filipino skills are available: Provided, finally, That projects which
would have difficulty in sourcing funds may be financed partly from
direct government appropriations and/or from Official Development
Assistance (ODA) of foreign governments or institutions not
exceeding fifty percent (50%) of the project cost, and the balance
to be provided by the project proponent. (Emphasis supplied.)
A similar provision appears in the Revised IRR of the BOT Law as amended, to wit:
SECTION 1.3 - DEFINITION OF TERMS
For purposes of these Implementing Rules and Regulations, the terms and
phrases hereunder shall be understood as follows:
xxxx
v. Private Sector Infrastructure or Development
Projects - The general description of infrastructure or Development
Projects normally financed, and operated by the public sector but
which will now be wholly or partly financed, constructed and
operated by the private sector, including but not limited to, power
plants, highways, ports, airports, canals, dams, hydropower
projects, water supply, irrigation, telecommunications, railroad and
railways, transport systems, land reclamation projects, industrial
estates or townships, housing, government buildings, tourism
projects, public markets, slaughterhouses, warehouses, solid waste
management, information technology networks and database
infrastructure, education and health facilities, sewerage, drainage,
dredging, and other infrastructure and development projects as may
otherwise be authorized by the appropriate Agency/LGU pursuant
to the Act or these Revised IRR. Such projects shall be undertaken
through Contractual Arrangements as defined herein, including
such other variations as may be approved by the President of the
Philippines.
xxxx
SECTION 2.2 - ELIGIBLE TYPES OF PROJECTS
The Construction, rehabilitation, improvement, betterment, expansion,

modernization, operation, financing and maintenance of the following types of
projects which are normally financed and operated by the public sector which will
now be wholly or partly financed, constructed and operated by the private sector,
including other infrastructure and development projects as may be authorized by
the appropriate agencies, may be proposed under the provisions of the Act and
these Revised IRR, provided however that such projects have a cost recovery
component which covers at least 50% of the Project Cost, or as determined by the
Approving Body:
xxxx
h. Information technology (IT) and data base infrastructure,

including modernization of IT, geo-spatial resource mapping and
cadastral survey for resource accounting and planning.
(Underscoring supplied.)
Undeniably, under the BOT Law, wherein the projects are to be privately funded, the entire
information technology project, includingthe civil works component and the technological aspect
thereof, is considered an infrastructure or development project and treated similarly as traditional
infrastructure projects. All the rules applicable to traditional infrastructure projects are also
applicable to information technology projects. In fact, the MRP/V Project awarded to BCA under
the BOT Law appears to include both civil works (i.e., site preparation of the Central Facility,
regional DFA offices and foreign service posts) and non-civil works aspects (i.e.,development,
installation and maintenance in the Philippines and foreign service posts of a computerized
passport and visa issuance system, including creation of databases, storage and retrieval
systems, training of personnel and provision of consumables).
In contrast, under Republic Act No. 9184 or the Government Procurement Reform Act, which
contemplates projects to be funded by public funds, the term infrastructure project was limited to
only the civil works component of information technology projects. The non-civil works component
of information technology projects would be treated as an acquisition of goods or consulting
services as the case may be.
This limited definition of infrastructure project in relation to information technology projects under
Republic Act No. 9184 is significant since the IRR of Republic Act No. 9184 has some provisions
that are particular to infrastructure projects and other provisions that are applicable only to
procurement of goods or consulting services.[68]
Implicitly, the civil works component of information technology projects are subject to the
provisions on infrastructure projects while the technological and other components would be
covered by the provisions on procurement of goods or consulting services as the circumstances
may warrant.
When Congress adopted a limited definition of what is to be considered infrastructure in relation

to information technology projects under the Government Procurement Reform Act, legislators
are presumed to have taken into account previous laws concerning infrastructure projects (the
BOT Law and Republic Act No. 8975) and deliberately adopted the limited definition. We can
further presume that Congress had written into law a different treatment for information technology
projects financed by public funds vis-a-visprivately funded projects for a valid legislative purpose.
The idea that the definitions of terms found in the Government Procurement Reform Act were not
meant to be applied to projects under the BOT Law is further reinforced by the following provision
in the IRR of the Government Procurement Reform Act:
Section 1. Purpose and General Coverage
This Implementing Rules and Regulations (IRR) Part A, hereinafter called IRR-A,
is promulgated pursuant to Section 75 of Republic Act No. 9184 (R.A. 9184),
otherwise known as the Government Procurement Reform Act (GPRA), for the
purpose of prescribing the necessary rules and regulations for the modernization,
standardization, and regulation of the procurement activities of the
government. This IRR-A shall cover all fully domestically-funded
procurement activities from procurement planning up to contract implementation
and termination, except for the following:
a) Acquisition of real property which shall be governed by Republic Act No. 8974
(R.A. 8974), entitled An Act to Facilitate the Acquisition of Right-of-Way Site or
Location for National Government Infrastructure Projects and for Other Purposes,
and other applicable laws; and
b) Private sector infrastructure or development projects and other

procurement covered by Republic Act No. 7718 (R.A. 7718), entitled An Act
Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and for Other Purposes, as
amended: Provided, however, That for the portions financed by the
Government, the provisions of this IRR-A shall apply.
The IRR-B for foreign-funded procurement activities shall be the subject of a

subsequent issuance. (Emphases supplied.)
The foregoing provision in the IRR can be taken as an administrative interpretation that the
provisions of Republic Act No. 9184 are inapplicable to a BOT project except only insofar as such
portions of the BOT project that are financed by the government.
Taking into account the different treatment of information technology projects under the BOT Law
and the Government Procurement Reform Act, petitioners contention the trial court had no
jurisdiction to issue a writ of preliminary injunction in the instant case would have been correct if
the e-Passport Project was a project under the BOT Law as they represented to the trial court.
However, petitioners presented no proof that the e-Passport Project was a BOT project. On the
contrary, evidence adduced by both sides tended to show that the e-Passport Project was a
procurement contract under Republic Act No. 9184.
The BSPs on-line request for expression of interest and to bid for the e-Passport Project[69] from
the BSP website and the newspaper clipping[70] of the same request expressly stated that [t]he
two stage bidding procedure under Section 30.4 of the Implementing Rules and Regulation (sic)
Part-A of Republic Act No. 9184 relative to the bidding and award of the contract shall
apply. During the testimony of DFA Assistant Secretary Domingo Lucenario, Jr. before the trial
court, he admitted that the e-Passport Project is a BSP procurement project and that it is the BSP
that will pay the suppliers.[71] In petitioners Manifestation dated July 29, 2008[72] and the
Erratum[73] thereto, petitioners informed the Court that a contract for the supply of a complete
package of systems design, technology, hardware, software, and peripherals, maintenance and
technical support, ecovers and datapage security laminates for the centralized production and
personalization of Machine Readable Electronic Passport was awarded to Francois Charles
Oberthur Fiduciaire. In the Notice of Award dated July 2, 2008[74] attached to petitioners pleading,
it was stated that the failure of the contractor/supplier to submit the required performance bond
would be sufficient ground for the imposition of administrative penalty under Section 69 of the
IRR-A of Republic Act No. 9184.
Being a government procurement contract under Republic Act No. 9184, only the civil works
component of the e-Passport Project would be considered an infrastructure project that may not
be the subject of a lower court-issued writ of injunction under Republic Act No. 8975.
Could the e-Passport Project be considered as engineering works or a service contract or as

related and necessary activities under Republic Act No. 8975 which may not be enjoined?
We hold in the negative. Under Republic Act No. 8975, a service contract refers
to infrastructure contracts entered into by any department, office or agency of the national
government with private entities and nongovernment organizations for services related or
incidental to the functions and operations of the department, office or agency concerned. On the
other hand, the phrase other related and necessary activities obviously refers to activities related
to a government infrastructure, engineering works, service contract or project under the BOT
Law. In other words, to be considered a service contract or related activity, petitioners must show
that the e-Passport Project is an infrastructure project or necessarily related to an infrastructure
project. This, petitioners failed to do for they saw fit not to present any evidence on the details of
the e-Passport Project before the trial court and this Court. There is nothing on record to indicate
that the e-Passport Project has a civil works component or is necessarily related to an
infrastructure project.
Indeed, the reference to Section 30.4[75] of the IRR of Republic Act No. 9184 (a provision specific
to the procurement of goods) in the BSPs request for interest and to bid confirms that the e-
Passport Project is a procurement of goods and not an infrastructure project. Thus, within the
context of Republic Act No. 9184 which is the governing law for the e-Passport Project the said
Project is not an infrastructure project that is protected from lower court issued injunctions under
Republic Act No. 8975, which, to reiterate, has for its purpose the expeditious and efficient
implementation and completion of government infrastructure projects.
We note that under Section 28, Republic Act No. 9285 or the Alternative Dispute
Resolution Act of 2004,[76] the grant of an interim measure of protection by the proper court before
the constitution of an arbitral tribunal is allowed:
Sec. 28. Grant of Interim Measure of Protection. (a) It is not incompatible

with an arbitration agreement for a party to request, before constitution of the
tribunal, from a Court an interim measure of protection and for the Court to grant
such measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or modification
thereof, may be made with the arbitral tribunal or to the extent that the arbitral
tribunal has no power to act or is unable to act effectively, the request may be
made with the Court. The arbitral tribunal is deemed constituted when the sole
arbitrator or the third arbitrator, who has been nominated, has accepted the
nomination and written communication of said nomination and acceptance has
been received by the party making the request.
(a) The following rules on interim or provisional relief shall be

observed:
(1) Any party may request that provisional relief be

granted against the adverse party.
(2) Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance

of any obligation;
(iii) to produce or preserve any evidence; or

(iv) to compel any other appropriate act or
omission.
(3) The order granting provisional relief may be

conditioned upon the provision of security or any act or omission
specified in the order.
(4) Interim or provisional relief is requested by

written application transmitted by reasonable means to the Court or
arbitral tribunal as the case may be and the party against whom the
relief is sought, describing in appropriate detail the precise relief,
the party against whom the relief is requested, the grounds for the
relief, and the evidence supporting the request.
(5) The order shall be binding upon the parties.
(6) Either party may apply with the Court for

assistance in implementing or enforcing an interim measure
ordered by an arbitral tribunal.
(7) A party who does not comply with the order

shall be liable for all damages resulting from noncompliance,
including all expenses and reasonable attorneys fees, paid in
obtaining the orders judicial enforcement.
Section 3(h) of the same statute provides that the "Court" as referred to in Article 6 of the
Model Law shall mean a Regional Trial Court.
Republic Act No. 9285 is a general law applicable to all matters and controversies to be
resolved through alternative dispute resolution methods. This law allows a Regional Trial Court
to grant interim or provisional relief, including preliminary injunction, to parties in an arbitration
case prior to the constitution of the arbitral tribunal. This general statute, however, must give way
to a special law governing national government projects, Republic Act No. 8975 which prohibits
courts, except the Supreme Court, from issuing TROs and writs of preliminary injunction in cases
involving national government projects.
However, as discussed above, the prohibition in Republic Act No. 8975 is inoperative in
this case, since petitioners failed to prove that the e-Passport Project is national government
project as defined therein. Thus, the trial court had jurisdiction to issue a writ of preliminary
injunction against the e-Passport Project.
On whether the trial courts issuance of a writ of

injunction was proper
Given the above ruling that the trial court had jurisdiction to issue a writ of injunction and
going to the second issue raised by petitioners, we answer the question: Was the trial courts
issuance of a writ of injunction warranted under the circumstances of this case?
Petitioners attack on the propriety of the trial courts issuance of a writ of injunction is two-
pronged: (a) BCA purportedly has no clear right to the injunctive relief sought; and (b) BCA will
suffer no grave and irreparable injury even if the injunctive relief were not granted.
To support their claim that BCA has no clear right to injunctive relief, petitioners mainly
allege that the MRP/V Project and the e-Passport Project are not the same project. Moreover, the
MRP/V Project purportedly involves a technology (the 2D optical bar code) that has been rendered
obsolete by the latest ICAO developments while the e-Passport Project will comply with the latest
ICAO standards (the contactless integrated circuit). Parenthetically, and not as a main argument,
petitioners imply that BCA has no clear contractual right under the Amended BOT Agreement
since BCA had previously assigned all its rights and obligations under the said Agreement to
PPC.
BCA, on the other hand, claims that the Amended BOT Agreement also contemplated the
supply and/or delivery of e-Passports with the integrated circuit technology in the future and not
only the machine readable passport with the 2D optical bar code technology. Also, it is BCAs
assertion that the integrated circuit technology is only optional under the ICAO issuances. On the
matter of its assignment of its rights to PPC, BCA counters that it had already terminated
(purportedly at DFAs request) the assignment agreement in favor of PPC and that even assuming
the termination was not valid, the Amended BOT Agreement expressly stated that BCA shall
remain solidarily liable with its assignee, PPC.
Most of these factual allegations and counter-allegations already touch upon the merits of
the main controversy between the DFA and BCA, i.e., the validity and propriety of the termination
of the Amended BOT Agreement (the MRP/V Project) between the DFA and BCA. The Court
deems it best to refrain from ruling on these matters since they should be litigated in the
appropriate arbitration or court proceedings between or among the concerned parties.
One preliminary point, however, that must be settled here is whether BCA retains a right
to seek relief against the DFA under the Amended BOT Agreement in view of BCAs previous
assignment of its rights to PPC. Without preempting any factual finding that the appropriate court
or arbitral tribunal on the matter of the validity of the assignment agreement with PPC or its
termination, we agree with BCA that it remained a party to the Amended BOT Agreement,
notwithstanding the execution of the assignment agreement in favor of PPC, for it was stipulated
in the Amended BOT Agreement that BCA would be solidarily liable with its assignee. For
convenient reference, we reproduce the relevant provision of the Amended BOT Agreement here:
Section 20.15. It is clearly and expressly understood that BCA may assign,
cede and transfer all of its rights and obligations under this Amended BOT
Agreement to PPC [Philippine Passport Corporation], as fully as if PPC is the
original signatory to this Amended BOT Agreement, provided however that BCA
shall nonetheless be jointly and severally liable with PPC for the
performance of all the obligations and liabilities under this Amended BOT
Agreement. (Emphasis supplied.)
Furthermore, a review of the records shows that the DFA continued to address its
correspondence regarding the MRP/V Project to both BCA and PPC, even after the execution of
the assignment agreement. Indeed, the DFAs Notice of Termination dated December 9, 2005
was addressed to Mr. Bonifacio Sumbilla as President of both BCA and PPC and referred to the
Amended BOT Agreement executed between the Department of Foreign Affairs (DFA), on one
hand, and the BCA International Corporation and/or the Philippine Passport Corporation
(BCA/PPC). At the very least, the DFA is estopped from questioning the personality of BCA to
bring suit in relation to the Amended BOT Agreement since the DFA continued to deal with both
BCA and PPC even after the signing of the assignment agreement. In any event, if the DFA truly
believes that PPC is an indispensable party to the action, the DFA may take necessary steps to
implead PPC but this should not prejudice the right of BCA to file suit or to seek relief for causes
of action it may have against the DFA or the BSP, for undertaking the e-Passport Project on behalf
of the DFA.
With respect to petitioners contention that BCA will suffer no grave and irreparable injury
so as to justify the grant of injunctive relief, the Court finds that this particular argument merits
consideration.
The BOT Law as amended by Republic Act No. 7718, provides:
SEC. 7. Contract Termination. - In the event that a project is revoked, cancelled

