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. 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 labormanagement 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 employeremployee 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 law were 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; 3. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss due to delayed payment of progress billings; 4. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss of productivity due to the cement crisis; 5. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for losses allegedly sustained on account of the failed coup d'tat; 6. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the alleged unpaid billings of Chung Fu;

7. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the alleged extended overhead expenses; 8. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing expenses for change order for site development outside the area of responsibility of Roblecor; 9. The Honorable Arbitrator committed grave error in granting to Roblecor the 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.

G.R. No. 1085 May 16, 1903 RUDOLPH WAHL, JR., AND Dr. KURT WAHL, partners in the business firm of Rudolph Wahl and Co., plaintiffsappellants, vs. DONALDSON, SIMS & CO., defendants-appellees. Gibbs and Kincaid for appellants. Simplicio del Rosario for appellees. COOPER, J.: This is an action brought by Rudolph Wahl & Co., vs. Donaldson, Sims and Co., based upon a contract by which the plaintiffs leased to the defendants a certain ship called Petrarch for the term of six months, under which contract the plaintiffs claimed that the defendants were indebted to them a balance of $25,484.38, with interest from the 30th day of July, 1901. Suit was instituted on the 4th day of March, 1902, and service of citation was had upon the defendants on the same day. The defendants failed to answer the complaint, and on the 18th day of April, 1902, judgment was rendered by default against the defendants in favor of the plaintiffs for the sum of $17,892.81.

Afterwards, on the 10th day of June, 1902, the defendants made an application to the Court of First Instance for a new trial, under section 113 of the Code of Civil Procedure, 1901. This motion for a new trial was granted by the Court of First Instance, and the judgment by default against the defendants was set aside on the 20th day of June, 1902. After the granting of the motion for a new trial a demurrer was made by the defendants to the complaint which presented the question of the competency of the Court of First Instance to try the case. The objection was based upon the grounds that there was a provision contained in the contract to the following effect: If there should arise any difference of opinion between the parties to the contract, whether it may be with reference to the principal matter or in any detail, this difference shall be referred for arbitration to two competent persons in Hongkong, one of which shall be selected by each of the contracting parties, with the power to call in a third party in the event of a disagreement; the majority of the opinions will be final and obligatory to the end of compelling any payment. This award may be made a rule of the court. The question presented for our determination is whether a provision of this character is invalid as being against public policy. Agreements to refer matters in dispute to arbitration have been regarded generally as attempts to oust the jurisdiction of the court, and are not enforced. The rule is thus stated in Clark on Contracts, page 432:

A condition in a contract that disputes arising out of it shall be referred to arbitration is good where the amount of damages sustained by a breach of the contract is to be ascertained by specified arbitration before any right of action arises, but that it is illegal where all the matters in dispute of whatever sort may be referred to arbitrators and to them alone. In the first case a condition precedent to the accrual of a right of action is imposed, while in the second it is attempted to prevent any right of action accruing at all, and this can not be permitted. This seems to be the general rule in the United States, and we understand that in the civil law it is also the rule that, where there is a stipulation that all matters in dispute are to be referred to arbitrators and to them alone, such stipulation is contrary to public policy. We reach the conclusion that the Court of First Instance should have entertained jurisdiction in this case, notwithstanding the clause providing for arbitration above referred to. With regard to the sufficiency of the motion to set aside the judgment by default and the order of the court in granting the same, the majority of this court are of the opinion that there was no error in the action of the court. In this the writer does not concur. The application of the defendants, upon which the judgment was set aside, appears to be defective and not sufficient to have justified the setting aside of the judgment by default.

There was no excuse whatever shown why the defendants failed to answer within the time prescribed by law. The citation was served upon the defendants on the 4th day of March, and the judgment by default was not taken until the 18th day of April, 1902. The application was based upon section 113 of the Code of Civil Procedure, 1901, which reads as follows: Upon such terms as may be just the court may relieve a party or his legal representative from a judgment, order, or other proceeding taken against him through his mistake, inadventure, surprise, or excusable neglect: Provided, That application therefor be made within a reasonable time, but in no case exceeding six months after such judgment, order, or proceedings was taken. This seems to be a literal copy of section 473 of the Civil Code of Procedure of California, and, according to the wellknown rule of construction, the decisions of the court of California, made prior to the adoption of the statute here, should have the same weight that such decisions would have in California. Under the construction by the supreme court of California of the section in question, it is stated that the application should show merits, and that this should be done with some degree of certainty and not left to surmise. In the case of Taylor vs. Randall (5 Cal., 80) an affidavit had been made to the effect that an instrument had been materially altered without showing in any manner in what the alteration consisted. It was held that this furnished no

