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precedent? BF Corporation eventually completed the construction of the
G.R. No. 174938 October 1, 2014 buildings.7 Shangri-La allegedly took possession of the buildings while still
owing BF Corporation an outstanding balance.8

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

vs. BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C.
RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN
C. RAMOS, Respondents.
Corporate representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the corporation they
represent if there are allegations of bad faith or malice in their acts
representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006
decision and October 5, 2006 resolution. The Court of Appeals affirmed the
trial court's decision holding that petitioners, as director, should submit
themselves as parties tothe arbitration proceedings between BF Corporation
and Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial
Court against Shangri-Laand the members of its board of directors: Alfredo
C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo
G. Licauco III, and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May
30, 1991, it entered into agreements with Shangri-La wherein it undertook to
construct for Shangri-La a mall and a multilevel parking structure along
EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with
its progress billing statements.3However, by October 1991, Shangri-La
started defaulting in payment.4
BF Corporation alleged that despite repeated demands, Shangri-La refused to
pay the balance owed to it.9 It also alleged that the Shangri-Las directors
were in bad faith in directing Shangri-Las affairs. Therefore, they should be
held jointly and severally liable with Shangri-La for its obligations as well as
for the damages that BF Corporation incurred as a result of Shangri-Las
default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo
G. Licauco III, and Benjamin C. Ramos filed a motion to suspend the
proceedings in view of BF Corporations failure to submit its dispute to
arbitration, in accordance with the arbitration clauseprovided in its contract,
quoted in the motion as follows: 11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between
the Owner or the Project Manager on his behalf and the Contractor, either
during the progress or after the completion or abandonment of the Works as
to the construction of this Contract or as to any matter or thing of
whatsoever nature arising there under or inconnection therewith (including
any matter or thing left by this Contract to the discretion of the Project
Manager or the withholding by the Project Manager of any certificate to which
the Contractor may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities
of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner
and the Contractor hereby agree to exert all efforts to settle their differences
or dispute amicably. Failing these efforts then such dispute or difference
shall be referred to arbitration in accordance with the rules and procedures
of the Philippine Arbitration Law.

BF Corporation alleged that Shangri-La induced BF Corporation to continue xxx xxx xxx
with the construction of the buildings using its own funds and credit despite
Shangri-Las default.5 According to BF Corporation, ShangriLa (6) The award of such Arbitrators shall be final and binding on the parties.
misrepresented that it had funds to pay for its obligations with BF The decision of the Arbitrators shall be a condition precedent to any right of
Corporation, and the delay in payment was simply a matter of delayed legal action that either party may have against the other. . . . 12 (Underscoring
processing of BF Corporations progress billing statements. 6 in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend

proceedings.13
In the November 18, 1993 order, the Regional Trial Court denied the motion
to suspend proceedings.14
On December 8, 1993, petitioners filed an answer to BF Corporations
complaint, with compulsory counter claim against BF Corporation and
crossclaim against Shangri-La.15 They alleged that they had resigned as
members of Shangri-Las board of directors as of July 15, 1991. 16
After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C.
Ramos, Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a
petition for certiorari with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari
and ordered the submission of the dispute to arbitration. 18
Aggrieved by the Court of Appeals decision, BF Corporation filed a petition
for review on certiorari with this court. 19 On March 27, 1998, this court
affirmed the Court of Appeals decision, directing that the dispute be
submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration
proceedings. BF Corporation and Shangri-La failed to agree as to the law that
should govern the arbitration proceedings. 21 On October 27, 1998, the trial
court issued the order directing the parties to conduct the proceedings in
accordance with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion
for clarification, both seeking to clarify the term, "parties," and whether
Shangri-Las directors should be included in the arbitration proceedings and
served with separate demands for arbitration. 23
Petitioners filed their comment on Shangri-Las and BF Corporations
motions, praying that they be excluded from the arbitration proceedings for
being non-parties to Shangri-Las and BF Corporations agreement. 24
On July 28, 2003, the trial court issued the order directing service of
demands for arbitration upon all defendants in BF Corporations
complaint.25 According to the trial court, Shangri-Las directors were
interested parties who "must also be served with a demand for arbitration to
give them the opportunity to ventilate their side of the controversy, safeguard
their interest and fend off their respective positions." 26 Petitioners motion for
reconsideration ofthis order was denied by the trial court on January 19,
2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging
grave abuse of discretion in the issuance of orders compelling them to submit
to arbitration proceedings despite being third parties to the contract between
Shangri-La and BF Corporation.28
In its May 11, 2006 decision, 29 the Court of Appeals dismissed petitioners
petition for certiorari. The Court of Appeals ruled that ShangriLas directors
were necessary parties in the arbitration proceedings. 30 According to the
Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for
their acts in representation of the party to the contract pursuant to Art. 31 of
the Corporation Code, and that as directors of the defendant corporation,
[they], in accordance with Art. 1217 of the Civil Code, stand to be benefited
or injured by the result of the arbitration proceedings, hence, being
necessary parties, they must be joined in order to have complete adjudication
of the controversy. Consequently, if [they were] excluded as parties in the
arbitration proceedings and an arbitral award is rendered, holding [Shangri-
La] and its board of directors jointly and solidarily liable to private
respondent BF Corporation, a problem will arise, i.e., whether petitioners will
be bound bysuch arbitral award, and this will prevent complete
determination of the issues and resolution of the controversy. 31
The Court of Appeals further ruled that "excluding petitioners in the
arbitration proceedings . . . would be contrary to the policy against
multiplicity of suits."32
The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28,
2003 and January 19, 2005 of public respondent RTC, Branch 157, Pasig
City, in Civil Case No. 63400, are AFFIRMED. 33
The Court of Appeals denied petitioners motion for reconsideration in the
October 5, 2006 resolution. 34
On November 24, 2006, petitioners filed a petition for review of the May 11,
2006 Court of Appeals decision and the October 5, 2006 Court of Appeals
resolution.35
The issue in this case is whether petitioners should be made parties to the
arbitration proceedings, pursuant to the arbitration clause provided in the
contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts
or obligations.36 The corporation is a separate being, and nothing justifies BF
Corporations allegation that they are solidarily liable with Shangri-
La.37Neither did they bind themselves personally nor did they undertake to
shoulder Shangri-Las obligations should it fail in its obligations. 38 BF
Corporation also failed to establish fraud or bad faith on their part. 39
Petitioners also argue that they are third parties to the contract between BF
Corporation and Shangri-La.40Provisions including arbitration stipulations
should bind only the parties.41 Based on our arbitration laws, parties who are
strangers to an agreement cannot be compelled to arbitrate. 42
Petitioners point out thatour arbitration laws were enacted to promote the
autonomy of parties in resolving their disputes. 43 Compelling them to submit
to arbitration is against this purpose and may be tantamount to stipulating
for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo
G. Licauco III, Alfredo C.Ramos and Benjamin C. Ramos. 45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed
with petitioners that Shangri-Lasdirectors, being non-parties to the contract,
should not be made personally liable for Shangri-Las acts. 46Since the
contract was executed only by BF Corporation and Shangri-La, only they
should be affected by the contracts stipulation. 47 BF Corporation also failed
to specifically allege the unlawful acts of the directors that should make them
solidarily liable with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts ruling
that the parties should undergo arbitration "clearly contemplated the
inclusion of the directors of the corporation[.]" 49 BF Corporation also argued
that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code. 50 Section 31 makes
directors solidarily liable for fraud, gross negligence, and bad
faith.51Petitioners are not really third parties to the agreement because they
are being sued as Shangri-Las representatives, under Section 31 of the
Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for
their solidary liability, they are necessary parties to the arbitration
proceedings.53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice. 54
In the manifestation dated September 6, 2007, petitioners informed the court
that the Arbitral Tribunal had already promulgated its decision on July 31,
2007.55 The Arbitral Tribunal denied BF Corporations claims against
them.56 Petitioners stated that "[they] were included by the Arbitral Tribunal
in the proceedings conducted . . . notwithstanding [their] continuing
objection thereto. . . ."57 They also stated that "[their] unwilling participation
in the arbitration case was done ex abundante ad cautela, as manifested
therein on several occasions."58 Petitioners informed the court that they
already manifested with the trial court that "any action taken on [the Arbitral
Tribunals decision] should be without prejudice to the resolution of [this]
case."59
Upon the courts order, petitioners and Shangri-La filed their respective
memoranda. Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and
Benjamin C. Ramos reiterated their arguments that they should not be held
liable for Shangri-Las default and made parties to the arbitration
proceedings because only BF Corporation and Shangri-La were parties to the
contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for
their solidary liability under Section 31 of the Corporation Code. Shangri-La
added that their exclusion from the arbitration proceedings will result in
multiplicity of suits, which "is not favored in this jurisdiction." 60 It pointed
out that the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated in. 61 Moreover,
BF Corporation assailed only the correctness of the Arbitral Tribunals award
and not the part absolving Shangri-Las directors from liability. 62
BF Corporation filed a counter-manifestation with motion to dismiss 63 in lieu
of the required memorandum.