or terminated by the Government through no fault of the project proponent or
by mutual agreement, the Government shall compensate the said project
proponent for its actual expensesincurred in the project plus a reasonable rate
of return thereon not exceeding that stated in the contract as of the date of such
revocation, cancellation or termination: Provided, That the interest of the
Government in this instances shall be duly insured with the Government Service
Insurance System [GSIS] or any other insurance entity duly accredited by the
Office of the Insurance Commissioner: Provided, finally, That the cost of the
insurance coverage shall be included in the terms and conditions of the bidding
referred to above.
In the event that the government defaults on certain major obligations in the
contract and such failure is not remediable or if remediable shall remain
unremedied for an unreasonable length of time, the project
proponent/contractor may, by prior notice to the concerned national government
agency or local government unit specifying the turn-over date, terminate the
contract. The project proponent/contractor shall be reasonably compensated
by the Government for equivalent or proportionate contract cost as defined
in the contract. (Emphases supplied.)
In addition, the Amended BOT Agreement, which is the law between and among the
parties to it, pertinently provides:
Section 17.01 Default In case a party commits an act constituting an
event of default, the non-defaulting party may terminate this Amended BOT
Agreement by serving a written notice to the defaulting party specifying the
grounds for termination and giving the defaulting party a period of ninety (90) days
within which to rectify the default. If the default is not remedied within this period
to the satisfaction of the non-defaulting party, then the latter will serve upon the
former a written notice of termination indicating the effective date of termination.
Section 17.02 Proponents Default If this Amended BOT Agreement

is terminated by reason of the BCAs default, the DFA shall have the following
options:
A. Allow the BCAs unpaid creditors who hold a lien on

the MRP/V Facility to foreclose on the MRP/V Facility. The
right of the BCAs unpaid creditors to foreclose on the
MRP/V Facility shall be valid for the duration of the effectivity
of this Amended BOT Agreement; or,
B. Allow the BCAs unpaid creditors who hold a lien

on the MRP/V Facility to designate a substitute BCA for
the MRP/V Project, provided the designated substitute BCA
is qualified under existing laws and acceptable to the DFA.
This substitute BCA shall hereinafter be referred to as the
Substitute BCA. The Substitute BCA shall assume all the
BCAs rights and privileges, as well as the obligations, duties
and responsibilities hereunder; provided, however, that the
DFA shall at all times and its sole option, have the right to
invoke and exercise any other remedy which may be
available to the DFA under any applicable laws, rules and/or
regulations which may be in effect at any time and from time
to time. The DFA shall cooperate with the creditors with a
view to facilitating the choice of a Substitute BCA, who shall
take-over the operation, maintenance and management of
the MRP/V Project, within three (3) months from the BCAs
receipt of the notice of termination from the DFA. The
Substituted BCA shall have all the rights and obligations of
the previous BCA as contained in this Amended BOT
Agreement; or
C. Take-over the MRP/V Facility and assume all

attendant liabilities thereof.
D. In all cases of termination due to the default of the

BCA, it shall pay DFA liquidated damages equivalent to
the applicable the (sic) Performance Security.
Section 17.03 DFAs Default If this Amended BOT Agreement is

terminated by the BCA by reason of the DFAs Default, the DFA shall:
A. Be obligated to take over the MRP/V Facility on an

as is, where is basis, and shall forthwith assume attendant
liabilities thereof; and
B. Pay liquidated damages to the BCA equivalent to the

following amounts, which may be charged to the insurance
proceeds referred to in Article 12:
(1) In the event of termination prior to

completion of the implementation of the MRP/V
Project, damages shall be paid equivalent to the
value of completed implementation, minus the
aggregate amount of the attendant liabilities
assumed by the DFA, plus ten percent (10%)
thereof. The amount of such compensation shall be
determined as of the date of the notice of termination
and shall become due and demandable ninety (90)
days after the date of this notice of termination.
Under this Amended BOT Agreement, the term
Value of the Completed Implementation shall mean
the aggregate of all reasonable costs and expenses
incurred by the BCA in connection with, in relation to
and/or by reason of the MRP/V Project, excluding all
interest and capitalized interest, as certified by a
reputable and independent accounting firm to be
appointed by the BCA and subject to the approval by
the DFA, such approval shall not be unreasonably
withheld.
(2) In the event of termination after completion

of design, development, and installation of the
MRP/V Project, just compensation shall be paid
equivalent to the present value of the net income
which the BCA expects to earn or realize during
the unexpired or remaining term of this
Amended BOT Agreement using the internal rate
of return on equity (IRRe) defined in the financial
projections of the BCA and agreed upon by the
parties, which is attached hereto and made as an
integral part of this Amended BOT Agreement as
Schedule 1. (Emphases supplied.)
The validity of the DFAs termination of the Amended BOT Agreement and the
determination of the party or parties in default are issues properly threshed out in arbitration
proceedings as provided for by the agreement itself. However, even if we hypothetically accept
BCAs contention that the DFA terminated the Amended BOT Agreement without any default or
wrongdoing on BCAs part, it is not indubitable that BCA is entitled to injunctive relief.
The BOT Law expressly allows the government to terminate a BOT agreement, even
without fault on the part of the project proponent, subject to the payment of the actual expenses
incurred by the proponent plus a reasonable rate of return.
Under the BOT Law and the Amended BOT Agreement, in the event of default on the part
of the government (in this case, the DFA) or on the part of the proponent, the non-defaulting party
is allowed to terminate the agreement, again subject to proper compensation in the manner set
forth in the agreement.
Time and again, this Court has held that to be entitled to injunctive relief the party seeking such
relief must be able to show grave, irreparable injury that is not capable of compensation.
In Lopez v. Court of Appeals, [77] we held:
Generally, injunction is a preservative remedy for the protection of one's

substantive right or interest. It is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. It is resorted to only when there
is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation. The application of the injunctive
writ rests upon the existence of an emergency or of a special reason before the
main case can be regularly heard. The essential conditions for granting such
temporary injunctive relief are that the complaint alleges facts which appear to be
sufficient to constitute a proper basis for injunction and that on the entire showing
from the contending parties, the injunction is reasonably necessary to protect the
legal rights of the plaintiff pending the litigation. Two requisites are necessary if a
preliminary injunction is to issue, namely, the existence of a right to be protected
and the facts against which the injunction is to be directed are violative of said
right. In particular, for a writ of preliminary injunction to issue, the existence of the
right and the violation must appear in the allegation of the complaint and a
preliminary injunction is proper only when the plaintiff (private respondent
herein) appears to be entitled to the relief demanded in his
complaint. (Emphases supplied.)
We reiterated this point in Transfield Philippines, Inc. v. Luzon Hydro Corporation,[78] where we
likewise opined:
Before a writ of preliminary injunction may be issued, there must be a clear

showing by the complaint that there exists a right to be protected and that the acts
against which the writ is to be directed are violative of the said right. It must be
shown that the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable and that there
is an urgent and paramount necessity for the writ to prevent serious
damage. Moreover, an injunctive remedy may only be resorted to when there
is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation. (Emphasis supplied.)
As the Court explained previously in Philippine Airlines, Inc. v. National Labor Relations
Commission[79]:
An injury is considered irreparable if it is of such constant and frequent

recurrence that no fair and reasonable redress can be had therefor in a court of
law, or where there is no standard by which their amount can be measured
with reasonable accuracy, that is, it is not susceptible of mathematical
computation. It is considered irreparable injury when it cannot be adequately
compensated in damages due to the nature of the injury itself or the nature
of the right or property injured or when there exists no certain pecuniary
standard for the measurement of damages. (Emphases supplied.)
It is still contentious whether this is a case of termination by the DFA alone or both the DFA and
BCA. The DFA contends that BCA, by sending its own Notice of Default, likewise terminated or
abandoned the Amended BOT Agreement. Still, whether this is a termination by the DFA alone
without fault on the part of BCA or a termination due to default on the part of either party, the BOT
Law and the Amended BOT Agreement lay down the measure of compensation to be paid under
the appropriate circumstances.
Significantly, in BCAs Request for Arbitration with the PDRCI, it prayed for, among others, a
judgment ordering respondent [DFA] to pay damages to Claimant [BCA], reasonably estimated
at P50,000,000.00 as of [the date of the Request for Arbitration], representing lost business
opportunities; financing fees, costs and commissions; travel expenses; legal fees and expenses;
and costs of arbitration, including the fees of the arbitrator/s.[80] All the purported damages that
BCA claims to have suffered by virtue of the DFAs termination of the Amended BOT Agreement
are plainly determinable in pecuniary terms and can be reasonably estimated according to BCAs
own words.
Indeed, the right of BCA, a party which may or may not have been in default on its BOT contract,
to have the termination of its BOT contract reversed is not guaranteed by the BOT Law. Even
assuming BCAs innocence of any breach of contract, all the law provides is that BCA should be
adequately compensated for its losses in case of contract termination by the government.
There is one point that none of the parties has highlighted but is worthy of discussion. In seeking
to enjoin the government from awarding or implementing a machine readable passport project or
any similar electronic passport or visa project and praying for the maintenance of the status quo
ante pending the resolution on the merits of BCAs Request for Arbitration, BCA effectively seeks
to enjoin the termination of the Amended BOT Agreement for the MRP/V Project.
There is no doubt that the MRP/V Project is a project covered by the BOT Law and, in turn,
considered a national government project under Republic Act No. 8795. Under Section 3(d) of
that statute, trial courts are prohibited from issuing a TRO or writ of preliminary injunction against
the government to restrain or prohibit the termination or rescission of any such national
government project/contract.
The rationale for this provision is easy to understand. For if a project proponent that the
government believes to be in default is allowed to enjoin the termination of its contract on the
ground that it is contesting the validity of said termination, then the government will be unable to
enter into a new contract with any other party while the controversy is pending
litigation. Obviously, a courts grant of injunctive relief in such an instance is prejudicial to public
interest since government would be indefinitely hampered in its duty to provide vital public goods
and services in order to preserve the private proprietary rights of the project proponent. On the
other hand, should it turn out that the project proponent was not at fault, the BOT Law itself
presupposes that the project proponent can be adequately compensated for the termination of
the contract. Although BCA did not specifically pray for the trial court to enjoin the termination of
the Amended BOT Agreement and thus, there is no direct violation of Republic Act No. 8795, a
grant of injunctive relief as prayed for by BCA will indirectly contravene the same statute.
Verily, there is valid reason for the law to deny preliminary injunctive relief to those who seek to
contest the governments termination of a national government contract. The only circumstance
under which a court may grant injunctive relief is the existence of a matter of extreme urgency
involving a constitutional issue, such that unless a TRO or injunctive writ is issued, grave injustice
and irreparable injury will result.
Now, BCA likewise claims that unless it is granted injunctive relief, it would suffer grave and
irreparable injury since the bidding out and award of the e-Passport Project would be tantamount
to a violation of its right against deprivation of property without due process of law under Article
III, Section 1 of the Constitution. We are unconvinced.
Article III, Section 1 of the Constitution provides [n]o person shall be deprived of life, liberty, or
property without due process of law, nor shall any person be denied the equal protection of the
laws. Ordinarily, this constitutional provision has been applied to the exercise by the State of its
sovereign powers such as, its legislative power,[81] police power,[82] or its power of eminent
domain.[83]
In the instant case, the State action being assailed is the DFAs termination of the Amended BOT
Agreement with BCA. Although the said agreement involves a public service that the DFA is
mandated to provide and, therefore, is imbued with public interest, the relationship of DFA to BCA
is primarily contractual and their dispute involves the adjudication of contractual rights. The
propriety of the DFAs acts, in relation to the termination of the Amended BOT Agreement, should
be gauged against the provisions of the contract itself and the applicable statutes to such contract.
These contractual and statutory provisions outline what constitutes due process in the present
case. In all, BCA failed to demonstrate that there is a constitutional issue involved in this case,
much less a constitutional issue of extreme urgency.
As for the DFAs purported failure to appropriate sufficient amounts in its budget to pay for
liquidated damages to BCA, this argument does not support BCAs position that it will suffer grave
and irreparable injury if it is denied injunctive relief. The DFAs liability to BCA for damages is
contingent on BCA proving that it is entitled to such damages in the proper proceedings. The DFA
has no obligation to set aside funds to pay for liquidated damages, or any other kind of damages,
to BCA until there is a final and executory judgment in favor of BCA. It is illogical and impractical
for the DFA to set aside a significant portion of its budget for an event that may never happen
when such idle funds should be spent on providing necessary services to the populace. For if it
turns out at the end of the arbitration proceedings that it is BCA alone that is in default, it would
be the one liable for liquidated damages to the DFA under the terms of the Amended BOT
Agreement.
With respect to BCAs allegation that the e-Passport Project is grossly disadvantageous to the
Filipino people since it is the government that will be spending for the project unlike the MRP/V
Project which would have been privately funded, the same is immaterial to the issue at hand. If it
is true that the award of the e-Passport Project is inimical to the public good or tainted with some
anomaly, it is indeed a cause for grave concern but it is a matter that must be investigated and
litigated in the proper forum. It has no bearing on the issue of whether BCA would suffer grave
and irreparable injury such that it is entitled to injunctive relief from the courts.
In all, we agree with petitioners DFA and BSP that the trial courts issuance of a writ of preliminary
injunction, despite the lack of sufficient legal justification for the same, is tantamount to grave
abuse of discretion.
To be very clear, the present decision touches only on the twin issues of (a) the jurisdiction of the
trial court to issue a writ of preliminary injunction as an interim relief under the factual milieu of
this case; and (b) the entitlement of BCA to injunctive relief. The merits of the DFA and BCAs
dispute regarding the termination of the Amended BOT Agreement must be threshed out in the
proper arbitration proceedings. The civil case pending before the trial court is purely for the grant
of interim relief since the main case is to be the subject of arbitration proceedings.
BCAs petition for interim relief before the trial court is essentially a petition for a provisional remedy
(i.e., preliminary injunction) ancillary to its Request for Arbitration in PDRCI Case No. 30-
2006/BGF. BCA specifically prayed that the trial court grant it interim relief pending the
constitution of the arbitral tribunal in the said PDRCI case. Unfortunately, during the pendency of
this case, PDRCI Case No. 30-2006/BGF was dismissed by the PDRCI for lack of jurisdiction, in
view of the lack of agreement between the parties to arbitrate before the PDRCI.[84] In Philippine
National Bank v. Ritratto Group, Inc.,[85] we held:
A writ of preliminary injunction is an ancillary or preventive remedy that may only