grounds on which to base a motion to set aside the judgment. It is said in the case of Bailey vs. Taffe (29 Cal., 422) that the better practice is to prepare and exhibit to the court the defendant's answer at the hearing of the motion. It is also held in the case of Reidy vs. Scott (53 Cal., 73) that there where the affidavit shows that the defense rests upon matters which would be deemed to be waived except for the interposition of a demurrer, the defense is merely of a technical character and the affidavit is insufficient. The affidavit in this case states in a general way that the defendants have a counterclaim against the plaintiffs for $125,000, based upon the failure on the part of the plaintiffs to perform the contract with regard to the Petrarch. This statement is too vague and uncertain to show merits in the defense. After the application to set aside the judgment had been granted, instead of presenting this defense, a demurrer is presented to the petition, based upon the purely technical grounds that under the contract the parties had agreed to settle the matters in dispute by arbitration at Hongkong. If the answer had been prepared by the defendants and presented to the Court of First Instance at the time of the granting of the order, the Court of First Instance must have concluded that the defense was based upon a technicality and the application must have been overruled. But, as stated before, this view is not concurred in by the majority of the court.

The judgment of the court is sustaining the demurrer to the complaint and in holding that the Court of First Instance did not have jurisdiction on account of the clause with reference to arbitration, was erroneous, and it will be set aside and a new trial had. The costs of this appeal is adjudged against the appellees, the defendants. It is so ordered and adjudged.
G.R. No. L-16398 December 14, 1921 A. CHAN LINTE, plaintiff-appellant, vs. LAW UNION AND ROCK INSURANCE CO., LTD., defendant-appellee. A. CHAN LINTE, plaintiff-appellant, vs. TOKYO MARINE INSURANCE CO., LTD., defendant-appellee. A. CHAN LINTE, plaintiff-appellant, vs. THE CHINE FIRE INSURANCE CO., LTD., defendant-appellee. Crossfield & O'Brien for appellant. Fisher & DeWitt for appellees. JOHNS, J.: The plaintiff is a resident adult of the Philippine Islands, and the defendants are fire insurance companies duly licensed to do business here. Plaintiff alleges that he was the owner of 30,992.50 kilos of hemp stored in the warehouse in Calbayog, Province of Samar, Philippine Islands, which on the 25 of March, 1916, he requested the defendant Law Union and Rock Insurance Co., Ltd., to insure against loss by fire in the sum of P5,000, and upon the date it issued its policy No. 1,787,379 in favor of the plaintiff against such loss until 4 o'clock p.m., of the 22nd of March, 1917, and that the policy was delivered to the plaintiff in consideration of which he paid the company a premium of P87.50. that in consideration of other previous payments, the policy was renewed from time to time and continued in force and effect to and including March 22, 1919; that during the life of the policy the hemp was destroyed by fire in the bodega where it was insured; that

its value was P21,296.27; that he at once notified the defendant of the loss, and in all other respects complied with the terms and conditions of the policy, and made a demand for the payment of the full amount of the insurance. That defendant refused and still refuses to pay the same or any part thereof, and plaintiff prays for judgment for P5,000, with interest and costs. In his amended complaint he alleges that after the commencement of the action, the defendant requested that its liability should be submitted to arbitration, in accord with the provisions of the policy, and that "plaintiff acceded to the requirement made by said defendant as aforesaid, but not that the award of arbitration should be conclusive or final, or deprive the courts of jurisdiction, and by agreement of both plaintiff and defendant Frank B. Ingersoll was named sole arbitrator, and both parties informally presented evidence before him and he made return of arbitration to the effect that said plaintiff had only seven bales of hemp destroyed in the fire of April 10, 1918, as hereinbefore set forth, with which return the said plaintiff is dissatisfied, and comes to this court for proper action under this amended complaint." For answer the defendant alleges that, claiming a loss under the policy, the plaintiff made a claim against the defendant for P5,000, that a difference arose between them as to the amount of the alleged loss, and that, under the terms of the policy, an arbitrator was agreed upon and selected by the mutual consent of both parties, for the purpose of deciding the alleged difference; that on December 28, 1918, the arbitrator found that only seven bales of hemp of the grade "ovillo" were destroyed. For supplemental answer to the amended complaint, the defendant further alleges that on July 8, 1919, the arbitrator filed a supplemental report and award wherein he finds from the evidence submitted that the local value of the seven bales of plaintiff's hemp destroyed by fire on April 10, 1918, was P608.34; that in addition to the defendant's policy, the same property was covered by two other fire insurance polices, by each of which the property in question was insured to the value of P5,000 against the loss; that defendant has offered and is now willing to pay plaintiff its one-third of the loss in full satisfaction of its liability.