In its counter-manifestation, BF Corporation pointed out that since
"petitioners counterclaims were already dismissed with finality, and the
claims against them were likewise dismissed with finality, they no longer have
any interest orpersonality in the arbitration case. Thus, there is no longer
any need to resolve the present Petition, which mainly questions the
inclusion of petitioners in the arbitration proceedings." 64 The courts decision
in this case will no longer have any effect on the issue of petitioners
inclusion in the arbitration proceedings.65
The petition must fail.
The Arbitral Tribunals decision, absolving petitioners from liability, and its
binding effect on BF Corporation, have rendered this case moot and
academic.
The mootness of the case, however, had not precluded us from resolving
issues so that principles may be established for the guidance of the bench,
bar, and the public. In De la Camara v. Hon. Enage, 66 this court disregarded
the fact that petitioner in that case already escaped from prison and ruled on
the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for
certiorari is notwarranted, still, as set forth at the opening of this opinion,
the fact that this case is moot and academic should not preclude this
Tribunal from setting forth in language clear and unmistakable, the
obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required. 67
This principle was repeated in subsequent cases when this court deemed it
proper to clarify important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration
proceedings in accordance with Shangri-Laand BF Corporations agreement,
in order to determine if the distinction between Shangri-Las personality and
their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the
parties to avoid litigation and settle disputes amicably and more
expeditiously by themselves and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code, 69 which
was approved as early as 1949. It was later institutionalized by the approval
of Republic Act No. 876,70 which expressly authorized, made valid,
enforceable, and irrevocable parties decision to submit their controversies,
including incidental issues, to arbitration. This court recognized this policy
in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.: 71
As a corollary to the question regarding the existence of an arbitration
agreement, defendant raises the issue that, even if it be granted that it
agreed to submit its dispute with plaintiff to arbitration, said agreement is
void and without effect for it amounts to removing said dispute from the
jurisdiction of the courts in which the parties are domiciled or where the
dispute occurred. It is true that there are authorities which hold 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" (Manila Electric Co. vs. Pasay
Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy
and amicable method of settling disputes, and as a means of avoiding
litigation, should receive every encouragement from the courts which may be
extended without contravening sound public policy or settled law" (3 Am.
Jur., p. 835). Congress has officially adopted the modern view when it
reproduced in the new Civil Code the provisions of the old Code on
Arbitration. And only recently it approved Republic Act No. 876 expressly
authorizing arbitration of future disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes,
arbitration clauses are liberally construed to favor arbitration. Thus, in LM
Power Engineering Corporation v. Capitol Industrial Construction Groups,
Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes,
arbitration along with mediation, conciliation and negotiation is
encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging alternative
dispute resolution methods, courts should liberally construe arbitration
clauses. Provided such clause is susceptible of an interpretation that covers
the asserted dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration. 74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to
favor interpretations that would render effective an arbitration clause was
later expressed in Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to
actively promote party autonomy in the resolution of disputes or the freedom
of the party to make their own arrangements to resolve their disputes.
Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to achieve
speedy and impartial justice and declog court dockets. As such, the State
shall provide means for the use of ADR as an efficient tool and an alternative
procedure for the resolution of appropriate cases. Likewise, the State shall
enlist active private sector participation in the settlement of disputes through
ADR. This Act shall be without prejudice to the adoption by the Supreme
Court of any ADR system, such as mediation, conciliation, arbitration, or any
combination thereof as a means of achieving speedy and efficient means of
resolving cases pending before all courts in the Philippines which shall be
governed by such rules as the Supreme Court may approve from time to
time.
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall
have due regard to the policy of the law in favor of arbitration.Where action is
commenced by or against multiple parties, one or more of whomare parties
who are bound by the arbitration agreement although the civil action may
continue as to those who are not bound by such arbitration agreement.
(Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration
clause for purposes ofavoiding litigation and expediting resolution of the
dispute, that interpretation shall be adopted. Petitioners main argument
arises from the separate personality given to juridical persons vis--vis their
directors, officers, stockholders, and agents. Since they did not sign the
arbitration agreement in any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance with the arbitration
agreement. Moreover, they had already resigned as directors of Shangri-Laat
the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La
are separate and distinct from Shangri-La.
76
A corporation is an artificial entity created by fiction of law. This means that
while it is not a person, naturally, the law gives it a distinct personality and
treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives, 77 and other juridical
entities. The law vests in corporations rights,powers, and attributes as if they
were natural persons with physical existence and capabilities to act on their
own.78 For instance, they have the power to sue and enter into transactions
or contracts. Section 36 of the Corporation Code enumerates some of a
corporations powers, thus:
Section 36. Corporate powers and capacity. Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated
in the articles of incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees; and
11. To exercise such other powers asmay be essential or necessary to
carry out its purpose or purposes as stated in its articles of
incorporation. (13a)
Because a corporations existence is only by fiction of law, it can only exercise
its rights and powers through itsdirectors, officers, or agents, who are all
natural persons. A corporation cannot sue or enter into contracts without
them.
A consequence of a corporations separate personality is that consent by a
corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its
representatives, are its own. A stockholder, director, or representative does
not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.
Hence, a corporations representatives are generally not bound by the terms
of the contract executed by the corporation. They are not personally liable for
obligations and liabilities incurred on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties autonomy
in resolving their disputes. This court recognized in Heirs of Augusto Salas,
Jr. v. Laperal Realty Corporation 79 that an arbitration clause shall not apply
to persons who were neither parties to the contract nor assignees of previous
parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing
the stipulation on arbitration, binds the parties thereto, as well as their
assigns and heirs. But only they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals, 81
this court
ruled:
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. Clearly, only
parties to the Agreement . . . are bound by the Agreement and its arbitration
clause as they are the only signatories thereto. 82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International
Air Terminals Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc.,
et al.84
As a general rule, therefore, a corporations representative who did not
personally bind himself or herself to an arbitration agreement cannot be
forced to participate in arbitration proceedings made pursuant to an
agreement entered into by the corporation. He or she is generally not
considered a party to that agreement.