be resorted to by a litigant to protect or preserve his rights or interests and for no
other purpose during the pendency of the principal action. The dismissal of the
principal action thus results in the denial of the prayer for the issuance of
the writ. x x x. (Emphasis supplied.)
In view of intervening circumstances, BCA can no longer be granted injunctive relief and the civil
case before the trial court should be accordingly dismissed. However, this is without prejudice to
the parties litigating the main controversy in arbitration proceedings, in accordance with the
provisions of the Amended BOT Agreement, which should proceed with dispatch.
It does not escape the attention of the Court that the delay in the submission of this controversy
to arbitration was caused by the ambiguity in Section 19.02 of the Amended BOT Agreement
regarding the proper body to which a dispute between the parties may be submitted and the failure
of the parties to agree on such an arbitral tribunal. However, this Court cannot allow this impasse
to continue indefinitely. The parties involved must sit down together in good faith and finally come
to an understanding regarding the constitution of an arbitral tribunal mutually acceptable to them.
WHEREFORE, the instant petition is hereby GRANTED. The assailed Order dated February 14,
2007 of the Regional Trial Court of Pasig in Civil Case No. 71079 and the Writ of Preliminary
Injunction dated February 23, 2007 are REVERSED and SET ASIDE.Furthermore, Civil Case
No. 71079 is hereby DISMISSED.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170633 October 17, 2007
MCC INDUSTRIAL SALES CORPORATION, petitioner,

vs.
SSANGYONG CORPORATION, respondents.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals in
CA-G.R. CV No. 82983 and its Resolution2 denying the motion for reconsideration thereof.
Petitioner MCC Industrial Sales (MCC), a domestic corporation with office at Binondo, Manila, is
engaged in the business of importing and wholesaling stainless steel products.3 One of its
suppliers is the Ssangyong Corporation (Ssangyong),4 an international trading company5 with
head office in Seoul, South Korea and regional headquarters in Makati City, Philippines. 6 The
two corporations conducted business through telephone calls and facsimile or telecopy
transmissions.7 Ssangyong would send the pro forma invoices containing the details of the steel
product order to MCC; if the latter conforms thereto, its representative affixes his signature on
the faxed copy and sends it back to Ssangyong, again by fax.8
On April 13, 2000, Ssangyong Manila Office sent, by fax, a letter9 addressed to Gregory Chan,
MCC Manager [also the President10 of Sanyo Seiki Stainless Steel Corporation], to confirm
MCC's and Sanyo Seiki's order of 220 metric tons (MT) of hot rolled stainless steel under a
preferential rate of US$1,860.00 per MT. Chan, on behalf of the corporations, assented and
affixed his signature on the conforme portion of the letter.11
On April 17, 2000, Ssangyong forwarded to MCC Pro Forma Invoice No. ST2-
POSTSO40112 containing the terms and conditions of the transaction. MCC sent back by fax to
Ssangyong the invoice bearing the conformity signature13 of Chan. As stated in the pro
forma invoice, payment for the ordered steel products would be made through an irrevocable
letter of credit (L/C) at sight in favor of Ssangyong.14 Following their usual practice, delivery of
the goods was to be made after the L/C had been opened.
In the meantime, because of its confirmed transaction with MCC, Ssangyong placed the order
with its steel manufacturer, Pohang Iron and Steel Corporation (POSCO), in South Korea15 and
paid the same in full.
Because MCC could open only a partial letter of credit, the order for 220MT of steel was split
into two,16 one for 110MT covered by Pro Forma Invoice No. ST2-POSTS0401-117 and another
for 110MT covered by ST2-POSTS0401-2,18 both dated April 17, 2000.
On June 20, 2000, Ssangyong, through its Manila Office, informed Sanyo Seiki and Chan, by
way of a fax transmittal, that it was ready to ship 193.597MT of stainless steel from Korea to the
Philippines. It requested that the opening of the L/C be facilitated.19 Chan affixed his signature
on the fax transmittal and returned the same, by fax, to Ssangyong.20
Two days later, on June 22, 2000, Ssangyong Manila Office informed Sanyo Seiki, thru Chan,
that it was able to secure a US$30/MT price adjustment on the contracted price of
US$1,860.00/MT for the 200MT stainless steel, and that the goods were to be shipped in
two tranches, the first 100MT on that day and the second 100MT not later than June 27, 2000.
Ssangyong reiterated its request for the facilitation of the L/C's opening.21
Ssangyong later, through its Manila Office, sent a letter, on June 26, 2000, to the Treasury
Group of Sanyo Seiki that it was looking forward to receiving the L/C details and a cable copy
thereof that day.22 Ssangyong sent a separate letter of the same date to Sanyo Seiki requesting
for the opening of the L/C covering payment of the first 100MT not later than June 28,
2000.23 Similar letters were transmitted by Ssangyong Manila Office on June 27, 2000.24 On
June 28, 2000, Ssangyong sent another facsimile letter to MCC stating that its principal in Korea
was already in a difficult situation25 because of the failure of Sanyo Seiki and MCC to open the
L/C's.
The following day, June 29, 2000, Ssangyong received, by fax, a letter signed by Chan,
requesting an extension of time to open the L/C because MCC's credit line with the bank had
been fully availed of in connection with another transaction, and MCC was waiting for an
additional credit line.26 On the same date, Ssangyong replied, requesting that it be informed of
the date when the L/C would be opened, preferably at the earliest possible time, since its Steel
Team 2 in Korea was having problems and Ssangyong was incurring warehousing costs.27 To
maintain their good business relationship and to support MCC in its financial predicament,
Ssangyong offered to negotiate with its steel manufacturer, POSCO, another US$20/MT
discount on the price of the stainless steel ordered. This was intimated in Ssangyong's June 30,
2000 letter to MCC.28 On July 6, 2000, another follow-up letter29 for the opening of the L/C was
sent by Ssangyong to MCC.
However, despite Ssangyong's letters, MCC failed to open a letter of credit. 30 Consequently, on
August 15, 2000, Ssangyong, through counsel, wrote Sanyo Seiki that if the L/C's were not
opened, Ssangyong would be compelled to cancel the contract and hold MCC liable for
damages for breach thereof amounting to US$96,132.18, inclusive of warehouse expenses,
related interests and charges.31
Later, Pro Forma Invoice Nos. ST2-POSTS080-132 and ST2-POSTS080-233 dated August 16,
2000 were issued by Ssangyong and sent via fax to MCC. The invoices slightly varied the terms
of the earlier pro forma invoices (ST2-POSTSO401, ST2-POSTS0401-1 and ST2-POSTS0401-
2), in that the quantity was now officially 100MT per invoice and the price was reduced
to US$1,700.00 per MT. As can be gleaned from the photocopies of the said August 16, 2000
invoices submitted to the court, they both bear the conformity signature of MCC Manager Chan.
On August 17, 2000, MCC finally opened an L/C with PCIBank for US$170,000.00 covering
payment for 100MT of stainless steel coil under Pro Forma Invoice No. ST2-POSTS080-
2.34 The goods covered by the said invoice were then shipped to and received by MCC.35
MCC then faxed to Ssangyong a letter dated August 22, 2000 signed by Chan, requesting for a
price adjustment of the order stated in Pro Forma Invoice No. ST2-POSTS080-1, considering
that the prevailing price of steel at that time was US$1,500.00/MT, and that MCC lost a lot of
money due to a recent strike.36
Ssangyong rejected the request, and, on August 23, 2000, sent a demand letter37 to Chan for
the opening of the second and last L/C of US$170,000.00 with a warning that, if the said L/C
was not opened by MCC on August 26, 2000, Ssangyong would be constrained to cancel the
contract and hold MCC liable for US$64,066.99 (representing cost difference, warehousing
expenses, interests and charges as of August 15, 2000) and other damages for breach. Chan
failed to reply.
Exasperated, Ssangyong through counsel wrote a letter to MCC, on September 11, 2000,
canceling the sales contract under ST2-POSTS0401-1 /ST2-POSTS0401-2, and demanding
payment of US$97,317.37 representing losses, warehousing expenses, interests and charges.38
Ssangyong then filed, on November 16, 2001, a civil action for damages due to breach of
contract against defendants MCC, Sanyo Seiki and Gregory Chan before the Regional Trial
Court of Makati City. In its complaint,39Ssangyong alleged that defendants breached their
contract when they refused to open the L/C in the amount of US$170,000.00 for the remaining
100MT of steel under Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2.
After Ssangyong rested its case, defendants filed a Demurrer to Evidence40 alleging that
Ssangyong failed to present the original copies of the pro forma invoices on which the civil
action was based. In an Order dated April 24, 2003, the court denied the demurrer, ruling that
the documentary evidence presented had already been admitted in the December 16, 2002
Order41 and their admissibility finds support in Republic Act (R.A.) No. 8792, otherwise known
as the Electronic Commerce Act of 2000. Considering that both testimonial and documentary
evidence tended to substantiate the material allegations in the complaint, Ssangyong's evidence
sufficed for purposes of a prima facie case.42
After trial on the merits, the RTC rendered its Decision43 on March 24, 2004, in favor of
Ssangyong. The trial court ruled that when plaintiff agreed to sell and defendants agreed to buy
the 220MT of steel products for the price of US$1,860 per MT, the contract was perfected. The
subject transaction was evidenced by Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2-
POSTS0401-2, which were later amended only in terms of reduction of volume as well as the
price per MT, following Pro Forma Invoice Nos. ST2-POSTS080-1 and ST2-POSTS080-2. The
RTC, however, excluded Sanyo Seiki from liability for lack of competent evidence. The fallo of
the decision reads:
WHEREFORE, premises considered, Judgment is hereby rendered ordering defendants

MCC Industrial Sales Corporation and Gregory Chan, to pay plaintiff, jointly and
severally the following:
1) Actual damages of US$93,493.87 representing the outstanding principal claim plus

interest at the rate of 6% per annum from March 30, 2001.
2) Attorney's fees in the sum of P50,000.00 plus P2,000.00 per counsel's appearance in
court, the same being deemed just and equitable considering that by reason of
defendants' breach of their obligation under the subject contract, plaintiff was
constrained to litigate to enforce its rights and recover for the damages it sustained, and
therefore had to engage the services of a lawyer.
3) Costs of suit.
No award of exemplary damages for lack of sufficient basis.
SO ORDERED.44
On April 22, 2004, MCC and Chan, through their counsel of record, Atty. Eladio B. Samson, filed
their Notice of Appeal.45 On June 8, 2004, the law office of Castillo Zamora & Poblador entered
its appearance as their collaborating counsel.
In their Appeal Brief filed on March 9, 2005,46 MCC and Chan raised before the CA the following
errors of the RTC:
I. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING THAT

APPELLANTS VIOLATED THEIR CONTRACT WITH APPELLEE
A. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING THAT

APPELLANTS AGREED TO PURCHASE 200 METRIC TONS OF STEEL
PRODUCTS FROM APPELLEE, INSTEAD OF ONLY 100 METRIC TONS.
1. THE HONORABLE COURT A QUO PLAINLY ERRED IN ADMITTING

IN EVIDENCE THE PRO FORMA INVOICES WITH REFERENCE NOS.
ST2- POSTS0401-1 AND ST2-POSTS0401-2.
II. THE HONORABLE COURT A QUO PLAINLY ERRED IN AWARDING ACTUAL