The other insurance companies are Tokyo Marine Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd., defendants and appellees. After the filing of the amended complaint, both parties agreed upon Frank B. Ingersoll as arbitrator, and submitted to him the evidence pro and con. His first finding was

made on December 28, 1918, and on July 8, 1919, he filed a supplemental report in which he found the value of the property destroyed to be P608.34. It was stipulated "that the arbitration clauses of the policies of insurance issued by the Law Union and Rock Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd., are in terms as follows, to wit: "If any difference arises as to the amount of any loss or damage, such difference shall independently of all other questions be referred to the decision of an arbitrator, to be appointed in writing by the parties in difference, or, if they cannot agree upon a single arbitrator, to the decision of two disinterested persons as arbitrators, of whom one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party. In case either party shall refuse or fail to appoint an arbitrator within two calendar months after receipt of notice in writing requiring appointment, the other party shall be at liberty to appoint a sole arbitrator; and in case of disagreement between the arbitrators, the difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings. The death of any party shall not revoke or affect the authority or powers of the arbitrator, arbitrators or umpire respectively; and in the event of the death of an arbitrator or umpire, another shall in each case be appointed in his stead by the party or arbitrators (as the case may be), by whom the arbitrator or umpire so dying was appointed. The costs of the reference and of the award shall be in the discretion of the arbitrator, arbitrators or umpire making the award. And it is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator, arbitrators or umpire of the amount of the loss or damage if disputed shall be first obtained." That the arbitration clause in the policy issued by the Tokyo Marine Insurance Company, Limited, is as follows, to wit: If any difference shall arise with respect to any claim for loss or damage by fire and no fraud be suspected, and the Company does not elect to rebuild, repair, reinstate or replace same, such difference shall be submitted to arbitrators, indifferently chosen, whose award, or that of their umpire, shall be conclusive.

Any liability arising out of the fire should be borne by the defendants in equal parts; that each of them has offered in writing to pay the plaintiff its one-third of the amount of the plaintiff's loss, as ascertained by the arbitrator. It is understood that in making this stipulation plaintiff shall not be deemed to have waived his right to contend, as a matter of law or fact, that the award of the arbitrator is not conclusive upon him and that the arbitrator was without authority to supplement or amend his findings after having once rendered decision; and that defendants have not waived their right to contend that such arbitration is conclusive, and that no evidence of the amount of the loss alleged to have been suffered by plaintiff should be considered, but that his right to recover is limited to the amount of damage found by the arbitrator to have been suffered by him. On November 6, 1919, "it is hereby stipulated and agreed that the above entitled causes be and they are hereby submitted to the court upon the evidence taken at the trial and the depositions taken in Samar before the justice of the peace of the municipality of Calbayog, and by him transmitted to the clerk of this court; provided, that nothing herein contained shall be construed as a waiver of the contention of defendants that the award of the arbitrator is conclusive, and that no evidence of the amount of the loss other than such award should be considered." After the testimony was taken, the trial court rendered judgment against each of the defendants for P202.78, and that plaintiff should pay the costs of the action, from which he appealed, claiming that the court erred in holding that the decision of the arbitrator is conclusive or in any way binding on the plaintiff; that the arbitrator's decision is in the main supported by the evidence; and that it erred in not awarding judgment for the plaintiff, is prayed for in his complaint. It will be noted that the policies of the Law Union and Rock Insurance Co., Ltd., and The Chine Fire Insurance Co., Ltd., provide for arbitration and expressly stipulated "that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator, arbitrators or umpire of the amount of the loss or damage if disputed shall be first obtained," and that the action was brought without making any effort to adjust the loss by arbitration. The policy of Tokyo Marine Insurance Co., Ltd., provides that in the event of a different it "shall be submitted to arbitrators, indifferently chosen, whose award, or that of their umpire, shall be conclusive." After the action was brought, and upon the request of the defendant, an arbitrator was chosen to whom the evidence of the loss was submitted. On December 28, 1918, he found that only seven bales of hemp of the grade "ovillo" were destroyed, but did not

then make any finding as to its value. July 8, 1919, he made and filed a supplemental report in which he found that the value of the hemp destroyed by the fire of April 10, 1918, was P608.34. The plaintiff contends; First, that the arbitration clauses are null and void as against public policy; second, that the award of the arbitrator of December 28, 1918, without finding the value of the property destroyed, was final, and that on July 8, 1919, he had no authority to make a supplemental finding as to the value of the property; and, third, that upon the evidence the court should have found for the plaintiff. Upon the first point he cites the case of Wahl and Wahl vs. Donaldson, Sims and Co. (2 Phil., 301), which apparently sustains his contention. That case holds that "a clause in a contract providing that all matters in dispute between the parties shall be referred to arbitrators and to them alone is contrary to public policy and cannot oust the courts of jurisdiction." In Chang vs. Royal Exchange Assurance Corporation of London (8 Phil., 399), agreement was very similar to the one here with the two defendants above quoted, and it was there held that such a condition for arbitration is valid, and that, unless there was an effort to comply, no action could be maintained. In Allen vs. Province of Tayabas (38 Phil., 356), it is said: . . . It would be highly improper for courts out of untoward jealousy to annul laws or agreements which seek to oust the courts of their jurisdiction. . . . Unless the agreement is such as absolutely to close the doors of the courts against the parties, which agreement would be void. (Wahl and Wahl vs. Donaldson, Sims and Co. [1903], 2 Phil., 301), 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. . . . In the instant case, it will be noted that sometime after the action was commenced and upon the request of the defendants, the plaintiff agreed to arbitrate under the terms and provisions of the policies; that the parties mutually agreed upon an arbitrator; and that each appeared before him and offered his or its evidence upon the questions in dispute. There is no claim or pretense that the proceedings were not honestly and fairly conducted. Having formally agreed and submitted to an arbitration after the action was commenced, it may well be doubted whether the plaintiff can at this time question the validity of the proceedings, except upon the ground of fraud or mistake. Ruling Case Law, vol. 2, p. 359, says that when the subject-matter of a pending suit is submitted to arbitration without rule of court "there is a conflict among the authorities as to whether or not the mere submission effects a discontinuance of the action. The

majority rule is that the parties themselves show an intent to discontinue the pending suit by substituting another tribunal, so that a submission furnishes ground for a discontinuance." On page 352 of the same volume, it is said: Arbitration as a method of settling disputes and controversies is recognized at common law. The award of the arbitrators is binding on the parties, but, in the absence of statute, the successful party can only enforce his rights thereunder by a suit at law. Thus the only gain by a common law arbitration is the substitution of the definite findings of the award as the basis of a suit, in the place of the former unsettled rights of the parties. In an action on the award the award itself is conclusive evidence of all matters therein contained, provided the arbitrators have not exceeded the powers delegated to them by the agreement of submission. The courts regard matters submitted as concluded by the award, and in an action thereon they will not review the merits of the arbitrators' findings. Corpus Juris, vol. 5, p. 16, says: The statement of controversies by arbitration is an ancient practice at common law. In its broad sense it is a substitution, by consent of parties, of another tribunal for the tribunals provided by the ordinary processes of law; a domestic tribunal, as contradistinguished from a regularly organized court proceeding according to the course of the common law, depending upon the voluntary act of the parties disputant in the selection of judges of their own choice. Its object is the final disposition, in a speedy and inexpensive way, of the matters involved, so that they may not become the subject of future litigation between the parties. On page 20, it is said: APPROVED METHOD OF SETTLEMENT; FAVORED BY CONSTRUCTION. Although arbitration was recognized at the common law as a mode of adjusting matters in dispute, especially such as concerned personal chattels and personal wrongs, yet, from efforts perceptible in the earlier cases to construe arbitration proceedings and awards so as to defeat them, it would seem that they were not originally favored by the courts. This hostility, however, has long since disappeared, and, by reason of the fact that the proceeding represents a method of the parties' own choice and furnishes a more expeditious and less