However, there are instances when the distinction between personalities of
directors, officers,and representatives, and of the corporation, are
disregarded. We call this piercing the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a
corporation] is used as a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues." 85 It is also warranted in alter ego
cases "where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation." 86
When corporate veil is pierced, the corporation and persons who are
normally treated as distinct from the corporation are treated as one person,
such that when the corporation is adjudged liable, these persons, too,
become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation
Code provides the instances when directors, trustees, or officers may become
liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of any
matter which has been reposed inhim in confidence, as to which equity
imposes a disability upon him to deal in his own behalf, he shall be liable as
a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation
may be made solidarily liable with it for all damages suffered by the
corporation, its stockholders or members, and other persons in any of the
following cases:
 a) The director or trustee willfully and knowingly voted for or
assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith
in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in
conflict with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following
instances:
a) "When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not forthwith
file with the corporate secretary his written objection thereto"; 87
b) "When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors
or representatives, it becomes the duty of courts or tribunals to determine if
these persons and the corporation should be treated as one. Without a trial,
courts and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. Courts or tribunals do not have such
prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the
distinction between the corporation and the persons representing it. The
determination of these circumstances must be made by one tribunal or court
in a proceeding participated in by all parties involved, including current
representatives of the corporation, and those persons whose personalities are
impliedly the sameas the corporation. This is because when the court or
tribunal finds that circumstances exist warranting the piercing of the
corporate veil, the corporate representatives are treated as the corporation
itself and should be held liable for corporate acts. The corporations distinct
personality is disregarded, and the corporation is seen as a mere aggregation
of persons undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice orbad faith on their part in directing the affairs
of the corporation, complainants are effectively alleging that the directors
and the corporation are not acting as separate entities. They are alleging that
the acts or omissions by the corporation that violated their rights are also
the directors acts or omissions.90 They are alleging that contracts executed
by the corporation are contracts executed by the directors. Complainants
effectively pray that the corporate veilbe pierced because the cause of action
between the corporation and the directors is the same.
In that case, complainants have no choice but to institute only one
proceeding against the parties.1wphi1 Under the Rules of Court, filing of
multiple suits for a single cause of action is prohibited. Institution of more
than one suit for the same cause of action constitutes splitting the cause of
action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. A party may not institute
more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. If two or more suits
are instituted on the basis of the same cause of action, the filing of one or a
judgment upon the merits in any one is available as a ground for the
dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be
found to be indistinct that we rule that petitioners may be compelled to
submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the
arbitration proceedings, we are not overturning Heirs of Augusto Salas
wherein this court affirmed the basic arbitration principle that only parties
to an arbitration agreement may be compelled to submit to arbitration. In
that case, this court recognizedthat persons other than the main party may
be compelled to submit to arbitration, e.g., assignees and heirs. Assignees
and heirs may be considered parties to an arbitration agreement entered into
by their assignor because the assignors rights and obligations are
transferred to them upon assignment. In other words, the assignors rights
and obligations become their own rights and obligations. In the same way,
the corporations obligations are treated as the representatives obligations
when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this
court affirmed its policy against multiplicity of suits and unnecessary delay.
This court said that "to split the proceeding into arbitration for some parties
and trial for other parties would "result in multiplicity of suits, duplicitous
procedure and unnecessary delay." 91 This court also intimated that the
interest of justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to direct the
trial court to proceed to determine the issues of thatcase, it did not prohibit
courts from allowing the case to proceed to arbitration, when circumstances
warrant.
Hence, the issue of whether the corporations acts in violation of
complainants rights, and the incidental issue of whether piercing of the
corporate veil is warranted, should be determined in a single proceeding.
Such finding would determine if the corporation is merely an aggregation of
persons whose liabilities must be treated as one with the corporation.
However, when the courts disregard the corporations distinct and separate
personality from its directors or officers, the courts do not say that the
corporation, in all instances and for all purposes, is the same as its directors,
stockholders, officers, and agents. It does not result in an absolute confusion
of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as
one, in relation to a specific act, in order to extend the terms of the contract
and the liabilities for all damages to erring corporate officials who
participated in the corporations illegal acts. This is done so that the legal
fiction cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for
the piercing of the corporate veil, parties who are normally treated as distinct
individuals should be made to participate in the arbitration proceedings in
order to determine ifsuch distinction should indeed be disregarded and, if so,
to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF
Corporation failed to prove the existence of circumstances that render
petitioners and the other directors solidarily liable. It ruled that petitioners
and Shangri-Las other directors were not liable for the contractual
obligations of Shangri-La to BF Corporation. The Arbitral Tribunals decision
was made with the participation of petitioners, albeit with their continuing
objection. In view of our discussion above, we rule that petitioners are bound
by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May
11, 2006 and resolution of October 5, 2006 are AFFIRMED.
SO ORDERED.
G.R. No. 185582 February 29, 2012
TUNA PROCESSING, INC., Petitioner,
vs. PHILIPPINE KINGFORD, INC., Respondent.
Can a foreign corporation not licensed to do business in the Philippines, but
which collects royalties from entities in the Philippines, sue here to enforce a
foreign arbitral award?
In this Petition for Review on Certiorari under Rule 45,1 petitioner Tuna
Processing, Inc. (TPI), a foreign corporation not licensed to do business in the
Philippines, prays that the Resolution 2 dated 21 November 2008 of the
Regional Trial Court (RTC) of Makati City be declared void and the case be
remanded to the RTC for further proceedings. In the assailed Resolution, the
RTC dismissed petitioners Petition for Confirmation, Recognition, and
Enforcement of Foreign Arbitral Award 3 against respondent Philippine
Kingford, Inc. (Kingford), a corporation duly organized and existing under the
laws of the Philippines,4 on the ground that petitioner lacked legal capacity to
sue.5
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the
"licensor"), co-patentee of U.S. Patent No. 5,484,619, Philippine Letters
Patent No. 31138, and Indonesian Patent No. ID0003911 (collectively referred
to as the "Yamaoka Patent"), 6 and five (5) Philippine tuna processors, namely,
Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna
Resources, Santa Cruz Seafoods, Inc., and respondent Kingford (collectively
referred to as the "sponsors"/"licensees")7 entered into a Memorandum of
Agreement (MOA),8 pertinent provisions of which read:
1. Background and objectives. The Licensor, co-owner of U.S.Patent
No. 5,484,619, Philippine Patent No. 31138, and Indonesian Patent
No. ID0003911 xxx wishes to form an alliance with Sponsors for
purposes of enforcing his three aforementioned patents, granting
licenses under those patents, and collecting royalties.
The Sponsors wish to be licensed under the aforementioned patents
in order to practice the processes claimed in those patents in the
United States, the Philippines, and Indonesia, enforce those patents
and collect royalties in conjunction with Licensor.
xxx
 4. Establishment of Tuna Processors, Inc. The parties hereto agree (B) For breach of the MOA in failing to cooperate with CLAIMANT
to the establishment of Tuna Processors, Inc. ("TPI"), a corporation TPI in fulfilling the objectives of the MOA, RESPONDENT
established in the State of California, in order to implement the KINGFORD shall pay CLAIMANT the total sum of TWO HUNDRED
objectives of this Agreement. SEVENTY ONE THOUSAND FOUR HUNDRED NINETY DOLLARS
AND TWENTY CENTS ($271,490.20)[;]14 and
5. Bank account. TPI shall open and maintain bank accounts in the
United States, which will be used exclusively to deposit funds that it (C) For violation of THE LANHAM ACT and infringement of
will collect and to disburse cash it will be obligated to spend in
the YAMAOKA 619 PATENT, RESPONDENT KINGFORD shall
connection with the implementation of this Agreement.
pay CLAIMANT the total sum of ONE MILLION TWO HUNDRED
FIFTY THOUSAND DOLLARS AND NO CENTS ($1,250,000.00).
6. Ownership of TPI. TPI shall be owned by the Sponsors and
xxx
Licensor. Licensor shall be assigned one share of TPI for the purpose
of being elected as member of the board of directors. The remaining
xxx15
shares of TPI shall be held by the Sponsors according to their
respective equity shares. 9
To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before
xxx
the RTC of Makati City. The petition was raffled to Branch 150 presided by
Judge Elmo M. Alameda.
The parties likewise executed a Supplemental Memorandum of
Agreement10 dated 15 January 2003 and an Agreement to Amend
At Branch 150, respondent Kingford filed a Motion to Dismiss. 16 After the
Memorandum of Agreement11 dated 14 July 2003.
court denied the motion for lack of merit, 17 respondent sought for the
inhibition of Judge Alameda and moved for the reconsideration of the order
Due to a series of events not mentioned in the petition, the licensees,
denying the motion.18 Judge Alameda inhibited himself notwithstanding "[t]he
including respondent Kingford, withdrew from petitioner TPI and
unfounded allegations and unsubstantiated assertions in the
correspondingly reneged on their obligations. 12 Petitioner submitted the
motion."19 Judge Cedrick O. Ruiz of Branch 61, to which the case was re-
dispute for arbitration before the International Centre for Dispute Resolution
raffled, in turn, granted respondents Motion for Reconsideration and
in the State of California, United States and won the case against
dismissed the petition on the ground that the petitioner lacked legal capacity
respondent.13 Pertinent portions of the award read:
to sue in the Philippines.20

13.1 Within thirty (30) days from the date of transmittal of this Award to the
Petitioner TPI now seeks to nullify, in this instant Petition for Review on
Parties, pursuant to the terms of this award, the total sum to be paid
Certiorari under Rule 45, the order of the trial court dismissing its Petition for
by RESPONDENT KINGFORD to CLAIMANT TPI, is the sum of ONE Confirmation, Recognition, and Enforcement of Foreign Arbitral Award.
MILLION SEVEN HUNDRED FIFTY THOUSAND EIGHT HUNDRED FORTY
SIX DOLLARS AND TEN CENTS ($1,750,846.10).
Issue

(A) For breach of the MOA by not paying past due The core issue in this case is whether or not the court a quo was correct in so
assessments, RESPONDENT KINGFORD shall pay CLAIMANT the dismissing the petition on the ground of petitioners lack of legal capacity to
total sum of TWO HUNDRED TWENTY NINE THOUSAND THREE sue.
HUNDRED AND FIFTY FIVE DOLLARS AND NINETY CENTS
($229,355.90) which is 20% of MOA assessments since September Our Ruling
1, 2005[;]
The petition is impressed with merit.
The Corporation Code of the Philippines expressly provides:
Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws.
It is pursuant to the aforequoted provision that the court a quo dismissed the
petition. Thus:
Herein plaintiff TPIs "Petition, etc." acknowledges that it "is a foreign
corporation established in the State of California" and "was given the
exclusive right to license or sublicense the Yamaoka Patent" and "was
assigned the exclusive right to enforce the said patent and collect
corresponding royalties" in the Philippines. TPI likewise admits that it does
not have a license to do business in the Philippines.
There is no doubt, therefore, in the mind of this Court that TPI has been
doing business in the Philippines, but sans a license to do so issued by the
concerned government agency of the Republic of the Philippines, when it
collected royalties from "five (5) Philippine tuna processors[,] namely[,] Angel
Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna Resources,
Santa Cruz Seafoods, Inc. and respondent Philippine Kingford, Inc." This
being the real situation, TPI cannot be permitted to maintain or intervene in
any action, suit or proceedings in any court or administrative agency of the
Philippines." A priori, the "Petition, etc." extant of the plaintiff TPI should be
dismissed for it does not have the legal personality to sue in the Philippines. 21
The petitioner counters, however, that it is entitled to seek for the recognition
and enforcement of the subject foreign arbitral award in accordance with
Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004),22the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
drafted during the United Nations Conference on International Commercial
Arbitration in 1958 (New York Convention), and the UNCITRAL Model Law on
International Commercial Arbitration (Model Law),23 as none of these
specifically requires that the party seeking for the enforcement should have
legal capacity to sue. It anchors its argument on the following:
In the present case, enforcement has been effectively refused on a ground not
found in the [Alternative Dispute Resolution Act of 2004], New York
Convention, or Model Law. It is for this reason that TPI has brought this
matter before this most Honorable Court, as it [i]s imperative to clarify
whether the Philippines international obligations and State policy to
strengthen arbitration as a means of dispute resolution may be defeated by
misplaced technical considerations not found in the relevant laws. 24
Simply put, how do we reconcile the provisions of the Corporation Code of the
Philippines on one hand, and the Alternative Dispute Resolution Act of 2004,
the New York Convention and the Model Law on the other?
In several cases, this Court had the occasion to discuss the nature and
applicability of the Corporation Code of the Philippines, a general law, viz-a-viz
other special laws. Thus, in Koruga v. Arcenas, Jr.,25 this Court rejected the
application of the Corporation Code and applied the New Central Bank Act. It
ratiocinated:
Korugas invocation of the provisions of the Corporation Code is misplaced.
In an earlier case with similar antecedents, we ruled that:
"The Corporation Code, however, is a general law applying to all types of
corporations, while the New Central Bank Act regulates specifically banks
and other financial institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter shall prevail
generalia specialibus non derogant." (Emphasis supplied)26
Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential
Agrarian Reform Council,27 this Court held:
Without doubt, the Corporation Code is the general law providing for the
formation, organization and regulation of private corporations. On the other
hand, RA 6657 is the special law on agrarian reform. As between a general
and special law, the latter shall prevailgeneralia specialibus non derogant.28
Following the same principle, the Alternative Dispute Resolution Act of
2004 shall apply in this case as the Act, as its title - An Act to Institutionalize
the Use of an Alternative Dispute Resolution System in the Philippines and to
Establish the Office for Alternative Dispute Resolution, and for Other Purposes
- would suggest, is a law especially enacted "to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make
their own arrangements to resolve their disputes." 29 It specifically provides
exclusive grounds available to the party opposing an application for
recognition and enforcement of the arbitral award. 30
Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal
law, applies in the instant petition, we do not see the need to discuss
compliance with international obligations under the New York Convention and
the Model Law. After all, both already form part of the law.
In particular, the Alternative Dispute Resolution Act of 2004 incorporated
the New York Convention in the Act by specifically providing:
SEC. 42. Application of the New York Convention. - The New York Convention
shall govern the recognition and enforcement of arbitral awards covered by
the said Convention.
xxx
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a foreign
arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedural rules to
be promulgated by the Supreme Court only on those grounds enumerated
under Article V of the New York Convention. Any other ground raised shall be
disregarded by the regional trial court.
It also expressly adopted the Model Law, to wit:
Sec. 19. Adoption of the Model Law on International Commercial
Arbitration. International commercial arbitration shall be governed by the
Model Law on International Commercial Arbitration (the "Model Law")
adopted by the United Nations Commission on International Trade Law on
June 21, 1985 xxx."
Now, does a foreign corporation not licensed to do business in the Philippines
have legal capacity to sue under the provisions of the Alternative Dispute
Resolution Act of 2004? We answer in the affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the
opposing party in an application for recognition and enforcement of the
arbitral award may raise only those grounds that were enumerated under
Article V of the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award may be refused, at the
request of the party against whom it is invoked, only if that party
furnishes to the competent authority where the recognition and
enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were,
under the law applicable to them, under some incapacity, or
the said agreement is not valid under the law to which the
parties have subjected it or, failing any indication thereon,
under the law of the country where the award was made; or
(b) The party against whom the award is invoked was not
given proper notice of the appointment of the arbitrator or of
the arbitration proceedings or was otherwise unable to
present his case; or
(c) The award deals with a difference not contemplated by or
not falling within the terms of the submission to arbitration,
or it contains decisions on matters beyond the scope of the
submission to arbitration, provided that, if the decisions on
matters submitted to arbitration can be separated from
those not so submitted, that part of the award which
contains decisions on matters submitted to arbitration may
be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral
procedure was not in accordance with the agreement of the
parties, or, failing such agreement, was not in accordance
with the law of the country where the arbitration took place;
or
(e) The award has not yet become binding on the parties, or
has been set aside or suspended by a competent authority of
the country in which, or under the law of which, that award
was made.
2. Recognition and enforcement of an arbitral award may also be
refused if the competent authority in the country where recognition
and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of
settlement by arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be
contrary to the public policy of that country.
Clearly, not one of these exclusive grounds touched on the capacity to sue of
the party seeking the recognition and enforcement of the award.
Pertinent provisions of the Special Rules of Court on Alternative Dispute
Resolution,31 which was promulgated by the Supreme Court, likewise support
this position.
Rule 13.1 of the Special Rules provides that "[a]ny party to a foreign
arbitration may petition the court to recognize and enforce a foreign arbitral
award." The contents of such petition are enumerated in Rule
13.5.32 Capacity to sue is not included. Oppositely, in the Rule on local
arbitral awards or arbitrations in instances where "the place of arbitration is
in the Philippines,"33 it is specifically required that a petition "to determine
any question concerning the existence, validity and enforceability of such
arbitration agreement"34 available to the parties before the commencement of
arbitration and/or a petition for "judicial relief from the ruling of the arbitral
tribunal on a preliminary question upholding or declining its
jurisdiction"35 after arbitration has already commenced should state "[t]he
facts showing that the persons named as petitioner or respondent have legal
capacity to sue or be sued."36
Indeed, it is in the best interest of justice that in the enforecement of a
foreign arbitral award, we deny availment by the losing party of the rule that
bars foreign corporations not licensed to do business in the Philippines from
maintaining a suit in our courts. When a party enters into a contract
containing a foreign arbitration clause and, as in this case, in fact submits
itself to arbitration, it becomes bound by the contract, by the arbitration and
by the result of arbitration, conceding thereby the capacity of the other party
to enter into the contract, participate in the arbitration and cause the
implementation of the result. Although not on all fours with the instant case,
also worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting
Opinion in Asset Privatization Trust v. Court of Appeals,37 to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining adherents in
legal and judicial circles here and abroad. If its tested mechanism can simply
be ignored by an aggrieved party, one who, it must be stressed, voluntarily
and actively participated in the arbitration proceedings from the very
beginning, it will destroy the very essence of mutuality inherent in
consensual contracts.38
Clearly, on the matter of capacity to sue, a foreign arbitral award should be
respected not because it is favored over domestic laws and procedures, but
because Republic Act No. 9285 has certainly erased any conflict of law
question.
Finally, even assuming, only for the sake of argument, that the court a
quo correctly observed that the Model Law, not the New York Convention,
governs the subject arbitral award, 39 petitioner may still seek recognition and
enforcement of the award in Philippine court, since the Model Law prescribes
substantially identical exclusive grounds for refusing recognition or
enforcement.40
Premises considered, petitioner TPI, although not licensed to do business in
the Philippines, may seek recognition and enforcement of the foreign arbitral
award in accordance with the provisions of the Alternative Dispute Resolution
Act of 2004.
II
The remaining arguments of respondent Kingford are likewise unmeritorious.
First. There is no need to consider respondents contention that petitioner TPI
improperly raised a question of fact when it posited that its act of entering
into a MOA should not be considered "doing business" in the Philippines for
the purpose of determining capacity to sue. We reiterate that the foreign
corporations capacity to sue in the Philippines is not material insofar as the
recognition and enforcement of a foreign arbitral award is concerned.
Second. Respondent cannot fault petitioner for not filing a motion for
reconsideration of the assailed Resolution dated 21 November
2008 dismissing the case. We have, time and again, ruled that the prior filing
of a motion for reconsideration is not required in certiorari under Rule 45.41
Third. While we agree that petitioner failed to observe the principle of
hierarchy of courts, which, under ordinary circumstances, warrants the
outright dismissal of the case, 42 we opt to relax the rules following the
pronouncement in Chua v. Ang,43 to wit:
[I]t must be remembered that [the principle of hierarchy of courts] generally
applies to cases involving conflicting factual allegations. Cases which depend
on disputed facts for decision cannot be brought immediately before us as we
are not triers of facts.44 A strict application of this rule may be excused when
the reason behind the rule is not present in a case, as in the present case,
where the issues are not factual but purely legal.1wphi1 In these types of
questions, this Court has the ultimate say so that we merely abbreviate the
review process if we, because of the unique circumstances of a case, choose
to hear and decide the legal issues outright. 45
Moreover, the novelty and the paramount importance of the issue herein
raised should be seriously considered. 46Surely, there is a need to take
cognizance of the case not only to guide the bench and the bar, but if only to
strengthen arbitration as a means of dispute resolution, and uphold the
policy of the State embodied in the Alternative Dispute Resolution Act of 2004,
to wit:
Sec. 2. Declaration of Policy. - It is hereby declared the policy of the State to
actively promote party autonomy in the resolution of disputes or the freedom
of the party to make their own arrangements to resolve their disputes.
Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to achieve
speedy and impartial justice and declog court dockets. xxx
Fourth. As regards the issue on the validity and enforceability of the foreign
arbitral award, we leave its determination to the court a quo where its
recognition and enforcement is being sought.
Fifth. Respondent claims that petitioner failed to furnish the court of origin a
copy of the motion for time to file petition for review on certiorari before the
petition was filed with this Court. 47 We, however, find petitioners reply in
order. Thus:
26. Admittedly, reference to "Branch 67" in petitioner TPIs "Motion for Time
to File a Petition for Review on Certiorari under Rule 45" is a typographical
error. As correctly pointed out by respondent Kingford, the order sought to be
assailed originated from Regional Trial Court, Makati City, Branch 61.
27. xxx Upon confirmation with the Regional Trial Court, Makati City,
Branch 61, a copy of petitioner TPIs motion was received by the Metropolitan
Trial Court, Makati City, Branch 67. On 8 January 2009, the motion was
forwarded to the Regional Trial Court, Makati City, Branch 61. 48
All considered, petitioner TPI, although a foreign corporation not licensed to
do business in the Philippines, is not, for that reason alone, precluded from
filing the Petition for Confirmation, Recognition, and Enforcement of Foreign
Arbitral Award before a Philippine court.
WHEREFORE, the Resolution dated 21 November 2008 of the Regional Trial
Court, Branch 61, Makati City in Special Proceedings No. M-6533 is
hereby REVERSED and SET ASIDE. The case is REMANDED to Branch 61
for further proceedings.
SO ORDERED.
G.R. No. 175404 January 31, 2011
CARGILL PHILIPPINES, INC., Petitioner,
vs.
SAN FERNANDO REGALA TRADING, INC., Respondent.
Before us is a petition for review on certiorari seeking to reverse and set aside
the Decision1 dated July 31, 2006 and the Resolution 2 dated November 13,
2006 of the Court of Appeals (CA) in CA G.R. SP No. 50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with
the Regional Trial Court (RTC) of Makati City a Complaint for Rescission of
Contract with Damages3 against petitioner Cargill Philippines, Inc. In its
Complaint, respondent alleged that it was engaged in buying and selling of
molasses and petitioner was one of its various sources from whom it
purchased molasses. Respondent alleged that it entered into a contract dated
July 11, 1996 with petitioner, wherein it was agreed upon that respondent
would purchase from petitioner 12,000 metric tons of Thailand origin cane
blackstrap molasses at the price of US$192 per metric ton; that the delivery
of the molasses was to be made in January/February 1997 and payment was
to be made by means of an Irrevocable Letter of Credit payable at sight, to be
opened by September 15, 1996; that sometime prior to September 15, 1996,
the parties agreed that instead of January/February 1997, the delivery
would be made in April/May 1997 and that payment would be by an
Irrevocable Letter of Credit payable at sight, to be opened upon petitioner's
advice. Petitioner, as seller, failed to comply with its obligations under the
contract, despite demands from respondent, thus, the latter prayed for
rescission of the contract and payment of damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings
and To Refer Controversy to Voluntary Arbitration, 4 wherein it argued that
the alleged contract between the parties, dated July 11, 1996, was never
consummated because respondent never returned the proposed agreement
bearing its written acceptance or conformity nor did respondent open the
Irrevocable Letter of Credit at sight. Petitioner contended that the controversy
between the parties was whether or not the alleged contract between the
parties was legally in existence and the RTC was not the proper forum to
ventilate such issue. It claimed that the contract contained an arbitration
clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the
American Arbitration Association. The Arbitration Award shall be final and
binding on both parties.5
that respondent must first comply with the arbitration clause before
resorting to court, thus, the RTC must either dismiss the case or suspend
the proceedings and direct the parties to proceed with arbitration, pursuant
to Sections 66 and 77 of Republic Act (R.A.) No. 876, or the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has
jurisdiction over the action for rescission of contract and could not be
changed by the subject arbitration clause. It cited cases wherein arbitration
clauses, such as the subject clause in the contract, had been struck down as
void for being contrary to public policy since it provided that the arbitration
award shall be final and binding on both parties, thus, ousting the courts of
jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already
inapplicable, having been rendered prior to the effectivity of the New Civil
Code in 1950 and the Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by
petitioner is invalid and unenforceable, considering that the requirements
imposed by the provisions of the Arbitration Law had not been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even
clarified that the issue boiled down to whether the arbitration clause
contained in the contract subject of the complaint is valid and enforceable;
that the arbitration clause did not violate any of the cited provisions of the
Arbitration Law.
On September 17, 1998, the RTC rendered an Order, 8 the dispositive portion
of which reads:
Premises considered, defendant's "Motion To Dismiss/Suspend Proceedings
and To Refer Controversy To Voluntary Arbitration" is hereby DENIED.
Defendant is directed to file its answer within ten (10) days from receipt of a
copy of this order.9
In denying the motion, the RTC found that there was no clear basis for
petitioner's plea to dismiss the case, pursuant to Section 7 of the Arbitration
Law. The RTC said that the provision directed the court concerned only to
stay the action or proceeding brought upon an issue arising out of an
agreement providing for the arbitration thereof, but did not impose the
sanction of dismissal. However, the RTC did not find the suspension of the
proceedings warranted, since the Arbitration Law contemplates an
arbitration proceeding that must be conducted in the Philippines under the
jurisdiction and control of the RTC; and before an arbitrator who resides in
the country; and that the arbitral award is subject to court approval,
disapproval and modification, and that there must be an appeal from the
judgment of the RTC. The RTC found that the arbitration clause in question
contravened these procedures, i.e., the arbitration clause contemplated an
arbitration proceeding in New York before a non-resident arbitrator (American
Arbitration Association); that the arbitral award shall be final and binding on
both parties. The RTC said that to apply Section 7 of the Arbitration Law to
such an agreement would result in disregarding the other sections of the
same law and rendered them useless and mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC denied in an
Order10 dated November 25, 1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that
the RTC acted in excess of jurisdiction or with grave abuse of discretion in
refusing to dismiss or at least suspend the proceedings a quo, despite the
fact that the party's agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then required to
file their respective Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition
and affirming the RTC Orders.
In denying the petition, the CA found that stipulation providing for
arbitration in contractual obligation is both valid and constitutional; that
arbitration as an alternative mode of dispute resolution has long been
accepted in our jurisdiction and expressly provided for in the Civil Code; that
R.A. No. 876 (the Arbitration Law) also expressly authorized the arbitration of
domestic disputes. The CA found error in the RTC's holding that Section 7 of
R.A. No. 876 was inapplicable to arbitration clause simply because the clause
failed to comply with the requirements prescribed by the law. The CA found
that there was nothing in the Civil Code, or R.A. No. 876, that require that
arbitration proceedings must be conducted only in the Philippines and the
arbitrators should be Philippine residents. It also found that the RTC ruling
effectively invalidated not only the disputed arbitration clause, but all other
agreements which provide for foreign arbitration. The CA did not find illegal
or against public policy the arbitration clause so as to render it null and void
or ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be
brought under the Arbitration Law for the purpose of suspending the
proceedings before the RTC, since in its Motion to Dismiss/Suspend
proceedings, petitioner alleged, as one of the grounds thereof, that the
subject contract between the parties did not exist or it was invalid; that the
said contract bearing the arbitration clause was never consummated by the
parties, thus, it was proper that such issue be first resolved by the court
through an appropriate trial; that the issue involved a question of fact that
the RTC should first resolve. Arbitration is not proper when one of the parties
repudiated the existence or validity of the contract.
Petitioner's motion for reconsideration was denied in a Resolution dated
November 13, 2006.
Hence, this petition.
Petitioner alleges that the CA committed an error of law in ruling that
arbitration cannot proceed despite the fact that: (a) it had ruled, in its
assailed decision, that the arbitration clause is valid, enforceable and binding
on the parties; (b) the case of Gonzales v. Climax Mining Ltd.11 is inapplicable
here; (c) parties are generally allowed, under the Rules of Court, to adopt
several defenses, alternatively or hypothetically, even if such
defenses are inconsistent with each other; and (d) the complaint filed by
respondent with the trial court is premature.
Petitioner alleges that the CA adopted inconsistent positions when it found
the arbitration clause between the parties as valid and enforceable and yet in
the same breath decreed that the arbitration cannot proceed because
petitioner assailed the existence of the entire agreement containing the
arbitration clause. Petitioner claims the inapplicability of the
cited Gonzales case decided in 2005, because in the present case, it was
respondent who had filed the complaint for rescission and damages with the
RTC, which based its cause of action against petitioner on the alleged
agreement dated July 11, 2006 between the parties; and that the same
agreement contained the arbitration clause sought to be enforced by
petitioner in this case. Thus, whether petitioner assails the genuineness and
due execution of the agreement, the fact remains that the agreement sued
upon provides for an arbitration clause; that respondent cannot use the
provisions favorable to him and completely disregard those that are
unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two
alternative defenses, i.e., the parties had not entered into any agreement
upon which respondent as plaintiff can sue upon; and, assuming that such
agreement existed, there was an arbitration clause that should be enforced,
thus, the dispute must first be submitted to arbitration before an action can
be instituted in court. Petitioner argues that under Section 1(j) of Rule 16 of
the Rules of Court, included as a ground to dismiss a complaint is when a
condition precedent for filing the complaint has not been complied with; and
that submission to arbitration when such has been agreed upon is one such
condition precedent. Petitioner submits that the proceedings in the RTC
must be dismissed, or at least suspended, and the parties be ordered to
proceed with arbitration.
On March 12, 2007, petitioner filed a Manifestation 12 saying that the CA's
rationale in declining to order arbitration based on the 2005 Gonzales ruling
had been modified upon a motion for reconsideration decided in 2007; that
the CA decision lost its legal basis, because it had been ruled that the
arbitration agreement can be implemented notwithstanding that one of the
parties thereto repudiated the contract which contained such agreement
based on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the
remedy against an order denying a Motion to Dismiss/Suspend Proceedings
and To Refer Controversy to Voluntary Arbitration. It claims that the
Arbitration Law which petitioner invoked as basis for its Motion prescribed,
under its Section 29, a remedy, i.e., appeal by a petition for review
on certiorari under Rule 45. Respondent contends that the Gonzales case,
which was decided in 2007, is inapplicable in this case, especially as to the
doctrine of separability enunciated therein. Respondent argues that even if
the existence of the contract and the arbitration clause is conceded, the
decisions of the RTC and the CA declining referral of the dispute between the
parties to arbitration would still be correct. This is so because respondent's
complaint filed in Civil Case No. 98-1376 presents the principal issue of
whether under the facts alleged in the complaint, respondent is entitled to
rescind its contract with petitioner and for the latter to pay damages; that
such issue constitutes a judicial question or one that requires the exercise of
judicial function and cannot be the subject of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a
defendant to adopt in the same action several defenses, alternatively or
hypothetically, even if such defenses are inconsistent with each other refers
to allegations in the pleadings, such as complaint, counterclaim, cross-claim,
third-party complaint, answer, but not to a motion to dismiss. Finally,
respondent claims that petitioner's argument is premised on the existence of
a contract with respondent containing a provision for arbitration. However,
its reliance on the contract, which it repudiates, is inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission
and damages on the basis of the contract, thus, respondent admitted the
existence of all the provisions contained thereunder, including the arbitration
clause; that if respondent relies on said contract for its cause of action
against petitioner, it must also consider itself bound by the rest of the terms
and conditions contained thereunder notwithstanding that respondent may
find some provisions to be adverse to its position; that respondents citation
of the Gonzales case, decided in 2005, to show that the validity of the
contract cannot be the subject of the arbitration proceeding and that it is the
RTC which has the jurisdiction to resolve the situation between the parties
herein, is not correct since in the resolution of the Gonzales' motion for
reconsideration in 2007, it had been ruled that an arbitration agreement is
effective notwithstanding the fact that one of the parties thereto repudiated
the main contract which contained it.
We first address the procedural issue raised by respondent that petitioners
petition for certiorari under Rule 65 filed in the CA against an RTC Order
denying a Motion to Dismiss/Suspend Proceedings and to Refer Controversy
to Voluntary Arbitration was a wrong remedy invoking Section 29 of R.A. No.
876, which provides:
Section 29.
x x x An appeal may be taken from an order made in a proceeding under this
Act, or from a judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to question
of law. x x x.
To support its argument, respondent cites the case of Gonzales v. Climax
Mining Ltd.13 (Gonzales case), wherein we ruled the impropriety of a petition
for certiorari under Rule 65 as a mode of appeal from an RTC Order directing
the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition
to compel arbitration under R.A. No. 876, pursuant to the arbitration clause
found in the Addendum Contract it entered with Gonzales. Judge Oscar
Pimentel of the RTC of Makati then directed the parties to arbitration
proceedings. Gonzales filed a petition for certiorari with Us contending that
Judge Pimentel acted with grave abuse of discretion in immediately ordering
the parties to proceed with arbitration despite the proper, valid and timely
raised argument in his Answer with counterclaim that the Addendum
Contract containing the arbitration clause was null and void. Climax-Arimco
assailed the mode of review availed of by Gonzales, citing Section 29 of R.A.
No. 876 contending that certiorari under Rule 65 can be availed of only if
there was no appeal or any adequate remedy in the ordinary course of law;
that R.A. No. 876 provides for an appeal from such order. We then ruled that
Gonzales' petition for certiorari should be dismissed as it was filed in lieu of
an appeal by certiorari which was the prescribed remedy under R.A. No. 876
and the petition was filed far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question of law, but not
a question of jurisdiction; that Judge Pimentel acted in accordance with the
procedure prescribed in R.A. No. 876 when he ordered Gonzales to proceed
with arbitration and appointed a sole arbitrator after making the
determination that there was indeed an arbitration agreement. It had been
held that as long as a court acts within its jurisdiction and does not gravely
abuse its discretion in the exercise thereof, any supposed error committed by
it will amount to nothing more than an error of judgment reviewable by a
timely appeal and not assailable by a special civil action of certiorari.14
In this case, petitioner raises before the CA the issue that the respondent
Judge acted in excess of jurisdiction or with grave abuse of discretion in
refusing to dismiss, or at least suspend, the proceedings a quo, despite the
fact that the partys agreement to arbitrate had not been complied with.
Notably, the RTC found the existence of the arbitration clause, since it said in
its decision that "hardly disputed is the fact that the arbitration clause in
question contravenes several provisions of the Arbitration Law x x x and to
apply Section 7 of the Arbitration Law to such an agreement would result in
the disregard of the afore-cited sections of the Arbitration Law and render
them useless and mere surplusages." However, notwithstanding the finding
that an arbitration agreement existed, the RTC denied petitioner's motion
and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,15 it was held that R.A. No.
876 explicitly confines the courts authority only to the determination of
whether or not there is an agreement in writing providing for arbitration. In
the affirmative, the statute ordains that the court shall issue an order
summarily directing the parties to proceed with the arbitration in accordance
with the terms thereof. If the court, upon the other hand, finds that no such
agreement exists, the proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend
Proceedings and to Refer Controversy to Voluntary Arbitration, the RTC went
beyond its authority of determining only the issue of whether or not there is
an agreement in writing providing for arbitration by directing petitioner to file
an answer, instead of ordering the parties to proceed to arbitration. In so
doing, it acted in excess of its jurisdiction and since there is no plain, speedy,
and adequate remedy in the ordinary course of law, petitioners resort to a
petition for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding
that this case cannot be brought under the arbitration law for the purpose of
suspending the proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been
recognized and accepted in our jurisdiction. 16 R.A. No. 87617 authorizes
arbitration of domestic disputes. Foreign arbitration, as a system of settling
commercial disputes of an international character, is likewise
recognized.18 The enactment of R.A. No. 9285 on April 2, 2004 further
institutionalized the use of alternative dispute resolution systems, including
arbitration, in the settlement of disputes.19
A contract is required for arbitration to take place and to be
binding.20 Submission to arbitration is a contract 21and a clause in a contract
providing that all matters in dispute between the parties shall be referred to
arbitration is a contract.22 The provision to submit to arbitration any dispute
arising therefrom and the relationship of the parties is part of the contract
and is itself a contract.23
In this case, the contract sued upon by respondent provides for an
arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the
American Arbitration Association, The Arbitration Award shall be final and
binding on both parties.
The CA ruled that arbitration cannot be ordered in this case, since petitioner
alleged that the contract between the parties did not exist or was invalid and
arbitration is not proper when one of the parties repudiates the existence or
validity of the contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed
arbitration clause providing for foreign arbitration, it is our considered
opinion that the case at bench still cannot be brought under the Arbitration
Law for the purpose of suspending the proceedings before the trial court. We
note that in its Motion to Dismiss/Suspend Proceedings, etc, petitioner
Cargill alleged, as one of the grounds thereof, that the alleged contract
between the parties do not legally exist or is invalid. As posited by petitioner,
it is their contention that the said contract, bearing the arbitration clause,
was never consummated by the parties. That being the case, it is but proper
that such issue be first resolved by the court through an appropriate trial.
The issue involves a question of fact that the trial court should first resolve.
Arbitration is not proper when one of the parties repudiates the existence or
validity of the contract. Apropos is Gonzales v. Climax Mining Ltd., 452 SCRA
607, (G.R.No.161957), where the Supreme Court held that:
The question of validity of the contract containing the agreement to
submit to arbitration will affect the applicability of the arbitration
clause itself. A party cannot rely on the contract and claim rights or
obligations under it and at the same time impugn its existence or
validity. Indeed, litigants are enjoined from taking inconsistent
positions....
Consequently, the petitioner herein cannot claim that the contract was never
consummated and, at the same time, invokes the arbitration clause provided
for under the contract which it alleges to be non-existent or invalid. Petitioner
claims that private respondent's complaint lacks a cause of action due to the
absence of any valid contract between the parties. Apparently, the arbitration
clause is being invoked merely as a fallback position. The petitioner must
first adduce evidence in support of its claim that there is no valid contract
between them and should the court a quo find the claim to be meritorious,
the parties may then be spared the rigors and expenses that arbitration in a
foreign land would surely entail.24
However, the Gonzales case,25 which the CA relied upon for not ordering
arbitration, had been modified upon a motion for reconsideration in this
wise:
x x x The adjudication of the petition in G.R. No. 167994 effectively
modifies part of the Decision dated 28 February 2005 in G.R. No.
161957. Hence, we now hold that the validity of the contract containing
the agreement to submit to arbitration does not affect the applicability
of the arbitration clause itself. A contrary ruling would suggest that a
party's mere repudiation of the main contract is sufficient to avoid
arbitration. That is exactly the situation that the separability doctrine,
as well as jurisprudence applying it, seeks to avoid. We add that when it
was declared in G.R. No. 161957 that the case should not be brought for
arbitration, it should be clarified that the case referred to is the case actually
filed by Gonzales before the DENR Panel of Arbitrators, which was for the
nullification of the main contract on the ground of fraud, as it had already
been determined that the case should have been brought before the regular
courts involving as it did judicial issues.26
In so ruling that the validity of the contract containing the arbitration
agreement does not affect the applicability of the arbitration clause itself, we
then applied the doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it, enunciates
that an arbitration agreement is independent of the main contract. The
arbitration agreement is to be treated as a separate agreement and the
arbitration agreement does not automatically terminate when the contract of
which it is a part comes to an end.
The separability of the arbitration agreement is especially significant to the
determination of whether the invalidity of the main contract also nullifies the
arbitration clause. Indeed, the doctrine denotes that the invalidity of the
main contract, also referred to as the "container" contract, does not affect the
validity of the arbitration agreement. Irrespective of the fact that the main
contract is invalid, the arbitration clause/agreement still remains valid and
enforceable.27
Respondent argues that the separability doctrine is not applicable in
petitioner's case, since in the Gonzales case, Climax-Arimco sought to
enforce the arbitration clause of its contract with Gonzales and the former's
move was premised on the existence of a valid contract; while Gonzales, who
resisted the move of Climax-Arimco for arbitration, did not deny the existence
of the contract but merely assailed the validity thereof on the ground of fraud
and oppression. Respondent claims that in the case before Us, petitioner who
is the party insistent on arbitration also claimed in their Motion to
Dismiss/Suspend Proceedings that the contract sought by respondent to be
rescinded did not exist or was not consummated; thus, there is no room for
the application of the separability doctrine, since there is no container or
main contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of
the main contract shall not be regarded as invalid or non-existent just
because the main contract is invalid or did not come into existence, since the
arbitration agreement shall be treated as a separate agreement independent
of the main contract. To reiterate. a contrary ruling would suggest that a
party's mere repudiation of the main contract is sufficient to avoid
arbitration and that is exactly the situation that the separability doctrine
sought to avoid. Thus, we find that even the party who has repudiated the
main contract is not prevented from enforcing its arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission
of contract and damages with the RTC. In so doing, respondent alleged that a
contract exists between respondent and petitioner. It is that contract which
provides for an arbitration clause which states that "any dispute which the
Buyer and Seller may not be able to settle by mutual agreement shall be
settled before the City of New York by the American Arbitration Association.
The arbitration agreement clearly expressed the parties' intention that any
dispute between them as buyer and seller should be referred to arbitration. It
is for the arbitrator and not the courts to decide whether a contract between
the parties exists or is valid.
Respondent contends that assuming that the existence of the contract and
the arbitration clause is conceded, the CA's decision declining referral of the
parties' dispute to arbitration is still correct. It claims that its complaint in
the RTC presents the issue of whether under the facts alleged, it is entitled to
rescind the contract with damages; and that issue constitutes a judicial
question or one that requires the exercise of judicial function and cannot be
the subject of an arbitration proceeding. Respondent cites our ruling
in Gonzales, wherein we held that a panel of arbitrator is bereft of
jurisdiction over the complaint for declaration of nullity/or termination of the
subject contracts on the grounds of fraud and oppression attendant to the
execution of the addendum contract and the other contracts emanating from
it, and that the complaint should have been filed with the regular courts as it
involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on
the Gonzales case to support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of
Arbitrators, Region II, Mines and Geosciences Bureau, of the Department of
Environment and Natural Resources (DENR) against respondents Climax-
Mining Ltd, Climax-Arimco and Australasian Philippines Mining Inc, seeking
the declaration of nullity or termination of the addendum contract and the
other contracts emanating from it on the grounds of fraud and oppression.
The Panel dismissed the complaint for lack of jurisdiction. However, the
Panel, upon petitioner's motion for reconsideration, ruled that it had
jurisdiction over the dispute maintaining that it was a mining dispute, since
the subject complaint arose from a contract between the parties which
involved the exploration and exploitation of minerals over the disputed
area.1wphi1 Respondents assailed the order of the Panel of Arbitrators via a
petition for certiorari before the CA. The CA granted the petition and declared
that the Panel of Arbitrators did not have jurisdiction over the complaint,
since its jurisdiction was limited to the resolution of mining disputes, such
as those which raised a question of fact or matter requiring the technical
knowledge and experience of mining authorities and not when the complaint
alleged fraud and oppression which called for the interpretation and
application of laws. The CA further ruled that the petition should have been
settled through arbitration under R.A. No. 876 the Arbitration Law as
provided under the addendum contract.
On a review on certiorari, we affirmed the CAs finding that the Panel of
Arbitrators who, under R.A. No. 7942 of the Philippine Mining Act of 1995,
has exclusive and original jurisdiction to hear and decide mining disputes,
such as mining areas, mineral agreements, FTAAs or permits and surface
owners, occupants and claimholders/concessionaires, is bereft of jurisdiction
over the complaint for declaration of nullity of the addendum contract; thus,
the Panels' jurisdiction is limited only to those mining disputes which raised
question of facts or matters requiring the technical knowledge and experience
of mining authorities. We then said:
In Pearson v. Intermediate Appellate Court, this Court observed that the
trend has been to make the adjudication of mining cases a purely
administrative matter. Decisions of the Supreme Court on mining disputes
have recognized a distinction between (1) the primary powers granted by
pertinent provisions of law to the then Secretary of Agriculture and Natural
Resources (and the bureau directors) of an executive or administrative
nature, such as granting of license, permits, lease and contracts, or
approving, rejecting, reinstating or canceling applications, or deciding
conflicting applications, and (2) controversies or disagreements of civil or
contractual nature between litigants which are questions of a judicial nature
that may be adjudicated only by the courts of justice. This distinction is
carried on even in Rep. Act No. 7942.28
We found that since the complaint filed before the DENR Panel of Arbitrators
charged respondents with disregarding and ignoring the addendum contract,
and acting in a fraudulent and oppressive manner against petitioner, the
complaint filed before the Panel was not a dispute involving rights to mining
areas, or was it a dispute involving claimholders or concessionaires, but
essentially judicial issues. We then said that the Panel of Arbitrators did not
have jurisdiction over such issue, since it does not involve the application of
technical knowledge and expertise relating to mining. It is in this context that
we said that:
Arbitration before the Panel of Arbitrators is proper only when there is a
disagreement between the parties as to some provisions of the contract
between them, which needs the interpretation and the application of that
particular knowledge and expertise possessed by members of that Panel. It is
not proper when one of the parties repudiates the existence or validity of
such contract or agreement on the ground of fraud or oppression as in this
case. The validity of the contract cannot be subject of arbitration
proceedings. Allegations of fraud and duress in the execution of a contract
are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation of
laws and jurisprudence which is necessarily a judicial function. 29
In fact, We even clarified in our resolution on Gonzales motion for
reconsideration that "when we declared that the case should not be brought
for arbitration, it should be clarified that the case referred to is the case
actually filed by Gonzales before the DENR Panel of Arbitrators, which was
for the nullification of the main contract on the ground of fraud, as it had
already been determined that the case should have been brought before the
regular courts involving as it did judicial issues." We made such clarification
in our resolution of the motion for reconsideration after ruling that the
parties in that case can proceed to arbitration under the Arbitration Law, as
provided under the Arbitration Clause in their Addendum Contract.
WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2006
and the Resolution dated November 13, 2006 of the Court of Appeals in CA-
G.R. SP No. 50304 are REVERSED and SET ASIDE. The parties are
hereby ORDERED to SUBMIT themselves to the arbitration of their dispute,
pursuant to their July 11, 1996 agreement. SO ORDERED.