DAMAGES TO APPELLEE.
III. THE HONORABLE COURT A QUO PLAINLY ERRED IN AWARDING ATTORNEY'S

FEES TO APPELLEE.
IV. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING APPELLANT

GREGORY CHAN JOINTLY AND SEVERALLY LIABLE WITH APPELLANT MCC.47
On August 31, 2005, the CA rendered its Decision48 affirming the ruling of the trial court, but
absolving Chan of any liability. The appellate court ruled, among others, that Pro Forma Invoice
Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E", "E-1" and "F") were admissible
in evidence, although they were mere facsimile printouts of MCC's steel orders. 49 The
dispositive portion of the appellate court's decision reads:
WHEREFORE, premises considered, the Court holds:
(1) The award of actual damages, with interest, attorney's fees and costs ordered by the
lower court is hereby AFFIRMED.
(2) Appellant Gregory Chan is hereby ABSOLVED from any liability.
SO ORDERED.50
A copy of the said Decision was received by MCC's and Chan's principal counsel, Atty. Eladio
B. Samson, on September 14, 2005.51 Their collaborating counsel, Castillo Zamora &
Poblador,52 likewise, received a copy of the CA decision on September 19, 2005.53
On October 4, 2005, Castillo Zamora & Poblador, on behalf of MCC, filed a motion for
reconsideration of the said decision.54 Ssangyong opposed the motion contending that the
decision of the CA had become final and executory on account of the failure of MCC to file the
said motion within the reglementary period. The appellate court resolved, on November 22,
2005, to deny the motion on its merits,55 without, however, ruling on the procedural issue raised.
Aggrieved, MCC filed a petition for review on certiorari56 before this Court, imputing the following
errors to the Court of Appeals:
THE COURT OF APPEALS DECIDED A LEGAL QUESTION NOT IN ACCORDANCE
WITH JURISPRUDENCE AND SANCTIONED A DEPARTURE FROM THE USUAL
AND ACCEPTED COURSE OF JUDICIAL PROCEEDINGS BY REVERSING
THE COURT A QUO'S DISMISSAL OF THE COMPLAINT IN CIVIL CASE NO. 02-124
CONSIDERING THAT:
I. THE COURT OF APPEALS ERRED IN SUSTAINING THE ADMISSIBILITY IN

EVIDENCE OF THE PRO-FORMA INVOICES WITH REFERENCE NOS. ST2-
POSTSO401-1 AND ST2-POSTSO401-2, DESPITE THE FACT THAT THE
SAME WERE MERE PHOTOCOPIES OF FACSIMILE PRINTOUTS.
II. THE COURT OF APPEALS FAILED TO APPRECIATE THE OBVIOUS FACT

THAT, EVEN ASSUMING PETITIONER BREACHED THE SUPPOSED
CONTRACT, THE FACT IS THAT PETITIONER FAILED TO PROVE THAT IT
SUFFERED ANY DAMAGES AND THE AMOUNT THEREOF.
III. THE AWARD OF ACTUAL DAMAGES IN THE AMOUNT OF US$93,493.87

IS SIMPLY UNCONSCIONABLE AND SHOULD HAVE BEEN AT LEAST
REDUCED, IF NOT DELETED BY THE COURT OF APPEALS.57
In its Comment, Ssangyong sought the dismissal of the petition, raising the following arguments:
that the CA decision dated 15 August 2005 is already final and executory, because MCC's
motion for reconsideration was filed beyond the reglementary period of 15 days from receipt of a
copy thereof, and that, in any case, it was a pro formamotion; that MCC breached the contract
for the purchase of the steel products when it failed to open the required letter of credit; that the
printout copies and/or photocopies of facsimile or telecopy transmissions were properly
admitted by the trial court because they are considered original documents under R.A. No.
8792; and that MCC is liable for actual damages and attorney's fees because of its breach, thus,
compelling Ssangyong to litigate.
The principal issues that this Court is called upon to resolve are the following:
I – Whether the CA decision dated 15 August 2005 is already final and executory;
II – Whether the print-out and/or photocopies of facsimile transmissions are electronic evidence
and admissible as such;
III – Whether there was a perfected contract of sale between MCC and Ssangyong, and, if in the
affirmative, whether MCC breached the said contract; and
IV – Whether the award of actual damages and attorney's fees in favor of Ssangyong is proper
and justified.
-I-
It cannot be gainsaid that in Albano v. Court of Appeals,58 we held that receipt of a copy of the
decision by one of several counsels on record is notice to all, and the period to appeal
commences on such date even if the other counsel has not yet received a copy of the decision.
In this case, when Atty. Samson received a copy of the CA decision on September 14, 2005,
MCC had only fifteen (15) days within which to file a motion for reconsideration conformably
with Section 1, Rule 52 of the Rules of Court, or to file a petition for review on certiorari in
accordance with Section 2, Rule 45. The period should not be reckoned from September 29,
2005 (when Castillo Zamora & Poblador received their copy of the decision) because notice to
Atty. Samson is deemed notice to collaborating counsel.
We note, however, from the records of the CA, that it was Castillo Zamora & Poblador, not Atty.
Samson, which filed both MCC's and Chan's Brief and Reply Brief. Apparently, the arrangement
between the two counsels was for the collaborating, not the principal, counsel to file the appeal
brief and subsequent pleadings in the CA. This explains why it was Castillo Zamora & Poblador
which filed the motion for the reconsideration of the CA decision, and they did so on October 5,
2005, well within the 15-day period from September 29, 2005, when they received their copy of
the CA decision. This could also be the reason why the CA did not find it necessary to resolve
the question of the timeliness of petitioner's motion for reconsideration, even as the CA denied
the same.
Independent of this consideration though, this Court assiduously reviewed the records and
found that strong concerns of substantial justice warrant the relaxation of this rule.
In Philippine Ports Authority v. Sargasso Construction and Development Corporation,59 we ruled

that:
In Orata v. Intermediate Appellate Court, we held that where strong considerations of

substantive justice are manifest in the petition, this Court may relax the strict application
of the rules of procedure in the exercise of its legal jurisdiction. In addition to the basic
merits of the main case, such a petition usually embodies justifying circumstance which
warrants our heeding to the petitioner's cry for justice in spite of the earlier negligence of
counsel. As we held in Obut v. Court of Appeals:
[W]e cannot look with favor on a course of action which would place the
administration of justice in a straight jacket for then the result would be a poor
kind of justice if there would be justice at all. Verily, judicial orders, such as the
one subject of this petition, are issued to be obeyed, nonetheless a non-
compliance is to be dealt with as the circumstances attending the case may
warrant. What should guide judicial action is the principle that a party-litigant is to
be given the fullest opportunity to establish the merits of his complaint or defense
rather than for him to lose life, liberty, honor or property on technicalities.
The rules of procedure are used only to secure and not override or frustrate justice. A
six-day delay in the perfection of the appeal, as in this case, does not warrant the
outright dismissal of the appeal. In Development Bank of the Philippines vs. Court of
Appeals, we gave due course to the petitioner's appeal despite the late filing of its brief
in the appellate court because such appeal involved public interest. We stated in the
said case that the Court may exempt a particular case from a strict application of the
rules of procedure where the appellant failed to perfect its appeal within the
reglementary period, resulting in the appellate court's failure to obtain jurisdiction over
the case. In Republic vs. Imperial, Jr., we also held that there is more leeway to exempt
a case from the strictness of procedural rules when the appellate court has already
obtained jurisdiction over the appealed case. We emphasize that:
[T]he rules of procedure are mere tools intended to facilitate the attainment of
justice, rather than frustrate it. A strict and rigid application of the rules must
always be eschewed when it would subvert the rule's primary objective of
enhancing fair trials and expediting justice. Technicalities should never be used
to defeat the substantive rights of the other party. Every party-litigant must be
afforded the amplest opportunity for the proper and just determination of his
cause, free from the constraints of technicalities.60
Moreover, it should be remembered that the Rules were promulgated to set guidelines in the
orderly administration of justice, not to shackle the hand that dispenses it. Otherwise, the courts
would be consigned to being mere slaves to technical rules, deprived of their judicial discretion.
Technicalities must take a backseat to substantive rights. After all, it is circumspect leniency in
this respect that will give the parties the fullest opportunity to ventilate the merits of their
respective causes, rather than have them lose life, liberty, honor or property on sheer
technicalities.61
The other technical issue posed by respondent is the alleged pro forma nature of MCC's motion
for reconsideration, ostensibly because it merely restated the arguments previously raised and
passed upon by the CA.
In this connection, suffice it to say that the mere restatement of arguments in a motion for
reconsideration does not per se result in a pro forma motion. In Security Bank and Trust
Company, Inc. v. Cuenca,62 we held that a motion for reconsideration may not be
necessarily pro forma even if it reiterates the arguments earlier passed upon and rejected by the
appellate court. A movant may raise the same arguments precisely to convince the court that its
ruling was erroneous. Furthermore, the pro forma rule will not apply if the arguments were not
sufficiently passed upon and answered in the decision sought to be reconsidered.
- II -
The second issue poses a novel question that the Court welcomes. It provides the occasion for
this Court to pronounce a definitive interpretation of the equally innovative provisions of the
Electronic Commerce Act of 2000 (R.A. No. 8792) vis-à-vis the Rules on Electronic Evidence.
Although the parties did not raise the question whether the original facsimile transmissions are
"electronic data messages" or "electronic documents" within the context of the Electronic
Commerce Act (the petitioner merely assails as inadmissible evidence the photocopies of the
said facsimile transmissions), we deem it appropriate to determine first whether the said fax
transmissions are indeed within the coverage of R.A. No. 8792 before ruling on whether the
photocopies thereof are covered by the law. In any case, this Court has ample authority to go
beyond the pleadings when, in the interest of justice or for the promotion of public policy, there
is a need to make its own findings in order to support its conclusions.63
Petitioner contends that the photocopies of the pro forma invoices presented by respondent
Ssangyong to prove the perfection of their supposed contract of sale are inadmissible in
evidence and do not fall within the ambit of R.A. No. 8792, because the law merely admits as
the best evidence the original fax transmittal. On the other hand, respondent posits that, from a
reading of the law and the Rules on Electronic Evidence, the original facsimile transmittal of
the pro forma invoice is admissible in evidence since it is an electronic document and, therefore,
the best evidence under the law and the Rules. Respondent further claims that the photocopies
of these fax transmittals (specifically ST2-POSTS0401-1 and ST2-POSTS0401-2) are
admissible under the Rules on Evidence because the respondent sufficiently explained the non-
production of the original fax transmittals.
In resolving this issue, the appellate court ruled as follows:
Admissibility of Pro Forma

Invoices; Breach of Contract
by Appellants
Turning first to the appellants' argument against the admissibility of the Pro Forma
Invoices with Reference Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E",
"E-1" and "F", pp. 215-218, Records), appellants argue that the said documents are
inadmissible (sic) being violative of the best evidence rule.
The argument is untenable.
The copies of the said pro-forma invoices submitted by the appellee are admissible in
evidence, although they are mere electronic facsimile printouts of appellant's orders.
Such facsimile printouts are considered Electronic Documents under the New Rules on
Electronic Evidence, which came into effect on August 1, 2001. (Rule 2, Section 1 [h],
A.M. No. 01-7-01-SC).
"(h) 'Electronic document' refers to information or the representation of

information, data, figures, symbols or other modes of written expression,
described or however represented, by which a right is established or an
obligation extinguished, or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored, processed, retrieved or produced
electronically. It includes digitally signed documents and any printout or output,
readable by sight or other means, which accurately reflects the electronic data
message or electronic document. For purposes of these Rules, the term
'electronic document' may be used interchangeably with 'electronic data
message'.
An electronic document shall be regarded as the equivalent of an original document
under the Best Evidence Rule, as long as it is a printout or output readable by sight or
other means, showing to reflect the data accurately. (Rule 4, Section 1, A.M. No. 01-7-
01-SC)
The ruling of the Appellate Court is incorrect. R.A. No. 8792,64 otherwise known as the
Electronic Commerce Act of 2000, considers an electronic data message or an electronic
document as the functional equivalent of a written document for evidentiary purposes.65 The
Rules on Electronic Evidence66 regards an electronic document as admissible in evidence if it
complies with the rules on admissibility prescribed by the Rules of Court and related laws, and
is authenticated in the manner prescribed by the said Rules.67 An electronic document is also
the equivalent of an original document under the Best Evidence Rule, if it is a printout or output
readable by sight or other means, shown to reflect the data accurately.68
Thus, to be admissible in evidence as an electronic data message or to be considered as the

functional equivalent of an original document under the Best Evidence Rule, the writing must
foremost be an "electronic data message" or an "electronic document."
The Electronic Commerce Act of 2000 defines electronic data message and electronic
document as follows:
Sec. 5. Definition of Terms. For the purposes of this Act, the following terms are
defined, as follows:
xxx
c. "Electronic Data Message" refers to information generated, sent, received or stored by

electronic, optical or similar means.
xxx
f. "Electronic Document" refers to information or the representation of information, data,

figures, symbols or other modes of written expression, described or however
represented, by which a right is established or an obligation extinguished, or by which a
fact may be proved and affirmed, which is received, recorded, transmitted, stored,
processed, retrieved or produced electronically.
The Implementing Rules and Regulations (IRR) of R.A. No. 8792,69 which was signed on July
13, 2000 by the then Secretaries of the Department of Trade and Industry, the Department of
Budget and Management, and then Governor of the Bangko Sentral ng Pilipinas, defines the
terms as:
Sec. 6. Definition of Terms. For the purposes of this Act and these Rules, the following
terms are defined, as follows:
xxx
(e) "Electronic Data Message" refers to information generated, sent, received or stored
by electronic, optical or similar means, but not limited to, electronic data interchange
(EDI), electronic mail, telegram, telex or telecopy. Throughout these Rules, the term
"electronic data message" shall be equivalent to and be used interchangeably with
"electronic document."
xxxx
(h) "Electronic Document" refers to information or the representation of information, data,