expensive means of settling controversies than the ordinary course of regular judicial proceedings, it is the policy of the law to favor arbitration. Therefore every reasonable intendment will be indulged to give effect to such proceedings, and in favor of the regularity and integrity of the arbitrators' acts. On page 43, it is said: Where a contract contains a stipulation, not that all questions arising thereunder, whether as to the validity or effect of such contract, or otherwise, shall be submitted to arbitration, but that the decision of arbitrators on a certain question or questions, such as the quantity, quality, or price of materials or workmanship, the value of work, the amount of loss or damage, or the like, shall be a condition precedent to the right of action on the contract itself, no fixed sum being stated in the contract, such stipulation will be enforced, because the parties to a contract have a right to adopt whatever method they see fit for determining such questions, and until the method adopted has been pursued, or some sufficient reason given for not pursuing it, no action can be brought on the contract. "Freedom to contract for arbitration to this extent," it has been said, "imports no invasion of the province of the courts, and there is no ground upon which a right so essential to the convenient transaction of modern business affairs can be denied," nor is such agreement objectionable as being against public policy. In order to give effect to such an agreement it must of course appear that the matter proposed to be referred is a difference, within the meaning of the agreement. In the instant case, there was no dispute about the policy of insurance or the fire. The only real difference was the amount of the loss which plaintiff sustained, and that was the only question submitted to arbitration. In December, the arbitrator found the amount of plaintiff's hemp which was destroyed, but did not find its value. Hence the award on the question submitted was not complete or final. In the finding of the actual value of the hemp, there was no change or revision of any previous finding. It was simply the completion by the arbitrator of an unfinished work. No formal notice was served on the arbitrator, and he was not removed or discharged, and until such time as his duties were fully performed, or he was discharged, he would have the legal right to complete his award. The plaintiff, having agreed to arbitration after the action was commenced and submitted his proof to the arbitrator, in the absence of fraud or mistake, is estopped and bound by the award. Where a plaintiff has commenced an action to recover upon an insurance policy, and then voluntarily submits the amount of his loss to arbitration, he cannot ignore or nullify the award and treat it as void upon the ground that he is dissatisfied with the decision.

Judgment is affirmed, with costs to the appellee. So ordered.

FIESTA WORLD MALL CORPORATION, Petitioner,

G.R. NO. 152471 Present: PUNO, J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, * AZCUNA, and GARCIA, JJ. Promulgated: August 18, 2006

- versus -

LINBERG PHILIPPINES, INC., Respondent.

x---------------------------------------------------------------------------------------------x DECISION

SANDOVAL-GUTIERREZ, J.: For our resolution is the instant Petition for Review on Certiorari1[1] assailing the Decision2[2] dated December 12, 2001 and Resolution3[3] dated February 28, 2002 rendered by the Court of Appeals in CA-G.R. SP No. 63671, entitled Fiesta World Mall Corporation, petitioner, versus Hon. Florito S. Macalino, Presiding Judge of the Regional Trial Court (RTC), Branch 267, Pasig City, and Linberg Philippines, Inc., respondents. The facts of this case are:

Fiesta World Mall Corporation, petitioner, owns and operates Fiesta World Mall located at Barangay Maraouy, Lipa City; while Linberg Philippines, Inc., respondent, is a corporation that builds and operates power plants.

On January 19, 2000, respondent filed with the Regional Trial Court (RTC), Branch 267, Pasig City, a Complaint for Sum of Money against petitioner, docketed as Civil Case No. 67755. The complaint alleges that on November 12, 1997, petitioner and respondent executed a build-own-operate agreement, entitled Contract Agreement for Power Supply Services, 3.8 MW Base Load Power Plant4[4] (the Contract). Under this Contract, respondent will construct, at its own cost, and operate as owner a power plant, and to supply petitioner power/electricity
1

at its shopping mall in Lipa City. Petitioner, on the other hand, will pay respondent energy fees to be computed in accordance with the Seventh Schedule of the Contract, the pertinent portions of which provide:
2.1 E1 E2 Where: E1 & E2 Energy fees in pesos for the billing period. Where E1 is based on the minimum energy off-take of 988,888 kw-hrs. per month and E2 is based on the actual meter reading less the minimum off-take. xxx 988,888 kw-hr x BER (ED-988,888) x BER

BER Base energy rate at Ps 2.30/Kw-Hr billing rate based on the exchange rate of Ps 26.20 to the US dollar, and with fuel oil to be supplied by LINBERG at its own cost. The base energy rate is subject to exchange rate adjustment accordingly to the formula as follows: BER 0.6426 + 0.3224 Pn + 1.345 Fn 26.40 4.00 WHERE: Pn is defined as the average of the Bangko Sentral ng Pilipinas published dealing rates for thirty (30) trading days immediately prior to the new billing rate. Weighted average of fuel price per liter based on the average of the last three (3) purchases made by LINBERG as evidenced by purchase invoices. Energy delivered in kw-hrs per meter reading. Minimum Energy Off-Take

Fn

ED 3.

The energy fees payable to LINBERG shall be on the basis of actual KWH generated by the plant. However, if the actual KWH generated is less than the minimum energy off-take level, the calculation of the energy fees shall be made as if LINBERG has generated the minimum energy off-take level

of 988,888 KW-HR per month.

The complaint further alleges that respondent constructed the power plant in Lipa City at a cost of about P130,000,000.00. In November 1997, the power plant became operational and started supplying power/electricity to petitioners shopping mall in Lipa City. In December 1997, respondent started billing petitioner. As of May 21, 1999, petitioners unpaid obligation amounted to P15,241,747.58, exclusive of interest. However, petitioner questioned the said amount and refused to pay despite respondents repeated demands.

In its Answer with Compulsory Counterclaim, petitioner specifically denied the allegations in the complaint, claiming that respondent failed to fulfill its obligations under the Contract by failing to supply all its power/fuel needs. From November 10, 1998 until May 21, 1999, petitioner personally shouldered the cost of fuel. Petitioner also disputed the amount of energy fees specified in the billings made by respondent because the latter failed to monitor, measure, and record the quantities of electricity delivered by taking photographs of the electricity meter reading prior to the issuance of its invoices and billings, also in violation of the Contract.5[5] Moreover, in the computation of the electrical billings, the minimum off-take of energy (E2) was based solely on the projected consumption as computed by respondent. However, based on petitioners actual experience, it could not consume the energy pursuant to the minimum off-take even if it kept open all its lights and operated all its machinery and equipment for twenty-four hours a day for a month. This fact was admitted by respondent. While both parties had discussions on the questioned billings,
5

however, there were no earnest efforts to resolve the differences in accordance with the arbitration clause provided for in the Contract.

Finally, as a special affirmative defense in its answer, petitioner alleged that respondents filing of the complaint is premature and should be dismissed on the ground of non-compliance with paragraph 7.4 of the Contract which provides:
7.4 Disputes

If FIESTA WORLD disputes the amount specified by any invoice, it shall pay the undisputed amount on or before such date(s), and the disputed amount shall be resolved by arbitration of three (3) persons, one (1) by mutual choice, while the other two (2) to be each chosen by the parties themselves, within fourteen (14) days after the due date for such invoice and all or any part of the disputed amount paid to LINBERG shall be paid together with interest pursuant to Article XXV from the due date of the invoice. It is agreed, however, that both parties must resolve the disputes within thirty (30) days, otherwise any delay in payment resulting to loss to LINBERG when converted to $US as a result of depreciation of the Pesos shall be for the account of FIESTA WORLD. Corollarily, in case of erroneous billings, however, LINBERG shall be liable to pay FIESTA WORLD for the cost of such deterioration, plus interest computed pursuant to Art. XXV from the date FIESTA WORLD paid for the erroneous billing. (Underscoring supplied)

Thereafter, petitioner filed a Motion to Set Case for Preliminary Hearing on the ground that respondent violated the arbitration clause provided in the Contract, thereby rendering its cause of action premature.

This was opposed by respondent, claiming that paragraph 7.4 of the Contract on arbitration is not the provision applicable to this case; and that since the parties failed to settle their dispute, then respondent may resort to court action pursuant to paragraph 17.2 of the same Contract which provides:

17.2

Amicable Settlement The parties hereto agree that in the event there is any dispute or difference between them arising out of this Agreement or in the interpretation of any of the provisions hereto, they shall endeavor to meet together in an effort to resolve such dispute by discussion between them but failing such resolution the Chief Executives of LINBERG and FIESTA WORLD shall meet to resolve such dispute or difference and the joint decision of such shall be binding upon the parties hereto, and in the event that a settlement of any such dispute or difference is not reached, then the provisions of Article XXI shall apply.

Article XXI, referred to in paragraph 17.2 above, reads:

ARTICLE XXI JURISDICTION The parties hereto submit to the exclusive jurisdiction of the proper courts of Pasig City, Republic of the Philippines for the hearing and determination of any action or proceeding arising out of or in connection with this Agreement.

In its Order dated October 3, 2000, the trial court denied petitioners motion for lack of merit.

Petitioner then filed a Motion for Reconsideration but it was denied in an Order dated January 11, 2001. Dissatisfied, petitioner elevated the matter to the Court of Appeals via a Petition for Certiorari, docketed as CA-G.R. SP No. 63671. On December 12, 2001, the appellate court rendered its Decision dismissing the petition and affirming the challenged Orders of the trial court.

Petitioners Motion for Reconsideration of the above Decision was likewise denied by the appellate court in its Resolution6[6] dated February 28, 2002.

Hence, the instant Petition for Review on Certiorari.

The sole issue for our resolution is whether the filing with the trial court of respondents complaint is premature.

Paragraph 7.4 of the Contract, quoted earlier, mandates that should petitioner dispute any amount of energy fees in the invoice and billings made by respondent, the same shall be resolved by arbitration of three (3) persons, one (1) by mutual choice, while the other two (2) to be each chosen by the parties themselves. The parties, in incorporating such agreement in their Contract, expressly intended that the said matter in dispute must first be resolved by an arbitration panel before it reaches the court. They made such arbitration mandatory.

It is clear from the records that petitioner disputed the amount of energy fees demanded by respondent. However, respondent, without prior recourse to arbitration as required in the Contract, filed directly with the trial court its complaint, thus violating the arbitration clause in the Contract. It bears stressing that such arbitration agreement is the law between the
6

parties. Since that agreement is binding between them, they are expected to abide by it in good faith.7[7] And because it covers the dispute between them in the present case, either of them may compel the other to arbitrate.8[8] Thus, it is well within petitioners right to demand recourse to arbitration.

We cannot agree with respondent that it can directly seek judicial recourse by filing an action against petitioner simply because both failed to settle their differences amicably. Suffice it to state that there is nothing in the Contract providing that the parties may dispense with the arbitration clause. Article XXI on jurisdiction cited by respondent, i.e., that the parties hereto submit to the exclusive jurisdiction of the proper courts of Pasig City merely provides for the venue of any action arising out of or in connection with the stipulations of the parties in the Contract.

Moreover, we note that the computation of the energy fees disputed by petitioner also involves technical matters that are better left to an arbitration panel who has expertise in those areas. Alternative dispute resolution methods or ADRs like arbitration, mediation, negotiation and conciliation are encouraged by this Court. By enabling the parties to resolve their disputes amicably, they provide solutions that are less time-consuming, less tedious, less confrontational, and more productive of goodwill and lasting relationships.9[9] To brush aside such agreement providing for arbitration in case of disputes between the parties would be a step

backward. As we held in BF Corporation v. Court of Appeals,10[10]

It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of Republic Act No. 876 (The Arbitration Law), this Court has countenanced the settlement of disputes through arbitration (Puromines, Inc. v. Court of Appeals, G.R. No. 91228, March 22, 1993, 220 SCRA 281-290). Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on arbitration (Chung Fu Industries Phils., Inc. v. Court of Appeals, G.R. No. 92683, February 25, 1992, 206 SCRA 545, 551). Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted as the wave of the future in international relations, is recognized worldwide. To brush aside a contractual agreement calling for arbitration in case of disagreement between the parties would therefore be a step backward.

In this connection, since respondent has already filed a complaint with the trial court without prior recourse to arbitration, the proper procedure to enable an arbitration panel to resolve the parties dispute pursuant to their Contract is for the trial court to stay the proceedings.11[11] After the arbitration proceeding has been pursued and completed, then the trial court may confirm the award made by the arbitration panel.12[12]

In sum, we hold that the Court of Appeals erred in disregarding the arbitration clause in the parties Contract.

WHEREFORE, we GRANT the instant petition. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 63671 are REVERSED.
10

11

12

The parties are ordered to submit their controversy to the arbitration panel pursuant to paragraph 7.4 of the Contract. The Regional Trial Court, Branch 267, Pasig City is directed to suspend the proceedings in Civil Case No. 67755 until after the Arbitration Panel shall have resolved the controversy and submitted its report to the trial court. Costs against respondent.