processed, retrieved or produced electronically. Throughout these Rules, the term
"electronic document" shall be equivalent to and be used interchangeably with
"electronic data message."
The phrase "but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex
or telecopy" in the IRR's definition of "electronic data message" is copied from the Model Law
on Electronic Commerce adopted by the United Nations Commission on International Trade
Law (UNCITRAL),70 from which majority of the provisions of R.A. No. 8792 were taken.71 While
Congress deleted this phrase in the Electronic Commerce Act of 2000, the drafters of the IRR
reinstated it. The deletion by Congress of the said phrase is significant and pivotal, as discussed
hereunder.
The clause on the interchangeability of the terms "electronic data message" and "electronic
document" was the result of the Senate of the Philippines' adoption, in Senate Bill 1902, of the
phrase "electronic data message" and the House of Representative's employment, in House Bill
9971, of the term "electronic document."72 In order to expedite the reconciliation of the two
versions, the technical working group of the Bicameral Conference Committee adopted both
terms and intended them to be the equivalent of each one.73 Be that as it may, there is a slight
difference between the two terms. While "data message" has reference to information
electronically sent, stored or transmitted, it does not necessarily mean that it will give rise to a
right or extinguish an obligation,74 unlike an electronic document. Evident from the law,
however, is the legislative intent to give the two terms the same construction.
The Rules on Electronic Evidence promulgated by this Court defines the said terms in the
following manner:
SECTION 1. Definition of Terms. – For purposes of these Rules, the following terms are
defined, as follows:
xxxx
(g) "Electronic data message" refers to information generated, sent, received or stored
by electronic, optical or similar means.
(h) "Electronic document" refers to information or the representation of information, data,

processed, retrieved or produced electronically. It includes digitally signed documents
and print-out or output, readable by sight or other means, which accurately reflects the
electronic data message or electronic document. For purposes of these Rules, the term
"electronic document" may be used interchangeably with "electronic data message."
Given these definitions, we go back to the original question: Is an original printout of a facsimile
transmission an electronic data message or electronic document?
The definitions under the Electronic Commerce Act of 2000, its IRR and the Rules on Electronic
Evidence, at first glance, convey the impression that facsimile transmissions are electronic data
messages or electronic documents because they are sent by electronic means. The expanded
definition of an "electronic data message" under the IRR, consistent with the UNCITRAL Model
Law, further supports this theory considering that the enumeration "xxx [is] not limited to,
electronic data interchange (EDI), electronic mail, telegram, telex or telecopy." And to telecopy
is to send a document from one place to another via a fax machine.75
As further guide for the Court in its task of statutory construction, Section 37 of the Electronic
Commerce Act of 2000 provides that
Unless otherwise expressly provided for, the interpretation of this Act shall give due
regard to its international origin and the need to promote uniformity in its application and
the observance of good faith in international trade relations. The generally accepted
principles of international law and convention on electronic commerce shall likewise be
considered.
Obviously, the "international origin" mentioned in this section can only refer to the UNCITRAL
Model Law, and the UNCITRAL's definition of "data message":
"Data message" means information generated, sent, received or stored by electronic,

optical or similar means including, but not limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy.76
is substantially the same as the IRR's characterization of an "electronic data message."
However, Congress deleted the phrase, "but not limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy," and replaced the term "data message" (as found in
the UNCITRAL Model Law ) with "electronic data message." This legislative divergence from
what is assumed as the term's "international origin" has bred uncertainty and now impels the
Court to make an inquiry into the true intent of the framers of the law. Indeed, in the construction
or interpretation of a legislative measure, the primary rule is to search for and determine the
intent and spirit of the law.77 A construction should be rejected that gives to the language used
in a statute a meaning that does not accomplish the purpose for which the statute was enacted,
and that tends to defeat the ends which are sought to be attained by the enactment.78
Interestingly, when Senator Ramon B. Magsaysay, Jr., the principal author of Senate Bill 1902
(the predecessor of R.A. No. 8792), sponsored the bill on second reading, he proposed to adopt
the term "data message" as formulated and defined in the UNCITRAL Model Law.79 During the
period of amendments, however, the term evolved into "electronic data message," and the
phrase "but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or
telecopy" in the UNCITRAL Model Law was deleted. Furthermore, the term "electronic data
message," though maintaining its description under the UNCITRAL Model Law, except for the
aforesaid deleted phrase, conveyed a different meaning, as revealed in the following
proceedings:
xxxx
Senator Santiago. Yes, Mr. President. I will furnish a copy together with the explanation
of this proposed amendment.
And then finally, before I leave the Floor, may I please be allowed to go back to Section
5; the Definition of Terms. In light of the acceptance by the good Senator of my
proposed amendments, it will then become necessary to add certain terms in our list of
terms to be defined. I would like to add a definition on what is "data," what is "electronic
record" and what is an "electronic record system."
If the gentleman will give me permission, I will proceed with the proposed amendment on
Definition of Terms, Section 5.
Senator Magsaysay. Please go ahead, Senator Santiago.
Senator Santiago. We are in Part 1, short title on the Declaration of Policy, Section 5,
Definition of Terms.
At the appropriate places in the listing of these terms that have to be defined since these
are arranged alphabetically, Mr. President, I would like to insert the term DATA and its
definition. So, the amendment will read: "DATA" MEANS REPRESENTATION, IN ANY
FORM, OF INFORMATION OR CONCEPTS.
The explanation is this: This definition of "data" or "data" as it is now fashionably

pronounced in America - - the definition of "data" ensures that our bill applies to any form
of information in an electronic record, whether these are figures, facts or ideas.
So again, the proposed amendment is this: "DATA" MEANS REPRESENTATIONS, IN

ANY FORM, OF INFORMATION OR CONCEPTS.
Senator Magsaysay. May I know how will this affect the definition of "Data Message"
which encompasses electronic records, electronic writings and electronic documents?
Senator Santiago. These are completely congruent with each other. These are
compatible. When we define "data," we are simply reinforcing the definition of what is a
data message.
Senator Magsaysay. It is accepted, Mr. President.
Senator Santiago. Thank you. The next term is "ELECTRONIC RECORD." The
proposed amendment is as follows:
"ELECTRONIC RECORD" MEANS DATA THAT IS RECORDED OR STORED ON ANY

MEDIUM IN OR BY A COMPUTER SYSTEM OR OTHER SIMILAR DEVICE, THAT
CAN BE READ OR PERCEIVED BY A PERSON OR A COMPUTER SYSTEM OR
OTHER SIMILAR DEVICE. IT INCLUDES A DISPLAY, PRINTOUT OR OTHER
OUTPUT OF THAT DATA.
The explanation for this term and its definition is as follows: The term "ELECTRONIC
RECORD" fixes the scope of our bill. The record is the data. The record may be on any
medium. It is electronic because it is recorded or stored in or by a computer system or a
similar device.
The amendment is intended to apply, for example, to data on magnetic strips on cards or
in Smart cards. As drafted, it would not apply to telexes or faxes, except computer-
generated faxes, unlike the United Nations model law on electronic commerce. It
would also not apply to regular digital telephone conversations since the information is
not recorded. It would apply to voice mail since the information has been recorded in or
by a device similar to a computer. Likewise, video records are not covered. Though
when the video is transferred to a website, it would be covered because of the
involvement of the computer. Music recorded by a computer system on a compact disc
would be covered.
In short, not all data recorded or stored in digital form is covered. A computer or a similar
device has to be involved in its creation or storage. The term "similar device" does not
extend to all devices that create or store data in digital form. Although things that are not
recorded or preserved by or in a computer system are omitted from this bill, these may
well be admissible under other rules of law. This provision focuses on replacing the
search for originality proving the reliability of systems instead of that of individual records
and using standards to show systems reliability.
Paper records that are produced directly by a computer system such as printouts are
themselves electronic records being just the means of intelligible display of the contents
of the record. Photocopies of the printout would be paper record subject to the usual
rules about copies, but the original printout would be subject to the rules of admissibility
of this bill.
However, printouts that are used only as paper records and whose computer origin is
never again called on are treated as paper records. In that case, the reliability of the
computer system that produces the record is irrelevant to its reliability.
Senator Magsaysay. Mr. President, if my memory does not fail me, earlier, the lady
Senator accepted that we use the term "Data Message" rather than "ELECTRONIC
RECORD" in being consistent with the UNCITRAL term of "Data Message." So with the
new amendment of defining "ELECTRONIC RECORD," will this affect her accepting of
the use of "Data Message" instead of "ELECTRONIC RECORD"?
Senator Santiago. No, it will not. Thank you for reminding me. The term I would like to
insert is ELECTRONIC DATA MESSAGE in lieu of "ELECTRONIC RECORD."
Senator Magsaysay. Then we are, in effect, amending the term of the definition of
"Data Message" on page 2A, line 31, to which we have no objection.
Senator Santiago. Thank you, Mr. President.
xxxx
Senator Santiago. Mr. President, I have proposed all the amendments that I desire to,
including the amendment on the effect of error or change. I will provide the language of
the amendment together with the explanation supporting that amendment to the
distinguished sponsor and then he can feel free to take it up in any session without any
further intervention.
Senator Magsaysay. Before we end, Mr. President, I understand from the proponent of
these amendments that these are based on the Canadian E-commerce Law of 1998. Is
that not right?
Senator Santiago. That is correct.80
Thus, when the Senate consequently voted to adopt the term "electronic data message," it was
consonant with the explanation of Senator Miriam Defensor-Santiago that it would not apply "to
telexes or faxes, except computer-generated faxes, unlike the United Nations model law on
electronic commerce." In explaining the term "electronic record" patterned after the E-
Commerce Law of Canada, Senator Defensor-Santiago had in mind the term "electronic data
message." This term then, while maintaining part of the UNCITRAL Model Law's terminology of
"data message," has assumed a different context, this time, consonant with the term "electronic
record" in the law of Canada. It accounts for the addition of the word "electronic" and the
deletion of the phrase "but not limited to, electronic data interchange (EDI), electronic mail,
telegram, telex or telecopy." Noteworthy is that the Uniform Law Conference of Canada,
explains the term "electronic record," as drafted in the Uniform Electronic Evidence Act, in a
manner strikingly similar to Sen. Santiago's explanation during the Senate deliberations:
"Electronic record" fixes the scope of the Act. The record is the data. The record may be
any medium. It is "electronic" because it is recorded or stored in or by a computer
system or similar device. The Act is intended to apply, for example, to data on magnetic
strips on cards, or in smart cards. As drafted, it would not apply to telexes or faxes
(except computer-generated faxes), unlike the United Nations Model Law on Electronic
Commerce. It would also not apply to regular digital telephone conversations, since the
information is not recorded. It would apply to voice mail, since the information has been
recorded in or by a device similar to a computer. Likewise video records are not covered,
though when the video is transferred to a Web site it would be, because of the
involvement of the computer. Music recorded by a computer system on a compact disk
would be covered.
In short, not all data recorded or stored in "digital" form is covered. A computer or similar
device has to be involved in its creation or storage. The term "similar device" does not
extend to all devices that create or store data in digital form. Although things that are not
recorded or preserved by or in a computer system are omitted from this Act, they may
well be admissible under other rules of law. This Act focuses on replacing the search for
originality, proving the reliability of systems instead of that of individual records, and
using standards to show systems reliability.
Paper records that are produced directly by a computer system, such as printouts, are
themselves electronic records, being just the means of intelligible display of the contents
of the record. Photocopies of the printout would be paper records subject to the usual
rules about copies, but the "original" printout would be subject to the rules of
admissibility of this Act.
However, printouts that are used only as paper records, and whose computer origin is
never again called on, are treated as paper records. See subsection 4(2). In this case
the reliability of the computer system that produced the record is relevant to its
reliability.81
There is no question then that when Congress formulated the term "electronic data message," it
intended the same meaning as the term "electronic record" in the Canada law. This construction
of the term "electronic data message," which excludes telexes or faxes, except computer-
generated faxes, is in harmony with the Electronic Commerce Law's focus on "paperless"
communications and the "functional equivalent approach"82 that it espouses. In fact, the
deliberations of the Legislature are replete with discussions on paperless and digital
transactions.
Facsimile transmissions are not, in this sense, "paperless," but verily are paper-based.
A facsimile machine, which was first patented in 1843 by Alexander Bain,83 is a device that can
send or receive pictures and text over a telephone line. It works by digitizing an image—dividing
it into a grid of dots. Each dot is either on or off, depending on whether it is black or white.
Electronically, each dot is represented by a bit that has a value of either 0 (off) or 1 (on). In this
way, the fax machine translates a picture into a series of zeros and ones (called a bit map) that
can be transmitted like normal computer data. On the receiving side, a fax machine reads the
incoming data, translates the zeros and ones back into dots, and reprints the picture.84 A fax
machine is essentially an image scanner, a modem and a computer printer combined into a
highly specialized package. The scanner converts the content of a physical document into a
digital image, the modem sends the image data over a phone line, and the printer at the other
end makes a duplicate of the original document.85 Thus, in Garvida v. Sales, Jr.,86where we
explained the unacceptability of filing pleadings through fax machines, we ruled that:
A facsimile or fax transmission is a process involving the transmission and reproduction

of printed and graphic matter by scanning an original copy, one elemental area at a time,
and representing the shade or tone of each area by a specified amount of electric
current. The current is transmitted as a signal over regular telephone lines or via
microwave relay and is used by the receiver to reproduce an image of the elemental
area in the proper position and the correct shade. The receiver is equipped with a stylus
or other device that produces a printed record on paper referred to as a facsimile.
x x x A facsimile is not a genuine and authentic pleading. It is, at best, an exact copy
preserving all the marks of an original. Without the original, there is no way of
determining on its face whether the facsimile pleading is genuine and authentic and was
originally signed by the party and his counsel. It may, in fact, be a sham pleading.87
Accordingly, in an ordinary facsimile transmission, there exists an original paper-

based information or data that is scanned, sent through a phone line, and re-printed at the
receiving end. Be it noted that in enacting the Electronic Commerce Act of 2000, Congress
intended virtual or paperless writings to be the functional equivalent and to have the same legal
function as paper-based documents.88 Further, in a virtual or paperless environment,
technically, there is no original copy to speak of, as all direct printouts of the virtual reality are
the same, in all respects, and are considered as originals.89 Ineluctably, the law's definition of
"electronic data message," which, as aforesaid, is interchangeable with "electronic document,"
could not have included facsimile transmissions, which have an original paper-based copy as
sent and a paper-based facsimile copy as received. These two copies are distinct from each
other, and have different legal effects. While Congress anticipated future developments in
communications and computer technology90 when it drafted the law, it excluded the early forms
of technology, like telegraph, telex and telecopy (except computer-generated faxes, which is a
newer development as compared to the ordinary fax machine to fax machine transmission),
when it defined the term "electronic data message."
Clearly then, the IRR went beyond the parameters of the law when it adopted verbatim the
UNCITRAL Model Law's definition of "data message," without considering the intention of
Congress when the latter deleted the phrase "but not limited to, electronic data interchange
(EDI), electronic mail, telegram, telex or telecopy." The inclusion of this phrase in the IRR
offends a basic tenet in the exercise of the rule-making power of administrative agencies. After
all, the power of administrative officials to promulgate rules in the implementation of a statute is
necessarily limited to what is found in the legislative enactment itself. The implementing rules
and regulations of a law cannot extend the law or expand its coverage, as the power to amend
or repeal a statute is vested in the Legislature.91 Thus, if a discrepancy occurs between the
basic law and an implementing rule or regulation, it is the former that prevails, because the law
cannot be broadened by a mere administrative issuance—an administrative agency certainly
cannot amend an act of Congress.92 Had the Legislature really wanted ordinary fax
transmissions to be covered by the mantle of the Electronic Commerce Act of 2000, it could
have easily lifted without a bit of tatter the entire wordings of the UNCITRAL Model Law.
Incidentally, the National Statistical Coordination Board Task Force on the Measurement of E-
Commerce,93 on November 22, 2006, recommended a working definition of "electronic
commerce," as "[a]ny commercial transaction conducted through electronic, optical and similar
medium, mode, instrumentality and technology. The transaction includes the sale or purchase of
goods and services, between individuals, households, businesses and governments conducted
over computer-mediated networks through the Internet, mobile phones, electronic data
interchange (EDI) and other channels through open and closed networks." The Task Force's
proposed definition is similar to the Organization of Economic Cooperation and Development's
(OECD's) broad definition as it covers transactions made over any network, and, in addition, it
adopted the following provisions of the OECD definition: (1) for transactions, it covers sale or
purchase of goods and services; (2) for channel/network, it considers any computer-mediated
network and NOT limited to Internet alone; (3) it excludes transactions received/placed using
fax, telephone or non-interactive mail; (4) it considers payments done online or offline; and (5) it
considers delivery made online (like downloading of purchased books, music or software
programs) or offline (deliveries of goods).94
We, therefore, conclude that the terms "electronic data message" and "electronic document," as
defined under the Electronic Commerce Act of 2000, do not include a facsimile transmission.
Accordingly, a facsimile transmissioncannot be considered as electronic evidence. It is not the
functional equivalent of an original under the Best Evidence Rule and is not admissible
as electronic evidence.
Since a facsimile transmission is not an "electronic data message" or an "electronic document,"

and cannot be considered as electronic evidence by the Court, with greater reason is a
photocopy of such a fax transmission not electronic evidence. In the present case, therefore,
Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E" and "F"),
which are mere photocopies of the original fax transmittals, are not electronic evidence,
contrary to the position of both the trial and the appellate courts.
- III -
Nevertheless, despite the pro forma invoices not being electronic evidence, this Court finds that
respondent has proven by preponderance of evidence the existence of a perfected contract of
sale.
In an action for damages due to a breach of a contract, it is essential that the claimant proves
(1) the existence of a perfected contract, (2) the breach thereof by the other contracting party
and (3) the damages which he/she sustained due to such breach. Actori incumbit onus
probandi. The burden of proof rests on the party who advances a proposition affirmatively.95 In
other words, a plaintiff in a civil action must establish his case by a preponderance of evidence,
that is, evidence that has greater weight, or is more convincing than that which is offered in
opposition to it.96
In general, contracts are perfected by mere consent,97 which is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute.98 They are, moreover, obligatory in whatever
form they may have been entered into, provided all the essential requisites for their validity are
present.99 Sale, being a consensual contract, follows the general rule that it is perfected at the
moment there is a meeting of the minds upon the thing which is the object of the contract and
upon the price. From that moment, the parties may reciprocally demand performance, subject to
the provisions of the law governing the form of contracts.100
The essential elements of a contract of sale are (1) consent or meeting of the minds, that is, to
transfer ownership in exchange for the price, (2) object certain which is the subject matter of the
contract, and (3) cause of the obligation which is established.101
In this case, to establish the existence of a perfected contract of sale between the parties,
respondent Ssangyong formally offered in evidence the testimonies of its witnesses and the
following exhibits:
Exhibit Description Purpose

E Pro forma Invoice dated 17 To show that defendants contracted
April 2000 with Contract with plaintiff for the delivery of 110 MT
No. ST2-POSTS0401- of stainless steel from Korea payable
1, photocopy by way of an irrevocable letter of credit
in favor of plaintiff, among other
conditions.
E-1 Pro forma Invoice dated 17 To show that defendants sent their
April 2000 with Contract confirmation of the (i) delivery to it of
No. ST2- the specified stainless steel products,
POSTS0401, contained in (ii) defendants' payment thereof by
facsimile/thermal paper faxed way of an irrevocable letter of credit in
by defendants to plaintiff favor of plaintiff, among other
showing the printed conditions.
transmission details on the
upper portion of said paper as
coming from defendant MCC
on 26 Apr 00 08:41AM
E-2 Conforme signature of Mr. To show that defendants sent their
Gregory Chan, contained in confirmation of the (i) delivery to it of
facsimile/thermal paper faxed the total of 220MT specified stainless
by defendants to plaintiff steel products, (ii) defendants'
showing the printed payment thereof by way of an
transmission details on the irrevocable letter of credit in favor of
upper portion of said paper as plaintiff, among other conditions.
on 26 Apr 00 08:41AM
F Pro forma Invoice dated 17 To show that defendants contracted
April 2000 with Contract with plaintiff for delivery of another 110
No. ST2-POSTSO401- MT of stainless steel from Korea
2, photocopy payable by way of an irrevocable letter
of credit in favor of plaintiff, among
other conditions.
G Letter to defendant SANYO To prove that defendants were
SEIKE dated 20 June informed of the date of L/C opening
2000, contained in and defendant's conforme/approval
facsimile/thermal paper thereof.
G-1 Signature of defendant
Gregory Chan, contained in
facsimile/thermal paper.
H Letter to defendants dated 22 To prove that defendants were
June 2000, original informed of the successful price
adjustments secured by plaintiff in
favor of former and were advised of
the schedules of its L/C opening.
I Letter to defendants dated 26 To prove that plaintiff repeatedly
June 2000, original requested defendants for the agreed
J Letter to defendants dated 26 opening of the Letters of Credit,
June 2000, original defendants' failure and refusal to
K Letter to defendants dated 27 comply with their obligations and the
June 2000, original problems of plaintiff is incurring by
L Facsimile message to reason of defendants' failure and
defendants dated 28 June refusal to open the L/Cs.
2000, photocopy
M Letter from defendants dated To prove that defendants admit of their
29 June 2000, contained in liabilities to plaintiff, that they
facsimile/thermal paper faxed requested for "more extension" of time
by defendants to plaintiff for the opening of the Letter of Credit,
showing the printed and begging for favorable
transmission details on the understanding and consideration.
on 29 June 00 11:12 AM
M-1 Signature of defendant
Gregory Chan, contained in
facsimile/thermal paper faxed
by defendants to plaintiff
showing the printed
transmission details on the
on June 00 11:12 AM
N Letter to defendants dated 29
June 2000, original
O Letter to defendants dated 30 To prove that plaintiff reiterated its
June 2000, photocopy request for defendants to L/C opening
after the latter's request for extension
of time was granted, defendants'
failure and refusal to comply therewith
extension of time notwithstanding.
P Letter to defendants dated 06
July 2000, original
Q Demand letter to defendants To prove that plaintiff was constrained
dated 15 Aug 2000, original to engaged services of a lawyer for
collection efforts.
R Demand letter to defendants To prove that defendants opened the
dated 23 Aug 2000, original first L/C in favor of plaintiff, requested
for further postponement of the final
L/C and for minimal amounts, were
urged to open the final L/C on time,
and were informed that failure to
comply will cancel the contract.
S Demand letter to defendants To show defendants' refusal and
dated 11 Sept 2000, original failure to open the final L/C on time,
the cancellation of the contract as a
consequence thereof, and final
demand upon defendants to remit its
obligations.
W Letter from plaintiff To prove that there was a perfected
SSANGYONG to defendant sale and purchase agreement
SANYO SEIKI dated 13 April between the parties for 220 metric
2000, with fax back from tons of steel products at the price of
defendants SANYO US$1,860/ton.
SEIKI/MCC to plaintiff
SSANGYONG, contained in
facsimile/thermal paper with
back-up photocopy
W-1 Conforme signature of To prove that defendants, acting
defendant Gregory Chan, through Gregory Chan, agreed to the
contained in facsimile/thermal sale and purchase of 220 metric tons
paper with back-up photocopy
of steel products at the price of
US$1,860/ton.
W-2 Name of sender MCC To prove that defendants sent their
Industrial Sales Corporation conformity to the sale and purchase
agreement by facsimile transmission.
X Pro forma Invoice dated 16 To prove that defendant MCC agreed
August 2000, photocopy to adjust and split the confirmed
purchase order into 2 shipments at
100 metric tons each at the discounted
price of US$1,700/ton.
X-1 Notation "1/2", photocopy To prove that the present Pro forma
Invoice was the first of 2 pro forma
invoices.
X-2 Ref. No. ST2-POSTS080- To prove that the present Pro
1, photocopy formaInvoice was the first of 2 pro
formainvoices.
X-3 Conforme signature of To prove that defendant MCC, acting
defendant Gregory through Gregory Chan, agreed to the
Chan, photocopy sale and purchase of the balance of
100 metric tons at the discounted price
of US$1,700/ton, apart from the other
order and shipment of 100 metric tons
which was delivered by plaintiff
SSANGYONG and paid for by
defendant MCC.
DD Letter from defendant MCC to To prove that there was a perfected
plaintiff SSANGYONG dated sale and purchase agreement
22 August 2000, contained in between plaintiff SSANGYONG and
facsimile/thermal paper with defendant MCC for the balance of 100
back-up photocopy metric tons, apart from the other order
and shipment of 100 metric tons which
was delivered by plaintiff
defendant MCC.
DD-1 Ref. No. ST2-POSTS080- To prove that there was a perfected
1, contained in sale and purchase agreement
facsimile/thermal paper with between plaintiff SSANGYONG and
back-up photocopy defendant MCC for the balance of 100
metric tons, apart from the other order
and shipment of 100 metric tons which
was delivered by plaintiff
defendant MCC.
DD-2 Signature of defendant To prove that defendant MCC, acting
Gregory Chan, contained in through Gregory Chan, agreed to the
facsimile/thermal paper with sale and purchase of the balance of
back-up photocopy 100 metric tons, apart from the other
order and shipment of 100 metric tons
which was delivered by plaintiff
Ssangyong and paid for by defendant
MCC.102
Significantly, among these documentary evidence presented by respondent, MCC, in its petition
before this Court, assails the admissibility only of Pro Forma Invoice Nos. ST2-POSTS0401-
1 and ST2-POSTS0401-2 (Exhibits "E" and "F"). After sifting through the records, the Court
found that these invoices are mere photocopies of their original fax transmittals. Ssangyong
avers that these documents were prepared after MCC asked for the splitting of the original order
into two, so that the latter can apply for an L/C with greater facility. It, however, failed to explain
why the originals of these documents were not presented.
To determine whether these documents are admissible in evidence, we apply the ordinary
Rules on Evidence, for as discussed above we cannot apply the Electronic Commerce Act of
2000 and the Rules on Electronic Evidence.
Because these documents are mere photocopies, they are simply secondary evidence,
admissible only upon compliance with Rule 130, Section 5, which states, "[w]hen the original
document has been lost or destroyed, or cannot be produced in court, the offeror, upon proof of
its execution or existence and the cause of its unavailability without bad faith on his part, may
prove its contents by a copy, or by a recital of its contents in some authentic document, or by
the testimony of witnesses in the order stated." Furthermore, the offeror of secondary evidence
must prove the predicates thereof, namely: (a) the loss or destruction of the original without bad
faith on the part of the proponent/offeror which can be shown by circumstantial evidence of
routine practices of destruction of documents; (b) the proponent must prove by a fair
preponderance of evidence as to raise a reasonable inference of the loss or destruction of the
original copy; and (c) it must be shown that a diligent and bona fide but unsuccessful search has
been made for the document in the proper place or places. It has been held that where the
missing document is the foundation of the action, more strictness in proof is required than where
the document is only collaterally involved.103
Given these norms, we find that respondent failed to prove the existence of the original fax
transmissions of Exhibits E and F, and likewise did not sufficiently prove the loss or destruction
of the originals. Thus, Exhibits E and F cannot be admitted in evidence and accorded probative
weight.
It is observed, however, that respondent Ssangyong did not rely merely on Exhibits E and F to
prove the perfected contract. It also introduced in evidence a variety of other documents, as
enumerated above, together with the testimonies of its witnesses. Notable among them are Pro
Forma Invoice Nos. ST2-POSTS080-1 and ST2-POSTS080-2 which were issued by Ssangyong
and sent via fax to MCC. As already mentioned, these invoices slightly varied the terms of the
earlier invoices such that the quantity was now officially 100MT per invoice and the price
reduced to US$1,700.00 per MT. The copies of the said August 16, 2000 invoices submitted to
the court bear the conformity signature of MCC Manager Chan.
Pro Forma Invoice No. ST2-POSTS080-1 (Exhibit "X"), however, is a mere photocopy of its
original. But then again, petitioner MCC does not assail the admissibility of this document in the
instant petition. Verily, evidence not objected to is deemed admitted and may be validly
considered by the court in arriving at its judgment.104 Issues not raised on appeal are deemed
abandoned.
As to Pro Forma Invoice No. ST2-POSTS080-2 (Exhibits "1-A" and "2-C"), which was certified
by PCIBank as a true copy of its original,105 it was, in fact, petitioner MCC which introduced this
document in evidence. Petitioner MCC paid for the order stated in this invoice. Its admissibility,
therefore, is not open to question.
These invoices (ST2-POSTS0401, ST2-POSTS080-1 and ST2-POSTS080-2), along with the

other unchallenged documentary evidence of respondent Ssangyong, preponderate in favor of
the claim that a contract of sale was perfected by the parties.
This Court also finds merit in the following observations of the trial court:
Defendants presented Letter of Credit (Exhibits "1", "1-A" to "1-R") referring to Pro
Forma Invoice for Contract No. ST2POSTS080-2, in the amount of US$170,000.00, and
which bears the signature of Gregory Chan, General Manager of MCC. Plaintiff, on the
other hand, presented Pro Forma Invoice referring to Contract No. ST2-POSTS080-1, in
the amount of US$170,000.00, which likewise bears the signature of Gregory Chan,
MCC. Plaintiff accounted for the notation "1/2" on the right upper portion of the Invoice,
that is, that it was the first of two (2) pro forma invoices covering the subject contract
between plaintiff and the defendants. Defendants, on the other hand, failed to account
for the notation "2/2" in its Pro Forma Invoice (Exhibit "1-A"). Observably further, both
Pro Forma Invoices bear the same date and details, which logically mean that they both
apply to one and the same transaction.106
Indeed, why would petitioner open an L/C for the second half of the transaction if there was no
first half to speak of?
The logical chain of events, as gleaned from the evidence of both parties, started with the
petitioner and the respondent agreeing on the sale and purchase of 220MT of stainless steel at
US$1,860.00 per MT. This initial contract was perfected. Later, as petitioner asked for several
extensions to pay, adjustments in the delivery dates, and discounts in the price as originally
agreed, the parties slightly varied the terms of their contract, without necessarily novating it, to
the effect that the original order was reduced to 200MT, split into two deliveries, and the price
discounted to US$1,700 per MT. Petitioner, however, paid only half of its obligation and failed to
open an L/C for the other 100MT. Notably, the conduct of both parties sufficiently established
the existence of a contract of sale, even if the writings of the parties, because of their contested
admissibility, were not as explicit in establishing a contract.107 Appropriate conduct by the
parties may be sufficient to establish an agreement, and while there may be instances where
the exchange of correspondence does not disclose the exact point at which the deal was
closed, the actions of the parties may indicate that a binding obligation has been undertaken.108
With our finding that there is a valid contract, it is crystal-clear that when petitioner did not open
the L/C for the first half of the transaction (100MT), despite numerous demands from
respondent Ssangyong, petitioner breached its contractual obligation. It is a well-entrenched
rule that the failure of a buyer to furnish an agreed letter of credit is a breach of the contract
between buyer and seller. Indeed, where the buyer fails to open a letter of credit as stipulated,
the seller or exporter is entitled to claim damages for such breach. Damages for failure to open
a commercial credit may, in appropriate cases, include the loss of profit which the seller would
reasonably have made had the transaction been carried out.109
- IV -
This Court, however, finds that the award of actual damages is not in accord with the evidence
on record. It is axiomatic that actual or compensatory damages cannot be presumed, but must
be proven with a reasonable degree of certainty.110 In Villafuerte v. Court of Appeals,111 we
explained that:
Actual or compensatory damages are those awarded in order to compensate a party for
an injury or loss he suffered. They arise out of a sense of natural justice and are aimed
at repairing the wrong done. Except as provided by law or by stipulation, a party is
entitled to an adequate compensation only for such pecuniary loss as he has duly
proven. It is hornbook doctrine that to be able to recover actual damages, the claimant
bears the onus of presenting before the court actual proof of the damages alleged to
have been suffered, thus:
A party is entitled to an adequate compensation for such pecuniary loss actually

suffered by him as he has duly proved. Such damages, to be recoverable, must
not only be capable of proof, but must actually be proved with a reasonable
degree of certainty. We have emphasized that these damages cannot be
presumed and courts, in making an award must point out specific facts which
could afford a basis for measuring whatever compensatory or actual damages
are borne.112
In the instant case, the trial court awarded to respondent Ssangyong US$93,493.87 as actual
damages. On appeal, the same was affirmed by the appellate court. Noticeably, however, the
trial and the appellate courts, in making the said award, relied on the following documents
submitted in evidence by the respondent: (1) Exhibit "U," the Statement of Account dated March
30, 2001; (2) Exhibit "U-1," the details of the said Statement of Account); (3) Exhibit "V," the
contract of the alleged resale of the goods to a Korean corporation; and (4) Exhibit "V-1," the
authentication of the resale contract from the Korean Embassy and certification from the
Philippine Consular Office.
The statement of account and the details of the losses sustained by respondent due to the said
breach are, at best, self-serving. It was respondent Ssangyong itself which prepared the said
documents. The items therein are not even substantiated by official receipts. In the absence of
corroborative evidence, the said statement of account is not sufficient basis to award actual
damages. The court cannot simply rely on speculation, conjecture or guesswork as to the fact
and amount of damages, but must depend on competent proof that the claimant had suffered,
and on evidence of, the actual amount thereof.113
Furthermore, the sales contract and its authentication certificates, Exhibits "V" and "V-1,"
allegedly evidencing the resale at a loss of the stainless steel subject of the parties' breached
contract, fail to convince this Court of the veracity of its contents. The steel items indicated in
the sales contract114 with a Korean corporation are different in all respects from the items
ordered by petitioner MCC, even in size and quantity. We observed the following discrepancies:
List of commodities as stated in Exhibit "V":
COMMODITY: Stainless Steel HR Sheet in Coil, Slit Edge

SPEC: SUS304 NO. 1
SIZE/Q'TY:
2.8MM X 1,219MM X C 8.193MT
3.0MM X 1,219MM X C 7.736MT
3.0MM X 1,219MM X C 7.885MT
3.0MM X 1,219MM X C 8.629MT
4.0MM X 1,219MM X C 7.307MT
4.0MM X 1,219MM X C 7.247MT
4.5MM X 1,219MM X C 8.450MT
4.5MM X 1,219MM X C 8.870MT
5.0MM X 1,219MM X C 8.391MT
6.0MM X 1,219MM X C 6.589MT
6.0MM X 1,219MM X C 7.878MT
6.0MM X 1,219MM X C 8.397MT
TOTAL: 95.562MT115
List of commodities as stated in Exhibit "X" (the invoice that was not paid):
DESCRIPTION: Hot Rolled Stainless Steel Coil SUS 304

SIZE AND QUANTITY:
2.6 MM X 4' X C 10.0MT
3.0 MM X 4' X C 25.0MT
4.0 MM X 4' X C 15.0MT
4.5 MM X 4' X C 15.0MT
5.0 MM X 4' X C 10.0MT
6.0 MM X 4' X C 25.0MT
TOTAL: 100MT116
From the foregoing, we find merit in the contention of MCC that Ssangyong did not adequately
prove that the items resold at a loss were the same items ordered by the petitioner. Therefore,
as the claim for actual damages was not proven, the Court cannot sanction the award.
Nonetheless, the Court finds that petitioner knowingly breached its contractual obligation and
obstinately refused to pay despite repeated demands from respondent. Petitioner even asked
for several extensions of time for it to make good its obligation. But in spite of respondent's
continuous accommodation, petitioner completely reneged on its contractual duty. For such
inattention and insensitivity, MCC must be held liable for nominal damages. "Nominal damages
are 'recoverable where a legal right is technically violated and must be vindicated against an
invasion that has produced no actual present loss of any kind or where there has been a breach
of contract and no substantial injury or actual damages whatsoever have been or can be
shown.'"117 Accordingly, the Court awards nominal damages of P200,000.00 to respondent
Ssangyong.
As to the award of attorney's fees, it is well settled that no premium should be placed on the
right to litigate and not every winning party is entitled to an automatic grant of attorney's fees.
The party must show that he falls under one of the instances enumerated in Article 2208 of the
Civil Code.118 In the instant case, however, the Court finds the award of attorney's fees proper,
considering that petitioner MCC's unjustified refusal to pay has compelled respondent
Ssangyong to litigate and to incur expenses to protect its rights.
WHEREFORE, PREMISES CONSIDERED, the appeal is PARTIALLY GRANTED. The

Decision of the Court of Appeals in CA-G.R. CV No. 82983 is MODIFIED in that the award of
actual damages is DELETED. However, petitioner is ORDERED to pay respondent NOMINAL
DAMAGES in the amount of P200,000.00, and the ATTORNEY'S FEES as awarded by the trial
court.
SO ORDERED.
[G.R. No. 129916. March 26, 2001.]
MAGELLAN CAPITAL MANAGEMENT CORPORATION and MAGELLAN CAPITAL

HOLDINGS CORPORATION, Petitioners, v. 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.
DECISION
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.chanroblesvirtuallawlibrary
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. 5 Nevertheless,
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:jgc:chanrobles.com.ph
"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."cralaw virtua1aw library
On November 10, 1995, respondent Zosa designated his brother, Atty. Francis Zosa, as his
representative in the arbitration panel 9 while MCHC designated Atty. Inigo S. Fojas 10 and
MCMC nominated Atty. Enrique I. Quiason 11 as 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
Cebu 12 to enforce his benefits under the Employment Agreement.
On July 3, 1996, petitioners filed a motion to dismiss 13 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.
On August 1, 1996, the RTC Branch 58 of Cebu City issued an Order denying petitioners
motion to 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, falls within the jurisdiction of the RTC. 15 Petitioners filed a motion for
reconsideration which was denied by the RTC in an order dated September 5, 1996. 16
In the interim, on August 22, 1996, in compliance with the earlier order of the court directing
petitioners to 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 had no jurisdiction over the nature of the action. 17
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:jgc:chanrobles.com.ph
"ISSUES:jgc:chanrobles.com.ph
"The Court will only resolve one issue in so far as this case is concerned, to
wit:jgc:chanrobles.com.ph
"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
damages in accordance with his complaint and the defendants in accordance with their
counterclaim.chanrob1es virtua1 1aw 1ibrary
"It is understood, that in the event the arbitration clause is valid and binding between the 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
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
Thereafter, petitioners MCMC and MCHC filed a Motion Ad Cautelam for the parties to file their
Memoranda to support their respective stand on the issue of the validity of the "arbitration
clause" contained in the Employment Agreement. In an order dated December 13, 1996, the
trial court denied the motion of petitioners MCMC and MCHC.
On January 17, 1997, petitioners MCMC and MCHC filed a petition for certiorari and prohibition
under 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
On March 21, 1997, the Court of Appeals rendered a decision, giving due course to the petition,
the decretal portion of which reads:jgc:chanrobles.com.ph
"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.
"SO ORDERED." 22
Petitioners filed a motions for partial reconsideration of the CA decision praying (1) for the
dismissal of the case in the trial court, on the ground of lack of jurisdiction, and (2) that the
parties be directed to 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 of merit.
In compliance with the CA decision, the trial court, on July 18, 1997, rendered a decision
declaring the "arbitration clause" in the Employment Agreement partially void and of no effect.
The dispositive portion of the decision reads:jgc:chanrobles.com.ph
"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
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
plaintiff and defendants. The other terms, conditions and stipulations in the arbitration clause
remain in force and effect." 23
In view of the trial court’s decision, petitioners filed this petition for review on certiorari, under
Rule 45 of the Rules of Court, assigning the following errors for the Court’s
resolution:jgc:chanrobles.com.ph
"I. The trial court gravely erred when it ruled that the arbitration clause under the employment
agreement is partially void and of no effect, considering that:jgc:chanrobles.com.ph
"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.
"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.
"C. The trial court grievously erred in its conclusion that petitioners MCMC and MCHC represent
the same interest.
"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 he himself has
invoked.
"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 v. IAC, 181 SCRA 244; Sales v.
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 v. 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:jgc:chanrobles.com.ph
"ENTRY OF JUDGMENT
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:chanrob1es virtua1
1aw 1ibrary
‘G.R. No. 129615. (Magellan Capital Management Corporation, Et. Al. v. 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:chanrob1es virtual 1aw library
‘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 Corporation shall 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].chanrob1es virtua1 1aw 1ibrary
"x x x" 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 v. 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.chanrob1es virtua1 1aw 1ibrary
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.chanrob1es virtua1 1aw 1ibrary
SECOND DIVISION
[G.R. No. 146717. November 22, 2004]
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,

AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter of
credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901
entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January
2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC)
entered into a Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun
River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given
the sole responsibility for the design, construction, commissioning, testing and completion of the
Project.[4]
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on
1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC
or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which
are variations, force majeure, and delays caused by LHC itself.[5] Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract.[6]
To secure performance of petitioners obligation on or before the target completion date, or
such time for completion as may be determined by the parties agreement, petitioner opened in
favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to
as the Securities), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited (ANZ Bank)[7] and Standby Letter
of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)[8] each in the
amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various EOT to complete
the Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of
legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request
for Arbitration, this time filed by petitioner before the International Chamber of Commerce
(ICC)[11] on 3 November 2000. In both arbitration proceedings, the common issues presented
were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to
justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate
the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract,[12] petitionerin two separate letters[13] both dated 10 August
2000advised respondent banks of the arbitration proceedings already pending before the CIAC
and ICC in connection with its alleged default in the performance of its obligations. Asserting that
LHC had no right to call on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent
banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant
to Clause 8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks informed petitioner that they would
pay on the Securities if and when LHC calls on them.[15]
LHC asserted that additional extension of time would not be warranted; accordingly it
declared petitioner in default/delay in the performance of its obligations under the Turnkey
Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay
beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the
payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
temporary restraining order and writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from transferring, paying
on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on the same day. The case was
docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until 26
November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury
to justify the issuance of the writ. Employing the principle of independent contract in letters of
credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the principle of independent contract could be
invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary
of the Securities. The trial court further ruled that the banks were mere custodians of the funds
and as such they were obligated to transfer the same to the beneficiary for as long as the latter
could submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65,
with prayer for the issuance of a temporary restraining order and writ of preliminary
injunction.[20] Petitioner submitted to the appellate court that LHCs call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by the
CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right
to draw on the Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call
on and use of the Securities as payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the face of the two Standby Letters
of Credit which both provide that the banks have no responsibility to investigate the authenticity
or accuracy of the certificates or the declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes
thereof and ordering respondent banks to cease and desist from transferring, paying or in any
manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives
of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing
the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate
court expressed conformity with the trial courts decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment that
he had not complied with the underlying contract. Further, the appellate court held that even
assuming that the trial courts denial of petitioners application for a writ of preliminary injunction
was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike
error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED

BY A BENEFICIARY THEREOF WHERE THE BENEFICIARYS CALL THEREON IS
WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONERS AND LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHCS CALL
THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN
THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN
FROM THE SECURITIES.[21]
Petitioner contends that the courts below improperly relied on the independence principle on
letters of credit when this case falls squarely within the fraud exception rule. Respondent LHC
deliberately misrepresented the supposed existence of delay despite its knowledge that the issue
was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities
pursuant to the principle against unjust enrichment and that, under the premises, injunction was
the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental
Memorandum,[23] alleging that in the course of the proceedings in the ICC Arbitration, a number
of documentary and testimonial evidence came out through the use of different modes of
discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and
admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its knowledge and admission that delays were
excused under the Turnkey Contractto be able to draw against the Securities. Reiterating that
fraud constitutes an exception to the independence principle, petitioner urges that this warrants a
ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and
basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be
allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental
pleadings filed by petitioner present erroneous and misleading information which would change
petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February
2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the
Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that
petitioners Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the
31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for
Review essentially dealt only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed
two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield Philippines Inc.
v. Luzon Hydro Corporation, in which the parties made claims and counterclaims arising from
petitioners performance/misperformance of its obligations as contractor for LHC; and (2) Civil
Case No. 04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before Branch
56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICCs partial
award mentioned in petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners
Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters
of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the
action to enforce the ICCs partial award is now fully within the Makati RTCs jurisdiction in Civil
Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this
appeal and at the same time seeking the suit for enforcement of the arbitral award before the
Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC
argues that it was under no obligation to look into the validity or accuracy of the certification
submitted by respondent LHC or into the latters capacity or entitlement to so certify. It adds that
the act sought to be enjoined by petitioner was already fait accompli and the present petition
would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHCs allegations that petitioner
defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioners prayer for preliminary injunction had been
rendered moot and academic.
At the core of the present controversy is the applicability of the independence principle and
fraud exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit,
also referred to simply as credits, would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the
minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract. Since the banks customer cannot draw
on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if
properly used, is it a contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the draft presented under it is often negotiable.[29]
In commercial transactions, a letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.[30] The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract for
the sale of goods. However, credits are also used in non-sale settings where they serve to reduce
the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as
standby credits.[31]
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The documents that accompany
the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a
commercial credit must demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not performed the contract.[32]
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee.[33] A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying contract
or disputes between the parties thereto.[34]
Since letters of credit have gained general acceptability in international trade transactions,
the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits
has undergone several revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that
the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that
in the absence of any particular provision in the Code of Commerce, commercial transactions
shall be governed by usages and customs generally observed. More recently, in Bank of America,
NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of credit, not only between
or among banks themselves but also between banks and the seller or the buyer, as the case may
be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with
or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in
the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the
applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary
can in no case avail himself of the contractual relationships existing between the banks or
between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called independence principle
assures the seller or the beneficiary of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor do
they assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents, or for the good
faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in toto where the
credit is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit,
LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the credit are
complied with.[41] Precisely, the independence principle liberates the issuing bank from the duty
of ascertaining compliance by the parties in the main contract. As the principles nomenclature
clearly suggests, the obligation under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and distinct from the underlying
transaction.
Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that
may invoke the independence principle on letters of creditdoes not impress this Court. To say that
the independence principle may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and obtained
it may confidently present the letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the other hand, the other party to the
business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the commercial transaction does
not push through, or the applicant fails to perform his part of the transaction. It is for this reason
that the party who is entitled to the proceeds of the letter of credit is appropriately called
beneficiary.
Petitioners argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement of a dispute between
the parties is not a pre-requisite for the release of funds under a letter of credit. In other words,
the argument is incompatible with the very nature of the letter of credit. If a letter of credit is
drawable only after settlement of the dispute on the contract entered into by the applicant and the
beneficiary, there would be no practical and beneficial use for letters of credit in commercial
transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the
issue:
The standby credit is an attractive commercial device for many of the same reasons that
commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often
they replace surety contracts, which tend to generate higher costs than credits do and are
usually triggered by a factual determination rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on
the one hand and the standby credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share a common purpose. Both
ensure against the obligors nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors
performance, usually by hiring someone to complete that performance. Surety contracts, then,
often involve costs of determining whether the obligor defaulted (a matter over which the surety
and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract
to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong
financial institution that will perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes lengthy and costly determination
that the obligor has defaulted. In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash
in the event of nonperformance, that he will receive it promptly, and that he will receive it before
any litigation with the obligor (the applicant) over the nature of the applicants performance takes
place. The standby credit has this opposite effect of the surety contract: it reverses the financial
burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligors performance. The beneficiary may have to establish that fact
in litigation. During the litigation, the surety holds the money and the beneficiary bears most of
the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives
his money promptly upon presentation of the required documents. It may be that the applicant
has, in fact, performed and that the beneficiarys presentation of those documents is not rightful.
In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty;
but, during the litigation to determine whether the applicant has in fact breached the obligation
to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit
and courts construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and standby
credits and to reallocate burdens by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right
to ask the bank to honor the credit by allowing him to draw thereon. The situation itself
emasculates petitioners posture that LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the banks concerned were impleaded as parties
by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of
the amounts due under the Securities. Owing to the nature and purpose of the standby letters of
credit, this Court rules that the respondent banks were left with little or no alternative but to honor
the credit and both of them in fact submitted that it was ministerial for them to honor the call for
payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at
its cost shall on the Commencement Date provide security to the Employer in the form of two
irrevocable and confirmed standby letters of credit (the Securities), each in the amount of
US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the
Employer. Each of the Securities must be in form and substance acceptable to the Employer
and may be provided on an annually renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer
by way of liquidated damages (Liquidated Damages for Delay) the amount of US$75,000 for
each and every day or part of a day that shall elapse between the Target Completion Date and
the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor
shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the following day without need of
demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount
of such damages from any monies due, or to become due to the Contractor and/or by drawing
on the Security.[45]
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the
intention of the parties to make the Securities answerable for the liquidated damages occasioned
by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy
on the part of LHC, is certainly an alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus, even without the use of the
independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the
Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities
is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a
breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral
tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of drawing
on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or
by implication, material representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principles purpose, which
is to serve the commercial function of the credit. If it does not serve those functions, application
of the principle is not warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To
be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch
issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to
the terms embodied in their agreement.[47]
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment. [48] The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:
(a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously
damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious by the ICC, then LHC would not
be entitled to any liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of ones substantive right or
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main
suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to
secure the rights of a party in a pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this discretion should be exercised based
upon the grounds and in the manner provided by law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to be
directed are violative of the said right.[52] It must be shown that the invasion of the right sought to
be protected is material and substantial, that the right of complainant is clear and unmistakable
and that there is an urgent and paramount necessity for the writ to prevent serious
damage.[53] Moreover, an injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any standard
compensation.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable right to
restrain LHCs call on the Securities which would justify the issuance of preliminary injunction. By
petitioners own admission, the right of LHC to call on the Securities was contractually rooted and
subject to the express stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is
plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case
of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the
Securities, stating the nature of the default for which the claim on any of the Securities is to be
made, provided that no notice will be required if the Employer calls upon any of the Securities
for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or
extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount
of such damages from any monies due, or to become due, to the Contractor and/or by drawing
on the Security.[57]
The pendency of the arbitration proceedings would not per se make LHCs draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that
the parties intended that all disputes regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and
CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate
court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
injunction.[58] What petitioner did assert before the courts below was the fact that LHCs draws on
the Securities would be premature and without basis in view of the pending disputes between
them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule
to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not
brought out in the proceedings below will ordinarily not be considered by a reviewing court as they
cannot be raised for the first time on appeal.[59] The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner
utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the
Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues
before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated,
the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights
in accordance with the tenor thereof. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith. [60] More importantly,
pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil
Code,[61] petitioner could have incorporated in its Contract with LHC, a proviso that only the final
determination by the arbitral tribunals that default had occurred would justify the enforcement of
the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its
inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence
principle the banks were under no obligation to determine the veracity of LHCs certification that
default has occurred. Neither were they bound by petitioners declaration that LHCs call thereon
was wrongful. To repeat, respondent banks undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs
draws upon the Securities were wrongful due to the non-existence of the fact of default, its right
to seek indemnification for damages it suffered would not normally be foreclosed pursuant to
general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the
subject letters of credit had been fully drawn. This fact alone would have been sufficient reason
to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have
already become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post
Manila, Inc.[64] this Court ruled that where the period within which the former employees were
prohibited from engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any declaration upholding the
propriety of the writ would be entirely useless as there would be no actual case or controversy
between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition mootfor any declaration by this Court as to propriety or impropriety of the non-
issuance of injunctive relief could have no practical effect on the existing controversy.[65] The other
issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully
drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestationdated 29 June 2004[66] LHC alleges that petitioner
presented before this Court the same claim for money which it has filed in two other proceedings,
to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC
argues that petitioners acts constitutes forum-shopping which should be punished by the
dismissal of the claim in both forums. Second, in its Comment to Petitioners Motion for Leave to
File Addendum to Petitioners Memorandum dated 8 October 2004, LHC alleges that by
maintaining the present appeal and at the same time pursuing Civil Case No. 04-332wherein
petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities
should be returnedpetitioner resorted to forum-shopping. In both instances, however, petitioner
has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded on
the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court.[67] It may also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another forum other
than by appeal or special civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or the other court might
look with favor upon the other party.[68] To determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements of litis pendentia are present or whether
a final judgment in one case will amount to res judicata in another.[69] Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the multiple petitions and
direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until
after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Supreme Court upholds validity of lease contracts over donated land

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Supreme Court upholds validity of lease contracts over donated land

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Republic of the Philippines

G.R. No. 198075 September 4, 2013

KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the

The Lease and the Amended Deed of Donation

2000 Lease Contract

2005 Lease Contract

The Assignment and Petitioner’s Refusal to Pay

The Demand Letters

On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement

The Ejectment Suit

Rulings of the MeTC, RTC and Court of Appeals

WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement

(4) and costs of suit.

The ruling of the RTC is premised on the following ratiocinations:

1. The respondent had adequately complied with the requirement of demand as a

Aggrieved, the petitioner appealed to the Court of Appeals.

Hence, this appeal.

For this reason, We grant the petition.

Present Dispute is Arbitrable Under the

Challenges Against the Application of the

1. The disagreement between the petitioner and respondent is non-arbitrable as it will

4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR)

None of the arguments have any merit.

Under the doctrine of separability, an arbitration agreement is considered as independent of the

Section 24 of R.A. No. 9285 reads:

RULE 4: REFERRAL TO ADR

Legal Effect of the Application of the

R.A. No. 9285

Civil Case No. CV 09-0346

WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.

4. REFERRING the petitioner and the respondent to arbitration pursuant to the

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,

VILLARAMA, JR., J.:

III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

3) The additional accomplishment of SSB, reflected in its reconciled and consolidated

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-

a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the rate

b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at the rate

2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, which is

The dispositive portion of the CA Decision reads:

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL

We reverse the CA.

Article 1169 of the Civil Code provides:

The Construction Agreement provides in Article 10 thereof the following conditions as to

April 30, 2008

Attention : Mr. Martin Mabunay

Dear Mr. Mabunay:

Very truly yours,

Engr. Sheila N. Botardo

October 15, 2008

Dear Mr. Mabunay,

We would highly appreciate your usual attention on this matter.

Dear Mr. Mabunay,

Dear Mr. Mabunay,

ARTICLE 12 – LIQUIDATED DAMAGES:

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

A stipulation for liquidated damages is attached to an obligation in order to ensure performance

ARTICLE 13 – DEFAULT OF CONTRACTOR: