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SPECIAL SECOND DIVISION

G.R. No. 161957 January 22, 2007

JORGE GONZALES and PANEL OF ARBITRATORS,


Petitioners, Present:
-versus-
CLIMAX MINING LTD., CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING INC.,
Respondents.
x--------------------------------------------------------------------------------- x
JORGE GONZALES, G.R. No. 167994
Petitioner,
- versus-
HON. OSCAR B. PIMENTEL, in his capacity as PRESIDING JUDGE of BR. 148 of the REGIONAL TRIAL
COURT of MAKATI CITY, and CLIMAX-ARIMCO MINING CORPORATION,
Respondents.
x-------------------------- --------------------------------------------------- x
R E S O L U T I ON
TINGA, J.:
This is a consolidation of two petitions rooted in the same disputed Addendum Contract entered into by the
parties. In G.R. No. 161957, the Court in its Decision of 28 February 2005[1] denied the Rule 45 petition of
petitioner Jorge Gonzales (Gonzales). It held that the DENR Panel of Arbitrators had no jurisdiction over the
complaint for the annulment of the Addendum Contract on grounds of fraud and violation of the Constitution and
that the action should have been brought before the regular courts as it involved judicial issues. Both parties
filed separate motions for reconsideration. Gonzales avers in his Motion for Reconsideration[2] that the Court
erred in holding that the DENR Panel of Arbitrators was bereft of jurisdiction, reiterating its argument that the
case involves a mining dispute that properly falls within the ambit of the Panels authority. Gonzales adds that
the Court failed to rule on other issues he raised relating to the sufficiency of his complaint before the DENR
Panel of Arbitrators and the timeliness of its filing.

Respondents Climax Mining Ltd., et al., (respondents) filed their Motion for Partial Reconsideration and/or
Clarification[3] seeking reconsideration of that part of the Decision holding that the case should not be brought for
arbitration under Republic Act (R.A.) No. 876, also known as the Arbitration Law.[4] Respondents, citing
American jurisprudence[5] and the UNCITRAL Model Law,[6] argue that the arbitration clause in the Addendum
Contract should be treated as an agreement independent of the other terms of the contract, and that a claimed
rescission of the main contract does not avoid the duty to arbitrate. Respondents add that Gonzaless argument
relating to the alleged invalidity of the Addendum Contract still has to be proven and adjudicated on in a proper
proceeding; that is, an action separate from the motion to compel arbitration. Pending judgment in such
separate action, the Addendum Contract remains valid and binding and so does the arbitration clause
therein. Respondents add that the holding in the Decision that the case should not be brought under the ambit of
the Arbitration Law appears to be premised on Gonzaless having impugn[ed] the existence or validity of the
addendum contract. If so, it supposedly conveys the idea that Gonzaless unilateral repudiation of the contract or
mere allegation of its invalidity is all it takes to avoid arbitration. Hence, respondents submit that the courts
holding that the case should not be brought under the ambit of the Arbitration Law be understood or clarified as
operative only where the challenge to the arbitration agreement has been sustained by final judgment.

Both parties were required to file their respective comments to the other partys motion for
reconsideration/clarification.[7] Respondents filed their Comment on 17 August 2005,[8] while Gonzales filed his
only on 25 July 2006.[9]

On the other hand, G.R. No. 167994 is a Rule 65 petition filed on 6 May 2005, or while the motions for
reconsideration in G.R. No. 161957[10] were pending, wherein Gonzales challenged the orders of the Regional
Trial Court (RTC) requiring him to proceed with the arbitration proceedings as sought by Climax-Arimco Mining
Corporation (Climax-Arimco).

On 5 June 2006, the two cases, G.R. Nos. 161957 and 167994, were consolidated upon the recommendation of
the Assistant Division Clerk of Court since the cases are rooted in the same Addendum Contract.

We first tackle the more recent case which is G.R. No. 167994. It stemmed from the petition to compel
arbitration filed by respondent Climax-Arimco before the RTC of Makati City on 31 March 2000 while the
complaint for the nullification of the Addendum Contract was pending before the DENR Panel of
Arbitrators. On 23 March 2000, Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant to Clause
19.1[11] of the Addendum Contract and also in accordance with Sec. 5 of R.A. No. 876. The petition for
arbitration was subsequently filed and Climax-Arimco sought an order to compel the parties to arbitrate pursuant
to the said arbitration clause. The case, docketed as Civil Case No. 00-444, was initially raffled to Br. 132 of the
RTC of Makati City, with Judge Herminio I. Benito as Presiding Judge. Respondent Climax-Arimco filed on 5
April 2000 a motion to set the application to compel arbitration for hearing.

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On 14 April 2000, Gonzales filed a motion to dismiss which he however failed to set for hearing. On 15 May
2000, he filed an Answer with Counterclaim,[12]questioning the validity of the Addendum Contract containing the
arbitration clause. Gonzales alleged that the Addendum Contract containing the arbitration clause is void in view
of Climax-Arimcos acts of fraud, oppression and violation of the Constitution. Thus, the arbitration clause,
Clause 19.1, contained in the Addendum Contract is also null and void ab initio and legally inexistent.

On 18 May 2000, the RTC issued an order declaring Gonzaless motion to dismiss moot and academic in view of
the filing of his Answer with Counterclaim.[13]

On 31 May 2000, Gonzales asked the RTC to set the case for pre-trial.[14] This the RTC denied on 16 June
2000, holding that the petition for arbitration is a special proceeding that is summary in nature. [15] However, on 7
July 2000, the RTC granted Gonzaless motion for reconsideration of the 16 June 2000 Order and set the case
for pre-trial on 10 August 2000, it being of the view that Gonzales had raised in his answer the issue of the
making of the arbitration agreement.[16]

Climax-Arimco then filed a motion to resolve its pending motion to compel arbitration. The RTC denied the same
in its 24 July 2000 order.

On 28 July 2000, Climax-Arimco filed a Motion to Inhibit Judge Herminio I. Benito for not possessing the cold
neutrality of an impartial judge.[17] On 5 August 2000, Judge Benito issued an Order granting the Motion to
Inhibit and ordered the re-raffling of the petition for arbitration.[18] The case was raffled to the sala of public
respondent Judge Oscar B. Pimentel of Branch 148.

On 23 August 2000, Climax-Arimco filed a motion for reconsideration of the 24 July 2000 Order.[19] Climax-
Arimco argued that R.A. No. 876 does not authorize a pre-trial or trial for a motion to compel arbitration but
directs the court to hear the motion summarily and resolve it within ten days from hearing. Judge Pimentel
granted the motion and directed the parties to arbitration. On 13 February 2001, Judge Pimentel issued the first
assailed order requiring Gonzales to proceed with arbitration proceedings and appointing retired CA Justice
Jorge Coquia as sole arbitrator.[20]

Gonzales moved for reconsideration on 20 March 2001 but this was denied in the Order dated 7 March 2005.[21]

Gonzales thus filed the Rule 65 petition assailing the Orders dated 13 February 2001 and 7 March
2005 of Judge Pimentel. Gonzales contends that public respondent 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,
is null and void. Gonzales has also sought a temporary restraining order to prevent the enforcement of the
assailed orders directing the parties to arbitrate, and to direct Judge Pimentel to hold a pre-trial conference and
the necessary hearings on the determination of the nullity of the Addendum Contract.

In support of his argument, Gonzales invokes Sec. 6 of R.A. No. 876:

SEC. 6. Hearing by court.A party aggrieved by the failure, neglect or refusal of another
to perform under an agreement in writing providing for arbitration may petition the court for an
order directing that such arbitration proceed in the manner provided for in such
agreement. Five days notice in writing of the hearing of such application shall be served either
personally or by registered mail upon the party in default. The court shall hear the parties, and
upon being satisfied that the making of the agreement or such failure to comply therewith is not
in issue, shall make an order directing the parties to proceed to arbitration in accordance with
the terms of the agreement. If the making of the agreement or default be in issue the court shall
proceed to summarily hear such issue. If the finding be that no agreement in writing providing
for arbitration was made, or that there is no default in the proceeding thereunder, the
proceeding shall be dismissed. If the finding be that a written provision for arbitration was made
and there is a default in proceeding thereunder, an order shall be made summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof.

The court shall decide all motions, petitions or applications filed under the provisions of
this Act, within ten (10) days after such motions, petitions, or applications have been heard by
it.
Gonzales also cites Sec. 24 of R.A. No. 9285 or the Alternative Dispute Resolution Act of 2004:
SEC. 24. Referral to Arbitration.A court before which an action is brought in a matter
which is the subject matter of an arbitration agreement shall, if at least one party so requests
not later than the pre-trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or
incapable of being performed.

According to Gonzales, the above-quoted provisions of law outline the procedure to be followed in petitions to
compel arbitration, which the RTC did not follow.Thus, referral of the parties to arbitration by Judge Pimentel
despite the timely and properly raised issue of nullity of the Addendum Contract was misplaced and without
legal basis. Both R.A. No. 876 and R.A. No. 9285 mandate that any issue as to the nullity, inoperativeness, or
incapability of performance of the arbitration clause/agreement raised by one of the parties to the alleged

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arbitration agreement must be determined by the court prior to referring them to arbitration. They require that the
trial court first determine or resolve the issue of nullity, and there is no other venue for this determination other
than a pre-trial and hearing on the issue by the trial court which has jurisdiction over the case. Gonzales adds
that the assailed 13 February 2001 Order also violated his right to procedural due process when the trial court
erroneously ruled on the existence of the arbitration agreement despite the absence of a hearing for the
presentation of evidence on the nullity of the Addendum Contract.

Respondent Climax-Arimco, on the other hand, assails the mode of review availed of by Gonzales. Climax-
Arimco cites Sec. 29 of R.A. No. 876:

SEC. 29. Appeals.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 questions of law. The proceedings upon such an appeal, including the
judgment thereon shall be governed by the Rules of Court in so far as they are applicable.

Climax-Arimco mentions that the special civil action for certiorari employed by Gonzales is available only where
there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law against the
challenged orders or acts. Climax-Arimco then points out that R.A. No. 876 provides for an appeal from such
orders, which, under the Rules of Court, must be filed within 15 days from notice of the final order or resolution
appealed from or of the denial of the motion for reconsideration filed in due time. Gonzales has not denied that
the relevant 15-day period for an appeal had elapsed long before he filed this petition for certiorari. He cannot
use the special civil action of certiorari as a remedy for a lost appeal.

Climax-Arimco adds that an application to compel arbitration under Sec. 6 of R.A. No. 876 confers on the trial
court only a limited and special jurisdiction, i.e., a jurisdiction solely to determine (a) whether or not the parties
have a written contract to arbitrate, and (b) if the defendant has failed to comply with that contract.Respondent
cites La Naval Drug Corporation v. Court of Appeals,[22] which holds that in a proceeding to compel arbitration,
[t]he arbitration law explicitly confines the courts authority only to pass upon the issue of whether there is or
there is no agreement in writing providing for arbitration, and [i]n 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.[23] Climax-Arimco argues that R.A. No. 876 gives no room for any other issue to be dealt with in
such a proceeding, and that the court presented with an application to compel arbitration may order arbitration
or dismiss the same, depending solely on its finding as to those two limited issues. If either of these matters is
disputed, the court is required to conduct a summary hearing on it. Gonzaless proposition contradicts both the
trial courts limited jurisdiction and the summary nature of the proceeding itself.

Climax-Arimco further notes that Gonzaless attack on or repudiation of the Addendum Contract also is not a
ground to deny effect to the arbitration clause in the Contract. The arbitration agreement is separate and
severable from the contract evidencing the parties commercial or economic transaction, it stresses. Hence, the
alleged defect or failure of the main contract is not a ground to deny enforcement of the parties arbitration
agreement. Even the party who has repudiated the main contract is not prevented from enforcing its arbitration
provision. R.A. No. 876 itself treats the arbitration clause or agreement as a contract separate from the
commercial, economic or other transaction to be arbitrated. The statute, in particular paragraph 1 of Sec. 2
thereof, considers the arbitration stipulation an independent contract in its own right whose enforcement may be
prevented only on grounds which legally make the arbitration agreement itself revocable, thus:

SEC. 2. Persons and matters subject to arbitration.Two or more persons or parties may submit
to the arbitration of one or more arbitrators any controversy existing, between them at the time
of the submission and which may be the subject of an action, or the parties to any contract may
in such contract agree to settle by arbitration a controversy thereafter arising between
them. Such submission or contract shall be valid, enforceable and irrevocable, save upon such
grounds as exist at law for the revocation of any contract.

xxxx

The grounds Gonzales invokes for the revocation of the Addendum Contractfraud and oppression in the
execution thereofare also not grounds for the revocation of the arbitration clause in the Contract, Climax-Arimco
notes. Such grounds may only be raised by way of defense in the arbitration itself and cannot be used to
frustrate or delay the conduct of arbitration proceedings. Instead, these should be raised in a separate action for
rescission, it continues.

Climax-Arimco emphasizes that the summary proceeding to compel arbitration under Sec. 6 of R.A. No. 876
should not be confused with the procedure in Sec. 24 of R.A. No. 9285. Sec. 6 of R.A. No. 876 refers to an
application to compel arbitration where the courts authority is limited to resolving the issue of whether there is or
there is no agreement in writing providing for arbitration, while Sec. 24 of R.A. No. 9285 refers to an ordinary
action which covers a matter that appears to be arbitrable or subject to arbitration under the arbitration
agreement. In the latter case, the statute is clear that the court, instead of trying the case, may, on request of
either or both parties, refer the parties to arbitration, unless it finds that the arbitration agreement is null and
void, inoperative or incapable of being performed.Arbitration may even be ordered in the same suit brought upon
a matter covered by an arbitration agreement even without waiting for the outcome of the issue of the validity of

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the arbitration agreement. Art. 8 of the UNCITRAL Model Law[24] states that where a court before which an
action is brought in a matter which is subject of an arbitration agreement refers the parties to arbitration, the
arbitral proceedings may proceed even while the action is pending.

Thus, the main issue raised in the Petition for Certiorari is whether it was proper for the RTC, in the proceeding
to compel arbitration under R.A. No. 876, to order the parties to arbitrate even though the defendant therein has
raised the twin issues of validity and nullity of the Addendum Contract and, consequently, of the arbitration
clause therein as well. The resolution of both Climax-Arimcos Motion for Partial Reconsideration and/or
Clarification in G.R. No. 161957 and Gonzaless Petition for Certiorari in G.R. No. 167994 essentially turns on
whether the question of validity of the Addendum Contract bears upon the applicability or enforceability of the
arbitration clause contained therein. The two pending matters shall thus be jointly resolved.

We address the Rule 65 petition in G.R. No. 167994 first from the remedial law perspective. It deserves
to be dismissed on procedural grounds, as it was filed in lieu of appeal which is the prescribed remedy and at
that far beyond the reglementary period. It is elementary in remedial law that the use of an erroneous mode of
appeal is cause for dismissal of the petition for certiorari and it has been repeatedly stressed that a petition for
certiorari is not a substitute for a lost appeal. As its nature, a petition for certiorari lies only where there is no
appeal, and no plain, speedy and adequate remedy in the ordinary course of law.[25] The Arbitration Law
specifically provides for an appeal by certiorari, i.e., a petition for review under certiorari under Rule 45 of the
Rules of Court that raises pure questions of law.[26]There is no merit to Gonzaless argument that the use of the
permissive term may in Sec. 29, R.A. No. 876 in the filing of appeals does not prohibit nor discount the filing of a
petition for certiorari under Rule 65.[27] Proper interpretation of the aforesaid provision of law shows that the term
may refers only to the filing of an appeal, not to the mode of review to be employed. Indeed, the use of may
merely reiterates the principle that the right to appeal is not part of due process of law but is a mere statutory
privilege to be exercised only in the manner and in accordance with law.

Neither can BF Corporation v. Court of Appeals[28] cited by Gonzales support his theory. Gonzales
argues that said case recognized and allowed a petition for certiorari under Rule 65 appealing the order of the
Regional Trial Court disregarding the arbitration agreement as an acceptable remedy.[29] The BF
Corporation case had its origins in a complaint for collection of sum of money filed by therein petitioner BF
Corporation against Shangri-la Properties, Inc. (SPI). SPI moved to suspend the proceedings alleging that the
construction agreement or the Articles of Agreement between the parties contained a clause requiring prior
resort to arbitration before judicial intervention. The trial court found that an arbitration clause was incorporated
in the Conditions of Contract appended to and deemed an integral part of the Articles of Agreement. Still, the
trial court denied the motion to suspend proceedings upon a finding that the Conditions of Contract were not
duly executed and signed by the parties. The trial court also found that SPI had failed to file any written notice of
demand for arbitration within the period specified in the arbitration clause. The trial court denied SPI's motion for
reconsideration and ordered it to file its responsive pleading. Instead of filing an answer, SPI filed a petition for
certiorari under Rule 65, which the Court of Appeals, favorably acted upon. In a petition for review before this
Court, BF Corporation alleged, among others, that the Court of Appeals should have dismissed the petition for
certiorari since the order of the trial court denying the motion to suspend proceedings is a resolution of an
incident on the merits and upon the continuation of the proceedings, the trial court would eventually render a
decision on the merits, which decision could then be elevated to a higher court in an ordinary appeal.[30]

The Court did not uphold BF Corporations argument. The issue raised before the Court was whether SPI
had taken the proper mode of appeal before the Court of Appeals. The question before the Court of Appeals
was whether the trial court had prematurely assumed jurisdiction over the controversy. The question of
jurisdiction in turn depended on the question of existence of the arbitration clause which is one of fact. While on
its face the question of existence of the arbitration clause is a question of fact that is not proper in a petition for
certiorari, yet since the determination of the question obliged the Court of Appeals as it did to interpret the
contract documents in accordance with R.A. No. 876 and existing jurisprudence, the question is likewise a
question of law which may be properly taken cognizance of in a petition for certiorari under Rule 65, so the Court
held.[31]

The situation in B.F. Corporation is not availing in the present petition. The disquisition in B.F.
Corporation led to the conclusion that in order that the question of jurisdiction may be resolved, the appellate
court had to deal first with a question of law which could be addressed in a certiorari proceeding. In the present
case, Gonzaless petition raises a question of law, but not a question of jurisdiction. 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 has 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. [32] Even if we
overlook the employment of the wrong remedy in the broader interests of justice, the petition would nevertheless
be dismissed for failure of Gonzalez to show grave abuse of discretion.

Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
jurisdiction. The Civil Code is explicit on the matter.[33] R.A. No. 876 also expressly authorizes arbitration of
domestic disputes. Foreign arbitration, as a system of settling commercial disputes of an international character,
was likewise recognized when the Philippines adhered to the United Nations "Convention on the Recognition
and the Enforcement of Foreign Arbitral Awards of 1958," under the 10 May 1965 Resolution No. 71 of the

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Philippine Senate, giving reciprocal recognition and allowing enforcement of international arbitration agreements
between parties of different nationalities within a contracting state.[34] The enactment of R.A. No. 9285 on 2 April
2004 further institutionalized the use of alternative dispute resolution systems, including arbitration, in the
settlement of disputes.

Disputes do not go to arbitration unless and until the parties have agreed to abide by the arbitrators
decision. Necessarily, a contract is required for arbitration to take place and to be binding. R.A. No. 876
recognizes the contractual nature of the arbitration agreement, thus:

SEC. 2. Persons and matters subject to arbitration.Two or more persons or parties may submit
to the arbitration of one or more arbitrators any controversy existing, between them at
the time of the submission and which may be the subject of an action, or the parties to any
contract may in such contract agree to settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be valid, enforceable and irrevocable,
save upon such grounds as exist at law for the revocation of any contract.

Such submission or contract may include question arising out of valuations, appraisals or other
controversies which may be collateral, incidental, precedent or subsequent to any issue
between the parties.

A controversy cannot be arbitrated where one of the parties to the controversy is an infant, or a
person judicially declared to be incompetent, unless the appropriate court having jurisdiction
approve a petition for permission to submit such controversy to arbitration made by the general
guardian or guardian ad litem of the infant or of the incompetent.[Emphasis added.]

Thus, we held in Manila Electric Co. v. Pasay Transportation Co.[35] that a submission to arbitration is a
contract. A clause in a contract providing that all matters in dispute between the parties shall be referred to
arbitration is a contract,[36] and in Del Monte Corporation-USA v. Court of Appeals[37] that [t]he provision to
submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that contract and
is itself a contract. As a rule, contracts are respected as the law between the contracting parties and produce
effect as between them, their assigns and heirs.[38]

The special proceeding under Sec. 6 of R.A. No. 876 recognizes the contractual nature of arbitration
clauses or agreements. It provides:

SEC. 6. Hearing by court.A party aggrieved by the failure, neglect or refusal of another
to perform under an agreement in writing providing for arbitration may petition the court for
an order directing that such arbitration proceed in the manner provided for in such
agreement. Five days notice in writing of the hearing of such application shall be served either
personally or by registered mail upon the party in default. The court shall hear the parties, and
upon being satisfied that the making of the agreement or such failure to comply
therewith is not in issue, shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. If the making of the agreement or default be in
issue the court shall proceed to summarily hear such issue. If the finding be that no agreement
in writing providing for arbitration was made, or that there is no default in the proceeding
thereunder, the proceeding shall be dismissed. If the finding be that a written provision for
arbitration was made and there is a default in proceeding thereunder, an order shall be made
summarily directing the parties to proceed with the arbitration in accordance with the terms
thereof.

The court shall decide all motions, petitions or applications filed under the provisions of
this Act, within ten days after such motions, petitions, or applications have been heard by
it. [Emphasis added.]

This special proceeding is the procedural mechanism for the enforcement of the contract to arbitrate. The
jurisdiction of the courts in relation to Sec. 6 of R.A. No. 876 as well as the nature of the proceedings therein
was expounded upon in La Naval Drug Corporation v. Court of Appeals.[39] There it was held that R.A. No. 876
explicitly confines the court's 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 proceeding shall be dismissed."[40] The cited
case also stressed that the proceedings are summary in nature.[41] The same thrust was made in the earlier
case of Mindanao Portland Cement Corp. v. McDonough Construction Co. of Florida[42] which held, thus:

Since there obtains herein a written provision for arbitration as well as failure on
respondent's part to comply therewith, the court a quo rightly ordered the parties to proceed to
arbitration in accordance with the terms of their agreement (Sec. 6, Republic Act 876).
Respondent's arguments touching upon the merits of the dispute are improperly raised herein.
They should be addressed to the arbitrators. This proceeding is merely a summary remedy to

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enforce the agreement to arbitrate. The duty of the court in this case is not to resolve the merits
of the parties' claims but only to determine if they should proceed to arbitration or not. x x x x[43]

Implicit in the summary nature of the judicial proceedings is the separable or independent character of
the arbitration clause or agreement. This was highlighted in the cases of Manila Electric Co. v. Pasay Trans.
Co.[44] and Del Monte Corporation-USA v. Court of Appeals.[45]

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 part
comes to an end.[46]

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.[47]

The separability of the arbitration clause is confirmed in Art. 16(1) of the UNCITRAL Model Law and Art.
21(2) of the UNCITRAL Arbitration Rules.[48]

The separability doctrine was dwelt upon at length in the U.S. case of Prima Paint Corp. v. Flood &
Conklin Manufacturing Co.[49] In that case, Prima Paint and Flood and Conklin (F & C) entered into a consulting
agreement whereby F & C undertook to act as consultant to Prima Paint for six years, sold to Prima Paint a list
of its customers and promised not to sell paint to these customers during the same period. The consulting
agreement contained an arbitration clause. Prima Paint did not make payments as provided in the consulting
agreement, contending that F & C had fraudulently misrepresented that it was solvent and able for perform its
contract when in fact it was not and had even intended to file for bankruptcy after executing the consultancy
agreement. Thus, F & C served Prima Paint with a notice of intention to arbitrate. Prima Paint sued in court for
rescission of the consulting agreement on the ground of fraudulent misrepresentation and asked for the
issuance of an order enjoining F & C from proceeding with arbitration. F & C moved to stay the suit pending
arbitration. The trial court granted F & Cs motion, and the U.S. Supreme Court affirmed.

The U.S. Supreme Court did not address Prima Paints argument that it had been fraudulently induced
by F & C to sign the consulting agreement and held that no court should address this argument. Relying on Sec.
4 of the Federal Arbitration Actwhich provides that if a party [claims to be] aggrieved by the alleged failure x x x
of another to arbitrate x x x, [t]he court shall hear the parties, and upon being satisfied that the making of the
agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing
the parties to proceed to arbitration x x x. If the making of the arbitration agreement or the failure, neglect, or
refusal to perform the same be in issue, the court shall proceed summarily to the trial thereofthe U.S. High Court
held that the court should not order the parties to arbitrate if the making of the arbitration agreement is in
issue. The parties should be ordered to arbitration if, and only if, they have contracted to submit to
arbitration. Prima Paint was not entitled to trial on the question of whether an arbitration agreement was made
because its allegations of fraudulent inducement were not directed to the arbitration clause itself, but only to the
consulting agreement which contained the arbitration agreement.[50] Prima Paint held that arbitration clauses are
separable from the contracts in which they are embedded, and that where no claim is made that fraud was
directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the
claim that the contract itself was induced by fraud.[51]

There is reason, therefore, to rule against Gonzales when he alleges that Judge Pimentel acted with
grave abuse of discretion in ordering the parties to proceed with arbitration. Gonzaless argument that the
Addendum Contract is null and void and, therefore the arbitration clause therein is void as well, is not
tenable. First, the proceeding in a petition for arbitration under R.A. No. 876 is limited only to the resolution of
the question of whether the arbitration agreement exists. Second, the separability of the arbitration clause from
the Addendum Contract means that validity or invalidity of the Addendum Contract will not affect the
enforceability of the agreement to arbitrate. Thus, Gonzaless petition for certiorari should be dismissed.

This brings us back to G.R. No. 161957. The adjudication of the petition in G.R. No. 167994 effectively
modifies part of the Decision dated 28 February 2005in 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 partys 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.

The Motion for Reconsideration of Gonzales in G.R. No. 161957 should also be denied. In the motion,
Gonzales raises the same question of jurisdiction, more particularly that the complaint for nullification of the
Addendum Contract pertained to the DENR Panel of Arbitrators, not the regular courts. He insists that the

ADR Set 3 Page 6


subject of his complaint is a mining dispute since it involves a dispute concerning rights to mining areas, the
Financial and Technical Assistance Agreement (FTAA) between the parties, and it also involves
claimowners. He adds that the Court failed to rule on other issues he raised, such as whether he had ceded his
claims over the mineral deposits located within the Addendum Area of Influence; whether the complaint filed
before the DENR Panel of Arbitrators alleged ultimate facts of fraud; and whether the action to declare the nullity
of the Addendum Contract on the ground of fraud has prescribed.

These are the same issues that Gonzales raised in his Rule 45 petition in G.R. No. 161957 which were
resolved against him in the Decision of 28 February 2005. Gonzales does not raise any new argument that
would sway the Court even a bit to alter its holding that the complaint filed before the DENR Panel of Arbitrators
involves judicial issues which should properly be resolved by the regular courts. He alleged fraud or
misrepresentation in the execution of the Addendum Contract which is a ground for the annulment of a voidable
contract. Clearly, such allegations entail legal questions which are within the jurisdiction of the courts.

The question of whether Gonzales had ceded his claims over the mineral deposits in the Addendum
Area of Influence is a factual question which is not proper for determination before this Court. At all events,
moreover, the question is irrelevant to the issue of jurisdiction of the DENR Panel of Arbitrators. It should be
pointed out that the DENR Panel of Arbitrators made a factual finding in its Order dated 18 October 2001, which
it reiterated in its Order dated 25 June 2002, that Gonzales had, through the various agreements, assigned his
interest over the mineral claims all in favor of [Climax-Arimco] as well as that without the complainant [Gonzales]
assigning his interest over the mineral claims in favor of [Climax-Arimco], there would be no FTAA to speak
of.[52] This finding was affirmed by the Court of Appeals in its Decision dated 30 July 2003 resolving the petition
for certiorari filed by Climax-Arimco in regard to the 18 October 2001 Order of the DENR Panel.[53]

The Court of Appeals likewise found that Gonzaless complaint alleged fraud but did not provide any
particulars to substantiate it. The complaint repeatedly mentioned fraud, oppression, violation of the Constitution
and similar conclusions but nowhere did it give any ultimate facts or particulars relative to the allegations.[54]

Sec. 5, Rule 8 of the Rules of Court specifically provides that in all averments of fraud, the
circumstances constituting fraud must be stated with particularity. This is to enable the opposing party to
controvert the particular facts allegedly constituting the same. Perusal of the complaint indeed shows that it
failed to state with particularity the ultimate facts and circumstances constituting the alleged fraud. It does not
state what particulars about Climax-Arimcos financial or technical capability were misrepresented, or how the
misrepresentation was done. Incorporated in the body of the complaint are verbatim reproductions of the
contracts, correspondence and government issuances that reportedly explain the allegations of fraud and
misrepresentation, but these are, at best, evidentiary matters that should not be included in the pleading.

As to the issue of prescription, Gonzaless claims of fraud and misrepresentation attending the execution
of the Addendum Contract are grounds for the annulment of a voidable contract under the Civil Code.[55] Under
Art. 1391 of the Code, an action for annulment shall be brought within four years, in the case of fraud, beginning
from the time of the discovery of the same. However, the time of the discovery of the alleged fraud is not clear
from the allegations of Gonzaless complaint. That being the situation coupled with the fact that this Court is not
a trier of facts, any ruling on the issue of prescription would be uncalled for or even unnecessary.

WHEREFORE, the Petition for Certiorari in G.R. No. 167994 is DISMISSED. Such dismissal effectively
renders superfluous formal action on the Motion for Partial Reconsideration and/or Clarification filed by Climax
Mining Ltd., et al. in G.R. No. 161957.

The Motion for Reconsideration filed by Jorge Gonzales in G.R. No. 161957 is DENIED WITH
FINALITY.

SO ORDERED.

ADR Set 3 Page 7


FIRST DIVISION
G.R. No. 141818 June 22, 2006

INSULAR SAVINGS BANK, Petitioner,


- versus -
FAR EAST BANK AND TRUST COMPANY, Respondent.
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari[1] assails the November 9, 1999 Order[2] of the Regional Trial Court of Makati
City, Branch 135, in Civil Case No. 92-145 which dismissed the petition for review for lack of jurisdiction and its
February 1, 2000 Order[3] denying reconsideration thereof.

The antecedent facts are as follows:


On December 11, 1991, Far East Bank and Trust Company (Respondent) filed a complaint against Home
Bankers Trust and Company (HBTC)[4] with the Philippine Clearing House Corporations (PCHC) Arbitration
Committee docketed as Arbicom Case No. 91-069.[5] Respondent sought to recover from the petitioner, the sum
of P25,200,000.00 representing the total amount of the three checks drawn and debited against its clearing
account. HBTC sent these checks to respondent for clearing by operation of the PCHC clearing
system. Thereafter, respondent dishonored the checks for insufficiency of funds and returned the checks to
HBTC. However, the latter refused to accept them since the checks were returned by respondent after the
reglementary regional clearing period.[6]

Meanwhile, on January 17, 1992, before the termination of the arbitration proceedings, respondent filed
another complaint but this time with the Regional Trial Court (RTC) in Makati City docketed as Civil Case No.
92-145 for Sum of Money and Damages with Preliminary Attachment. The complaint was filed not only against
HBTC but also against Robert Young, Eugene Arriesgado and Victor Tancuan (collectively known as
Defendants), who were the president and depositors of HBTC respectively.[7] Aware of the arbitration
proceedings between respondent and petitioner, the RTC, in an Omnibus Order dated April 30,
1992,[8] suspended the proceedings in the case against all the defendants pending the decision of the Arbitration
Committee, to wit:

WHEREFORE, the Court hereby orders:

(a) Home Bankers & Trust Co. to produce and permit plaintiff to inspect, copy and/or
photograph the checking account deposit ledger of Victor Tancuans Account No. 1803-00605-3;

(b) The Motions to Dismiss filed by all defendants denied, for lack of merit; and
(c) Proceedings in this case against all defendants be suspended pending
award/decision in the arbitration proceedings against Home Bankers and Trust Co.

SO ORDERED.[9] (Emphasis supplied)

The above Omnibus Order was amended by the trial court in its October 1, 1992 Order,[10] the
dispositive portion of which reads as follows:

WHEREFORE, the Omnibus Order dated 30 April 1992 is hereby reconsidered by


deleting the phrase since the complaint also seeks exemplary damages, attorneys fees, litigation
expenses and costs of suit against HBT, on page 4 thereof and par. C of its dispositive portion is
amended to read:

(c) Procedings against Home Bankers and Trust Co. are suspended pending
award/decision in the arbitration proceedings while those against individual defendants be
immediately reinstated and continued.

HBT and Tancuans separate Motions for Reconsiderations are hereby denied, for lack of
merit.

SO ORDERED.[11]

On February 2, 1998, the PCHC Arbitration Committee rendered its decision in favor of respondent,[12] thus:

IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and
against the defendant sentencing the latter to pay the plaintiff the sum of P25.2 million as
principal. In view of the fact, however, that this amount was split between the plaintiff and the
defendant in the course of the proceedings, the amount to be paid by the defendant to the
plaintiff should only be P12,600,000.00 plus interest on this latter amount at the rate of 12% per
annum from February 11, 1992, the date when the total amount of P25.2 Million was split
between plaintiff and defendant up to the date of payment.

In view of the facts found by the committee, no attorneys fees nor other damages are awarded.

ADR Set 3 Page 8


SO ORDERED.[13]

The motion for reconsideration filed by petitioner was denied by the Arbitration Committee.[14] Consequently, to
appeal the decision of the Arbitration Committee in Arbicom Case No. 91-069, petitioner filed a petition for
review in the earlier case filed by respondent in Branch 135 of the RTC of Makati and docketed as Civil
Case No. 92-145.[15] In an order dated January 20, 1999, the RTC directed both petitioner and respondent to file
their respective memoranda, after which, said petition would be deemed submitted for resolution.[16]

Both parties filed several pleadings. On February 8, 1999, respondent filed a Motion to Dismiss Petition for
Review for Lack of Jurisdiction,[17] which was opposed by the petitioner.[18] Respondent then filed its Reply to the
opposition,[19] to which petitioner filed a Rejoinder.[20] On August 16, 1999, respondent submitted its
Surrejoinder.[21]

On November 9, 1999, the RTC rendered the assailed Order which held, thus:

Acting on plaintiff Far East Bank and Trust Companys Motion To Dismiss Petition For Review
For Lack Of Jurisdiction, considering that the petition for review is a separate and distinct case,
the same must comply with all the requirements for filing initiatory pleadings for civil actions
before this Court so that since the commencement of the subject petition lacks the mandatory
requirements provided for, except the payment of docket fees, for lack of jurisdiction, the petition
for review is hereby dismissed.

SO ORDERED.[22]

The RTC denied petitioners motion for reconsideration,[23] hence, this petition on the sole ground, to wit:

THE REGIONAL TRIAL COURT ERRED IN DISMISSING THE PETITION OF PETITIONER


FOR LACK OF JURISDICTION ON THE GROUND THAT IT SHOULD HAVE BEEN
DOCKETED AS A SEPARATE CASE.[24]

Petitioner contends that Civil Case No. 92-145 was merely suspended to await the outcome of the arbitration
case pending before the PCHC. Thus, any petition questioning the decision of the Arbitration Committee must
be filed in Civil Case No. 92-145 and should not be docketed as a separate action. Likewise, petitioner avers
that had it filed a separate action, this would have resulted in a multiplicity of suits, which is abhorred in
procedure.

Meanwhile respondent avers that the RTC correctly dismissed the appeal from the award of private
arbitrators since there is no statutory basis for such appeal.Respondent argues that petitioners claim that the
parties by agreement had conferred on the RTC appellate jurisdiction over decisions of private arbitrators is
erroneous because they cannot confer a non-existent jurisdiction on the RTC or any court. Furthermore, the
petition for review filed by petitioner violated the rule on commencing an original action under Section 5, Rule 1,
and the raffle of cases under Section 2, Rule 20 of the Rules of Court, when it filed the same in Branch 135 of
the RTC of Makati where there was already a pending original action, i.e., Civil Case No. 92-145.

The petition lacks merit.

The Philippine Clearing House Corporation was created to facilitate the clearing of checks of member
banks. Among these member banks exists a compromissoire,[25] or an arbitration agreement embedded in their
contract wherein they consent that any future dispute or controversy between its PCHC participants involving
any check would be submitted to the Arbitration Committee for arbitration. Petitioner and respondent are
members of PCHC, thus they underwent arbitration proceedings.

The PCHC has its own Rules of Procedure for Arbitration (PCHC Rules). However, this is governed by
Republic Act No. 876, also known as The Arbitration Law[26] and supplemented by the Rules of Court.[27] Thus,
we first thresh out the remedy of petition for review availed of by the petitioner to appeal the order of the
Arbitration Committee.

Sections 23, 24 and 29 of The Arbitration Law, and Section 13 of the PCHC Rules, provide:

SEC. 23. Confirmation of award. At any time within one month after the award is made, any
party to the controversy which was arbitrated may apply to the court having jurisdiction, as
provided in Section 28, for an order confirming the award; and thereupon the court must
grant such order unless the award is vacated, modified or corrected, as prescribed
herein. Notice of such motion must be served upon the adverse party or his attorney as
prescribed by law for the service of such notice upon an attorney in action in the same court.

ADR Set 3 Page 9


SEC. 24. Grounds for vacating award. In any one of the following cases, the court must make an
order vacating the award upon the petition of any party to the controversy when such party
proves affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the
controversy; that one or more of the arbitrators was disqualified to act as such under section nine
hereof, and willfully refrained from disclosing such disqualification or of any other misbehavior by
which the rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not made.

xxxx

SEC. 25. Grounds for modifying or correcting award. In any one of the following cases, the court
must make an order modifying or correcting the award, upon the application of any party to the
controversy which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been amended or
disregarded by the court.

The order may modify and correct the award so as to effect the intent thereof and
promote justice between the parties.

SEC. 29. Appeals. An appeal may be taken from an order made in a proceeding under this Act,
or from judgment entered upon an award through certiorari proceedings, but such appeals shall
be limited to questions of law. The proceedings upon such an appeal, including the judgment
thereon shall be governed by the Rules of Court insofar as they are applicable.

AMENDED ARBITRATION RULES OF PROCEDURE OF PCHC

Sec. 13. The findings of facts of the decision or award rendered by the Arbitration
Committee or by the sole Arbitrator as the case may be shall be final and conclusive upon
all the parties in said arbitration dispute. The decision or award of the Arbitration Committee
or of the Sole Arbitrator or of the Board of Directors, as the case may be, shall be appealable
only on questions of law to any of the Regional Trial Courts in the National Capital Region
where the Head Office of any of the parties is located. The appellant shall perfect his appeal
by filing a notice of appeal to the Arbitration Secretariat and filing a Petition with the Regional
Trial Court of the National Capital Region for the review of the decision or award of the
committee or sole arbitrator or of the Board of Directors, as the case may be, within a non-
extendible period of fifteen (15) days from and after its receipt of the order denying or granting
said motion for reconsideration or new trial had been filed, within a non-extendible period of
fifteen (15) days from and after its receipt of the order denying or granting said motion for
reconsideration or of the decision rendered after the new trial if one had been granted.

x x x x. (Emphasis supplied)

As provided in the PCHC Rules, the findings of facts of the decision or award rendered by the Arbitration
Committee shall be final and conclusive upon all the parties in said arbitration dispute.[28] Under Article
2044[29] of the New Civil Code, the validity of any stipulation on the finality of the arbitrators award or decision is
recognized. However, where the conditions described in Articles 2038,[30] 2039[31] and 2040[32] applicable to both
compromises and arbitrations are obtaining, the arbitrators award may be annulled or
rescinded.[33] Consequently, the decision of the Arbitration Committee is subject to judicial review.

Furthermore, petitioner had several judicial remedies available at its disposal after the Arbitration
Committee denied its Motion for Reconsideration. It may petition the proper RTC to issue an order vacating the
award on the grounds provided for under Section 24 of the Arbitration Law.[34] Petitioner likewise has the option
to file a petition for review under Rule 43 of the Rules of Court with the Court of Appeals on questions of fact, of
law, or mixed questions of fact and law.[35]Lastly, petitioner may file a petition for certiorari under Rule 65 of the
Rules of Court on the ground that the Arbitrator Committee acted without or in excess of its jurisdiction or with
grave abuse of discretion amounting to lack or excess of jurisdiction. Since this case involves acts or omissions
of a quasi-judicial agency, the petition should be filed in and cognizable only by the Court of Appeals.[36]

ADR Set 3 Page 10


In this instance, petitioner did not avail of any of the abovementioned remedies available to it. Instead it filed a
petition for review with the RTC where Civil Case No. 92-145 is pending pursuant to Section 13 of the PCHC
Rules to sustain its action. Clearly, it erred in the procedure it chose for judicial review of the arbitral award.

Having established that petitioner failed to avail of the abovementioned remedies, we now discuss the
issue of the jurisdiction of the trial court with respect to the petition for review filed by petitioner.

Jurisdiction is the authority to hear and determine a cause - the right to act in a case.[37] Jurisdiction over
the subject matter is the power to hear and determine the general class to which the proceedings in question
belong. Jurisdiction over the subject matter is conferred by law and not by the consent or acquiescence of any
or all of the parties or by erroneous belief of the court that it exists.[38]

In the instant case, petitioner and respondent have agreed that the PCHC Rules would govern in case of
controversy. However, since the PCHC Rules came about only as a result of an agreement between and among
member banks of PCHC and not by law, it cannot confer jurisdiction to the RTC. Thus, the portion of the PCHC
Rules granting jurisdiction to the RTC to review arbitral awards, only on questions of law, cannot be given effect.

Consequently, the proper recourse of petitioner from the denial of its motion for reconsideration by the
Arbitration Committee is to file either a motion to vacate the arbitral award with the RTC, a petition for review
with the Court of Appeals under Rule 43 of the Rules of Court, or a petition for certiorari under Rule 65 of the
Rules of Court. In the case at bar, petitioner filed a petition for review with the RTC when the same should have
been filed with the Court of Appeals under Rule 43 of the Rules of Court. Thus, the RTC of Makati did not err in
dismissing the petition for review for lack of jurisdiction but not on the ground that petitioner should have filed a
separate case from Civil Case No. 92-145 but on the necessity of filing the correct petition in the proper court. It
is immaterial whether petitioner filed the petition for review in Civil Case No. 92-145 as an appeal of the arbitral
award or whether it filed a separate case in the RTC, considering that the RTC will only have jurisdiction over an
arbitral award in cases of motions to vacate the same. Otherwise, as elucidated herein, the Court of Appeals
retains jurisdiction in petitions for review or in petitions for certiorari. Consequently, petitioners arguments, with
respect to the filing of separate action from Civil Case No. 92-145 resulting in a multiplicity of suits, cannot be
given due course.

Alternative dispute resolution methods or ADRs like arbitration, mediation, negotiation and conciliation
are encouraged by the Supreme Court. By enabling parties to resolve their disputes amicably, they provide
solutions that are less time-consuming, less tedious, less confrontational, and more productive of goodwill and
lasting relationships.[39] It must be borne in mind that arbitration proceedings are mainly governed by the
Arbitration Law and suppletorily by the Rules of Court.

WHEREFORE, in light of the foregoing, the petition is DENIED. The November 9, 1999 Order of the Regional
Trial Court of Makati City, Branch 135, in Civil Case No. 92-145 which dismissed the petition for review for lack
of jurisdiction and the February 1, 2000 Order denying its reconsideration, are AFFIRMED.

SO ORDERED.

ADR Set 3 Page 11


Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION

CARGILL PHILIPPINES, INC., G.R. No. 175404


Petitioner, Promulgated:
- versus - January 31, 2011
SAN FERNANDO REGALA TRADING, INC.,
Respondent.
x--------------------------------------------------x
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to reverse and set aside the Decision[1] dated July 31,
2006 and the Resolution[2] dated November 13, 2006 of the Court of Appeals (CA) in CA G.R. SP No. 50304.

The factual antecedents are as follows:

On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with the Regional Trial Court
(RTC) of Makati City a Complaint for Rescission of Contract with Damages[3] against petitioner Cargill
Philippines, Inc. In its Complaint, respondent alleged that it was engaged in buying and selling of molasses and
petitioner was one of its various sources from whom it purchased molasses. Respondent alleged that it entered
into a contract dated July 11, 1996 with petitioner, wherein it was agreed upon that respondent would purchase
from petitioner 12,000 metric tons of Thailand origin cane blackstrap molasses at the price of US$192 per metric
ton; that the delivery of the molasses was to be made in January/February 1997 and payment was to be made
by means of an Irrevocable Letter of Credit payable at sight, to be opened by September 15, 1996; that
sometime prior to September 15, 1996, the parties agreed that instead of January/February 1997, the delivery
would be made in April/May 1997 and that payment would be by an Irrevocable Letter of Credit payable at sight,
to be opened upon petitioner's advice. Petitioner, as seller, failed to comply with its obligations under the
contract, despite demands from respondent, thus, the latter prayed for rescission of the contract and payment of
damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings and To Refer Controversy
to Voluntary Arbitration,[4] wherein it argued that the alleged contract between the parties, dated July 11, 1996,
was never consummated because respondent never returned the proposed agreement bearing its written
acceptance or conformity nor did respondent open the Irrevocable Letter of Credit at sight. Petitioner contended
that the controversy between the parties was whether or not the alleged contract between the parties was legally
in existence and the RTC was not the proper forum to ventilate such issue. It claimed that the contract contained
an arbitration clause, to wit:

ARBITRATION

Any dispute which the Buyer and Seller may not be able to settle by mutual agreement
shall be settled by arbitration in the City of New York before the American Arbitration Association.
The Arbitration Award shall be final and binding on both parties.[5]

that respondent must first comply with the arbitration clause before resorting to court, thus, the RTC
must either dismiss the case or suspend the proceedings and direct the parties to proceed with arbitration,
pursuant to Sections 6[6] and 7[7] of Republic Act (R.A.) No. 876, or the Arbitration Law.

Respondent filed an Opposition, wherein it argued that the RTC has jurisdiction over the action for
rescission of contract and could not be changed by the subject arbitration clause. It cited cases wherein
arbitration clauses, such as the subject clause in the contract, had been struck down as void for being contrary
to public policy since it provided that the arbitration award shall be final and binding on both parties, thus,
ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already inapplicable, having been
rendered prior to the effectivity of the New Civil Code in 1950 and the Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by petitioner is invalid and
unenforceable, considering that the requirements imposed by the provisions of the Arbitration Law had not been
complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even clarified that the issue boiled
down to whether the arbitration clause contained in the contract subject of the complaint is valid and
enforceable; that the arbitration clause did not violate any of the cited provisions of the Arbitration Law.
On September 17, 1998, the RTC rendered an Order,[8] the dispositive portion of which reads:

Premises considered, defendant's Motion To Dismiss/Suspend Proceedings and To Refer


Controversy To Voluntary Arbitration is hereby DENIED. Defendant is directed to file its answer
within ten (10) days from receipt of a copy of this order.[9]

ADR Set 3 Page 12


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 Order [10] dated November 25,
1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that the RTC acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss or at least suspend the proceedings a quo,
despite the fact that the party's agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then required to file their respective
Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition and affirming the RTC
Orders.
In denying the petition, the CA found that stipulation providing for arbitration in contractual obligation is
both valid and constitutional; that arbitration as an alternative mode of dispute resolution has long been
accepted in our jurisdiction and expressly provided for in the Civil Code; that R.A. No. 876 (the Arbitration Law)
also expressly authorized the arbitration of domestic disputes. The CA found error in the RTC's holding that
Section 7 of R.A. No. 876 was inapplicable to arbitration clause simply because the clause failed to comply with
the requirements prescribed by the law. The CA found that there was nothing in the Civil Code, or R.A. No.876,
that require that arbitration proceedings must be conducted only in the Philippines and the arbitrators should be
Philippine residents. It also found that the RTC ruling effectively invalidated not only the disputed arbitration
clause, but all other agreements which provide for foreign arbitration. The CA did not find illegal or against public
policy the arbitration clause so as to render it null and void or ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be brought under the Arbitration
Law for the purpose of suspending the proceedings before the RTC, since in its Motion to Dismiss/Suspend
proceedings, petitioner alleged, as one of the grounds thereof, that the subject contract between the parties did
not exist or it was invalid; that the said contract bearing the arbitration clause was never consummated by the
parties, thus, it was proper that such issue be first resolved by the court through an appropriate trial; that the
issue involved a question of fact that the RTC should first resolve. Arbitration is not proper when one of the
parties repudiated the existence or validity of the contract.

Petitioner's motion for reconsideration was denied in a Resolution dated November 13, 2006.

Hence, this petition.

Petitioner alleges that the CA committed an error of law in ruling that arbitration cannot proceed despite
the fact that: (a) it had ruled, in its assailed decision, that the arbitration clause is valid, enforceable and binding
on the parties; (b) the case of Gonzales v. Climax Mining Ltd.[11] is inapplicable here; (c) parties are generally
allowed, under the Rules of Court, to adopt several defenses, alternatively or hypothetically, even if such
defenses are inconsistent with each other; and (d) the complaint filed by respondent with the trial court is
premature.

Petitioner alleges that the CA adopted inconsistent positions when it found the arbitration clause
between the parties as valid and enforceable and yet in the same breath decreed that the arbitration cannot
proceed because petitioner assailed the existence of the entire agreement containing the arbitration
clause. Petitioner claims the inapplicability of the cited Gonzales case decided in 2005, because in the present
case, it was respondent who had filed the complaint for rescission and damages with the RTC, which based its
cause of action against petitioner on the alleged agreement dated July 11, 2006 between the parties; and that
the same agreement contained the arbitration clause sought to be enforced by petitioner in this case. Thus,
whether petitioner assails the genuineness and due execution of the agreement, the fact remains that the
agreement sued upon provides for an arbitration clause; that respondent cannot use the provisions favorable to
him and completely disregard those that are unfavorable, such as the arbitration clause.

Petitioner contends that as the defendant in the RTC, it presented two alternative defenses, i.e., the
parties had not entered into any agreement upon which respondent as plaintiff can sue upon; and, assuming
that such agreement existed, there was an arbitration clause that should be enforced, thus, the dispute must first
be submitted to arbitration before an action can be instituted in court. Petitioner argues that under Section 1(j) of
Rule 16 of the Rules of Court, included as a ground to dismiss a complaint is when a condition precedent for
filing the complaint has not been complied with; and that submission to arbitration when such has been agreed
upon is one such condition precedent. Petitioner submits that the proceedings in the RTC must be dismissed, or
at least suspended, and the parties be ordered to proceed with arbitration.
On March 12, 2007, petitioner filed a Manifestation[12] saying that the CA's rationale in declining to order
arbitration based on the 2005 Gonzales ruling had been modified upon a motion for reconsideration decided in

ADR Set 3 Page 13


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 certiorariunder Rule 65 as a mode of appeal from an RTC
Order directing the parties to arbitration.
We find the cited case not in point.

In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition to compel arbitration
under R.A. No. 876, pursuant to the arbitration clause found in the Addendum Contract it entered with Gonzales.
Judge Oscar Pimentel of the RTC of Makati then directed the parties to arbitration proceedings. Gonzales filed a
petition for certiorari with Us contending that Judge Pimentel acted with grave abuse of discretion in immediately
ordering the parties to proceed with arbitration despite the proper, valid and timely raised argument in his
Answer with counterclaim that the Addendum Contract containing the arbitration clause was null and void.
Climax-Arimco assailed the mode of review availed of by Gonzales, citing Section 29 of R.A. No. 876
contending that certiorari under Rule 65 can be availed of only if there was no appeal or any adequate remedy
in the ordinary course of law; that R.A. No. 876 provides for an appeal from such order. We then ruled that
Gonzales' petition for certiorari should be dismissed as it was filed in lieu of an appeal by certiorari which was
the prescribed remedy under R.A. No. 876 and the petition was filed far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question of law, but not a question of jurisdiction;
that Judge Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when he ordered
Gonzales to proceed with arbitration and appointed a sole arbitrator after making the determination that there
was indeed an arbitration agreement. It had been held that as long as a court acts within its jurisdiction and does
not gravely abuse its discretion in the exercise thereof, any supposed error committed by it will amount to
nothing more than an error of judgment reviewable by a timely appeal and not assailable by a special civil action
of certiorari.[14]
In this case, petitioner raises before the CA the issue that the respondent Judge acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss, or at least suspend, the proceedings a
quo, despite the fact that the partys agreement to arbitrate had not been complied with. Notably, the RTC found
the existence of the arbitration clause, since it said in its decision that hardly disputed is the fact that the
arbitration clause in question contravenes several provisions of the Arbitration Law x x x and to apply Section 7
of the Arbitration Law to such an agreement would result in the disregard of the afore-cited sections of the

ADR Set 3 Page 14


Arbitration Law and render them useless and mere surplusages. However, notwithstanding the finding that an
arbitration agreement existed, the RTC denied petitioner's motion and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,[15] it was held that R.A. No. 876 explicitly confines the
courts authority only to the determination of whether or not there is an agreement in writing providing for
arbitration. In the affirmative, the statute ordains that the court shall issue an order summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof. If the court, upon the other hand,
finds that no such agreement exists, the proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend Proceedings and to Refer
Controversy to Voluntary Arbitration, the RTC went beyond its authority of determining only the issue of whether
or not there is an agreement in writing providing for arbitration by directing petitioner to file an answer, instead of
ordering the parties to proceed to arbitration. In so doing, it acted in excess of its jurisdiction and since there is
no plain, speedy, and adequate remedy in the ordinary course of law, petitioners resort to a petition
for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding that this case cannot be
brought under the arbitration law for the purpose of suspending the proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
jurisdiction.[16] R.A. No. 876[17] authorizes arbitration of domestic disputes. Foreign arbitration, as a system of
settling commercial disputes of an international character, is likewise recognized.[18] The enactment of R.A. No.
9285 on April 2, 2004 further institutionalized the use of alternative dispute resolution systems, including
arbitration, in the settlement of disputes.[19]

A contract is required for arbitration to take place and to be binding.[20] Submission to arbitration is a
contract [21] and a clause in a contract providing that all matters in dispute between the parties shall be referred
to arbitration is a contract.[22] The provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of the contract and is itself a contract.[23]
In this case, the contract sued upon by respondent provides for an arbitration clause, to wit:

ARBITRATION

Any dispute which the Buyer and Seller may not be able to settle by mutual agreement shall be
settled by arbitration in the City of New York before the American Arbitration Association, The
Arbitration Award shall be final and binding on both parties.

The CA ruled that arbitration cannot be ordered in this case, since petitioner alleged that the contract between
the parties did not exist or was invalid and arbitration is not proper when one of the parties repudiates the
existence or validity of the contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed arbitration clause
providing for foreign arbitration, it is our considered opinion that the case at bench still cannot be
brought under the Arbitration Law for the purpose of suspending the proceedings before the trial
court. We note that in its Motion to Dismiss/Suspend Proceedings, etc, petitioner Cargill alleged,
as one of the grounds thereof, that the alleged contract between the parties do not legally exist or
is invalid. As posited by petitioner, it is their contention that the said contract, bearing the
arbitration clause, was never consummated by the parties. That being the case, it is but proper
that such issue be first resolved by the court through an appropriate trial. The issue involves a
question of fact that the trial court should first resolve.

Arbitration is not proper when one of the parties repudiates the existence or validity of the
contract. Apropos is Gonzales v. Climax Mining Ltd., 452 SCRA 607, (G.R.No.161957), where
the Supreme Court held that:

The question of validity of the contract containing the agreement to


submit to arbitration will affect the applicability of the arbitration clause
itself. A party cannot rely on the contract and claim rights or obligations
under it and at the same time impugn its existence or validity. Indeed,
litigants are enjoined from taking inconsistent positions....

Consequently, the petitioner herein cannot claim that the contract was never consummated and,
at the same time, invokes the arbitration clause provided for under the contract which it alleges
to be non-existent or invalid. Petitioner claims that private respondent's complaint lacks a cause
of action due to the absence of any valid contract between the parties. Apparently, the
arbitration clause is being invoked merely as a fallback position. The petitioner must first adduce
evidence in support of its claim that there is no valid contract between them and should the
court a quo find the claim to be meritorious, the parties may then be spared the rigors and
expenses that arbitration in a foreign land would surely entail.[24]

However, the Gonzales case,[25] which the CA relied upon for not ordering arbitration, had been modified upon a
motion for reconsideration in this wise:

ADR Set 3 Page 15


x x x The adjudication of the petition in G.R. No. 167994 effectively modifies part of the
Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now hold that the validity
of the contract containing the agreement to submit to arbitration does not affect the
applicability of the arbitration clause itself. A contrary ruling would suggest that a party's
mere repudiation of the main contract is sufficient to avoid arbitration. That is exactly the
situation that the separability doctrine, as well as jurisprudence applying it, seeks to
avoid. We add that when it was declared in G.R. No. 161957 that the case should not be brought
for arbitration, it should be clarified that the case referred to is the case actually filed by Gonzales
before the DENR Panel of Arbitrators, which was for the nullification of the main contract on the
ground of fraud, as it had already been determined that the case should have been brought
before the regular courts involving as it did judicial issues.[26]

In so ruling that the validity of the contract containing the arbitration agreement does not affect the applicability
of the arbitration clause itself, we then applied the doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it, enunciates that an
arbitration agreement is independent of the main contract. The arbitration agreement is to be
treated as a separate agreement and the arbitration agreement does not automatically terminate
when the contract of which it is a part comes to an end.

The separability of the arbitration agreement is especially significant to the determination of


whether the invalidity of the main contract also nullifies the arbitration clause. Indeed, the doctrine
denotes that the invalidity of the main contract, also referred to as the "container" contract, does
not affect the validity of the arbitration agreement. Irrespective of the fact that the main contract is
invalid, the arbitration clause/agreement still remains valid and enforceable.[27]

Respondent argues that the separability doctrine is not applicable in petitioner's case, since in
the Gonzales case, Climax-Arimco sought to enforce the arbitration clause of its contract with Gonzales and the
former's move was premised on the existence of a valid contract; while Gonzales, who resisted the move of
Climax-Arimco for arbitration, did not deny the existence of the contract but merely assailed the validity thereof
on the ground of fraud and oppression. Respondent claims that in the case before Us, petitioner who is the party
insistent on arbitration also claimed in their Motion to Dismiss/Suspend Proceedings that the contract sought by
respondent to be rescinded did not exist or was not consummated; thus, there is no room for the application of
the separability doctrine, since there is no container or main contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of the main contract shall not be
regarded as invalid or non-existent just because the main contract is invalid or did not come into existence,
since the arbitration agreement shall be treated as a separate agreement independent of the main contract. To
reiterate. a contrary ruling would suggest that a party's mere repudiation of the main contract is sufficient to
avoid arbitration and that is exactly the situation that the separability doctrine sought to avoid. Thus, we find that
even the party who has repudiated the main contract is not prevented from enforcing its arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission of contract and damages
with the RTC. In so doing, respondent alleged that a contract exists between respondent and petitioner. It is that
contract which provides for an arbitration clause which states that any dispute which the Buyer and Seller may
not be able to settle by mutual agreement shall be settled before the City of New York by the American
Arbitration Association. The arbitration agreement clearly expressed the parties' intention that any dispute
between them as buyer and seller should be referred to arbitration. It is for the arbitrator and not the courts to
decide whether a contract between the parties exists or is valid.
Respondent contends that assuming that the existence of the contract and the arbitration clause is
conceded, the CA's decision declining referral of the parties' dispute to arbitration is still correct. It claims that its
complaint in the RTC presents the issue of whether under the facts alleged, it is entitled to rescind the contract
with damages; and that issue constitutes a judicial question or one that requires the exercise of judicial function
and cannot be the subject of an arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we
held that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to the execution of the addendum
contract and the other contracts emanating from it, and that the complaint should have been filed with the
regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of Arbitrators, Region II, Mines and
Geosciences Bureau, of the Department of Environment and Natural Resources (DENR) against respondents
Climax- Mining Ltd, Climax-Arimco and Australasian Philippines Mining Inc, seeking the declaration of nullity or
termination of the addendum contract and the other contracts emanating from it on the grounds of fraud and
oppression. The Panel dismissed the complaint for lack of jurisdiction. However, the Panel, upon petitioner's
motion for reconsideration, ruled that it had jurisdiction over the dispute maintaining that it was a mining dispute,
since the subject complaint arose from a contract between the parties which involved the exploration and
exploitation of minerals over the disputed area. Respondents assailed the order of the Panel of Arbitrators via a
petition for certiorari before the CA. The CA granted the petition and declared that the Panel of Arbitrators did
not have jurisdiction over the complaint, since its jurisdiction was limited to the resolution of mining disputes,
such as those which raised a question of fact or matter requiring the technical knowledge and experience of
mining authorities and not when the complaint alleged fraud and oppression which called for the interpretation
and application of laws. The CA further ruled that the petition should have been settled through arbitration under
R.A. No. 876 − the Arbitration Law − as provided under the addendum contract.

ADR Set 3 Page 16


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.

ADR Set 3 Page 17


Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 182248 December 18, 2008
EQUITABLE PCI BANKING CORPORATION,[1]GEORGE L. GO, PATRICK D. GO, GENEVIEVE W.J. GO,
FERDINAND MARTIN G. ROMUALDEZ, OSCAR P. LOPEZ-DEE, RENE J. BUENAVENTURA, GLORIA L.
TAN-CLIMACO, ROGELIO S. CHUA, FEDERICO C. PASCUAL, LEOPOLDO S. VEROY, WILFRIDO V.
VERGARA, EDILBERTO V. JAVIER, ANTHONY F. CONWAY, ROMULAD U. DY TANG, WALTER C.
WESSMER, and ANTONIO N. COTOCO, Petitioners,
- versus -
RCBC CAPITAL CORPORATION, Respondent.
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the January 8, 2008 [2] and
March 17, 2008[3] Orders of the Regional Trial Court (RTC), Branch 148 in Makati City in SP Proc. Case No.
6046, entitled In the Matter of ICC Arbitration Ref. No. 13290/MS/JB/JEM Between RCBC Capital Corporation,
(Claimant), and Equitable PCI Banking Corporation, Inc. et al., (Respondents). The assailed January 8, 2008
Order confirmed the Partial Award dated September 27, 2007[4] rendered by the International Chamber of
Commerce-International Court of Arbitration (ICC-ICA) in Case No. 13290/MS/JB/JEM, entitled RCBC Capital
Corporation (Philippines) v. Equitable PCI Bank, Inc. & Others (Philippines). The March 17, 2008 Order denied
petitioners motion for reconsideration of the January 8, 2008 Order.

The Facts

On May 24, 2000, petitioners Equitable PCI Bank, Inc. (EPCIB) and the individual shareholders of
Bankard, Inc., as sellers, and respondent RCBC Capital Corporation (RCBC), as buyer, executed a Share
Purchase Agreement[5] (SPA) for the purchase of petitioners interests in Bankard, representing 226,460,000
shares, for the price of PhP 1,786,769,400. To expedite the purchase, RCBC agreed to dispense with the
conduct of a due diligence audit on the financial status of Bankard.

Under the SPA, RCBC undertakes, on the date of contract execution, to deposit, as downpayment, 20%
of the purchase price, or PhP 357,353,880, in an escrow account. The escrowed amount, the SPA stated,
should be released to petitioners on an agreed-upon release date and the balance of the purchase price shall be
delivered to the share buyers upon the fulfillment of certain conditions agreed upon, in the form of a managers
check.

The other relevant provisions of the SPA are:

Section 5. Sellers Representations and Warranties

The SELLERS jointly and severally represent and warrant to the BUYER that:

xxxx

The Financial Condition of Bankard

g. The audited financial statements of Bankard for the three (3) fiscal years ended
December 31, 1997, 1998 and 1999, and the unaudited financial statements for the first quarter
ended 31 March 2000, are fair and accurate, and complete in all material respects, and have
been prepared in accordance with generally accepted accounting principles consistently followed
throughout the period indicated and:
i) the balance sheet of Bankard as of 31 December 1999, as prepared and
certified by SGV & Co. (SGV), and the unaudited balance sheet for the first quarter
ended 31 March 2000, present a fair and accurate statement as of those dates, of
Bankards financial condition and of all its assets and liabilities, and is complete in all
material respects; and

ii) the statements of Bankards profit and loss accounts for the fiscal years 1996 to 1999, as
prepared and certified by SGV, and the unaudited profit and loss accounts for the first
quarter ended 31 March 2000, fairly and accurately present the results of the operations
of Bankard for the periods indicated, and are complete in all material respects.

h. Except as disclosed in the Disclosures, and except to the extent set forth or reserved
in the audited financial statements of Bankard as of 31 December 1999 and its unaudited
financial statements as of 31 March 2000, Bankard, as of such dates and up to 31 May 2000,
had and shall have no liabilities, omissions or mistakes in its records which will have material

ADR Set 3 Page 18


adverse effect on the net worth or financial condition of Bankard to the extent of more than One
Hundred Million Pesos (P100,000,000.00) in the aggregate. In the event such material adverse
effect on the net worth or financial condition of Bankard exceeds One Hundred Million Pesos
(P100,000,000.00), the Purchase Price shall be reduced in accordance with the following
formula:

Reduction in Purchase Price = X multiplied by 226,460,000

where
Amount by which negative
adjustment exceeds P100 Million
X = ------------------------------------------- (1.925)
338,000,000

xxxx

Section 7. Remedies for Breach of Warranties

a. If any of the representations and warranties of any or all of the SELLERS or the
BUYER (the Defaulting Party) contained in Sections 5 and 6 shall be found to be untrue when
made and/or as of the Closing Date, the other party, i.e., the BUYER if the Defaulting Party is
any or all of the SELLERS and the SELLERS if the Defaulting Party is the BUYER (hereinafter
referred to as the Non-Defaulting Party) shall have the right to require the Defaulting Party, at the
latters expense, to cure such breach, and/or seek damages, by providing notice or presenting a
claim to the Defaulting Party, reasonably specifying therein the particulars of the breach. The
foregoing remedies shall be available to the Non-Defaulting Party only if the demand therefor is
presented in writing to the Defaulting Party within three (3) years from the Closing Date except
that the remedy for a breach of the SELLERS representation and warrant in Section 5 (h) shall
be available only if the demand therefor is presented to the Defaulting Party in writing together
with schedules and to substantiate such demand, within six (6) months from the Closing Date.[6]

On June 2, 2000, RCBC deposited the stipulated downpayment amount in an escrow account after
which it was given full management and operational control of Bankard. June 2, 2000 is also considered by the
parties as the Closing Date referred to in the SPA.

Thereafter, the parties executed an Amendment to Share Purchase Agreement (ASPA)


dated September 19, 2000.[7] Its paragraph 2(e) provided that:

2. Notwithstanding any provisions to the contrary in the Share Purchase Agreement


and/or any agreement, instrument or document entered into or executed by the Parties in
relation thereto (the Related Agreements), the Parties hereby agree that:

xxxx

e) Notwithstanding the provisions of Sec. 7 of the Share Purchase Agreement to the


contrary, the remedy for a breach of the SELLERS representation and warranty in Section
5(h) of the Share Purchase Agreement shall be available if the demand therefor is
presented to the SELLERS in writing together with schedules and data to substantiate such
demand, on or before 31 December 2000. (Emphasis added.)

Sometime in September 2000, RCBC had Bankards accounts audited, creating for the purpose an audit
team led by a certain Rubio, the Vice-President for Finance of RCBC at the time. Rubios conclusion was that the
warranty, as contained in Section 5(h) of the SPA (simply Sec. 5[h] hereinafter), was correct.

On December 28, 2000, RCBC paid the balance of the contract price. The corresponding deeds of sale
for the shares in question were executed in January 2001.
Thereafter, in a letter of May 5, 2003, RCBC informed petitioners of its having overpaid the purchase
price of the subject shares, claiming that there was an overstatement of valuation of accounts amounting to PhP
478 million, resulting in the overpayment of over PhP 616 million. Thus, RCBC claimed that petitioners violated
their warranty, as sellers, embodied in Sec. 5(g) of the SPA (Sec. 5[g] hereinafter).

Following unsuccessful attempts at settlement, RCBC, in accordance with Sec. 10 of the SPA, filed
a Request for Arbitration dated May 12, 2004[8] with the ICC-ICA. In the request, RCBC charged Bankard with
deviating from, contravening and not following generally accepted accounting principles and practices in
maintaining their books. Due to these improper accounting practices, RCBC alleged that both the audited and
unaudited financial statements of Bankard prior to the stock purchase were far from fair and accurate and,
hence, violated the representations and warranties of petitioners in the SPA. Per RCBC, its overpayment
amounted to PhP 556 million. It thus prayed for the rescission of the SPA, restitution of the purchase price,
payment of actual damages in the amount of PhP 573,132,110, legal interest on the purchase price until actual
restitution, moral damages, and litigation and attorneys fees. As alternative to rescission and restitution, RCBC
prayed for damages in the amount of at least PhP 809,796,092 plus legal interest.

ADR Set 3 Page 19


To the Request for Arbitration, petitioners filed an Answer dated July 28, 2004,[9] denying RCBCs
inculpatory averments and setting up the following affirmative allegations: the period for filing of the asserted
claim had already lapsed by force of Sec. 7 of the SPA; RCBC is not entitled to rescission having had ample
opportunity and reasonable time to file a claim against petitioners; RCBC is not entitled to its alternative prayer
of damages, being guilty of laches and failing to set out the details of the breach as required under Sec. 7.
Arbitration in the ICC-ICA proceeded after the formation of the arbitration tribunal consisting of retired
Justice Santiago M. Kapunan, nominated by petitioners; Neil Kaplan, RCBCs nominee; and Sir Ian Barker,
appointed by the ICC-ICA.

After drawn out proceedings with each party alleging deviation and non-compliance by the other with
arbitration rules, the tribunal, with Justice Kapunan dissenting, rendered a Partial Award dated September 27,
2007,[10] the dispositive portion of which states:

15 AWARD AND DIRECTIONS

15.1 The Tribunal makes the following declarations by way of Partial Award:

(a) The Claimants claim is not time-barred under the provisions of this SPA.
(b) The Claimant is not estopped by its conduct or the equitable doctrine of laches from
pursuing its claim.
(c) As detailed in the Partial Award, the Claimant has established the following breaches
by the Respondents of clause 5(g) of the SPA:

i) the assets, revenue and net worth of Bankard were overstated by reason of its policy
on and recognition of Late Payment Fees;
ii) reported receivables were higher than their realizable values by reason of the
bucketing method, thus overstating Bankards assets; and
iii) the relevant Bankard statements were inadequate and misleading in that their
disclosures caused readers to be misinformed about Bankards accounting policies on
revenue and receivables.
(d) Subject to proof of loss the Claimant is entitled to damages for the foregoing
breaches.
(e) The Claimant is not entitled to rescission of the SPA.
(f) All other issues, including any issue relating to costs, will be dealt with in a further or
final award.
15.2 A further Procedural Order will be necessary subsequent to the delivery of this
Partial Award to deal with the determination of quantum and in particular, whether there should
be an Expert appointed by the Tribunal under Article 20(4) of the ICC Rules to assist the Tribunal
in this regard.

15.3 This Award is delivered by a majority of the Tribunal (Sir Ian Barker and Mr.
Kaplan). Justice Kapunan is unable to agree with the majoritys conclusion on the claim of
estoppel brought by the respondents.
On the matter of prescription, the tribunal held that RCBCs claim is not time-barred, the claim properly
falling under the contemplation of Sec. 5(g) and not Sec. 5(h). As such, the tribunal concluded, RCBCs claim
was filed within the three (3)-year period under Sec. 5(g) and that the six (6)-month period under Sec. 5(h) did
not apply.

The tribunal also exonerated RCBC from laches, the latter having sought relief within the three (3)-year
period prescribed in the SPA. On the matter of estoppel suggested in petitioners answer, the tribunal stated in
par. 10.27 of the Partial Award the following:

10.27 Clearly, there has to be both an admission or representation by (in this case) the
Claimant [RCBC], plus reliance upon it by (in this case) the Respondents [herein petitioners].
The Tribunal cannot find as proved any admission/representation that the Claimant was
abandoning a 5(g) claim, any reliance by the Respondents on an admission, and any detriment
to the Respondents such as would entitle them to have the Claimant deprived of the benefit of
clause 5(g). These aspects of the claim for estoppels are rejected.[11]

Notably, the tribunal considered the rescission of the SPA and ASPA as impracticable and totally out of
the question.[12]

In his Dissenting Opinion[13] which he submitted to and which was received on September 24, 2007 by
the ICC-ICA, Justice Kapunan stated the observation that RCBCs claim is time-barred, falling as such claim did
under Sec. 5(h), which prescribes a comparatively shorter prescriptive period, not 5(g) as held by the majority of
the tribunal, to wit:

Claimant admits that the Claim is for recovery of P431 million on account of alleged
overvaluation of the net worth of Bankard, allegedly for improper accounting practices resulting
in its book value per share as of 31 December 1999 [being] overstated. Claimants witness, Dean

ADR Set 3 Page 20


Echanis asserts that the inadequate provisioning for Bankards doubtful accounts result[ed] in an
overstatement of its December 31, 1999 total assets and net worth of by [sic] least P418.2
million.

In addition, Claimants demand letter addressed to the Respondents alleged that we


overpaid for the Shares to the extent of the impact of the said overstatement on the Book Value
per share.

These circumstances establish beyond dispute that the Claim is based on the alleged
overstatement of the 1999 net worth of Bankard, which the parties relied on in setting the
purchase price of the shares. Moreover, it is clear that there was an overstatement because of
improper accounting practices which led Claimant to overpay for the shares.

Ultimately, the Claim is one for recovery of overpayment in the purchase price of the
shares. x x x

As to the issue of estoppel, Justice Kapunan stated:

Moreover, Mr. Rubios findings merely corroborated the disclosures made in the
Information Memorandum that Claimant received from the Respondents prior to the execution of
the SPA. In this connection, I note that Bankards policy on provisioning and setting of
allowances using the Bucketed Method and income recognition from AR/Principal, AR/Interest
and AR/LPFs were disclosed in the Information Memorandum. Thus, these alleged improper
accounting practices were known to the Claimant even prior to the execution of the SPA.

Thus, when Claimant paid the balance of the purchase price, it did so with full knowledge
of these accounting practices of Bankard that it now assails. By paying the balance of the
purchase price without taking exception or objecting to the accounting practices disclosed
through Mr. Rubio s review and the Information Memorandum, Claimant is deemed to have
accepted such practices as correctly reporting the 1999 net worth. x x x

xxxx

As last point, I note that my colleagues invoke a principle that for estoppels to apply there
must be positive indication that the right to sue was waived. I am of the view that there is no such
principle under Philippine law. What is applicable is the holding in Knecht and in Coca-
Cola that prior knowledge of an unfavorable fact is binding on the party who has such
knowledge; when the purchaser proceeds to make investigations by himself, and the vendor
does nothing to prevent such investigation from being as complete as the former might wish, the
purchaser cannot later allege that the vendor made false representations to him (Cf. Songco v.
Sellner, 37 Phil 254 citations omitted).

Applied to this case, the Claimant cannot seek relief on the basis that when it paid the
purchase price in December 2000, it was unaware that the accounting practices that went into
the reporting of the 1999 net worth as amounting to P1,387,275,847 were not in conformity with
GAAP [generally accepted accounting principles]. (Emphasis added.)

On October 26, 2007, RCBC filed with the RTC a Motion to Confirm Partial Award. On the same day,
petitioners countered with a Motion to Vacate the Partial Award. On November 9, 2007, petitioners again filed a
Motion to Suspend and Inhibit Barker and Kaplan.

On January 8, 2008, the RTC issued the first assailed order confirming the Partial Award and denying
the adverted separate motions to vacate and to suspend and inhibit. From this order, petitioners sought
reconsideration, but their motion was denied by the RTC in the equally assailed second order of March 17,
2008.

From the assailed orders, petitioners came directly to this Court through this petition for review.

The Issues

This petition seeks the review, reversal and setting aside of the orders Annexes A and B
and, in lieu of them, it seeks judgment vacating the arbitrators liability award, Annex C, on these
grounds:

(a) The trial court acted contrary to law and judicial authority in refusing to
vacate the arbitral award, notwithstanding it was rendered in plain disregard of the
parties contract and applicable Philippine law, under which the claim in arbitration was
indubitably time-barred.

ADR Set 3 Page 21


(b) The trial court acted contrary to law and judicial authority in refusing to
vacate and in confirming the arbitral award, notwithstanding that the arbitrators had
plainly and admittedly failed to accord petitioners due process by denying them a hearing
on the basic factual matter upon which their liability is predicated.

(c) The trial court committed grave error in confirming the arbitrators award,
which held petitioners-sellers liable for an alleged improper recording of accounts,
allegedly affecting the value of the shares they sold, notwithstanding that the respondent-
buyer knew before contracting that the accounts were kept in the manner complained of,
and in fact ratified and adopted the questioned accounting practice and policies.[14]

The Courts Ruling

The petition must be denied.

On Procedural Misstep of Direct Appeal to This Court

As earlier recited, the ICC-ICAs Partial Award dated September 27, 2007 was confirmed by the RTC in its first
assailed order of January 8, 2008. Thereafter, the RTC, by order of March 17, 2008, denied petitioners motion
for reconsideration. Therefrom, petitioners came directly to this Court on a petition for review under Rule 45 of
the Rules of Court.

This is a procedural miscue for petitioners who erroneously bypassed the Court of Appeals (CA) in pursuit of its
appeal. While this procedural gaffe has not been raised by RCBC, still we would be remiss in not pointing out
the proper mode of appeal from a decision of the RTC confirming, vacating, setting aside, modifying, or
correcting an arbitral award.

Rule 45 is not the remedy available to petitioners as the proper mode of appeal assailing the decision of the
RTC confirming as arbitral award is an appeal before the CA pursuant to Sec. 46 of Republic Act No. (RA) 9285,
otherwise known as the Alternative Dispute Resolution Act of 2004, or completely, An Act to Institutionalize the
Use of an Alternative Dispute Resolution System in the Philippines and to Establish the Office for Alternative
Dispute Resolution, and for other Purposes, promulgated on April 2, 2004 and became effective on April 28,
2004 after its publication on April 13, 2004.

In Korea Technologies Co., Ltd v. Lerma, we explained, inter alia, that the RTC decision of an assailed arbitral
award is appealable to the CA and may further be appealed to this Court, thus:

Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party in
cases where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the Regional Trial Court
confirming, vacating, setting aside, modifying or correcting an arbitral award may be appealed to
the Court of Appeals in accordance with the rules and procedure to be promulgated by the
Supreme Court.

The losing party who appeals from the judgment of the court confirming an arbitral award shall
be required by the appellate court to post a counterbond executed in favor of the prevailing party
equal to the amount of the award in accordance with the rules to be promulgated by the
Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this Court through a
petition for review under Rule 45 of the Rules of Court.[15]

It is clear from the factual antecedents that RA 9285 applies to the instant case. This law was already effective
at the time the arbitral proceedings were commenced by RCBC through a request for arbitration filed before the
ICC-ICA on May 12, 2004. Besides, the assailed confirmation order of the RTC was issued on March 17,
2008. Thus, petitioners clearly took the wrong mode of appeal and the instant petition can be outright rejected
and dismissed.

Even if we entertain the petition, the outcome will be the same.

The Court Will Not Overturn an Arbitral Award


Unless It Was Made in Manifest Disregard of the Law

In Asset Privatization Trust v. Court of Appeals,[16] the Court passed on similar issues as the ones
tendered in the instant petition. In that case, the arbitration committee issued an arbitral award which the trial
court, upon due proceedings, confirmed despite the opposition of the losing party. Motions for reconsideration
by the losing party were denied. An appeal interposed by the losing party to the CA was denied due course. On
appeal to this Court, we established the parameters by which an arbitral award may be set aside, to wit:

ADR Set 3 Page 22


As a rule, the award of an arbitrator cannot be set aside for mere errors of
judgment either as to the law or as to the facts. Courts are without power to amend or
overrule merely because of disagreement with matters of law or facts determined by the
arbitrators. They will not review the findings of law and fact contained in an award, and
will not undertake to substitute their judgment for that of the arbitrators, since any other
rule would make an award the commencement, not the end, of litigation. Errors of law and
fact, or an erroneous decision of matters submitted to the judgment of the arbitrators, are
insufficient to invalidate an award fairly and honestly made. Judicial review of an
arbitration is, thus, more limited than judicial review of a trial.

Nonetheless, the arbitrators awards is not absolute and without exceptions. The
arbitrators cannot resolve issues beyond the scope of the submission agreement. The parties to
such an agreement are bound by the arbitrators award only to the extent and in the manner
prescribed by the contract and only if the award is rendered in conformity thereto. Thus, Sections
24 and 25 of the Arbitration Law provide grounds for vacating, rescinding or modifying an
arbitration award. Where the conditions described in Articles 2038, 2039 and 2040 of the Civil
Code applicable to compromises and arbitration are attendant, the arbitration award may also be
annulled.

xxxx

Finally, it should be stressed that while a court is precluded from overturning an award
for errors in determination of factual issues, nevertheless, if an examination of the record reveals
no support whatever for the arbitrators determinations, their award must be vacated. In the same
manner, an award must be vacated if it was made in manifest disregard of the
law.[17] (Emphasis supplied.)

Following Asset Privatization Trust, errors in law and fact would not generally justify the reversal of an
arbitral award. A party asking for the vacation of an arbitral award must show that any of the grounds for
vacating, rescinding, or modifying an award are present or that the arbitral award was made in manifest
disregard of the law. Otherwise, the Court is duty-bound to uphold an arbitral award.

The instant petition dwells on the alleged manifest disregard of the law by the ICC-ICA.
The US case of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros[18] expounded on the phrase
manifest disregard of the law in the following wise:

This court has emphasized that manifest disregard of the law is a very narrow standard
of review. Anaconda Co. v. District Lodge No. 27, 693 F.2d 35 (6th Cir.1982). A mere error in
interpretation or application of the law is insufficient. Anaconda, 693 F.2d at 37-38. Rather, the
decision must fly in the face of clearly established legal precedent. When faced with questions of
law, an arbitration panel does not act in manifest disregard of the law unless (1) the applicable
legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators
refused to heed that legal principle.

Thus, to justify the vacation of an arbitral award on account of manifest disregard of the law, the arbiters
findings must clearly and unequivocally violate an established legal precedent. Anything less would not suffice.

In the present case, petitioners, in a bid to establish that the arbitral award was issued in manifest
disregard of the law, allege that the Partial Award violated the principles of prescription, due process, and
estoppel. A review of petitioners arguments would, however, show that their arguments are bereft of merit. Thus,
the Partial Award dated September 27, 2007 cannot be vacated.

RCBCs Claim Is Not Time-Barred

Petitioners argue that RCBCs claim under Sec. 5(g) is based on overvaluation of Bankards revenues,
assets, and net worth, hence, for price reduction falling under Sec. 5(h), in which case it was belatedly filed, for
RCBC presented the claim to petitioners on May 5, 2003, when the period for presenting it under Sec. 5(h)
expired on December 31, 2000. As a counterpoint, RCBC asserts that its claim clearly comes under Sec. 5(g) in
relation to Sec. 7 which thus gave it three (3) years from the closing date of June 2, 2000, or until June 1, 2003,
within which to make its claim. RCBC contends having acted within the required period, having presented its
claim-demand on May 5, 2003.

To make clear the issue at hand, we highlight the pertinent portions of Secs. 5(g), 5(h), and 7 bearing on
what petitioners warranted relative to the financial condition of Bankard and the remedies available to RCBC in
case of breach of warranty:

g. The audited financial statements of Bankard for the three (3) fiscal years ended
December 31, 1997, 1998 and 1999, and the unaudited financial statements for the first
quarter ended 31 March 2000, are fair and accurate, and complete in all material

ADR Set 3 Page 23


respects, and have been prepared in accordance with generally accepted accounting
principles consistently followed throughout the period indicated and:

i) the balance sheet of Bankard as of 31 December 1999, as prepared and


certified by SGV & Co. (SGV), and the unaudited balance sheet for the first quarter
ended 31 March 2000, present a fair and accurate statement as of those dates,
of Bankards financial condition and of all its assets and liabilities, and is
complete in all material respects; and

ii) the statements of Bankards profit and loss accounts for the fiscal years 1996
to 1999, as prepared and certified by SGV, and the unaudited profit and loss
accounts for the first quarter ended 31 March 2000, fairly and accurately
present the results of the operations of Bankard for the periods indicated,
and are complete in all material respects.

h. Except as disclosed in the Disclosures, and except to the extent set forth or reserved in
the audited financial statements of Bankard as of 31 December 1999 and its unaudited
financial statements for the first quarter ended 31 March 2000, Bankard, as of such dates
and up to 31 May 2000, had and shall have no liabilities, omissions or mistakes in its
records which will have a material adverse effect on the net worth or financial
condition of Bankard to the extent of more than One Hundred Million Pesos (P
100,000,000.00) in the aggregate. In the event such material adverse effect on the net
worth or financial condition of Bankard exceeds One Hundred Million Pesos (P
100,000,000.00), the Purchase Price shall be reduced in accordance with the following
formula:

xxxx

Section 7. Remedies for Breach of Warranties

If any of the representations and warranties of any or all of the SELLERS or the BUYER (the
Defaulting Party) contained in Sections 5 and 6 shall be found to be untrue when made and/or
as of the Closing Date, the other party, i.e., the BUYER if the Defaulting is any of the SELLERS
and the SELLERS if the Defaulting Party is the BUYER (hereinafter referred to as the Non-
Defaulting Party) shall have the right to require the Defaulting Party, at the latters expense,
to cure such breach, and/or seek damages, by providing notice or presenting a claim to
the Defaulting Party, reasonably specifying therein the particulars of the breach. The foregoing
remedies shall be available to the Non-Defaulting Party only if the demand therefor is
presented in writing to the Defaulting Party within three (3) years from the Closing Date,
except that the remedy for a breach of the SELLERS representation and warranty in
Section 5 (h) shall be available only if the demand therefor is presented to the Defaulting
Party in writing together with schedules and data to substantiate such demand, within six (6)
months from the Closing Date. (Emphasis supplied.)

Before we address the issue put forward by petitioners, there is a necessity to determine the nature
and application of the reliefs provided under Sec. 5(g) and Sec. 5(h) in conjunction with Sec. 7, thus:

(1) The relief under Sec. 5(h) is specifically for price reduction as said section explicitly states that the
Purchase Price shall be reduced in accordance with the following formula x x x. In addition, Sec. 7 gives the
aggrieved party the right to ask damages based on the stipulation that the non-defaulting party shall have the
right to require the Defaulting Party, at the latters expense, to cure such breach and/or seek damages.

On the other hand, the remedy under Sec. 5(g) in conjunction with Sec. 7 can include specific
performance, damages, and other reliefs excluding price reduction.

(2) Sec. 5(g) warranty covers the audited financial statements (AFS) for the three (3) years
ending December 31, 1997 to 1999 and the unaudited financial statements (UFS) for the first quarter
ending March 31, 2000. On the other hand, the Sec. 5(h) warranty refers only to the AFS for the year
ending December 31, 1999and the UFS up to May 31, 2000. It is undenied that Sec. 5(h) refers to price
reduction as it covers only the most up-to-date audited and unaudited financial statements upon which the price
must have been based.[19]

(3) Under Sec. 5(h), the responsibility of petitioners for its warranty shall exclude the disclosures and
reservations made in AFS of Bankard as of December 31, 1999 and its UFS up to May 31, 2000. No such
exclusions were made under Sec. 5(g) with respect to the warranty of petitioners in the AFS and UFS of
Bankard.

(4) Sec. 5(h) gives relief only if there is material adverse effect in the net worth in excess of PhP 100
million and it provides a formula for price reduction.[20]On the other hand, Sec. 5(g) can be the basis for

ADR Set 3 Page 24


remedies like specific performance, damages, and other reliefs, except price reduction, even if the overvaluation
is less or above PhP 100 million and there is no formula for computation of damages.

(5) Under Sec. 7, the aggrieved party shall present its written demand to the defaulting party within three
(3) years from closing date. Under Sec. 5(h), the written demand shall be presented within six (6) months from
closing date. In accordance with par. 2(c) of the ASPA, the deadline to file the demand under Sec. 5(h) was
extended to December 31, 2000.

From the above determination, it becomes clear that the aggrieved party is entitled to two (2) separate
alternative remedies under Secs. 5 and 7 of the SPA, thus:

1. A claim for price reduction under Sec. 5(h) and/or damages based on the breach of
warranty by Bankard on the absence of liabilities, omissions and mistakes on the financial
statements as of 31 December 1999 and the UFS as of 31 May 2000, provided that the material
adverse effect on the net worth exceeds PhP 100M and the written demand is presented within
six (6) months from closing date (extended to 31 December 2000); and

2. An action to cure the breach like specific performance and/or damages under Sec.
5(g) based on Bankards breach of warranty involving its AFS for the three (3) fiscal years ending
31 December 1997, 1998, and 1999 and the UFS for the first quarter ending 31 March 2000
provided that the written demand shall be presented within three (3) years from closing date.

Has RCBC the option to choose between Sec. 5(g) or Sec. 5(h)?

The answer is yes. Sec. 5 and Sec. 7 are clear that it is discretionary on the aggrieved parties to avail
themselves of any remedy mentioned above. They may choose one and dispense with the other. Of course, the
relief for price reduction under Sec. 5(h) will have to conform to the prerequisites and time frame of six (6)
months; otherwise, it is waived.

Preliminarily, petitioners basic posture that RCBCs claim is for the recovery of overpayment is specious. The
records show that in its Request for Arbitration dated May 12, 2004, RCBC prayed for the rescission of the SPA,
restitution of the whole purchase price, and damages not for reduction of price or for the return of any
overpayment. Even in its May 5, 2000 letter,[21] RCBC did not ask for the recovery of any overpayment or
reduction of price, merely stating in it that the accounts of Bankard, as reflected in its AFS for 1999, were
overstated which, necessarily, resulted in an overpayment situation. RCBC was emphatic and unequivocal that
petitioners violated their warranty covered by Sec. 5(g) of the SPA.

It is thus evident that RCBC did not avail itself of the option under Sec. 5(h), i.e., for price reduction or the return
of any overpayment arising from the overvaluation of Bankards financial condition. Clearly, RCBC invoked Sec.
5(g) to claim damages from petitioners which is one of the alternative reliefs granted under Sec. 7 in addition to
rescission and restitution of purchase price.

Petitioners do not deny that RCBC formally filed its claim under Sec. 5(g) which is anchored on the material
overstatement or overvaluation of Bankards revenues, assets, and net worth and, hence, the overstatement of
the purchase price. They, however, assert that such claim for overpayment is actually a claim under Sec. 5(h) of
the SPA for price reduction which it forfeited after December 31, 2000.

We cannot sustain petitioners position.

It cannot be disputed that an overstatement or overvaluation of Bankards financial condition as of closing date
translates into a misrepresentation not only of the accuracy and truthfulness of the financial statements under
Sec. 5(g), but also as to Bankards actual net worth mentioned in Sec. 5(h). Overvaluation presupposes mistakes
in the entries in the financial statements and amounts to a breach of petitioners representations and warranties
under Sec. 5. Consequently, such error in the financial statements would impact on the figure representing the
net worth of Bankard as of closing date. An overvaluation means that the financial condition of Bankard as of
closing date, i.e., June 2, 2000, is overstated, a situation that will definitely result in a breach of EPCIBs
representations and warranties.

A scrutiny of Sec. 5(g) and Sec. 5(h) in relation to Sec. 7 of the SPA would indicate the following
remedies available to RCBC should it be discovered, as of closing date, that there is overvaluation which will
constitute breach of the warranty clause under either Sec. 5(g) or (h), to wit:

(1) An overvaluation of Bankards actual financial condition as of closing date taints the veracity and
accuracy of the AFS for 1997, 1998, and 1999 and the UFS for the first quarter of 2000 and is an actionable
breach of petitioners warranties under Sec. 5(g).

(2) An overvaluation of Bankards financial condition as of May 31, 2000, encompassing the warranted
financial condition as of December 31, 1999 through the AFS for 1999 and as of March 31, 2000 through the
UFS for the first quarter of 2000, is a breach of petitioners representations and warranties under Sec. 5(h).

ADR Set 3 Page 25


Thus, RCBC has two distinct alternative remedies in case of an overvaluation of Bankards financial
condition. It may invoke Sec. 5(h) when the conditions of the threshold aggregate overvaluation and the claim
made within the six-month time-bar are present. In the alternative, it may invoke Sec. 5(g) when it finds that a
claim for curing the breach and/or damages will be more advantageous to its interests provided it is filed within
three (3) years from closing date. Since it has two remedies, RCBC may opt to exercise either one. Of course,
the exercise of either one will preclude the other.

Moreover, the language employed in Sec. 5(g) and Sec. 5(h) is clear and bereft of any ambiguity. The
SPAs stipulations reveal that the non-use or waiver of Sec. 5(h) does not preclude RCBC from availing itself of
the second relief under Sec. 5(g). Article 1370 of the Civil Code is explicit that if terms of a contract are clear and
leave no doubt upon the intention of the contracting parties the literal meaning of its stipulations shall control.
Since the terms of a contract have the force of law between the parties,[22] then the parties must respect and
strictly conform to it. Lastly, it is a long held cardinal rule that when the terms of an agreement are reduced to
writing, it is deemed to contain all the terms agreed upon and no evidence of such terms can be admitted other
than the contents of the agreement itself.[23] Since the SPA is unambiguous, and petitioners failed to adduce
evidence to the contrary, then they are legally bound to comply with it.

Petitioners agreed ultimately to the stipulation that:

Each of the representations and warranties of the SELLERS is deemed to be a separate


representation and warranty, and the BUYER has placed complete reliance thereon in
agreeing to the Purchase Price and in entering into this Agreement. The representations and
warranties of the SELLERS shall be correct as of the date of this Agreement and as of the
Closing Date with the same force and effect as though such representations and warranties had
been made as of the Closing Date.[24] (Emphasis supplied.)

The Court sustains the finding in the Partial Award that Sec. 5(g) of the SPA is a free standing warranty
and not constricted by Sec. 5(h) of the said agreement.

Upon the foregoing premises and in the light of the undisputed facts on record, RCBCs claim for
rescission of the SPA and damages due to overvaluation of Bankards accounts was properly for a breach of the
warranty under Sec. 5(g) and was not time-barred. To repeat, RCBC presented its written claim on May 5, 2003,
or a little less than a month before closing date, well within the three (3)-year prescriptive period provided under
Sec. 7 for the exercise of the right provided under Sec. 5(g).

Petitioners bemoan the fact that the arbitrators liability award (a) disregarded the 6-month contractual
limitation for RCBCs overprice claim, and [b] substituted in its place the 3-year limitation under the contract
for other claims,[25] adopting in that regard the interpretation of the SPA made by arbitral tribunal member,
retired Justice Kapunan, in his Dissenting Opinion, in which he asserted:

Ultimately, the Claim is one for recovery of overpayment in the purchase price of the
shares. And it is in this context, that I respectfully submit that Section 5(h) and not Section 5(g),
applies to the present controversy.[26]

xxxx

True, without Section 5(h), the Claim for price recovery would fall under Section 5(g).
The recovery of the pecuniary loss of the Claimant in the form of the excess price paid would be
in the nature of a claim for actual damages by way of compensation. In that situation, all the
accounts in the 1999 financial statements would be the subject of the warranty in Section 5(g).
However, since the parties explicitly included Section 5(h) in their SPA, which assures
the Claimant that there were no omissions or mistakes in the records that would misstate the
1999 net worth account, I am left with no other conclusion but that the accuracy of the net
worth was the subject of the warranty in Section 5(h), while the accuracy or correctness
of the other accounts that did not bear on, or affect Bankards net worth, were guaranteed
by Section 5(g).

xxxx
This manner of reconciling the two provisions is consistent with the principle in Rule 130,
Section 12 of the Rules of Court that when a general and a particular provision are inconsistent,
the latter is paramount to the former [so] a particular intent will control a general one that is
inconsistent with it. This is also consistent with existing doctrines on statutory construction, the
application of which is illustrated in the case of Commissioner of Customs vs. Court of Tax
Appeals, GR No. L-41861, dated March 23, 1987 x x x.

xxxx

The Claim is for recovery of the excess price by way of actual damages.[27] x x x
(Emphasis supplied.)

ADR Set 3 Page 26


Justice Kapunan noted that without Sec. 5(h), RCBCs claim would fall under Sec. 5(g), impliedly
admitting that both provisions could very well cover RCBCs claim, except that Sec. 5(h) excludes the situation
contemplated in it from the general terms of Sec. 5(g).

Such view is incorrect.

While it is true that Sec. 5(h), as couched, is a warranty on the accuracy of the Bankards net worth while
Sec. 5(g), as also couched, is a warranty on the veracity, accuracy, and completeness of the AFS in all material
respects as prepared in accordance with generally accepted accounting principles consistently followed
throughout the period audited, yet both warranties boil down to the same thing and stem from the same
accounts as summarized in the AFS. Since the net worth is the balance of Bankards assets less its
liabilities, it necessarily includes all the accounts under the AFS. In short, there are no accounts in the
AFS that do not bear on the net worth of Bankard. Moreover, as earlier elucidated, any overvaluation of
Bankards net worth is necessarily a misrepresentation of the veracity, accuracy, and completeness of the AFS
and also a breach of the warranty under Sec. 5(g). Thus, the subject of the warranty in Sec. 5(h) is also covered
by the warranty in Sec. 5(g), and Sec. 5(h) cannot exclude such breach from the ambit of Sec. 5(g). There is no
need to rely on Sec. 12, Rule 130 of the Rules of Court for both Sec. 5(g) and Sec. 5(h) as alternative remedies
are of equal footing and one need not categorize one section as a general provision and the other a particular
provision.

More importantly, a scrutiny of the four corners of the SPA does not explicitly reveal any stipulation nor
even impliedly that the parties intended to limit the scope of the warranty in Sec. 5(g) or gave priority to Sec.
5(h) over Sec. 5(g).

The arbitral tribunal did not find any legal basis in the SPA that Sec. 5(h) somehow cuts down the scope
of Sec. 5(g), thus:

9.10 In the opinion of the Tribunal, there is nothing in the wording used in the SPA to
give priority to one warranty over the other. There is nothing in the wording used to
indicate that the parties intended to limit the scope of the warranty in 5(g). If it be
contended that, on a true construction of the two warranties, 5(h) somehow cuts down the scope
of 5(g), the Tribunal can find no justification for such conclusion on the wording used.
Furthermore, the Tribunal is of the view that very clear words would be needed to cut down the
scope of the 5(g) warranty.[28]

The Court upholds the conclusion of the tribunal and rules that the claim of RCBC under Sec. 5(g) is not
time-barred.

Petitioners Were Not Denied Due Process

Petitioners impute on RCBC the act of creating summaries of the accounts of Bankard which in turn
were used by its experts to conclude that Bankard improperly recorded its receivables and committed material
deviations from GAAP requirements.[29] Later, petitioners would assert that the arbitrators partial award admitted
and used the Summaries as evidence, and held on the basis of the information contained in them that
petitioners were in breach of their warranty in GAAP compliance.

To petitioners, the ICC-ICAs use of such summaries but without presenting the source documents
violates their right to due process. Pressing the point, petitioners had moved, but to no avail, for the exclusion of
the said summaries. Petitioners allege that they had reserved the right to cross-examine the witnesses of RCBC
who testified on the summaries, pending the resolution of their motion to exclude. But, according to them, they
were effectively denied the right to cross-examine RCBCs witnesses when the ICC-ICA admitted the summaries
of RCBC as evidence.

Petitioners position is bereft of merit.

Anent the use but non-presentation of the source documents as the jumping board for a claim of denial
of due process, petitioners cite Compania Maritima v. Allied Free Workers Union.[30] It may be stated, however,
that such case is not on all fours with the instant case and, therefore, cannot be applied here considering that it
does not involve an administrative body exercising quasi-judicial function but rather the regular court.

In a catena of cases, we have ruled that [t]he essence of due process is the opportunity to be heard.
What the law prohibits is not the absence of previous notice but the absolute absence thereof and the lack of
opportunity to be heard.[31]

We also explained in Lastimoso v. Asayo that [d]ue process in an administrative context does not
require trial type proceedings similar to those in courts of justice. Where an opportunity to be heard either
through oral arguments or through pleadings is accorded, there is no denial of procedural due process.[32]

Were petitioners afforded the opportunity to refute the summaries and pieces of evidence submitted by
RCBC which became the bases of the experts opinion?

ADR Set 3 Page 27


The answer is in the affirmative.

We recall the events that culminated in the issuance of the challenged Partial Award, thus:

On May 17, 2004, the ICC-ICA received the Request for Arbitration dated May 12, 2004 from RCBC
seeking rescission of the SPA and restitution of all the amounts paid by RCBC to petitioners, with actual and
moral damages, interest, and costs of suit.

On August 8, 2004, petitioners filed an Answer to the Request for Arbitration dated July 28, 2004, setting
up a counterclaim for USD 300,000 for actual and exemplary damages.

RCBC filed its Reply[33] dated August 31, 2004 to petitioners Answer to the Request for Arbitration.
On October 4, 2004, the parties entered into the Terms of Reference.[34] At the same time, the
chairperson of the arbitral tribunal issued a provisional timetable[35] for the arbitration.

On October 25, 2004, as previously agreed upon in the meeting on October 4, 2004, petitioners filed a
Motion to Dismiss[36] while RCBC filed a Claimants Position Paper (Re: [Petitioners] Assertion that RCBC
CAPITAL CORPORATIONs Present Claim Is Time Barred).[37]

Then, the tribunal issued Procedural Order No. 1 dated January 12, 2005,[38] denying the motion to
dismiss and setting the initial hearing of the case on April 11, 2005.

In a letter dated February 9, 2005,[39] petitioners requested that the tribunal direct RCBC to produce
certain documents. At the same time, petitioners sought the postponement of the hearing on April 11,
2005 to March 21, 2005, in light of their own request.

On February 11, 2005, petitioners received RCBCs brief of evidence and supporting documentation in
accordance with the provisional timetable.[40] In the brief of evidence, RCBC provided summaries of the
accounts of Bankard, which petitioners now question.

Later, in a letter dated February 14, 2005,[41] petitioners complained to the tribunal with regard to their
lack of access to RCBCs external auditor. Petitioners sought an audit by an accounting firm of the records of
Bankard with respect to the claims of RCBC. By virtue of such requests, petitioners also sought a rescheduling
of the provisional timetable, despite their earlier assurance to the tribunal that if they received the documents
that they requested on February 9, 2005 on or before February 21, 2005, they would abide by the provisional
timetable.

Thereafter, the tribunal issued Procedural Order No. 2 dated February 18, 2005,[42] in which it allowed
the discovery and inspection of the documents requested by petitioners that were also scheduled on February
18, 2005. The request for an audit of Bankards accounts was denied without prejudice to the conduct of such
audit during the course of the hearings. Consequently, the tribunal amended the provisional timetable, extending
the deadline for petitioners to file their brief of evidence and documents to March 21, 2005. The date of the initial
hearing, however, remained on April 11, 2005.

On February 18, 2005, petitioners were furnished the documents that they requested RCBC.[43] The
parties also agreed to meet again on February 23, 2005 to provide petitioners with a walk-through of Bankards
Statistical Analysis System and to provide petitioners with a soft copy of all of Bankards cardholders.[44]

During the February 23, 2005 meeting, EPCIBs counsels/representatives were accompanied to the
Bankards Credit-MIS Group. There, Bankards representative, Amor Lazaro, described and explained to
petitioners representatives the steps involved in procuring and translating raw data on customer transactions.
Lazaro explained that Bankard captures cardholder information and transactions through encoding or electronic
data capture. Thereafter, such data are transmitted to its main credit card administration system. Such raw data
are then sent to Bankards Information Technology Group. Using a proprietary software called SAS, the raw data
is then converted into SAS files which may be viewed, handled, and converted into Excel files for reporting
purposes. During the walk-through, petitioners representatives asked questions which were answered in detail
by Lazaro.

At the same time, another Bankard representative, Felix L. Sincoegue, accompanied two
auditors/representatives of petitioners to examine the journal vouchers and supporting documents of Bankard
consisting of several boxes. The auditors randomly sifted through the boxes which they had earlier requested to
be inspected.

In addition, petitioners were furnished with an electronic copy of the details of all cardholders, including
relevant data for aging of receivables for the years 2000 to 2003, as well as data containing details of written-off
accounts from 1999 to March 2000 contained in compact discs.[45]

On March 4, 2005, petitioners sent a letter[46] to the tribunal requesting for a postponement of the April
11, 2005 hearing of the case. Petitioners claim that they could not confirm the summaries prepared by RCBC,
considering that RCBC allegedly did not cooperate in providing data that would facilitate their verification.

ADR Set 3 Page 28


Petitioners specifically mentioned the following data: (1) list of names of cardholders whose accounts are
sources of data gathered or calculated in the summaries; (2) references to the basic cardholder documents from
which such data were collected; and (3) access to the underlying cardholder documents at a time and under
conditions mutually convenient to the parties. As regards the compact discs of information provided to
petitioners, it is claimed that such information could not be accessed as the software necessary for the handling
of the data could not be made immediately available to them.
In Procedural Order No. 3 dated March 11 2005,[47] the initial hearing was moved to June 13 to 16, 2005,
considering that petitioners failed to pay the advance on costs of the tribunal.

On March 23, 2005, RCBC paid the balance of the advance on costs.[48]

On April 22, 2005, petitioners sent the tribunal a letter,[49] requesting for the postponement of the hearing
scheduled on June 13 to 16, 2005 on the ground that they could not submit their witness statements due to the
volume of data that they acquired from RCBC.

In a letter dated April 25, 2005,[50] petitioners demanded from RCBC that they be allowed to examine the
journal vouchers earlier made available to them during the February 23, 2005 meeting. This demand was
answered by RCBC in a letter dated April 26, 2005,[51] stating that such demand was being denied by virtue of
Procedural Order No. 2, in which it was ruled that further requests for discovery would not be made except with
leave of the chairperson of the tribunal.

In Procedural Order No. 4,[52] the tribunal granted petitioners request for the postponement of the
hearing on June 13, 2005 and rescheduled it to November 21, 2005 in light of the pending motions filed by
EPCIB with the RTC in Makati City.

On July 29, 2005, the parties held a meeting wherein it was agreed that petitioners would be provided
with hard and soft copies of the inventory of the journal vouchers earlier presented to its representatives, while
making the journal vouchers available to petitioners for two weeks for examination and photocopying.[53]

On September 2, 2005, petitioners applied for the postponement of the November 21, 2005 hearing due
to the following: (1) petitioners had earlier filed a motion dated August 11, 2005 with the RTC, in which the issue
of whether the non-Filipino members of the tribunal were illegally practicing law in the Philippines by hearing
their case, which was still pending; and (2) the gathering and processing of the data and documents made
available by RCBC would require 26 weeks.[54]Such application was denied by the tribunal in Procedural Order
No. 5 dated September 16, 2005.[55]

On October 21, 2005, the tribunal issued Procedural Order No. 6,[56] postponing the November 21,
2005 hearing by virtue of an order issued by the RTC in Makati City directing the tribunal to reset the hearing for
April 21 and 24, 2006.

Thereafter, in a letter dated January 18, 2006,[57] petitioners wrote the tribunal requesting that RCBC be
directed to: (1) provide petitioners with information identifying the journal vouchers and other supporting
documents that RCBC used to arrive at the figures set out in the summaries and other relevant information
necessary to enable them to reconstruct and/or otherwise understand the figures or amounts in each summary;
and (2) submit to petitioners the requested pieces of information as soon as these are or have become
available, or in any case not later than five days.

In response to such letter, RCBC addressed a letter dated January 31, 2006[58] to the tribunal claiming
that the pieces of information that petitioners requested are already known to petitioners considering that RCBC
merely maintained the systems that they inherited when it bought Bankard from petitioners. RCBC added that
the documents that EPCIB originally transmitted to it when RCBC bought Bankard were all being made available
to petitioners; thus, any missing supporting documents from these files were never transmitted to them in the
first place.

Later, petitioners sent to the tribunal a letter dated February 10, 2006,[59] asking that it direct RCBC to
provide petitioners with the supporting documents that RCBC mentioned in its letter dated January 31, 2006.
Petitioners wrote that should RCBC fail to present such documents, RCBCs summaries should be excluded
from the records.

In a letter dated March 10, 2006,[60] petitioners requested that they be given an additional period of at
least 47 days within which to submit their evidence-in-chief with the corresponding request for the cancellation of
the hearing on April 24, 2006. Petitioners submit that should such request be denied, RCBCs summaries should
be excluded from the records.

On April 6, 2006, petitioners filed their arbitration briefs and witness statements. By way of reply, on April
17, 2006, RCBC submitted Volumes IV and V of its exhibits and Volume II of its evidence-in-chief.[61]

On April 18, 2006, petitioners requested the tribunal that they be allowed to file rejoinder briefs, or
otherwise exclude RCBCs reply brief and witness statements.[62] In this request, petitioners also requested that
the hearing set for April 24, 2006 be moved. These requests were denied.

ADR Set 3 Page 29


Consequently, on April 24 to 27, 2006, the arbitral tribunal conducted hearings on the case.[63]
On December 4, 2006, petitioners submitted rejoinder affidavits, raising new issues for the first time, to
which RCBC submitted Volume III of its evidence-in-chief by way of a reply.

On January 16, 2007, both parties simultaneously submitted their memoranda. On January 26, 2007,
both parties simultaneously filed their reply to the others memorandum.[64]

Thus, on September 27, 2007, the Partial Award was rendered by the Tribunal.

Later, petitioners moved to vacate the said award before the RTC. Such motion was denied by the trial
court in the first assailed order dated January 8, 2008. Petitioners then moved for a reconsideration of such
order, but their motion was also denied in the second assailed order dated March 17, 2008.

The foregoing events unequivocally demonstrate ample opportunity for petitioners to verify and examine
RCBCs summaries, accounting records, and reports. The pleadings reveal that RCBC granted petitioners
requests for production of documents and accounting records. More so, they had more than three (3) years to
prepare for their defense after RCBCs submission of its brief of evidence. Finally, it must be emphasized that
petitioners had the opportunity to appeal the Partial Award to the RTC, which they in fact did. Later, petitioners
even moved for the reconsideration of the denial of their appeal. Having been able to appeal and move for a
reconsideration of the assailed rulings, petitioners cannot claim a denial of due process.[65]

Petitioners right to due process was not breached.


As regards petitioners claim that its right to due process was violated when they were allegedly denied
the right to cross-examine RCBCs witnesses, their claim is also bereft of merit.

Sec. 15 of RA 876 or the Arbitration Law provides that:

Section 15. Hearing by arbitrators. Arbitrators may, at the commencement of the hearing,
ask both parties for brief statements of the issues in controversy and/or an agreed statement of
facts. Thereafter the parties may offer such evidence as they desire, and shall produce such
additional evidence as the arbitrators shall require or deem necessary to an understanding and
determination of the dispute. The arbitrators shall be the sole judge of the relevancy and
materiality of the evidence offered or produced, and shall not be bound to conform to the
Rules of Court pertaining to evidence. Arbitrators shall receive as exhibits in evidence
any document which the parties may wish to submit and the exhibits shall be properly
identified at the time of submission. All exhibits shall remain in the custody of the Clerk of
Court during the course of the arbitration and shall be returned to the parties at the time the
award is made. The arbitrators may make an ocular inspection of any matter or premises which
are in dispute, but such inspection shall be made only in the presence of all parties to the
arbitration, unless any party who shall have received notice thereof fails to appear, in which
event such inspection shall be made in the absence of such party. (Emphasis supplied.)

The well-settled rule is that administrative agencies exercising quasi-judicial powers shall not be fettered
by the rigid technicalities of procedure, albeit they are, at all times required, to adhere to the basic concepts of
fair play. The Court wrote in CMP Federal Security Agency, Inc. v. NLRC:

While administrative tribunals exercising quasi-judicial powers, like the NLRC and Labor
Arbiters, are free from the rigidity of certain procedural requirements, they are nonetheless
bound by law and practice to observe the fundamental and essential requirements of due
process. The standard of due process that must be met in administrative tribunals allows a
certain degree of latitude as long as fairness is not ignored. Hence, it is not legally objectionable,
for being violative of due process, for the Labor Arbiter to resolve a case based solely on the
position papers, affidavits or documentary evidence submitted by the parties. The affidavits of
witnesses in such case may take the place of their direct testimony.[66]

Of the same tenor is our holding in Quiambao v. Court of Appeals:

In resolving administrative cases, conduct of full-blown trial is not indispensable to dispense


justice to the parties. The requirement of notice and hearing does not connote full adversarial
proceedings. Submission of position papers may be sufficient for as long as the parties thereto
are given the opportunity to be heard. In administrative proceedings, the essence of due
process is simply an opportunity to be heard, or an opportunity to explain ones side or
opportunity to seek a reconsideration of the action or ruling complained of. This
constitutional mandate is deemed satisfied if a person is granted an opportunity to seek
reconsideration of an action or a ruling. It does not require trial-type proceedings similar to
those in the courts of justice. Where opportunity to be heard either through oral arguments or
through pleadings is accorded, there is no denial of procedural due process.[67] (Emphasis
supplied.)

ADR Set 3 Page 30


Citing Vertudes v. Buenaflor, petitioners also cry denial of due process when they were allegedly denied
the right to cross-examine the witnesses presented by RCBC. It is true that in Vertudes, we stated: The right of a
party to confront and cross-examine opposing witnesses in a judicial litigation, be it criminal or civil in nature, or
in proceedings before administrative tribunals with quasi-judicial powers, is a fundamental right which is part of
due process.[68]

It is, however, equally true that:

[T]he right is a personal one which may be waived expressly or impliedly by conduct
amounting to a renunciation of the right of cross-examination. Thus, where a party has had the
opportunity to cross-examine a witness but failed to avail himself of it, he necessarily
forfeits the right to cross-examine and the testimony given on direct examination of the
witness will be received or allowed to remain in the record.[69] (Emphasis supplied.)

We also held in one case:

However, the right has always been understood as requiring not necessarily an actual
cross-examination but merely an opportunity to exercise the right to cross-examine if
desired. What is proscribed by statutory norm and jurisprudential precept is the absence
of the opportunity to cross-examine. The right is a personal one and may be waived expressly
or impliedly. There is an implied waiver when the party was given the opportunity to confront and
cross-examine an opposing witness but failed to take advantage of it for reasons attributable to
himself alone. If by his actuations, the accused lost his opportunity to cross-examine wholly or in
part the witnesses against him, his right to cross-examine is impliedly waived.[70] (Emphasis
supplied.)

And later in Velez v. De Vera, the Court En Banc expounded on the above rulings, adding that in
administrative proceedings, cross-examination is not indispensable, thus:

Due process of law in administrative cases is not identical with judicial process for a trial
in court is not always essential to due process. While a day in court is a matter of right in judicial
proceedings, it is otherwise in administrative proceedings since they rest upon different
principles. The due process clause guarantees no particular form of procedure and its
requirements are not technical. Thus, in certain proceedings of administrative character, the
right to a notice or hearing [is] not essential to due process of law. The constitutional
requirement of due process is met by a fair hearing before a regularly established administrative
agency or tribunal. It is not essential that hearings be had before the making of a determination
if thereafter, there is available trial and tribunal before which all objections and defenses to the
making of such determination may be raised and considered. One adequate hearing is all that
due process requires. What is required for hearing may differ as the functions of the
administrative bodies differ.

The right to cross-examine is not an indispensable aspect of due process.[71] x x x


(Emphasis supplied.)

Clearly, the right to cross-examine a witness, although a fundamental right of a party, may be waived.
Petitioners themselves admit having had the opportunity to cross-examine RCBCs witnesses during the
hearings before the tribunal, but declined to do so by reserving such right at a later time. Having had the
opportunity to cross-examine RCBCs witnesses, petitioners were not denied their right to due process.

RCBC Is Not Estopped from Questioning


the Financial Condition of Bankard

On estoppel, petitioners contend that RCBC already knew the recording of the Bankard accounts before
it paid the balance of the purchase price and could no longer challenge the financial statements of Bankard.
RCBC, they claim, had full control of the operations of Bankard since June 2, 2000 and RCBCs audit team
reviewed the accounts in September 2000. Thus, RCBC is now precluded from denying the fairness and
accuracy of said accounts since it did not seek price reduction under Sec. 5(h). Lastly, they asseverate that
RCBC continued with Bankards accounting policies and practices and found them to conform to the generally
accepted accounting principles, contrary to RCBCs allegations.

It also bears stating that in his dissent, retired Justice Kapunan, an arbitral tribunal member, argued that
Bankards accounting practices were disclosed in the information memorandum provided to RCBC; hence,
RCBC was supposed to know such accounting practices and to have accepted their propriety even before the
execution of the SPA. He then argued that when it paid the purchase price on December 29, 2000, RCBC could
no longer claim that the accounting practices that went into the reporting of the 1999 AFS of Bankard were not in
accord with generally accepted accounting principles. He pointed out that RCBC was bound by the audit
conducted by a certain Rubio prior to the full payment of the purchase price of Bankard. Anchored on these
statements by Justice Kapunan, petitioners conclude that RCBC is estopped from claiming that the former
violated their warranties under the SPA.

ADR Set 3 Page 31


Petitioners contention is not meritorious.

Art. 1431 of the Civil Code, on the subject of estoppel, provides: Through estoppel an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against
the person relying thereon.

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith, and justice;
and its purpose is to forbid one to speak against ones own acts, representations, or commitments to the injury of
one to whom they were directed and who reasonably relied on them.[72]

We explained the principle of estoppel in Philippine Savings Bank v. Chowking Food Corporation:

x x x The equitable doctrine of estoppel was explained by this Court in Caltex


(Philippines), Inc. v. Court of Appeals:

Under the doctrine of estoppel, an admission or representation is rendered


conclusive upon the person making it, and cannot be denied or disproved as against the
person relying thereon. A party may not go back on his own acts and representations to
the prejudice of the other party who relied upon them. In the law of evidence, whenever
a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to falsify it.

The principle received further elaboration in Maneclang v. Baun:

In estoppel by pais, as related to the party sought to be estopped, it is necessary


that there be a concurrence of the following requisites: (a) conduct amounting to false
representation or concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (b) intent, or at least expectation that this conduct shall
be acted upon, or at least influenced by the other party; and (c) knowledge, actual or
constructive of the actual facts.

Estoppel may vary somewhat in definition, but all authorities agree that a party invoking
the doctrine must have been misled to ones prejudice. That is the final and, in reality, most
important of the elements of equitable estoppel. It is this element that is lacking
here.[73] (Emphasis supplied.)

The elements of estoppel pertaining to the party estopped are:

(1) conduct which amounts to a false representation or concealment of material facts, or,
at least, which calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intention, or at least
expectation, that such conduct shall be acted upon by the other party; and (3) knowledge, actual
or constructive, of the actual facts.[74]
In the case at bar, the first element of estoppel in relation to the party sought to be estopped is not
present. Petitioners claim that RCBC misrepresented itself when RCBC made it appear that they considered
petitioners to have sufficiently complied with its warranties under Sec. 5(g) and 5(h), in relation to Sec. 7 of the
SPA. Petitioners position is that RCBC was aware of the manner in which the Bankard accounts were recorded,
well before it consummated the SPA by taking delivery of the shares and paying the outstanding 80% balance of
the contract price.[75]

Petitioners, therefore, theorize that in this case, the first element of estoppel in relation to the party
sought to be estopped is that RCBC made a false representation that it considered Bankards accounts to be in
order and, thus, RCBC abandoned any claim under Sec. 5(g) and 5(h) by its inaction.

Such contention is incorrect.

It must be emphasized that it was only after a second audit that RCBC presented its claim to petitioners
for violation of Sec. 5(g), within the three (3)-year period prescribed. In other words, RCBC, prior to such second
audit, did not have full and thorough knowledge of the correctness of Bankards accounts, in relation to Sec. 5(g).
RCBC, therefore, could not have misrepresented itself considering that it was still in the process of verifying the
warranties covered under Sec. 5(g). Considering that there must be a concurrence of the elements of estoppel
for it to arise, on this ground alone such claim is already negated. As will be shown, however, all the other
elements of estoppel are likewise absent in the case at bar.

As to the second element, in order to establish estoppel, RCBC must have intended that petitioners
would act upon its actions. This element is also missing. RCBC by its actions did not mislead petitioners into
believing that it waived any claim for violation of a warranty. The periods under Sec. 5(g) and 5(h) were still
available to RCBC.

ADR Set 3 Page 32


The element that petitioners relied on the acts and conduct of RCBC is absent. The Court finds that
there was no reliance on the part of petitioners on the acts of RCBC that would lead them to believe that the
RCBC will forego the filing of a claim under Sec. 5(g). The allegation that RCBC knew that the Bankard
accounts did not comply with generally accepted accounting principles before payment and, hence, it cannot
question the financial statements of Bankard is meritless. Precisely, the SPA explicitly provides that claims for
violation of the warranties under Sec. 5(g) can still be filed within three (3) years from the closing date.
Petitioners contention that RCBC had full control of Bankard operations after payment of the price and that an
audit undertaken by the Rubio team did not find anything wrong with the accounts could not have plausibly
misled petitioners into believing that RCBC will waive its right to file a claim under Sec. 5(g). After all, the period
to file a claim under Sec. 5(g) is three (3) years under Sec. 7, much longer than the six (6)-month period under
Sec. 5(h). Petitioners are fully aware that the warranties under Sec. 5(g) (1997 up to March 2000) are of a wider
scope than that of Sec. 5(h) (AFS of 1999 and UFS up to May 31, 2000), necessitating a longer audit period
than the six (6)-month period under Sec. 5(h).

The third element of estoppel in relation to the party sought to be estopped is also absent considering
that, as stated, RCBC was still in the process of verifying the correctness of Bankards accounts prior to
presenting its claim of overvaluation to petitioners. RCBC, therefore, had no sufficient knowledge of the
correctness of Bankards accounts.

On another issue, RCBC could not have immediately changed the Bankard accounting practices until it
had conducted a more extensive and thorough audit of Bankards voluminous records and transactions to
uncover any irregularities. That would be the only logical explanation why Bankards alleged irregular practices
were maintained for more than two (2) years from closing date. The fact that RCBC continued with the audit of
Bankards AFS and records after the termination of the Rubio audit can only send the clear message to
petitioners that RCBC is still entertaining the possibility of filing a claim under Sec. 5(g). It cannot then be said
that petitioners reliance on RCBCs acts after full payment of the price could have misled them into believing that
no more claim will be presented by RCBC.

The Arbitral Tribunal explained in detail why estoppel is not present in the case at bar, thus:

10.18 The audit exercise conducted by Mr. Legaspi and Mr. Rubio was clearly not one
comprehensive enough to have discovered the problems later unearthed by Dr. Laya
and Dean Ledesma. x x x

10.19 Although the powers of the TC [Transition Committee] may have been widely expressed in
the view of Mr. Rogelio Chua, then in charge of Bankard x x x the TC conducted
meetings only to get updated on the status and progress of Bankards operations.
Commercially, one would expect that an unpaid vendor expecting to receive 80% of a
large purchase price would not be receptive to a purchaser making vast policy changes
in the operation of the business until the purchaser has paid up its money. It is more
likely that, until the settlement date, there was a practice of maintaining the status quo at
Bankard.

10.20 But neither the Claimant nor the TC did anything, in the Tribunals view, which would have
given the Respondents the impression that they were being relieved over the next three
years of susceptibility to a claim under clause 5(g). Maybe the TC could have been more
proactive in commissioning further or more in-depth audits but it was not. It did not have
to be. It is commercially unlikely that it have been done so, with the necessary degree of
attention to detail, within the relatively short time between the appointment of the TC and
the ultimate settlement date of the purchase a period of some three months. An interim
arrangement was obviously sensible to enable the Claimant and its staff to become
familiar with the practices and procedures of Bankard.

10.21 The core consideration weighing with the Tribunal in assessing these claims for estoppel
is that the SPA allowed two types of claim; one within six months under 5(h) and one
within three years under 5(g). The Tribunal has already held the present claim is not
barred by clause 5(h). It must therefore have been within the reasonable contemplation
of the parties that a 5(g) claim could surface within the three-year period and that it could
be somewhat differently assessed than the claim under 5(h). The Tribunal cannot find
estoppel by conduct either from the formation of the TC or from the limited auditing
exercise done by Mr. Rubio and Mr. Legaspi. The onus proving estoppel is on the
Respondents and it has not been discharged.

10.22 If the parties had wished the avenues of relief for misrepresentation afforded to the
Claimant to have been restricted to a claim under Clause 5(h), then they could have said
so. The special audit may have provided an answer to any claim based on clause 5(h)
but it cannot do so in respect of a claim based on Clause 5(g). Clause 5(g) imposed a
positive obligation on the Respondents from which they cannot be excused, simply by
reason of either the formation and conduct of the TC or of the limited audit.

ADR Set 3 Page 33


10.23 The three-year limitation period obviously contemplated that it could take some time to
ascertain whether there had been a breach of the GAAP standards, etc. Such was the
case. A six-month limitation period under Clause 5(h), in contrast, presaged a somewhat
less stringent enquiry of the kind carried out by Mr. Rubio and Mr. Legaspi.

10.24 Clause 2(3) of the Amendment to the SPA strengthens the conclusion that the parties
were concerned only with a 5(h) claim during the TCs reign. The focus of the audit
however intense it was conducted by Mr. Rubio and Mr. Legaspi, was on establishing
possible liability under that section and thus as a possible reduction in the price to be
paid on settlement.

10.25 The fact that the purchase price was paid over in full without any deduction in terms of
clause 5(h) is not a bar to the Claimant bringing a claim under 5(g) within the three-year
period. The fact that payment was made can be, as the Tribunal has held, a barrier to a
claim for rescission and restitution ad inegrum. A claim for estoppel needs a finding of
representation by words of conduct or a shared presumption that a right would not be
relied upon. The party relying on estoppel has to show reliance to its detriment or that,
otherwise, it would be unconscionable to resile from the provision.

10.26 Article 1431 of the Civil Code states:


Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.

10.27 Clearly, there has to both an admission or representation by (in this case) the Claimant,
plus reliance upon it by (in this case) the Respondents. The Tribunal cannot find as
proved any admission/representation that the Claimant was abandoning a 5(g) claim,
any reliance by Respondents on an admission, and any detriment to the Respondents
such as would entitle them to have the Claimant deprived of the benefit of clause 5(g).
These aspects of the claim of estoppel are rejected.

xxxx
10.42 The Tribunal is not the appropriate forum for deciding whether there have been any
regulatory or ethical infractions by Bankard and/or the Claimant in setting the buy-back
price. It has no bearing on whether the Claimant must be considered as having waived
its right to claim against the Respondents.

10.43 In the Tribunals view, neither any infraction by Bankard in failing to advise the Central
Bank of the experts findings, nor a failure to put a tag on the accounts nor to have said
something to the shareholders in the buy-back exercise operates as a technical knock-
out of Claimants claim.

10.44 The Tribunal notes that the conciliation process mandated by the SPA took most of 2003
and this may explain a part of the delay in commencing arbitral proceedings.

10.45 Whatever the status of Mr. Rubios and Mr. Legaspis enquiries in late 2000, the Claimant
was quite entitled to commission subsequent reports from Dr. Laya and Dr. Echanis and,
on the basis of those reports, make a timeous claim under clause 5(g) of the SPA.

10.46 In the Tribunals view, therefore, there is no merit in Respondents various submissions that
the Claimant is debarred from prosecuting its claims on the grounds of estoppel. There is
just no proof of the necessary representation to the Respondent, nor any detriment to the
Respondent proved. The grounds of delay and laches are not substantiated.

In summary, the tribunal properly ruled that petitioners failed to prove that the formation of the Transition
Committee and the conduct of the audit by Rubio and Legaspi were admissions or representations by RCBC
that it would not pursue a claim under Sec. 5(g) and that petitioners relied on such representation to their
detriment. We agree with the findings of the tribunal that estoppel is not present in the situation at bar.

Additionally, petitioners claim that in Knecht v. Court of Appeals[76] and Coca-Cola Bottlers Philippines,
Inc. v. Court of Appeals (Coca-Cola),[77] this Court ruled that the absence of the element of reliance by a party
on the representation of another does not negate the principle of estoppel. Those cases are, however, not on all
fours with and cannot be applied to this case.

In Knecht, the buyer had the opportunity of knowing the conditions of the land he was buying early on in
the transaction, but proceeded with the sale anyway. According to the Court, the buyer was estopped from
claiming that the vendor made a false representation as to the condition of the land. This is not true in the instant
case. RCBC did not conduct a due diligence audit in relation to Sec.5(g) prior to the sale due to petitioners
express representations and warranties. The examination conducted by RCBC, through Rubio, after the
execution of the SPA on June 2, 2000, was confined to finding any breach under Sec. 5(h) for a possible
reduction of the purchase price prior to the payment of its balance on December 31, 2000. Further, the parties

ADR Set 3 Page 34


clearly agreed under Sec. 7 of the SPA to a three (3)-year period from closing date within which to present a
claim for damages for violation of the warranties under the SPA. Hence, Knecht is not a precedent to the case at
bar.

So is Coca-Cola. As lessee, Coca-Cola Bottlers was well aware of the nature and situation of the land
relative to its intended use prior to the signing of the contract. Its subsequent assertion that the land was not
suited for the purpose it was leased was, therefore, cast aside for being unmeritorious. Such circumstance does
not obtain in the instant case. There was no prior due diligence audit conducted by RCBC, it having relied, as
earlier stated, on the warranties of petitioners with regard to the financial condition of Bankard under Sec. 5(g).
As such, Sec. 5(g) guaranteed RCBC that it could file a claim for damages for any mistakes in the AFS and UFS
of Bankard. Clearly, Coca-Cola also cannot be applied to the instant case.

It becomes evident from all of the foregoing findings that the ICC-ICA is not guilty of any manifest
disregard of the law on estoppel. As shown above, the findings of the ICC-ICA in the Partial Award are well-
supported in law and grounded on facts. The Partial Award must be upheld.

We close this disposition with the observation that a member of the three-person arbitration panel was
selected by petitioners, while another was respondents choice. The respective interests of the parties, therefore,
are very much safeguarded in the arbitration proceedings. Any suggestion, therefore, on the partiality of the
arbitration tribunal has to be dismissed.

WHEREFORE, the instant petition is hereby DENIED. The assailed January 8, 2008 and March 17,
2008 Orders of the RTC, Branch 148 in Makati City are hereby AFFIRMED.

Costs against petitioners.

SO ORDERED.

ADR Set 3 Page 35


SECOND DIVISION

FIESTA WORLD MALL CORPORATION, G.R. NO. 152471


Petitioner, August 18, 2006
- versus -
LINBERG PHILIPPINES, INC.,
Respondent.
x---------------------------------------------------------------------------------------------x
DECISION

SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari[1] assailing the
Decision[2] dated December 12, 2001 and Resolution[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
Plant[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 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 x x x

E1 988,888 kw-hr x BER


E2 (ED-988,888) x BER

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.

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.

Fn 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.

ED Energy delivered in kw-hrs per meter reading.

3. Minimum Energy Off-Take

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

ADR Set 3 Page 36


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] Moreover, in the computation of the electrical billings, the minimum off-take of
energy (E2) was based solely on the projected consumption ascomputed 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, 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.

ADR Set 3 Page 37


Petitioners Motion for Reconsideration of the above Decision was likewise denied by the appellate
court in its Resolution[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 panelbefore 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 parties. Since that agreement is
binding between them, they are expected to abide by it in good faith.[7] And because it covers the dispute
between them in the present case, either of them may compel the other to arbitrate.[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 venueof 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 whohas 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] 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]

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] After the arbitration proceeding has been pursued and
completed, then the trial court may confirm the award made by the arbitration panel.[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. 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.

ADR Set 3 Page 38


SECOND DIVISION
[G.R. No. 115412. November 19, 1999]
HOME BANKERS SAVINGS AND TRUST COMPANY, petitioner
vs.
COURT OF APPEALS and FAR EAST BANK & TRUST COMPANY, respondents.
DECISION
BUENA , J.:
This appeal by certiorari under Rule 45 of the Rules of Court seeks to annul and set aside the decision [1] of
the Court of Appeals[2] dated January 21, 1994 in CA-G.R. SP No. 29725, dismissing the petition
for certiorari filed by petitioner to annul the two (2) orders issued by the Regional Trial Court of Makati[3] in Civil
Case No. 92-145, the first, dated April 30, 1992, denying petitioner's motion to dismiss and the second, dated
October 1, 1992 denying petitioner's motion for reconsideration thereof.

The pertinent facts may be briefly stated as follows: Victor Tancuan, one of the defendants in Civil Case No.
92-145, 0issued Home Bankers Savings and Trust Company (HBSTC) check No. 193498 for P25,250,000.00
while Eugene Arriesgado issued Far East Bank and Trust Company (FEBTC) check Nos. 464264, 464272 and
464271 for P8,600,000.00, P8,500,000.00 and P8,100,000.00, respectively, the three checks amounting
to P25,200,000.00. Tancuan and Arriesgado exchanged each other's checks and deposited them with their
respective banks for collection.When FEBTC presented Tancuan's HBSTC check for clearing, HBSTC
dishonored it for being "Drawn Against Insufficient Funds." On October 15, 1991, HBSTC sent Arriesgado's
three (3) FEBTC checks through the Philippine Clearing House Corporation (PCHC) to FEBTC but was returned
on October 18, 1991 as "Drawn Against Insufficient Funds." HBSTC received the notice of dishonor on October
21, 1991 but refused to accept the checks and on October 22, 1991, returned them to FEBTC through the
PCHC for the reason "Beyond Reglementary Period," implying that HBSTC already treated the three (3) FEBTC
checks as cleared and allowed the proceeds thereof to be withdrawn.[4] FEBTC demanded reimbursement for
the returned checks and inquired from HBSTC whether it had permitted any withdrawal of funds against the
unfunded checks and if so, on what date. HBSTC, however, refused to make any reimbursement and to provide
FEBTC with the needed information.

Thus, on December 12, 1991, FEBTC submitted the dispute for arbitration before the PCHC Arbitration
Committee,[5] under the PCHC's Supplementary Rules on Regional Clearing to which FEBTC and HBSTC are
bound as participants in the regional clearing operations administered by the PCHC.[6]

On January 17, 1992, while the arbitration proceedings was still pending, FEBTC filed an action for sum of
money and damages with preliminary attachment[7] against HBSTC, Robert Young, Victor Tancuan and Eugene
Arriesgado with the Regional Trial Court of Makati, Branch 133. A motion to dismiss was filed by HBSTC
claiming that the complaint stated no cause of action and accordingly should be dismissed because it seeks to
enforce an arbitral award which as yet does not exist.[8] The trial court issued an omnibus order dated April 30,
1992 denying the motion to dismiss and an order dated October 1, 1992 denying the motion for reconsideration.

On December 16, 1992, HBSTC filed a petition for certiorari with the respondent Court of Appeals
contending that the trial court acted with grave abuse of discretion amounting to lack of jurisdiction in denying
the motion to dismiss filed by HBSTC.

In a Decision[9] dated January 21, 1994, the respondent court dismissed the petition for lack of merit and
held that "FEBTC can reiterate its cause of action before the courts which it had already raised in the arbitration
case"[10] after finding that the complaint filed by FEBTC "seeks to collect a sum of money from HBT [HBSTC]
and not to enforce or confirm an arbitral award."[11] The respondent court observed that "[i]n the Complaint,
FEBTC applied for the issuance of a writ of preliminary attachment over HBT's [HBSTC] property"[12] and citing
section 14 of Republic Act No. 876, otherwise known as the Arbitration Law, maintained that "[n]ecessarily, it
has to reiterate its main cause of action for sum of money against HBT [HBSTC]," [13] and that "[t]his prayer for
conservatory relief [writ of preliminary attachment] satisfies the requirement of a cause of action which FEBTC
may pursue in the courts."[14]

Furthermore, the respondent court ruled that based on section 7 of the Arbitration Law and the cases
of National Union Fire Insurance Company of Pittsburg vs. Slolt-Nielsen Philippines, Inc.,[15] and Bengson
vs. Chan,[16] "when there is a condition requiring prior submission to arbitration before the institution of a court
action, the complaint is not to be dismissed but should be suspended for arbitration." [17] Finding no merit in
HBSTC's contention that section 7 of the Arbitration Law "contemplates a situation in which a party to an
arbitration agreement has filed a court action without first resorting to arbitration, while in the case at bar,
FEBTC has initiated arbitration proceedings before filing a court action," the respondent court held that "if the
absence of a prior arbitration may stay court action, so too and with more reason, should an arbitration already
pending as obtains in this case stay the court action. A party to a pending arbitral proceeding may go to court to
obtain conservatory reliefs in connection with his cause of action although the disposal of that action on the
merits cannot as yet be obtained."[18] The respondent court discarded Puromines, Inc. vs. Court of
Appeals,[19] stating that "perhaps Puromines may have been decided on a different factual basis."[20]

In the instant petition,[21] petitioner contends that first, "no party litigant can file a non-existent
complaint,"[22] arguing that "one cannot file a complaint in court over a subject that is undergoing
arbitration."[23] Second, petitioner submits that "[s]ince arbitration is a special proceeding by a clear provision of
law,[24] the civil suit filed below is, without a shadow of doubt, barred by litis pendencia and should be

ADR Set 3 Page 39


dismissed de plano insofar as HBSTC is concerned."[25] Third, petitioner insists that "[w]hen arbitration is agreed
upon and suit is filed without arbitration having been held and terminated, the case that is filed should be
dismissed,"[26] citing Associated Bank vs. Court of Appeals,[27] Puromines, Inc. vs. Court of
Appeals,[28] and Ledesma vs. Court of Appeals.[29] Petitioner demurs that the Puromines ruling was deliberately
not followed by the respondent court which claimed that:

"xxx xxx.

It would really be much easier for Us to rule to dismiss the complainant as the petitioners here seeks to do,
following Puromines. But with utmost deference to the Honorable Supreme Court, perhaps Puromines may have
been decided on a different factual basis.

xxx xxx."[30]

Petitioner takes exception to FEBTC's contention that Puromines cannot modify or reverse the rulings in
National Union Fire Insurance Company of Pittsburg vs. Stolt-Nielsen Philippines,
Inc.,[31] and Bengson vs. Chan,[32] where this Court suspended the action filed pending arbitration, and argues
that "[s]ound policy requires that the conclusion of whether a Supreme Court decision has or has not reversed or
modified [a] previous doctrine, should be left to the Supreme Court itself; until then, the latest pronouncement
should prevail."[33] Fourth, petitioner alleges that the writ of preliminary attachment issued by the trial court is
void considering that the case filed before it "is a separate action which cannot exist,"[34] and "there is even no
need for the attachment as far as HBSTC is concerned because such automatic debit/credit procedure [35] may
be regarded as a security for the transactions involved and, as jurisprudence confirms, one requirement in the
issuance of an attachment [writ of preliminary attachment] is that the debtor has no sufficient
security."[36] Petitioner asserts further that a writ of preliminary attachment is unwarranted because no ground
exists for its issuance. According to petitioner, "the only allegations against it [HBSTC] are that it refused to
refund the amounts of the checks of FEBTC and that it knew about the fraud perpetrated by the other
defendants,"[37] which, at best, constitute only "incidental fraud" and not causal fraud which justifies the issuance
of the writ of preliminary attachment.

Private respondent FEBTC, on the other hand, contends that "the cause of action for collection [of a sum of
money] can coexist in the civil suit and the arbitration [proceeding]"[38] citing section 7 of the Arbitration Law
which provides for the stay of the civil action until an arbitration has been had in accordance with the terms of
the agreement providing for arbitration. Private respondent further asserts that following section 4(3), article
VIII[39]of the 1987 Constitution, the subsequent case of Puromines does not overturn the ruling in the earlier
cases of National Union Fire Insurance Company of Pittsburg vs. Stolt-Nielsen Philippines,
Inc.[40] and Bengson vs. Chan,[41] hence, private respondents concludes that the prevailing doctrine is that the
civil action must be stayed rather than dismissed pending arbitration.

In this petition, the lone issue presented for the consideration of this Court is:

WHETHER OR NOT PRIVATE RESPONDENT WHICH COMMENCED AN ARBITRATION


PROCEEDING UNDER THE AUSPICES OF THE PHILIPPINE CLEARING HOUSE CORPORATION
(PCHC) MAY SUBSEQUENTLY FILE A SEPARATE CASE IN COURT OVER THE SAME SUBJECT
MATTER OF ARBITRATION DESPITE THE PENDENCY OF THAT ARBITRATION, SIMPLY TO
OBTAIN THE PROVISIONAL REMEDY OF ATTACHMENT AGAINST THE BANK, THE ADVERSE
PARTY IN THE ARBITRATION PROCEEDINGS."[42]

We find no merit in the petition. Section 14 of Republic Act 876, otherwise known as the Arbitration Law,
allows any party to the arbitration proceeding to petition the court to take measures to safeguard and/or
conserve any matter which is the subject of the dispute in arbitration, thus:

Section 14. Subpoena and subpoena duces tecum. - Arbitrators shall have the power to require any person to
attend a hearing as a witness. They shall have the power to subpoena witnesses and documents when the
relevancy of the testimony and the materiality thereof has been demonstrated to the arbitrators. Arbitrators may
also require the retirement of any witness during the testimony of any other witness. All of the arbitrators
appointed in any controversy must attend all the hearings in that matter and hear all the allegations and proofs
of the parties; but an award by the majority of them is valid unless the concurrence of all of them is expressly
required in the submission or contract to arbitrate. The arbitrator or arbitrators shall have the power at any
time, before rendering the award, without prejudice to the rights of any party to petition the court to take
measures to safeguard and/or conserve any matter which is the subject of the dispute in
arbitration. (emphasis supplied)

Petitioner's exposition of the foregoing provision deserves scant consideration. Section 14 simply grants an
arbitrator the power to issue subpoena and subpoena duces tecum at any time before rendering the award. The
exercise of such power is without prejudice to the right of a party to file a petition in court to safeguard any
matter which is the subject of the dispute in arbitration. In the case at bar, private respondent filed an action for a
sum of money with prayer for a writ of preliminary attachment. Undoubtedly, such action involved the same
subject matter as that in arbitration, i.e., the sum of P25,200,000.00 which was allegedly deprived from private
respondent in what is known in banking as a "kiting scheme." However, the civil action was not a simple case of

ADR Set 3 Page 40


a money claim since private respondent has included a prayer for a writ of preliminary attachment, which is
sanctioned by section 14 of the Arbitration Law.

Petitioner cites the cases of Associated Bank vs. Court of Appeals,[43] Puromines, Inc. vs. Court of
Appeals,[44] and Ledesma vs. Court of Appeals[45] in contending that "[w]hen arbitration is agreed upon and suit
is filed without arbitration having been held and terminated, the case that is filed should be
dismissed."[46] However, the said cases are not in point. In Associated Bank, we affirmed the dismissal of the
third-party complaint filed by Associated Bank against Philippine Commercial International Bank, Far East Bank
& Trust Company, Security Bank and Trust Company and Citytrust Banking Corporation for lack of jurisdiction, it
being shown that the said parties were bound by the Clearing House Rules and Regulations on Arbitration of the
Philippine Clearing House Corporation. In Associated Bank, we declared that:

"xxx xxx. Under the rules and regulations of the Philippine Clearing House Corporation (PCHC), the
mere act of participation of the parties concerned in its operations in effect amounts to a manifestation of
agreement by the parties to abide by its rules and regulations. As a consequence of such
participation, a party cannot invoke the jurisdiction of the courts over disputes and
controversies which fall under the PCHC Rules and Regulations without first going through the
arbitration processes laid out by the body."[47] (emphasis supplied)

And thus we concluded:

"Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to
the arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to
do so. The jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is
particularly applicable to all the parties in the third party complaint under their obligation to first seek
redress of their disputes and grievances with the PCHC before going to the trial court."[48] (emphasis
supplied)

Simply put, participants in the regional clearing operations of the Philippine Clearing House
Corporation cannot bypass the arbitration process laid out by the body and seek relief directly from the
courts. In the case at bar, undeniably, private respondent has initiated arbitration proceedings as required by
the PCHC rules and regulations, and pending arbitration has sought relief from the trial court for measures to
safeguard and/or conserve the subject of the dispute under arbitration, as sanctioned by section 14 of the
Arbitration Law, and otherwise not shown to be contrary to the PCHC rules and regulations.

Likewise, in the case of Puromines, Inc. vs. Court of Appeals,[49] we have ruled that:

"In any case, whether the liability of respondent should be based on the sales contract or that of the bill
of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales
contract and/or bill of lading. Petitioner being a signatory and party to the sales contract cannot escape
from his obligation under the arbitration clause as stated therein."

In Puromines, we found the arbitration clause stated in the sales contract to be valid and applicable, thus,
we ruled that the parties, being signatories to the sales contract, are obligated to respect the arbitration
provisions on the contract and cannot escape from such obligation by filing an action for breach of contract in
court without resorting first to arbitration, as agreed upon by the parties.

At this point, we emphasize that arbitration, as an alternative method of dispute resolution, is encouraged
by this Court. Aside from unclogging judicial dockets, it also hastens solutions especially of commercial
disputes.[50] The Court looks with favor upon such amicable arrangement and will only interfere with great
reluctance to anticipate or nullify the action of the arbitrator.[51]

WHEREFORE, premises considered, the petition is hereby DISMISSED and the decision of the
court a quo is AFFIRMED.

SO ORDERED.

ADR Set 3 Page 41


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 198075 September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.
116865.

The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered
owner of a parcel of land located at Km. 16, South Superhighway, Parañaque City (subject land). 3 Within the
subject land are buildings and other improvements dedicated to the business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of herein
respondent Makati Rotary Club Foundation, Incorporated by way of a conditional donation.6 The respondent
accepted the donation with all of its conditions.7 On 26 May1975, FKI and the respondent executed a Deed of
Donation8evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease the subject land back to FKI
under terms specified in their Deed of Donation.9 With the respondent’s acceptance of the donation, a lease
agreement between FKI and the respondent was, therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is ₱40,126.00 per annum .11

The Deed of Donation also stipulated that the lease over the subject property is renewable for another
period of twenty-five (25) years " upon mutual agreement" of FKI and the respondent.12 In which case, the
amount of rent shall be determined in accordance with item 2(g) of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual agreement and in case of
disagreement the matter shall be referred to a Board of three Arbitrators appointed and with powers in
accordance with the Arbitration Law of the Philippines, Republic Act 878, whose function shall be to
decide the current fair market value of the land excluding the improvements, provided, that, any increase
in the fair market value of the land shall not exceed twenty five percent (25%) of the original value of the
land donated as stated in paragraph 2(c) of this Deed. The rental for the second 25 years shall not
exceed three percent (3%) of the fair market value of the land excluding the improvements as
determined by the Board of Arbitrators.13

In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that reiterated the
provisions of the Deed of Donation , including those relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of
Donation , FKI was able to continue in its possession and use of the subject land.

2000 Lease Contract


Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation
was set to expire, or on 23 May 2000, FKI and respondent executed another contract of lease ( 2000 Lease
Contract )15covering the subject land. In this 2000 Lease Contract, FKI and respondent agreed on a new five-
year lease to take effect on the 26th of May 2000, with annual rents ranging from ₱4,000,000 for the first year up
to ₱4,900,000 for the fifth year.16 The 2000 Lease Contract also contained an arbitration clause enforceable in
the event the parties come to disagreement about the" interpretation, application and execution" of the lease, viz
:
19. Governing Law – The provisions of this 2000 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the Philippines.
The decision of the majority of the arbitrators shall be binding upon FKI and respondent.17 (Emphasis supplied)

2005 Lease Contract


After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another five
(5) years. This new lease (2005 Lease Contract )18 required FKI to pay a fixed annual rent of ₱4,200,000.19 In
addition to paying the fixed rent, however, the 2005 Lease Contract also obligated FKI to make a yearly "
donation " of money to the respondent.20 Such donations ranged from ₱3,000,000 for the first year up to
₱3,900,000for the fifth year.21Notably, the 2005 Lease Contract contained an arbitration clause similar to that in
the 2000 Lease Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

ADR Set 3 Page 42


Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the Philippines.
The decision of the majority of the arbitrators shall be binding upon FKI and respondent.22 (Emphasis supplied)

The Assignment and Petitioner’s Refusal to Pay


From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in favor of herein
petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner executed an Assignment and
Assumption of Lease and Donation25 —wherein FKI, with the conformity of the respondent, formally assigned all
of its interests and obligations under the Amended Deed of Donation and the 2005 Lease Contract in favor of
petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the 2005
Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental stipulations
of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they violated
one of the" material conditions " of the donation of the subject land, as stated in the Deed of Donation and
Amended Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually established not
only one but two (2) lease agreements between FKI and respondent, i.e. , one lease for the first twenty-five
(25)years or from 1975 to 2000, and another lease for the next twenty-five (25)years thereafter or from 2000 to
2025. 27 Both leases are material conditions of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was
not fixed in the Deed of Donation and Amended Deed of Donation , both deeds nevertheless prescribed rules
and limitations by which the same may be determined. Such rules and limitations ought to be observed in any
succeeding lease agreements between petitioner and respondent for they are, in themselves, material
conditions of the donation of the subject land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation
that supposedly limits the amount of rent for the lease over the second twenty-five (25) years to only " three
percent (3%) of the fair market value of the subject land excluding the improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract
cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation of the aforementioned
threshold in item 2(g) of the Deed of Donation and Amended Deed of Donation . Consequently, petitioner insists
that the amount of rent it has to pay thereon is and must still be governed by the limitations prescribed in the
Deed of Donation and Amended Deed of Donation.30

The Demand Letters


On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter of its
default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of the rent and "
donation " due for the year 2009. Respondent, in the same letter, further intimated of canceling the 2005 Lease
Contract should petitioner fail to settle the said obligations.32 Petitioner received the First Demand Letter on2
June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the
rental stipulations of the 2005 Lease Contract — calling them " severely disproportionate," "unconscionable" and
"in clear violation to the nominal rentals mandated by the Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled to ₱8,394,000.00, exclusive of interests, petitioner
offered to pay only ₱80,502.79,35 in accordance with the rental provisions of the Deed of Donation and
Amended Deed of Donation.36Respondent refused this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease Contract. The
Second Demand Letter also contained a demand for petitioner to " immediately vacate the leased premises "
should it fail to pay such obligations within seven (7) days from its receipt of the letter. 39 The respondent warned
of taking " legal steps " in the event that petitioner failed to comply with any of the said demands.40 Petitioner
received the Second Demand Letter on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009,
petitioner filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission or
cancellation of the Deed of Donation and Amended Deed of Donation against the respondent. This case is
currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.

The Ejectment Suit


On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the
Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and was
docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it, petitioner
reiterated its objection over the rental stipulations of the 2005 Lease Contract for being violative of the material
conditions of the Deed of Donation and Amended Deed of Donation.45 In addition to the foregoing, however,
petitioner also interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in view
of the insufficiency of respondent’s demand.46 The First Demand Letter did not contain an actual
demand to vacate the premises and, therefore, the refusal to comply there with does not give rise to
an action for unlawful detainer.47

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2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same until the
disagreement between the parties is first referred to arbitration pursuant to the arbitration clause of
the 2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would not lie as
the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005 Lease Contract requiring
petitioner to give yearly " donations " to respondent is a simulation, for they are, in fact, parts of the
rent. 50 Such grants were only denominated as " donations " in the contract so that the
respondent—anon-stock and non-profit corporation—could evade payment of the taxes otherwise
due thereon.51

In due course, petitioner and respondent both submitted their position papers, together with their other
documentary evidence.52 Remarkably, however, respondent failed to submit the Second Demand Letter as part
of its documentary evidence.

Rulings of the MeTC, RTC and Court of Appeals


On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to
dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the petitioner
with respect to the issues regarding the insufficiency of the respondent’s demand and the nullity of the 2005
Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to
costs.
SO ORDERED.55

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

As to the existing improvements belonging to the defendant-appellee, as these were built in good faith,
the provisions of Art. 1678of the Civil Code shall apply.
SO ORDERED.57

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


1. The respondent had adequately complied with the requirement of demand as a jurisdictional
precursor to an unlawful detainer action.58 The First Demand Letter, in substance, contains a
demand for petitioner to vacate when it mentioned that it was a notice " per Section12 of the 2005
Lease Contract."59 Moreover, the issue of sufficiency of the respondent’s demand ought to have
been laid to rest by the Second Demand Letter which, though not submitted in evidence, was
nonetheless admitted by petitioner as containing a" demand to eject " in its Answer with Compulsory
Counterclaim.60
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the
same time, impugn such contract’s validity.61 Even assuming that it can, petitioner still did not file a
formal application before the MeTC so as to render such arbitration clause operational.62 At any rate,
the MeTC would not be precluded from exercising its jurisdiction over an action for unlawful detainer,
over which, it has exclusive original jurisdiction.63
3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was not able to
adduce any evidence to support its allegation that the same is void.64 There was, in this case, no
evidence that respondent is guilty of any tax evasion.65

Aggrieved, the petitioner appealed to the Court of Appeals.


On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:
WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of Parañaque
City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67

Hence, this appeal.

On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary
Restraining Order68staying the immediate implementation of the decisions adverse to it.

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OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in overlooking
the significance of the arbitration clause incorporated in the 2005 Lease Contract . As the Court sees it, that is a
fatal mistake.
For this reason, We grant the petition.

Present Dispute is Arbitrable Under the Arbitration Clause of the 2005


Lease Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner and
respondent emanates from the rental stipulations of the 2005 Lease Contract. The respondent insists upon the
enforce ability and validity of such stipulations, whereas, petitioner, in substance, repudiates them. It is from
petitioner’s apparent breach of the 2005 Lease Contract that respondent filed the instant unlawful detainer
action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the
petitioner and respondent arose from the application or execution of the 2005 Lease Contract . Undoubtedly,
such kinds of dispute are covered by the arbitration clause of the 2005 Lease Contract to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the Philippines.
The decision of the majority of the arbitrators shall be binding upon FKI and respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the "
interpretation, application or execution " of the 2005 Lease Contract ought to be submitted to arbitration.70 To
the mind of this Court, such stipulation is clear and is comprehensive enough so as to include virtually any kind
of conflict or dispute that may arise from the 2005 Lease Contract including the one that presently besets
petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain
legal effects. However, before discussing what these legal effects are, We shall first deal with the challenges
posed against the application of such arbitration clause.

Challenges Against the Application of the Arbitration Clause of the 2005


Lease Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as well
as the MeTC, RTC and the Court of Appeals, vouched for the non-application of the same in the instant case. A
plethora of arguments was hurled in favor of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against the
application of the arbitration clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is non-arbitrable as it will inevitably touch
upon the issue of the validity of the 2005 Lease Contract.71 It was submitted that one of the reasons
offered by the petitioner in justifying its failure to pay under the 2005 Lease Contract was the nullity
of such contract for being contrary to law and public policy.72 The Supreme Court, in Gonzales v.
Climax Mining, Ltd.,73 held that " the validity of contract cannot be subject of arbitration proceedings "
as such questions are " legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function ." 74
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the
same time, impugn such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the 2005 Lease
Contract , petitioner still did not file a formal application before the MeTC so as to render such
arbitration clause operational.76 Section 24 of Republic Act No. 9285 requires the party seeking
arbitration to first file a " request " or an application therefor with the court not later than the
preliminary conference.77
4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR) proceedings before
the RTC.78 Hence, a further referral of the dispute to arbitration would only be circuitous.79 Moreover,
an ejectment case, in view of its summary nature, already fulfills the prime purpose of arbitration, i.e.
, to provide parties in conflict with an expedient method for the resolution of their
dispute.80 Arbitration then would no longer be necessary in this case.81

None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the petitioner and respondent
falls within the all-encompassing terms of the arbitration clause of the 2005 Lease Contract. While it may be
conceded that in the arbitration of such disagreement, the validity of the 2005 Lease Contract, or at least, of
such contract’s rental stipulations would have to be determined, the same would not render such disagreement
non-arbitrable. The quotation from Gonzales that was used to justify the contrary position was taken out of
context. A rereading of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and
Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance Agreement and
other mining related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud and unconstitutionality.83 The
pivotal issue that confronted the Court then was whether the PA-MGB has jurisdiction over that particular

ADR Set 3 Page 45


arbitration complaint. Stated otherwise, the question was whether the complaint for arbitration raises arbitrable
issues that the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to
take cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or the
Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only over mining disputes, i.e.,
disputes involving " rights to mining areas," "mineral agreements or permits," and " surface owners, occupants,
claim holders or concessionaires" requiring the technical knowledge and experience of mining authorities in
order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise mining disputes
as contemplated under R.A. No. 7942 but only issues relating to the validity of certain mining related
agreements, this Court held that such complaint could not be arbitrated before the PA-MGB.85 It is in this context
that we made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the
parties as to some provisions of the contract between them, which needs the interpretation and the application
of that particular knowledge and expertise possessed by members of that Panel. It is not proper when one of the
parties repudiates the existence or validity of such contract or agreement on the ground of fraud or oppression
as in this case. The validity of the contract cannot be subject of arbitration proceedings. Allegations of fraud and
duress in the execution of a contract are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation of laws and jurisprudence which is
necessarily a judicial function.86(Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground that
the issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The real consideration behind the
ruling was the limitation that was placed by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral
body . Gonzales rejected the complaint for arbitration because the issue raised therein is not a mining dispute
per R.A. No. 7942 and it is for this reason, and only for this reason, that such issue is rendered non-arbitrable
before the PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB only to
mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc.
v. San Fernando Regal Trading, Inc.88 In Cargill , this Court answered the question of whether issues involving
the rescission of a contract are arbitrable. The respondent in Cargill argued against arbitrability, also citing
therein Gonzales . After dissecting Gonzales , this Court ruled in favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause is
conceded, the CA's decision declining referral of the parties' dispute to arbitration is still correct. It claims that its
complaint in the RTC presents the issue of whether under the facts alleged, it is entitled to rescind the contract
with damages; and that issue constitutes a judicial question or one that requires the exercise of judicial function
and cannot be the subject of an arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we
held that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to the execution of the addendum
contract and the other contracts emanating from it, and that the complaint should have been filed with the
regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding the
fact that it assails the validity of such contract. This is due to the doctrine of separability.91
Under the doctrine of separability, an arbitration agreement is considered as independent of the main
contract.92Being a separate contract in itself, the arbitration agreement may thus be invoked regardless of the
possible nullity or invalidity of the main contract.93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the doctrine
of separability, even the very party who repudiates the main contract may invoke its arbitration clause.94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of the
petitioner to file a formal "request" or application therefor with the MeTC. We find that the filing of a "request"
pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an arbitration clause may be validly
invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:

SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial
conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, inoperative or incapable of being performed. [Emphasis ours; italics
original]

The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of A.M. No.
07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules):

RULE 4: REFERRAL TO ADR

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

ADR Set 3 Page 46


(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is filed but
the parties subsequently enter into an arbitration agreement, they may request the court to refer their dispute to
arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which shall state
that the dispute is covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the arbitration
agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and time when
it would be heard. The party making the request shall serve it upon the respondent to give him the opportunity to
file a comment or opposition as provided in the immediately succeeding Rule before the hearing. [Emphasis
ours; italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a pending action
filed in violation of the arbitration agreement x x x may request the court to refer the parties to arbitration in
accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No. 9285, the
Special ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a pending suit
solely via such "request." After all, non-compliance with an arbitration agreement is a valid defense to any
offending suit and, as such, may even be raised in an answer as provided in our ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration before
the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with Counterclaim ,had
already apprised the MeTC of the existence of the arbitration clause in the 2005 Lease Contract 96 and, more
significantly, of its desire to have the same enforced in this case.97 This act of petitioner is enough valid
invocation of his right to arbitrate. Fourth . The fact that the petitioner and respondent already under went
through JDR proceedings before the RTC, will not make the subsequent conduct of arbitration between the
parties unnecessary or circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation
which entails the submission of a dispute before a " JDR judge " who shall merely " facilitate settlement "
between the parties in conflict or make a " non-binding evaluation or assessment of the chances of each party’s
case."98 Thus in JDR, the JDR judge lacks the authority to render a resolution of the dispute that is binding upon
the parties in conflict. In arbitration, on the other hand, the dispute is submitted to an arbitrator/s —a neutral third
person or a group of thereof— who shall have the authority to render a resolution binding upon the parties.99
Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the
subsequent conduct of arbitration a mere surplusage. The failure of the parties in conflict to reach an amicable
settlement before the JDR may, in fact, be supplemented by their resort to arbitration where a binding resolution
to the dispute could finally be achieved. This situation precisely finds application to the case at bench.
Neither would the summary nature of ejectment cases be a valid reason to disregard the enforcement of
the arbitration clause of the 2005 Lease Contract . Notwithstanding the summary nature of ejectment cases,
arbitration still remains relevant as it aims not only to afford the parties an expeditious method of resolving their
dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost,
a product of party autonomy or the freedom of the parties to " make their own arrangements to resolve their own
disputes."100Arbitration agreements manifest not only the desire of the parties in conflict for an expeditious
resolution of their dispute. They also represent, if not more so, the parties’ mutual aspiration to achieve such
resolution outside of judicial auspices, in a more informal and less antagonistic environment under the terms of
their choosing. Needless to state, this critical feature can never be satisfied in an ejectment case no matter how
summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease
Agreement in this case, We shall now proceed with the discussion of its legal effects.

Legal Effect of the Application of the Arbitration Clause


Since there really are no legal impediments to the application of the arbitration clause of the 2005
Contract of Lease in this case, We find that the instant unlawful detainer action was instituted in violation of such
clause. The Law, therefore, should have governed the fate of the parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue arising
out of an agreement providing for the arbitration thereof, the court in which such suit or proceeding is pending,
upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration, shall stay the
action or proceeding until an arbitration has been had in accordance with the terms of the agreement: Provided,
That the applicant for the stay is not in default in proceeding with such arbitration.[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial
conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, in operative or incapable of being performed. [Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been stayed; 101 the
petitioner and the respondent should have been referred to arbitration pursuant to the arbitration clause of the
2005 Lease Contract . The MeTC, however, did not do so in violation of the law—which violation was, in turn,
affirmed by the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid all
proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with Counterclaim —the
point when the petitioner and the respondent should have been referred to arbitration. This case must, therefore,

ADR Set 3 Page 47


be remanded to the MeTC and be suspended at said point. Inevitably, the decisions of the MeTC, RTC and the
Court of Appeals must all be vacated and set aside.
The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration clause
of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about to make.
Nonetheless, this Court must make the same if only to stress the point that, in our jurisdiction, bona fide
arbitration agreements are recognized as valid;102 and that laws,103 rules and regulations104 do exist protecting
and ensuring their enforcement as a matter of state policy. Gone should be the days when courts treat otherwise
valid arbitration agreements with disdain and hostility, if not outright " jealousy," 105 and then get away with it.
Courts should instead learn to treat alternative means of dispute resolution as effective partners in the
administration of justice and, in the case of arbitration agreements, to afford them judicial restraint.106 Today, this
Court only performs its part in upholding a once disregarded state policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of Donation against
the respondent. The case is currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV
09-0346.
This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve
matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract. However, since the
records of Civil Case No. CV 09-0346 are not before this Court, We can never know with true certainty and only
speculate. In this light, let a copy of this Decision be also served to Branch 257of the RTC of Parañaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby render
a Decision:
1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of
Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of its Answer with
Counterclaim ;
2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by petitioner of
its Answer with Counterclaim;
3. SETTING ASIDE the following:
a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865,
b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of Parañaque City in
Civil Case No. 10-0255,
c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of Parañaque City in
Civil Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to arbitration pursuant to the arbitration clause of the
2005 Lease Contract, repeatedly included in the 2000 Lease Contract and in the 1976 Amended
Deed of Donation.

Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its consideration and,
possible, application to Civil Case No. CV 09-0346.
No costs. SO ORDERED.

ADR Set 3 Page 48


THIRD DIVISION
[G.R. No. 127004. March 11, 1999]
NATIONAL STEEL CORPORATION, petitioner,
vs.
THE REGIONAL TRIAL COURT OF LANAO DEL NORTE, BRANCH 2, ILIGAN CITY and E. WILLKOM
ENTERPRISES, INC., respondents.

SYNOPSIS
This is a petition for certiorari with a prayer for preliminary injunction and temporary restraining order under
Rule 65 of the Revised Rules of Court assailing the decision of the Regional Trial Court of Lanao del Norte
affirming the decision of the Board of Arbitrators directing petitioner to pay private respondent the Final Billing
No. 16 and price escalation adjustment, both with interest of 1-1/4% per month from January 1, 1985 to actual
date of payment and exemplary damages, attorneys fees and cost of arbitration.
Petitioner alleged that there was evident partiality in the decision of the Board of Arbitrators and there was
mistaken appreciation of the facts of the law. Moreover, petitioner sought to bar payment of Billing No. 16 since
private respondent allegedly failed to complete the works as agreed upon. In addition, petitioner contended that
private respondent is not entitled to price escalation.
Voluntary arbitrators, by the nature of their functions act in a quasi-judicial capacity. As a rule, findings of
facts by quasi-judicial bodies are accorded not only respect but even finality if they are supported by substantial
evidence. As petitioner has availed of Rule 65, the Supreme Court will not review the facts found or even of the
law as interpreted or applied by the arbitrator unless the supposed errors of facts or of law are so patent and
gross and prejudicial as to amount to a grave abuse of discretion on the part of the arbitrators.
Petitioners allegation of evident partiality is untenable. The Court found that petitioner was never deprived
of the right to present evidence nor was there any showing that the Board showed signs of any bias in favor of
private respondent.
Under the contract sued upon, petitioner is required to send a letter to private respondent within seven (7)
days after completion of the inspection to specify any objections thereto, should he feels that work agreed upon
was not completed. Petitioner failed to comply with this requirement, and therefore it would be unfair to refuse
payment to private respondent considering that the latter had faithfully submitted Final Billing No. 16 believing
that its work had been completed because Petitioner did not call its attention to any objectionable aspect of their
project. PD 1594 expressly allows price escalation. The subject contract does not contain a waiver of the
provisions of PD 1594. Thus, when there is no prohibitory clause on price escalation, the Court will allow
payment therefor. The Court, however, disregarded the Boards imposition of 1-1/4% interest per month. There
is nothing in the Contract to justify said award. The Court instead ordered that the legal rate of 6% per annum
from January 1, 1985 until the decision becomes final and executory should be applied to Final Billing No. 16
and price escalation adjustment. The Court likewise disregarded the exemplary damages and attorneys fees
awarded by the Board of Arbitrators.
SYLLABUS
1. LABOR AND SOCIAL LEGISLATION; LABOR RELATIONS; ARBITRATION PROCEEDINGS;
VOLUNTARY ARBITRATOR; A STIPULATION TO REFER ALL FUTURE DISPUTES OR TO SUBMIT
ONGOING DISPUTE THERETO, CONSIDERED VALID. -- A stipulation to refer all future disputes or to
submit an ongoing dispute to an arbitrator is valid. Republic Act 876, otherwise known as the Arbitration
Law, was enacted by Congress since there was a growing need for a law regulating arbitration in general.
2. ID.; ID.; ID.; ID.; FINDINGS OF FACTS THEREOF ACCORDED NOT ONLY RESPECT BUT EVEN
FINALITY. -- It should be stressed that voluntary arbitrators, by the nature of their functions, act in a quasi-
judicial capacity. As a rule, findings of facts by quasi-judicial bodies, which have acquired expertise because
their jurisdiction is confined to specific matters, are accorded not only respect but even finality if they are
supported by substantial evidence, even if not overwhelming or preponderant. As the petitioner has availed
of Rule 65, the Court will not review the facts found nor even of the law as interpreted or applied by the
arbitrator unless the supposed errors of facts or of law are so patent and gross and prejudicial as to amount
to a grave abuse of discretion or an excess de pouvoir on the part of the arbitrators.
3. ID.; ID.; ID.; ID.; PRESUMPTION OF REGULARITY IN THE PERFORMANCE THEREOF OF OFFICIAL
FUNCTIONS. -- In a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the
performance of official functions is presumed and the complaining party has the burden of proving the
existence of any of the grounds for vacating the award, as provided for by Sections 24 of the Arbitration
Law.
4. ID.; ID.; ID.; BOARD OF ARBITRATORS; ALLEGATION OF EVIDENT PARTIALITY THEREOF NOT
SUBSTANTIATED IN CASE AT BAR; RULING IN ADAMSON (232 SCRA 602) CASE, CITED. --
Petitioner's allegation that there was evident partiality is untenable. It is anemic of evidentiary support. In
the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of the Board of
Arbitrators, this Court ruled that the fact that a party was disadvantaged by the decision of the Arbitration
Committee does not prove evident partiality. Proofs other than mere inference are needed to establish
evident partiality. Here, petitioner merely averred evident partiality without any proof to back it up. Petitioner
was never deprived of the right to present evidence nor was there any showing that the Board showed signs
of any bias in favor of EWEI. The allegation of evident partiality is not well-taken because the petitioner
failed to substantiate the same.
5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTOR'S WORK DEEMED COMPLETED
WHERE OWNER AFTER COMPLETION OF INSPECTION FAILED TO SPECIFY ANY OBJECTION
THERETO. -- Under the contract sued upon, it is clear that should the Owner feel that the work agreed upon
was not completed by the contractor, it is incumbent upon the OWNER to send to CONTRACTOR a letter
within seven (7) days after completion of the inspection to specify the objections thereto. NSC failed to

ADR Set 3 Page 49


comply with such requirement, and therefore it would be unfair to refuse payment to EWEI, considering that
the latter had faithfully submitted Final Billing No.16 believing that its work had been completed because
NSC did not call its attention to any objectionable aspect of their project.
6. ID.; INTEREST; AWARD OF 1-1/4% INTEREST PER MONTH NOT JUSTIFIED; LEGAL RATE OF 6%
PER ANNUM SHOULD BE APPLIED; REASON THEREOF. -- But, what cannot be upheld is the Board's
imposition of a 1-1/4% interest per month from January 1, 1985 to actual date of payment. There is nothing
in the said contract to justify or authorize such an award. The trial court should have therefore disregarded
the same and instead, applied the legal rate of 6% per annum, from Jan. 1, 1985 until this decision becomes
final and executory. This is so because the legal rate of interest on monetary obligations not arising from
loans or forebearance of credits or goods is 6% per annum in the absence of any stipulation to the contrary.
7. ID.; ID.; PRICE ESCALATION; PHRASE PRICES ABOVE FIXED, CONSTRUED; PRICE ESCALATION
IN ALL CONTRACTS INVOLVING GOVERNMENT PROJECTS, ALLOWED UNDER P.D. NO. 1594. --
The phrase prices above fixed means that the contract price of the work shall be that agreed upon by the
parties at the time of the execution of the contract, which is the law between them provided it is not contrary
to law, morals, good customs, public order, or public policy. (Article 1306, New Civil Code). It cannot be
inferred therefrom, however, that the parties are prohibited from imposing future increases or price
escalation. It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall
control. But price escalation is expressly allowed under Presidential Decree 1594, which law allows price
escalation in all contracts involving government projects including contracts entered into by government
entities and instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic
rule in contracts that the law is deemed written into the contract between the parties. And when there is no
prohibitory clause on price escalation, the Court will allow payment therefor.
8. ID.; ID.; ID.; PETITIONER NOT EXEMPT FROM PAYMENT THEREOF; RATE OF 6% PER ANNUM NOT
1-1/4% PER MONTH SHOULD BE APPLIED TO THE PRICE ESCALATION IN CASE AT BAR. --In a vain
attempt to evade said law's application, they would like the Court to believe that it is an acquired asset
corporation and not a government owned or controlled corporation so that they are not within the coverage
of PD 1594. Whether NSC is an asset-acquired corporation or a government owned or controlled
corporation is of no moment. It is not determinative of the pivot of inquiry. It bears emphasizing that during
the hearings conducted by the Board of Arbitrators, there was presented documentary evidence to show that
NSC, despite its being allegedly an asset-acquired corporation, allowed price escalation to another
contractor, Geo Transport and Construction, Inc. (GTCI). If Petitioner seeks to refute such evidence, it
should have done so before the Board of Arbitrators, during the hearings. To raise the issue now is futile.
However, the same line of reasoning with respect to the first award should be used in disregarding the
interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly applied to the price escalation to
be computed from January 1, 1985 until this decision becomes final and executory.
9. ID.; DAMAGES; EXEMPLARY DAMAGES; REQUIREMENTS FOR THE AWARD THEREOF; AWARD
THEREOF NOT WARRANTED IN CASE AT BAR. -- The requirements for an award of exemplary
damages, are: (1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimants right to them has been established; (2) that they cannot be recovered as a matter of right,
their determination depending upon the amount of compensatory damages that may be awarded to the
claimant; (3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner. EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it refused
payment of the Final Billing No. 16. The belief that the work was never completed by EWEI and that it
(NSC) had the right to make it chargeable to the cost differential paid by the latter to another contractor was
neither wanton nor done in evident bad faith. The payment of legal rate of interest will suffice to compensate
EWEI of whatever prejudice it suffered by reason of the delay caused by NSC.
10. ID.; ID.; ATTORNEY'S FEES; DISALLOWED IN CASE AT BAR. -- As regards the award of attorney's fees,
award for attorney's fees without justification is a conclusion without a premise, its basis being improperly left
to speculation and conjecture. The fixed counsel's fee of P350,000 should be disallowed. The trial court
acted with grave abuse of discretion when it adopted the same in toto.

DECISION
PURISIMA, J.:
Before the Court is a Petition for Certiorari with Prayer for Preliminary Injunction & Temporary Restraining
Order under Rule 65 of the Revised Rules of Court assailing the decision of the Regional Trial Court of Lanao
del Norte, Branch 2, Iligan City, on the following consolidated cases :
(a) Special Proceeding Case No. 2206 entitled National Steel Corporation vs E. Willkom Enterprise Inc to
Vacate Arbitrators Award; and;
(b) Civil Case No. 2198 entitled to E. Willkom Enterprises Inc. vs National Steel Corporation for Sum of
Money with application for Confirmation of Arbitrators Award.
The facts as found below are, as follows:
"xxx On Nov. 18, 1992, petitioner-defendant Edward Wilkom Enterprises Inc. (EWEI for brevity) together with
one Ramiro Construction and respondent-petitioner National Steel Corporation (NSC for short) executed a
contract whereby the former jointly undertook the Contract for Site Development (Exhs. "3" & "D") for the latter's
Integrated Iron and Steel Mills Complex to be established at Iligan City.
Sometime in the year 1983, the services of Ramiro Construction was terminated and on March 7, 1983,
petitioner-defendant EWEI took over Ramiro's contractual obligation. Due to this and to other causes deemed
sufficient by EWEI, extensions of time for the termination of the project, initially agreed to be finished on July 17,
1983, were granted by NSC.

ADR Set 3 Page 50


Differences later arose, Plaintiff-defendant EWEI filed Civil Case No. 1615 before the Regional Trial Court of
Lanao del Norte, Branch 06, (Exhs. "A" and "1") praying essentially for the payments of P458,381.001 with
interest from the time of delay; the price adjustment as provided by PD 1594; and exemplary damages in the
amount of P50,000.00 and attorney's fees.
Defendant-petitioner NSC filed an answer with counterclaim to plaintiff's complaints on May 18, 1990.
On August 21, 1990, the Honorable Court through Presiding Judge Valario M. Salazar upon joint motion of both
parties had issued an order (Exhs. "C" and "3") dismissing the said complaint and counterclaim x x x in view of
the desire of both parties to implement Sec. 19 of the contract, providing for a resolution of any conflict by
arbitration x x x . ( underscoring supplied).
In accordance with the aforesaid order, and pursuant to Sec. 19 of the Contract for Site Development (id) the
herein parties constituted an Arbitration Board composed of the following:
(a) Engr. Pafnucio M. Mejia as Chairman, who was nominated by the two arbitrators earlier nominated
by EWEI and NSC with an Oath of Office (Exh. "E");
(b) Engr. Eutaquio 0. Lagapa, Jr., member, who was nominated by EWEI with an oath office (Exh. "F")
(c) Engr. Gil A. Aberilia, a member who was nominated by NSC, with an Oath of Office (Exh. "G").
After series of hearings, the Arbitrators rendered the decision (Exh. "H" & "4") which is the subject matter of
these present causes of action, both initiated separately by the herein contending parties, substantial portion of
which directs NSC to pay EWEI, as follows:
(a) P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1-1/4% per
month from January 1, 1985 to actual date of payment;
(b) P1,335,514.20 representing price escalation adjustment under PD No. 1594, with interest thereon
at the rate of 1-1/4 % per month from January 1, 1985 to actual date of payment;
(c) P50,000 as and for exemplary damages;
(d) P350,000 as and for attorney's fees.; and
(e) P35,000.00 as and for cost of arbitration."[1]
The Regional Trial Court of Lanao del Norte Branch 2, Iligan City through Judge Maximo B. Ratunil,
rendered judgment as follows:
(1) In Civil Case No. 11-2198, declaring the award of the Board of Arbitrators, dated April 21, 1992 to
be duly AFFIRMED and CONFIRMED "en toto" ; that an entry of judgment be entered therewith
pursuant to Republic Act No. 876 (the Arbitration Law); and costs against respondent National Steel
Corporation.
(2) In Special Proceeding No. 11-2206, ordering the petition to vacate the aforesaid award be
DISMISSED.
SO ORDERED.[2] "
With the denial on October 18, 1996 of its Motion for Reconsideration, the National Steel Corporation (NSC)
has come to this court via the present petition.
After deliberating on the petition as well as the comment and reply thereon, the court gave due course to
the petition and considered the case ripe for decision.
The pivot of inquiry here is whether or not the lower court acted with grave abuse of discretion in
not vacating the arbitrator's award.
A stipulation to refer all future disputes or to submit an ongoing dispute to an arbitrator is valid. Republic Act
876, otherwise known as the Arbitration Law, was enacted by Congress since there was a growing need for a
law regulating arbitration in general.
The parties in the present case, upon entering into a Contract for Site Development, mutually agreed that
any dispute arising from the said contract shall be submitted for arbitration. Explicit is Paragraph 19 of subject
contract, which reads:
"Paragraph 19. ARBITRATION. All disputes questions or differences which may at any time arise between the
parties hereto in connection with or relating to this Agreement or the subject matter hereof, including questions
of interpretation or construction, shall be referred to an Arbitration Board composed of three (3) arbitrators, one
to be appointed by each party, and the third, to be appointed by the two (2) arbitrators. The appointment of
arbitrators and procedure for arbitration shall be governed by the provisions of the Arbitration Law (Republic Act
No. 876). The Board shall apply Philippine Law in adjudicating the dispute. The decision of a majority of the
members of the Arbitration Board shall be valid, binding, final and conclusive upon the parties, and from which
there will be no appeal, subject to the provisions on vacating, modifying, or correcting an award under the said
Republic Act No. 876.[3]
Thereunder, if a dispute should arise from the contract, the Arbitration Board shall assume jurisdiction and
conduct hearings. After the Board comes up with a decision, the parties may immediately implement the same
by treating it as an amicable settlement. However, if one of the parties refuses to comply or is dissatisfied with
the decision, he may file a Petition to Vacate the Arbitrator's decision before the trial court. On the other hand,
the winning party may ask the trial court's confirmation to have such decision enforced.
It should be stressed that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity.[4] As a rule, findings of facts by quasi-judicial bodies, which have acquired expertise because their
jurisdiction is confined to specific matters, are accorded not only respect but even finality if they are supported
by substantial evidence,[5] even if not overwhelming or preponderant.[6] As the petitioner has availed of Rule 65,
the Court will not review the facts found nor even of the law as interpreted or applied by the arbitrator unless the
supposed errors of facts or of law are so patent and gross and prejudicial as to amount to a grave abuse of
discretion or an excess de pouvoir on the part of the arbitrators.[7]
Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the performance of
official functions is presumed and the complaining party has the burden of proving the existence of any of the
grounds for vacating the award, as provided for by Sections 24 of the Arbitration Law, to wit:

ADR Set 3 Page 51


"Sec. 24 GROUNDS FOR VACATING THE AWARD - In any one of the following cases, the court must make
an order vacating the award upon the petition of any party to the controversy when such party proves
affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud or other undue means;
(b) That there was evident partiality or corruption in the arbitrators of any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause
shown, or in refusing to hear evidence pertinent and material to the controversy; that one or more of the
arbitrators was disqualified to act as such under section nine hereof, and wilfully refrained from disclosing such
disqualification or of any other misbehavior by which the rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite
award upon the subject matter submitted to them was not made. xxx"
The grounds relied upon by the petitioner were the following (a) That there was evident partiality in the
assailed decision of the Arbitrators in favor of the respondent; and (b) That there was mistaken appreciation of
the facts and application of the law by the Arbitrators. These were the very same grounds alleged by NSC
before the trial court in their Petition to Vacate the Arbitration Award and which petitioner is reiterating in this
petition under scrutiny.
Petitioner's allegation that there was evident partiality is untenable. It is anemic of evidentiary support.
In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of the Board of
Arbitrators, this Court ruled that the fact that a party was disadvantaged by the decision of the Arbitration
Committee does not prove evident partiality. Proofs other than mere inference are needed to establish evident
partiality. Here, petitioner merely averred evident partiality without any proof to back it up. Petitioner was never
deprived of the right to present evidence nor was there any showing that the Board showed signs of any bias in
favor of EWEI. As correctly found by the trial court:
"Thirdly, this Court cannot find its way to support NSC's contention that there was evident partiality in the
assailed Award of the Arbitrator in favor of the respondent because the conclusion of the Board, which the Court
found to be well-founded, is fully supported by substantial evidence, as follows:
"xxx The testimonies of witnesses from both parties were heard to clarify facts and to threash (sic) out
the dispute in the hearings. Upon motion by NSC counsel, the hearing of testimony from witnesses
was terminated on 22 January 1992. To end the testimonies in the hearing both litigant parties upon
query by Arbitrator-Chairman freely declared that there has been no partiality in the manner the
Arbitrators conducted the hearing, that there has been no instance, where Arbitrators refused to
postpone requested or to hear/accept evidence pertinent and material to the dispute. xxx
(underscoring supplied)
Parentethically, and in the light of the record above-mentioned, this Court hereby holds that the Board of
Arbitrators did not commit any 'evident partiality' imputed by petitioner NSC. Above all, this Court must sustain
the said decision for it is a well settled rule that the actual findings of an administrative body should be affirmed if
there is substantial evidence to support them and the conclusions stated in the decision are not clearly against
the law and jurisprudence similar to the instant case. Henceforth, every reasonable intendment will be indulged
to give effect such proceedings and in favor of the regulatory and integrity of the arbitrators act. (Corpus Juris,
Vol. 5, p. 20)"[8]
Indeed, the allegation of evident partiality is not well-taken because the petitioner failed to substantiate the
same.
Anent the issue of mistaken appreciation of facts and law of the case, the petitioner theorizes that the
awards made by the Board were unsubstantiated and the same were a plain misapplication of the law and even
contrary to jurisprudence. To have a clearer understanding of the petition, this Court will try to discuss
individually the awards made by the Board, and determine if there was grave abuse of discretion on the part of
the trial court when it adopted such awards in toto.
I. P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1 1/4% per month from January 1, 1985 to actual date of payment;

Petitioner seeks to bar payment of the said amount to EWEI. Since the latter failed to complete the works
as agreed upon, NSC had the right to withhold such amount. The same will be used to cover the cost differential
paid to another contractor who finished the work allegedly left uncompleted by EWEI. Said work cost
NSC P1,225,000, and should be made chargeable to EWEI's receivables on Final Billing No. 16 issued to NSC.
The query here therefore is whether there was failure on the part of EWEI to complete the work agreed
upon. This will determine whether Final Billing No. 16 can be made chargeable to the cost differential paid by
NSC to another contractor.
After a series of hearings, the Board of Arbitrators concluded that the work was completed by EWEI. As
correctly stated:
"To authenticate the extent of unfinished work, quantity, unit cost differential and amount, NSC was required to
submit copies of payment vouchers and/or job awards extended to the other contractor engaged to complete the
works. The best efforts by NSC despite the multiplicity of accounting/auditing/engineering records required in a
corporate complex failed to produce documentary proofs from their Iligan or Makati office despite repeated
requests. NSC failed to substantiate such allusion of completion by another contractor three unfinished items of
works, actual quantities accomplished and unit cost differential paid chargeable against EWEI.
xxx xxx xxx
The latest evaluation on record of the items of work completed by EWEI under the contract is drawn from the
NSC report (Exhibit "11-d") dated 12 November 1985 submitted with the EWEI Billing No. 16-Final in the course
of processing claim on items of work accomplished. There is no such report or mention of unfinished work of
90,000 MT of dumped riprap, 100,000 cu. m. of site grading and 300,000 cu. m. of spreading common
excavated materials in the EWEI contract alluded to by the NSC as unfinished work otherwise EWEI Billing No.
16-Final would not have passed processing for payment unless there is really no such unfinished work NSC
evaluation report with no adverse findings of unfinished work consider the contract as completed.

ADR Set 3 Page 52


To affirm the work items, quantity, unit cost differential and amount of unfinished work left behind by EWEI, NSC
in serving notice of contract termination to EWEI should have instead specifically cited these obligations in detail
for EWEI to perform/comply within 30 days, such failure to perform/comply should have constituted as an event
in default that would have justified termination of contract of NSC with EWEI. If at all, this unfinished work may
be additional/extra work awarded in 1984 to another contractor at prices higher than the unit price tendered by
EWEI in 1982 and/or the discrepancy between actual quantities of work accomplished per plans versus
estimated quantities of work covered by separate contract as expansion of the original project."
xxx xxx xxx
IN VIEW OF THE FOREGOING, THE SO-CALLED UNFINISHED WORKS IN THE CONTRACT BY EWEI
ALLUDED TO BY NSC IS NOT CONSIDERED AN OBLIGATION TO PERFORM/COMPLY THUS ABSOLVING
EWEI OF ANY FAILURE TO PERFORM/COMPLY AND THEREFORE CANNOT BE AVAILED OF AS A RIGHT
OR REMEDY BY NSC TO RECOVER UNIT DIFFERENTIAL COST FROM EWEI FOR THE SAME
UNSUBSTANTIATED WORK DONE BY ANOTHER CONTRACTOR." (ANNEX "C" ARBITRATION, page 86-88
of Rollo.)
Furthermore, under the contract sued upon, it is clear that should the Owner feel that the work agreed upon
was not completed by the contractor, it is incumbent upon the OWNER to send to CONTRACTOR a letter within
seven (7) days after completion of the inspection to specify the objections thereto[9] NSC failed to comply with
such requirement, and therefore it would be unfair to refuse payment to EWEI, considering that the latter had
faithfully submitted Final Billing No.16 believing that its work had been completed because NSC did not call its
attention to any objectionable aspect of their project.
But, what cannot be upheld is the Board's imposition of a 1-1/4% interest per month from January 1, 1985
to actual date of payment. There is nothing in the said contract to justify or authorize such an award. The trial
court should have therefore disregarded the same and instead, applied the legal rate of 6% per annum, from
Jan. 1, 1985 until this decision becomes final and executory. This is so because the legal rate of interest on
monetary obligations not arising from loans or forebearance of credits or goods is 6%[10] per annum in the
absence of any stipulation to the contrary.
(II) Price escalation with the interest rate of 1-1/4% per month from 1 January 1985 to actual date of payment.

Petitioner contends that EWEI is not entitled to price escalation absent any stipulation to that effect in the
contract under which, the contract price is fixed, citing Paragraph 2 thereof, which stipulates:
2. CONTRACT PRICE -
xxx xxx
The applicable unit prices above fixed are based on the assumption that the disposal areas for cleared, grubbed
materials, debris, excess filling materials and other matters that are to be disposed of or are within the boundary
limits of the site, as designated in Annex A hereof. In the event that disposal areas fixed and designated in
Annex A are diverted and transferred to such other areas as would be outside the limits of the site as would
require additional costs to the contractor, then Owner shall be liable for such additional hauling costs
of P1.45/km/m3." (Annex "A", Contract for Site Development, page 55 of Rollo)
The phrase "prices above fixed" means that the contract price of the work shall be that agreed upon by the
parties at the time of the execution of the contract, which is the law between them provided it is not contrary to
law, morals, good customs, public order, or public policy. (Article 1306, New Civil Code). It cannot be inferred
therefrom, however, that the parties are prohibited from imposing future increases or price escalation. It is a
cardinal rule in the interpretation of contracts that "if the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall control."[11]
But price escalation is expressly allowed under Presidential Decree 1594, which law allows price escalation
in all contracts involving government projects including contracts entered into by government entities and
instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic rule in contracts that
the law is deemed written into the contract between the parties. And when there is no prohibitory clause on price
escalation, the Court will allow payment therefor. Thus, petitioner cannot rely on the case of Llama Development
Corporation vs. Court of Appeals and National Steel Corporation, GR 88093, Resolution, Third Division, 20
Sept 1989. It is not applicable here since in that case, the contract explicitly provided that the contract price
stipulated was fixed, inclusive of all costs and not subject to escalation, (emphasis supplied). This, in effect,
waived the provisions of PD 1594. The case under scrutiny is different as the disputed contract does not contain
a similar provision.
In a vain attempt to evade said law's application, they would like the Court to believe that it is an acquired
asset corporation and not a government owned or controlled corporation so that they are not within the coverage
of PD 1594. Whether NSC is an asset-acquired corporation or a government owned or controlled corporation is
of no moment. It is not determinative of the pivot of inquiry. It bears emphasizing that during the hearings
conducted by the Board of Arbitrators, there was presented documentary evidence to show that NSC, despite its
being allegedly an asset acquired corporation, allowed price escalation to another contractor, Geo Transport
and Construction, Inc. (GTCI). As said in the decision of the Board of Arbitrators:
"On the other hand, there was documentary evidence presented that NSC granted Geo Transport and
Construction, Inc. (GTCI), the other favored contractor working side by side with EWEI on the site development
project during the same period the GTCE was granted upon request and paid by NSC an actual sum of P6.9
million as price adjustment compensation even without the benefit of escalation provision in the contract but
allowed in accordance with PD NO. 1594 enforceable among government controlled or owned corporation. The
statement is embodied in an affidavit (Exhibit "111-h") submitted by affiant Jose M. Mesina, Asst. to the
President and Legal Counsel of GTCI, submitted to the Arbitrators upon solicitation of EWEI, copy to NSC, on 3
October 1991. NSC did not assail the affidavit upon receipt of such document as evidence until the hearing of 19
December 1991 when the affidavit was branded by NSC counsel as incorrect and hearsay. Within 7 days
reglamentary period after receipt of affidavit in 3 October 1991, the NSC had the recourse to contest the affidavit
even preferably charge the affiant for slander if NSC could disprove the statements as untrue."[12]

ADR Set 3 Page 53


If Petitioner seeks to refute such evidence, it should have done so before the Board of Arbitrators, during
the hearings. To raise the issue now is futile.
However, the same line of reasoning with respect to the first award should be used in disregarding the
interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly applied to the price escalation to be
computed from Jan. 1, 1985 until this decision becomes final and executory.
(III) The award of P50,000 as exemplary damages and P350,000 as attorney's fees;

The exemplary damages and attorneys fees awarded by the Board of Arbitrators should be deleted in light
of the circumstances surrounding the case.
The requirements for an award of exemplary damages, are: (1) they may be imposed by way of example in
addition to compensatory damages, and only after the claimants right to them has been established; (2) that
they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory
damages that may be awarded to the claimant; (3) the act must be accompanied by bad faith or done in a
wanton, fraudulent, oppressive or malevolent manner.[13]
EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it refused payment of the Final
Billing No. 16. The belief that the work was never completed by EWEI and that it (NSC) had the right to make it
chargeable to the cost differential paid by the latter to another contractor was neither wanton nor done in evident
bad faith. The payment of legal rate of interest will suffice to compensate EWEI of whatever prejudice it suffered
by reason of the delay caused by NSC.
As regards the award of attorney's fees, award for attorney's fees without justification is a "conclusion
without a premise, its basis being improperly left to speculation and conjencture.[14]The "fixed counsel's fee"
of P350,000 should be disallowed. The trial court acted with grave abuse of discretion when it adopted the
same in toto.
WHEREFORE, the awards made by the Board of Arbitrators which the trial court adopted in its decision of
July 31,1996, are modified, thus:
(1) The award of P474,780.23 for Billing No. 16-Final and P1,335,514.20 for price adjustment shall be
paid with legal interest of six (6 %) percent per annum, from January 1, 1985 until this decision shall
have become final and executory;
(2) The award of P50,000 for exemplary damages and attorney's fees of P350,000 are deleted; and
(3) The cost of arbitration of P35,000 to supplement arbitration agreement has to be paid.
No pronouncement as to costs.
SO ORDERED.

ADR Set 3 Page 54


SECOND DIVISION

PHILIPPINE ECONOMIC ZONE G.R. No. 179537


AUTHORITY, Petitioner, October 23, 2009

- versus -

EDISON (BATAAN) COGENERATION


CORPORATION, Respondent.
x--------------------------------------------------x

DECISION

CARPIO MORALES, J.:


Petitioner Philippine Economic Zone Authority (PEZA) and Edison (Bataan) Cogeneration Corporation
(respondent) entered into a Power Supply and Purchase Agreement (PSPA or agreement) for a 10-year period
effective October 25, 1997 whereby respondent undertook to construct, operate, and maintain a power plant
which would sell, supply and deliver electricity to PEZA for resale to business locators in the Bataan Economic
Processing Zone.
In the course of the discharge of its obligation, respondent requested from PEZA a tariff increase with a
mechanism for adjustment of the cost of fuel and lubricating oil, which request it reiterated on March 5, 2004.

PEZA did not respond to both requests, however, drawing respondent to write PEZA on May 3,
2004. Citing a tariff increase which PEZA granted to the East Asia Utilities Corporation (EAUC), another supplier
of electricity in the Mactan Economic Zone, respondent informed PEZA of a violation of its obligation under
Clause 4.9 of the PSPA not to give preferential treatment to other power suppliers.

After the lapse of 90 days, respondent terminated the PSPA, invoking its right thereunder, and
demanded P708,691,543.00 as pre-termination fee. PEZA disputed respondents right to terminate the
agreement and refused to pay the pre-termination fee, prompting respondent to request PEZA to submit the
dispute to arbitration pursuant to the arbitration clause of the PSPA.

Petitioner refused to submit to arbitration, however, prompting respondent to file a Complaint[1] against
PEZA for specific performance before the Regional Trial Court (RTC) of Pasay, alleging that, inter alia:

xxxx

4. Under Clauses 14.1 and 14.2 of the Agreement, the dispute shall be resolved through
arbitration before an Arbitration Committee composed of one representative of each
party and a third member who shall be mutually acceptable to the parties: x x x
xxx
5. Conformably with the Agreement, plaintiff notified defendant in a letter
dated September 6, 2004 requesting that the parties submit their dispute to
arbitration. In a letter dated September 8, 2004, which defendant received on the same
date, defendant unjustifiably refused to comply with the request for arbitration, in
violation of its undertaking under the Agreement. Defendant likewise refused to
nominate its representative to the Arbitration Committee as required by the Agreement.

6. Under Section 8 of Republic Act No. 876 (1953), otherwise known as the Arbitration
Law, (a) if either party to the contract fails or refuses to name his arbitrator within 15
days after receipt of the demand for arbitration; or (b) if the arbitrators appointed by
each party to the contract, or appointed by one party to the contract and by the proper
court, shall fail to agree upon or to select the third arbitrator, then this Honorable
Court shall appoint the arbitrator or arbitrators.[2] (Emphasis and underscoring
supplied)

ADR Set 3 Page 55


Respondent accordingly prayed for judgment

x x x (a) designating (i) an arbitrator to represent defendant; and (ii) the third arbitrator
who shall act as Chairman of the Arbitration Committee; and (b) referring the attached
Request for Arbitration to the Arbitration Committee to commence the arbitration.[3]

and for other just and equitable reliefs.

In its Answer,[4] PEZA (hereafter petitioner):

1. ADMIT[TED] the allegations in paragraphs 1, 2, 3, 4, and 6 of the


complaint, with the qualification that the alleged dispute subject of the
plaintiffs Request for Arbitration dated October 20, 2004 is not an
arbitrable issue, considering that the provision on pre-termination fee in
the Power Sales and Purchase Agreement (PSPA), is gravely onerous,
unconscionable, greatly disadvantageous to the government, against
public policy and therefore invalid and unenforceable.

2. ADMIT[TED] the allegation in paragraph 5 of the complaint with


the qualification that the refusal of the defendant to arbitrate is justified
considering that the provision on the pre-termination fee subject of the
plaintiffs Request for Arbitration is invalid and unenforceable. Moreover,
the pre-termination of the PSPA is whimsical, has no valid basis and in
violation of the provisions thereof, constituting breach of contract on the
part of the plaintiff.[5] (Emphasis and underscoring supplied)

Xxxx
Respondent thereafter filed a Reply and Motion to Render Judgment on the Pleadings,[6] contending that
since petitioner

x x x does not challenge the fact that (a) there is a dispute between the parties; (b)
the dispute must be resolved through arbitration before a three-member arbitration
committee; and (c) defendant refused to submit the dispute to arbitration by naming its
representative in the arbitration committee,

judgment may be rendered directing the appointment of the two other members to complete the composition of
the arbitration committee that will resolve the dispute of the parties.[7]

By Order of April 5, 2005, Branch 118 of the Pasay City RTC granted respondents Motion to Render
Judgment on the Pleadings, disposing as follows:

WHEREFORE, all the foregoing considered, this Court hereby renders judgment in
favor of the plaintiff and against the defendant. Pursuant to Section 8 of RA 876, also known
as the Arbitration Law, and Power Sales and Purchase Agreement, this Court
hereby appoints, subject to their agreement as arbitrators, retired Supreme Court Chief
Justice Andres Narvasa, as chairman of the committee, and retired Supreme Court Justices
Hugo Gutierrez, and Justice Jose Y. Feria, as defendants and plaintiffs representative,
respectively, to the arbitration committee. Accordingly, let the Request for Arbitration be
immediately referred to the Arbitration Committee so that it can commence with the
arbitration.

SO ORDERED.[8] (Underscoring supplied)

On appeal,[9] the Court of Appeals, by Decision of April 10, 2007, affirmed the RTC Order.[10] Its Motion
for Reconsideration[11] having been denied,[12]petitioner filed the present Petition for Review on
Certiorari,[13] faulting the appellate court

ADR Set 3 Page 56


. . . WHEN IT DISMISSED PETITIONERS APPEAL AND AFFIRMED THE 05 APRIL
2004 ORDER OF THE TRIAL COURT WHICH RENDERED JUDGMENT ONTHE
PLEADINGS, DESPITE THE FACT THAT PETITIONERS ANSWER TENDERED AN ISSUE.

II

. . . WHEN IT AFFIRMED THE ORDER OF THE TRIAL COURT WHICH REFERRED


RESPONDENTS REQUEST FOR ARBITRATION DESPITE THE FACT THAT THE ISSUE
PRESENTED BY THE RESPONDENT IS NOT AN ARBITRABLE ISSUE.[14] (Underscoring
supplied)

The petition fails.


The dispute raised by respondent calls for a proceeding under Section 6 of Republic Act No. 876, AN
ACT TO AUTHORIZE THE MAKING OF ARBITRATION AND SUBMISSION AGREEMENTS, TO PROVIDE
FOR THE APPOINTMENT OF ARBITRATORS AND THE PROCEDURE FOR ARBITRATION IN CIVIL
CONTROVERSIES, AND FOR OTHER PURPOSES which reads:

SECTION 6. Hearing by court. A party aggrieved by the failure, neglect or refusal of another
to perform under an agreement in writing providing for arbitration may petition the court for an
order directing that such arbitration proceed in the manner provided for in such agreement.
Five days notice in writing of the hearing of such application shall be served either personally
or by registered mail upon the party in default. The court shall hear the parties, and upon
being satisfied that the making of the agreement or such failure to comply therewith is not in
issue, shall make an order directing the parties to proceed to arbitration in accordance with
the terms of the agreement. If the making of the agreement or default be in issue the court
shall proceed to summarily hear such issue. If the finding be that no agreement in writing
providing for arbitration was made, or that there is no default in the proceeding thereunder,
the proceeding shall be dismissed. If the finding be that a written provision for arbitration was
made and there is a default in proceeding thereunder, an order shall be made summarily
directing the parties to proceed with the arbitration in accordance with the terms thereof.

x x x x (Underscoring supplied)

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.[15]Given petitioners admission of the material allegations of
respondents complaint including the existence of a written agreement to resolve disputes through arbitration, the
assailed appellate courts affirmance of the trial courts grant of respondents Motion for Judgment on the
Pleadings is in order.

Petitioner argues that it tendered an issue in its Answer as it disputed the legality of the pre-termination
fee clause of the PSPA. Even assuming arguendo that the clause is illegal, it would not affect the agreement
between petitioner and respondent to resolve their dispute by arbitration.

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.[16] (Emphasis in the original; underscoring supplied)
Petitioner nevertheless contends that the legality of the pre-termination fee clause is not arbitrable,
citing Gonzales v. Climax Mining Ltd. [17] which declared that the therein complaint should be brought before the
regular courts, and not before an arbitral tribunal, as it involved a judicial issue. Held the Court:

We agree that the case should not be brought under the ambit of the Arbitration Law
xxx. 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. As previously

ADR Set 3 Page 57


discussed, the complaint should have been filed before the regular courts as it involved
issues which are judicial in nature.[18]

The ruling in Gonzales was, on motion for reconsideration filed by the parties, modified, however, 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
partys 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.[19] (Emphasis and underscoring supplied)

It bears noting that respondent does not seek to nullify the main contract. It merely submits these issues
for resolution by the arbitration committee, viz:

a. Whether or not the interest of Claimant in the project or its economic return in its
investment was materially reduced as a result of any laws or regulations of the
Philippine Government or any agency or body under its control;

b. Whether or not the parties failed to reach an agreement on the amendments to the
Agreement within 90 days from notice to respondent on May 3, 2004 of the material
reduction in claimants economic return under the Agreement;

c. Whether or not as a result of (a) and (b) above, Claimant is entitled to terminate the
Agreement;

d. Whether or not Respondent accorded preferential treatment to EAUC in violation of the


Agreement;

e. Whether or not as a result of (d) above, Claimant is entitled to terminate the


Agreement;

f. Whether or not Claimant is entitled to a termination fee equivalent to P708,691,543.00;


and

g. Who between Claimant and Respondent shall bear the cost and expenses of the
arbitration, including arbitrators fees, administrative expenses and legal fees.[20]
In fine, the issues raised by respondent are subject to arbitration in accordance with the arbitration clause
in the parties agreement.

WHEREFORE, the petition is DENIED.

SO ORDERED.

ADR Set 3 Page 58


SECOND DIVISION

PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, G.R. No. 179537


October 23, 2009
- versus -

EDISON (BATAAN) COGENERATION CORPORATION, Respondent.


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

CARPIO MORALES, J.:


Petitioner Philippine Economic Zone Authority (PEZA) and Edison (Bataan) Cogeneration Corporation
(respondent) entered into a Power Supply and Purchase Agreement (PSPA or agreement) for a 10-year period
effective October 25, 1997 whereby respondent undertook to construct, operate, and maintain a power plant
which would sell, supply and deliver electricity to PEZA for resale to business locators in the Bataan Economic
Processing Zone.
In the course of the discharge of its obligation, respondent requested from PEZA a tariff increase with a
mechanism for adjustment of the cost of fuel and lubricating oil, which request it reiterated on March 5, 2004.

PEZA did not respond to both requests, however, drawing respondent to write PEZA on May 3,
2004. Citing a tariff increase which PEZA granted to the East Asia Utilities Corporation (EAUC), another supplier
of electricity in the Mactan Economic Zone, respondent informed PEZA of a violation of its obligation under
Clause 4.9 of the PSPA not to give preferential treatment to other power suppliers.

After the lapse of 90 days, respondent terminated the PSPA, invoking its right thereunder, and
demanded P708,691,543.00 as pre-termination fee. PEZA disputed respondents right to terminate the
agreement and refused to pay the pre-termination fee, prompting respondent to request PEZA to submit the
dispute to arbitration pursuant to the arbitration clause of the PSPA.

Petitioner refused to submit to arbitration, however, prompting respondent to file a Complaint[1] against
PEZA for specific performance before the Regional Trial Court (RTC) of Pasay, alleging that, inter alia:

xxxx

4. Under Clauses 14.1 and 14.2 of the Agreement, the dispute shall be resolved through
arbitration before an Arbitration Committee composed of one representative of each
party and a third member who shall be mutually acceptable to the parties: x x x
xxx
5. Conformably with the Agreement, plaintiff notified defendant in a letter
dated September 6, 2004 requesting that the parties submit their dispute to
arbitration. In a letter dated September 8, 2004, which defendant received on the same
date, defendant unjustifiably refused to comply with the request for arbitration, in
violation of its undertaking under the Agreement. Defendant likewise refused to
nominate its representative to the Arbitration Committee as required by the Agreement.

6. Under Section 8 of Republic Act No. 876 (1953), otherwise known as the Arbitration
Law, (a) if either party to the contract fails or refuses to name his arbitrator within 15
days after receipt of the demand for arbitration; or (b) if the arbitrators appointed by
each party to the contract, or appointed by one party to the contract and by the proper
court, shall fail to agree upon or to select the third arbitrator, then this Honorable
Court shall appoint the arbitrator or arbitrators.[2] (Emphasis and underscoring
supplied)

Respondent accordingly prayed for judgment

ADR Set 3 Page 59


x x x (a) designating (i) an arbitrator to represent defendant; and (ii) the third arbitrator
who shall act as Chairman of the Arbitration Committee; and (b) referring the attached
Request for Arbitration to the Arbitration Committee to commence the arbitration.[3]

and for other just and equitable reliefs.

In its Answer,[4] PEZA (hereafter petitioner):

1. ADMIT[TED] the allegations in paragraphs 1, 2, 3, 4, and 6 of the


complaint, with the qualification that the alleged dispute subject of the
plaintiffs Request for Arbitration dated October 20, 2004 is not an
arbitrable issue, considering that the provision on pre-termination fee in
the Power Sales and Purchase Agreement (PSPA), is gravely onerous,
unconscionable, greatly disadvantageous to the government, against
public policy and therefore invalid and unenforceable.

2. ADMIT[TED] the allegation in paragraph 5 of the complaint with


the qualification that the refusal of the defendant to arbitrate is justified
considering that the provision on the pre-termination fee subject of the
plaintiffs Request for Arbitration is invalid and unenforceable. Moreover,
the pre-termination of the PSPA is whimsical, has no valid basis and in
violation of the provisions thereof, constituting breach of contract on the
part of the plaintiff.[5] (Emphasis and underscoring supplied)

Xxxx
Respondent thereafter filed a Reply and Motion to Render Judgment on the Pleadings,[6] contending that
since petitioner

x x x does not challenge the fact that (a) there is a dispute between the parties; (b)
the dispute must be resolved through arbitration before a three-member arbitration
committee; and (c) defendant refused to submit the dispute to arbitration by naming its
representative in the arbitration committee,

judgment may be rendered directing the appointment of the two other members to complete the composition of
the arbitration committee that will resolve the dispute of the parties.[7]

By Order of April 5, 2005, Branch 118 of the Pasay City RTC granted respondents Motion to Render
Judgment on the Pleadings, disposing as follows:

WHEREFORE, all the foregoing considered, this Court hereby renders judgment in
favor of the plaintiff and against the defendant. Pursuant to Section 8 of RA 876, also known
as the Arbitration Law, and Power Sales and Purchase Agreement, this Court
hereby appoints, subject to their agreement as arbitrators, retired Supreme Court Chief
Justice Andres Narvasa, as chairman of the committee, and retired Supreme Court Justices
Hugo Gutierrez, and Justice Jose Y. Feria, as defendants and plaintiffs representative,
respectively, to the arbitration committee. Accordingly, let the Request for Arbitration be
immediately referred to the Arbitration Committee so that it can commence with the
arbitration.

SO ORDERED.[8] (Underscoring supplied)

On appeal,[9] the Court of Appeals, by Decision of April 10, 2007, affirmed the RTC Order.[10] Its Motion
for Reconsideration[11] having been denied,[12]petitioner filed the present Petition for Review on
Certiorari,[13] faulting the appellate court

. . . WHEN IT DISMISSED PETITIONERS APPEAL AND AFFIRMED THE 05 APRIL


2004 ORDER OF THE TRIAL COURT WHICH RENDERED JUDGMENT ONTHE
PLEADINGS, DESPITE THE FACT THAT PETITIONERS ANSWER TENDERED AN ISSUE.

ADR Set 3 Page 60


II

. . . WHEN IT AFFIRMED THE ORDER OF THE TRIAL COURT WHICH REFERRED


RESPONDENTS REQUEST FOR ARBITRATION DESPITE THE FACT THAT THE ISSUE
PRESENTED BY THE RESPONDENT IS NOT AN ARBITRABLE ISSUE.[14] (Underscoring
supplied)

The petition fails.

The dispute raised by respondent calls for a proceeding under Section 6 of Republic Act No. 876, AN
ACT TO AUTHORIZE THE MAKING OF ARBITRATION AND SUBMISSION AGREEMENTS, TO PROVIDE
FOR THE APPOINTMENT OF ARBITRATORS AND THE PROCEDURE FOR ARBITRATION IN CIVIL
CONTROVERSIES, AND FOR OTHER PURPOSES which reads:

SECTION 6. Hearing by court. A party aggrieved by the failure, neglect or refusal of another
to perform under an agreement in writing providing for arbitration may petition the court for an
order directing that such arbitration proceed in the manner provided for in such agreement.
Five days notice in writing of the hearing of such application shall be served either personally
or by registered mail upon the party in default. The court shall hear the parties, and upon
being satisfied that the making of the agreement or such failure to comply therewith is not in
issue, shall make an order directing the parties to proceed to arbitration in accordance with
the terms of the agreement. If the making of the agreement or default be in issue the court
shall proceed to summarily hear such issue. If the finding be that no agreement in writing
providing for arbitration was made, or that there is no default in the proceeding thereunder,
the proceeding shall be dismissed. If the finding be that a written provision for arbitration was
made and there is a default in proceeding thereunder, an order shall be made summarily
directing the parties to proceed with the arbitration in accordance with the terms thereof.

x x x x (Underscoring supplied)

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.[15]Given petitioners admission of the material allegations of
respondents complaint including the existence of a written agreement to resolve disputes through arbitration, the
assailed appellate courts affirmance of the trial courts grant of respondents Motion for Judgment on the
Pleadings is in order.

Petitioner argues that it tendered an issue in its Answer as it disputed the legality of the pre-termination
fee clause of the PSPA. Even assuming arguendo that the clause is illegal, it would not affect the agreement
between petitioner and respondent to resolve their dispute by arbitration.

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.[16] (Emphasis in the original; underscoring supplied)
Petitioner nevertheless contends that the legality of the pre-termination fee clause is not arbitrable,
citing Gonzales v. Climax Mining Ltd. [17] which declared that the therein complaint should be brought before the
regular courts, and not before an arbitral tribunal, as it involved a judicial issue. Held the Court:

We agree that the case should not be brought under the ambit of the Arbitration Law
xxx. 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. As previously

ADR Set 3 Page 61


discussed, the complaint should have been filed before the regular courts as it involved
issues which are judicial in nature.[18]

The ruling in Gonzales was, on motion for reconsideration filed by the parties, modified, however, 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
partys 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.[19] (Emphasis and underscoring supplied)

It bears noting that respondent does not seek to nullify the main contract. It merely submits these issues
for resolution by the arbitration committee, viz:

a. Whether or not the interest of Claimant in the project or its economic return in
its investment was materially reduced as a result of any laws or regulations of the
Philippine Government or any agency or body under its control;

b. Whether or not the parties failed to reach an agreement on the amendments to


the Agreement within 90 days from notice to respondent on May 3, 2004 of the
material reduction in claimants economic return under the Agreement;

c. Whether or not as a result of (a) and (b) above, Claimant is entitled to terminate
the Agreement;

d. Whether or not Respondent accorded preferential treatment to EAUC in violation


of the Agreement;

e. Whether or not as a result of (d) above, Claimant is entitled to terminate the


Agreement;

f. Whether or not Claimant is entitled to a termination fee equivalent to


P708,691,543.00; and

g. Who between Claimant and Respondent shall bear the cost and expenses of the
arbitration, including arbitrators fees, administrative expenses and legal fees.[20]

In fine, the issues raised by respondent are subject to arbitration in accordance with the arbitration clause
in the parties agreement.

WHEREFORE, the petition is DENIED.

SO ORDERED.

ADR Set 3 Page 62


FIRST DIVISION
G.R. No. 169332 February 11, 2008
ABS-CBN BROADCASTING CORPORATION, Petitioner,
-versus-
WORLD INTERACTIVE NETWORK SYSTEMS (WINS) JAPAN CO., LTD., Respondent.

x--------------------------------------------------x

DECISION

CORONA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside the February 16,
2005 decision[1] and August 16, 2005 resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No. 81940.
On September 27, 1999, petitioner ABS-CBN Broadcasting Corporation entered into a licensing agreement with
respondent World Interactive Network Systems (WINS) Japan Co., Ltd., a foreign corporation licensed under the
laws of Japan. Under the agreement, respondent was granted the exclusive license to distribute and sublicense
the distribution of the television service known as The Filipino Channel (TFC) in Japan. By virtue thereof,
petitioner undertook to transmit the TFC programming signals to respondent which the latter received through its
decoders and distributed to its subscribers.
A dispute arose between the parties when petitioner accused respondent of inserting nine episodes of WINS
WEEKLY, a weekly 35-minute community news program for Filipinos in Japan, into the TFC programming from
March to May 2002.[3] Petitioner claimed that these were unauthorized insertions constituting a material breach
of their agreement. Consequently, on May 9, 2002,[4] petitioner notified respondent of its intention to terminate
the agreement effective June 10, 2002.
Thereafter, respondent filed an arbitration suit pursuant to the arbitration clause of its agreement with petitioner.
It contended that the airing of WINS WEEKLY was made with petitioner's prior approval. It also alleged that
petitioner only threatened to terminate their agreement because it wanted to renegotiate the terms thereof to
allow it to demand higher fees. Respondent also prayed for damages for petitioner's alleged grant of an
exclusive distribution license to another entity, NHK (Japan Broadcasting Corporation).[5]
The parties appointed Professor Alfredo F. Tadiar to act as sole arbitrator. They stipulated on the following
issues in their terms of reference (TOR)[6]:
1. Was the broadcast of WINS WEEKLY by the claimant duly authorized by the respondent
[herein petitioner]?

2. Did such broadcast constitute a material breach of the agreement that is a ground for
termination of the agreement in accordance with Section 13 (a) thereof?

3. If so, was the breach seasonably cured under the same contractual provision of Section
13 (a)?

4. Which party is entitled to the payment of damages they claim and to the other reliefs
prayed for?

xxx xxx xxx


The arbitrator found in favor of respondent.[7] He held that petitioner gave its approval to respondent for the
airing of WINS WEEKLY as shown by a series of written exchanges between the parties. He also ruled that, had
there really been a material breach of the agreement, petitioner should have terminated the same instead of
sending a mere notice to terminate said agreement. The arbitrator found that petitioner threatened to terminate
the agreement due to its desire to compel respondent to re-negotiate the terms thereof for higher fees. He
further stated that even if respondent committed a breach of the agreement, the same was seasonably cured.
He then allowed respondent to recover temperate damages, attorney's fees and one-half of the amount it paid
as arbitrator's fee.
Petitioner filed in the CA a petition for review under Rule 43 of the Rules of Court or, in the alternative, a petition
for certiorari under Rule 65 of the same Rules, with application for temporary restraining order and writ of
preliminary injunction. It was docketed as CA-G.R. SP No. 81940. It alleged serious errors of fact and law and/or
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the arbitrator.
Respondent, on the other hand, filed a petition for confirmation of arbitral award before the Regional Trial Court
(RTC) of Quezon City, Branch 93, docketed as Civil Case No. Q-04-51822.
Consequently, petitioner filed a supplemental petition in the CA seeking to enjoin the RTC of Quezon City from
further proceeding with the hearing of respondent's petition for confirmation of arbitral award. After the petition
was admitted by the appellate court, the RTC of Quezon City issued an order holding in abeyance any further
action on respondent's petition as the assailed decision of the arbitrator had already become the subject of an

ADR Set 3 Page 63


appeal in the CA. Respondent filed a motion for reconsideration but no resolution has been issued by the lower
court to date.[8]
On February 16, 2005, the CA rendered the assailed decision dismissing ABS-CBNs petition for lack of
jurisdiction. It stated that as the TOR itself provided that the arbitrator's decision shall be final and unappealable
and that no motion for reconsideration shall be filed, then the petition for review must fail. It ruled that it is the
RTC which has jurisdiction over questions relating to arbitration. It held that the only instance it can exercise
jurisdiction over an arbitral award is an appeal from the trial court's decision confirming, vacating or modifying
the arbitral award. It further stated that a petition for certiorari under Rule 65 of the Rules of Court is proper in
arbitration cases only if the courts refuse or neglect to inquire into the facts of an arbitrator's award. The
dispositive portion of the CA decision read:
WHEREFORE, the instant petition is hereby DISMISSED for lack of jurisdiction. The application
for a writ of injunction and temporary restraining order is likewise DENIED. The Regional Trial
Court of Quezon City Branch 93 is directed to proceed with the trial for the Petition for
Confirmation of Arbitral Award.
SO ORDERED.
Petitioner moved for reconsideration. The same was denied. Hence, this petition.
Petitioner contends that the CA, in effect, ruled that: (a) it should have first filed a petition to vacate the award in
the RTC and only in case of denial could it elevate the matter to the CA via a petition for review under Rule 43
and (b) the assailed decision implied that an aggrieved party to an arbitral award does not have the option of
directly filing a petition for review under Rule 43 or a petition for certiorari under Rule 65 with the CA even if the
issues raised pertain to errors of fact and law or grave abuse of discretion, as the case may be, and not
dependent upon such grounds as enumerated under Section 24 (petition to vacate an arbitral award) of RA 876
(the Arbitration Law). Petitioner alleged serious error on the part of the CA.
The issue before us is whether or not an aggrieved party in a voluntary arbitration dispute may avail of,
directly in the CA, a petition for review under Rule 43 or a petition for certiorari under Rule 65 of the Rules of
Court, instead of filing a petition to vacate the award in the RTC when the grounds invoked to overturn the
arbitrators decision are other than those for a petition to vacate an arbitral award enumerated under RA 876.
RA 876 itself mandates that it is the Court of First Instance, now the RTC, which has jurisdiction over
questions relating to arbitration,[9] such as a petition to vacate an arbitral award.
Section 24 of RA 876 provides for the specific grounds for a petition to vacate an award made by an arbitrator:
Sec. 24. Grounds for vacating award. - In any one of the following cases, the court must
make an order vacating the award upon the petition of any party to the controversy when such
party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon
sufficient cause shown, or in refusing to hear evidence pertinent and material to the
controversy; that one or more of the arbitrators was disqualified to act as such under section
nine hereof, and willfully refrained from disclosing such disqualifications or of any other
misbehavior by which the rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual,
final and definite award upon the subject matter submitted to them was not made.
Based on the foregoing provisions, the law itself clearly provides that the RTC must issue an order
vacating an arbitral award only in any one of the . . . cases enumerated therein. Under the legal maxim in
statutory construction expressio unius est exclusio alterius, the explicit mention of one thing in a statute means
the elimination of others not specifically mentioned. As RA 876 did not expressly provide for errors of fact and/or
law and grave abuse of discretion (proper grounds for a petition for review under Rule 43 and a petition for
certiorari under Rule 65, respectively) as grounds for maintaining a petition to vacate an arbitral award in the
RTC, it necessarily follows that a party may not avail of the latter remedy on the grounds of errors of fact and/or
law or grave abuse of discretion to overturn an arbitral award.
Adamson v. Court of Appeals[10] gave ample warning that a petition to vacate filed in the RTC which is not based
on the grounds enumerated in Section 24 of RA 876 should be dismissed. In that case, the trial court vacated
the arbitral award seemingly based on grounds included in Section 24 of RA 876 but a closer reading thereof
revealed otherwise. On appeal, the CA reversed the decision of the trial court and affirmed the arbitral award. In
affirming the CA, we held:
The Court of Appeals, in reversing the trial court's decision held that the nullification of the
decision of the Arbitration Committee was not based on the grounds provided by the Arbitration
Law and that xxx private respondents (petitioners herein) have failed to substantiate with any
evidence their claim of partiality. Significantly, even as respondent judge ruled against the
arbitrator's award, he could not find fault with their impartiality and integrity. Evidently, the
nullification of the award rendered at the case at bar was not made on the basis of any of
the grounds provided by law.

xxx xxx xxx

ADR Set 3 Page 64


It is clear, therefore, that the award was vacated not because of evident partiality of the
arbitrators but because the latter interpreted the contract in a way which was not favorable to
herein petitioners and because it considered that herein private respondents, by submitting the
controversy to arbitration, was seeking to renege on its obligations under the contract.

xxx xxx xxx

It is clear then that the Court of Appeals reversed the trial court not because the latter
reviewed the arbitration award involved herein, but because the respondent appellate court
found that the trial court had no legal basis for vacating the award. (Emphasis supplied).
In cases not falling under any of the aforementioned grounds to vacate an award, the Court has already made
several pronouncements that a petition for review under Rule 43 or a petition for certiorari under Rule 65 may
be availed of in the CA. Which one would depend on the grounds relied upon by petitioner.
In Luzon Development Bank v. Association of Luzon Development Bank Employees,[11] the Court held that a
voluntary arbitrator is properly classified as a quasi-judicial instrumentality and is, thus, within the ambit of
Section 9 (3) of the Judiciary Reorganization Act, as amended. Under this section, the Court of Appeals shall
exercise:
xxx xxx xxx
(3) Exclusive appellate jurisdiction over all final judgments, decisions, resolutions, orders
or awards of Regional Trial Courts and quasi-judicial agencies, instrumentalities, boards or
commissions, including the Securities and Exchange Commission, the Employees
Compensation Commission and the Civil Service Commission, except those falling within the
appellate jurisdiction of the Supreme Court in accordance with the Constitution, the Labor Code
of the Philippines under Presidential Decree No. 442, as amended, the provisions of this Act and
of subparagraph (1) of the third paragraph and subparagraph (4) of the fourth paragraph of
Section 17 of the Judiciary Act of 1948. (Emphasis supplied)
As such, decisions handed down by voluntary arbitrators fall within the exclusive appellate jurisdiction of the CA.
This decision was taken into consideration in approving Section 1 of Rule 43 of the Rules of Court.[12] Thus:
SECTION 1. Scope. - This Rule shall apply to appeals from judgments or final orders of the
Court of Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by
any quasi-judicial agency in the exercise of its quasi-judicial functions. Among these agencies
are the Civil Service Commission, Central Board of Assessment Appeals, Securities and
Exchange Commission, Office of the President, Land Registration Authority, Social Security
Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer,
National Electrification Administration, Energy Regulatory Board, National Telecommunications
Commission, Department of Agrarian Reform under Republic Act Number 6657, Government
Service Insurance System, Employees Compensation Commission, Agricultural Inventions
Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments,
Construction Industry Arbitration Commission, and voluntary arbitrators authorized by
law. (Emphasis supplied)
This rule was cited in Sevilla Trading Company v. Semana,[13] Manila Midtown Hotel v. Borromeo,[14] and Nippon
Paint Employees Union-Olalia v. Court of Appeals.[15] These cases held that the proper remedy from the
adverse decision of a voluntary arbitrator, if errors of fact and/or law are raised, is a petition for review under
Rule 43 of the Rules of Court. Thus, petitioner's contention that it may avail of a petition for review under Rule
43 under the circumstances of this case is correct.
As to petitioner's arguments that a petition for certiorari under Rule 65 may also be resorted to, we hold the
same to be in accordance with the Constitution and jurisprudence.
Section 1 of Article VIII of the 1987 Constitution provides that:
SECTION 1. The judicial power shall be vested in one Supreme Court and in such lower courts
as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or
not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the Government. (Emphasis supplied)
As may be gleaned from the above stated provision, it is well within the power and jurisdiction of the Court to
inquire whether any instrumentality of the Government, such as a voluntary arbitrator, has gravely abused its
discretion in the exercise of its functions and prerogatives. Any agreement stipulating that the decision of the
arbitrator shall be final and unappealable and that no further judicial recourse if either party disagrees with the
whole or any part of the arbitrator's award may be availed of cannot be held to preclude in proper cases the
power of judicial review which is inherent in courts.[16] We will not hesitate to review a voluntary arbitrator's
award where there is a showing of grave abuse of authority or discretion and such is properly raised in a petition
for certiorari[17] and there is no appeal, nor any plain, speedy remedy in the course of law.[18]

ADR Set 3 Page 65


Significantly, Insular Savings Bank v. Far East Bank and Trust Company[19] definitively outlined several
judicial remedies an aggrieved party to an arbitral award may undertake:
(1) a petition in the proper RTC to issue an order to vacate the award on the grounds provided
for in Section 24 of RA 876;
(2) a petition for review in the CA under Rule 43 of the Rules of Court on questions of fact, of
law, or mixed questions of fact and law; and
(3) a petition for certiorari under Rule 65 of the Rules of Court should the arbitrator have acted
without or in excess of his jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction.
Nevertheless, although petitioners position on the judicial remedies available to it was correct, we sustain the
dismissal of its petition by the CA. The remedy petitioner availed of, entitled alternative petition for review under
Rule 43 or petition for certiorari under Rule 65, was wrong.
Time and again, we have ruled that the remedies of appeal and certiorari are mutually exclusive and not
alternative or successive.[20]
Proper issues that may be raised in a petition for review under Rule 43 pertain to errors of fact, law or mixed
questions of fact and law.[21] While a petition for certiorari under Rule 65 should only limit itself to errors of
jurisdiction, that is, grave abuse of discretion amounting to a lack or excess of jurisdiction.[22] Moreover, it cannot
be availed of where appeal is the proper remedy or as a substitute for a lapsed appeal.[23]
In the case at bar, the questions raised by petitioner in its alternative petition before the CA were the following:
A. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR GRAVELY ABUSED
HIS DISCRETION IN RULING THAT THE BROADCAST OF WINS WEEKLY WAS DULY
AUTHORIZED BY ABS-CBN.
B. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR GRAVELY ABUSED
HIS DISCRETION IN RULING THAT THE UNAUTHORIZED BROADCAST DID NOT
CONSTITUTE MATERIAL BREACH OF THE AGREEMENT.
C. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR GRAVELY ABUSED
HIS DISCRETION IN RULING THAT WINS SEASONABLY CURED THE BREACH.
D. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR GRAVELY ABUSED
HIS DISCRETION IN RULING THAT TEMPERATE DAMAGES IN THE AMOUNT
OF P1,166,955.00 MAY BE AWARDED TO WINS.
E. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR GRAVELY ABUSED
HIS DISCRETION IN AWARDING ATTORNEY'S FEES IN THE UNREASONABLE
AMOUNT AND UNCONSCIONABLE AMOUNT OF P850,000.00.
F. THE ERROR COMMITTED BY THE SOLE ARBITRATOR IS NOT A SIMPLE ERROR OF
JUDGMENT OR ABUSE OF DISCRETION. IT IS GRAVE ABUSE OF DISCRETION
TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.
A careful reading of the assigned errors reveals that the real issues calling for the CA's resolution were less the
alleged grave abuse of discretion exercised by the arbitrator and more about the arbitrators appreciation of the
issues and evidence presented by the parties. Therefore, the issues clearly fall under the classification of errors
of fact and law questions which may be passed upon by the CA via a petition for review under Rule 43.
Petitioner cleverly crafted its assignment of errors in such a way as to straddle both judicial remedies, that is, by
alleging serious errors of fact and law (in which case a petition for review under Rule 43 would be proper) and
grave abuse of discretion (because of which a petition for certiorari under Rule 65 would be permissible).
It must be emphasized that every lawyer should be familiar with the distinctions between the two remedies for it
is not the duty of the courts to determine under which rule the petition should fall. Petitioner's ploy was fatal to its
cause. An appeal taken either to this Court or the CA by the wrong or inappropriate mode shall be
dismissed.[25] Thus, the alternative petition filed in the CA, being an inappropriate mode of appeal, should have
been dismissed outright by the CA.
WHEREFORE, the petition is hereby DENIED. The February 16, 2005 decision and August 16, 2005 resolution
of the Court of Appeals in CA-G.R. SP No. 81940 directing the Regional Trial Court of Quezon City, Branch 93
to proceed with the trial of the petition for confirmation of arbitral award is AFFIRMED.
Costs against petitioner.
SO ORDERED.

ADR Set 3 Page 66


SECOND DIVISION
[G.R. NO. 135362. December 13, 1999]
HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself and as legal guardian of
the minor FABRICE CYRILL D. SALAS, MA. CRISTINA S. LESACA, and KARINA TERESA D.
SALAS, petitioners,
vs.
LAPERAL REALTY CORPORATION, ROCKWAY REAL ESTATE CORPORATION, SOUTH RIDGE
VILLAGE, INC., MAHARAMI DEVELOPMENT CORPORATION, Spouses THELMA D. ABRAJANO and
GREGORIO ABRAJANO, OSCAR DACILLO, Spouses VIRGINIA D. LAVA and RODEL LAVA, EDUARDO
A. VACUNA, FLORANTE DE LA CRUZ, JESUS VICENTE B. CAPELLAN, and the REGISTER OF DEEDS
FOR LIPA CITY, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Order[1] of Branch 85 of the Regional Trial Court of Lipa
City[2] dismissing petitioners complaint[3] for rescission of several sale transactions involving land owned by
Augusto L. Salas, Jr., their predecessor-in-interest, on the ground that they failed to first resort to arbitration.
Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas spanning 1,484,354 square
meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement[4] (hereinafter referred to as the
Agreement) with respondent Laperal Realty Corporation (hereinafter referred to as Laperal Realty) to render and
provide complete (horizontal) construction services on his land.
On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of respondent Laperal
Realty to exercise general control, supervision and management of the sale of his land, for cash or on
installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva Ecija. He never
returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati City a verified petition
for the declaration of presumptive death of her husband, Salas, Jr., who had then been missing for more than
seven (7) years. It was granted on December 12, 1996.[5]
Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold subdivided portions thereof
to respondents Rockway Real Estate Corporation and South Ridge Village, Inc. on February 22, 1990; to
respondent spouses Abrajano and Lava and Oscar Dacillo on June 27, 1991; and to respondents Eduardo
Vacuna, Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of whom are hereinafter referred to
as respondent lot buyers).
On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court of Lipa City a
Complaint[6] for declaration of nullity of sale, reconveyance, cancellation of contract, accounting and damages
against herein respondents which was docketed as Civil Case No. 98-0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to Dismiss[7]on the ground that petitioners failed
to submit their grievance to arbitration as required under Article VI of the Agreement which provides:
ARTICLE VI. ARBITRATION.
All cases of dispute between CONTRACTOR and OWNERS representative shall be referred to the committee
represented by:
a. One representative of the OWNER;
b. One representative of the CONTRACTOR;
c. One representative acceptable to both OWNER and CONTRACTOR.[8]
On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed a Joint Answer with
Counterclaim and Crossclaim[9] praying for dismissal of petitioners Complaint for the same reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing petitioners Complaint for
non-compliance with the foregoing arbitration clause.
Hence this petition.
Petitioners argue, thus:
The petitioners causes of action did not emanate from the Owner-Contractor Agreement.
The petitioners causes of action for cancellation of contract and accounting are covered by the exception under
the Arbitration Law.
Failure to arbitrate is not a ground for dismissal.[10]
In a catena of cases[11] inspired by Justice Malcolms provocative dissent in Vega v. San Carlos Milling
[12]
Co. , this Court has recognized arbitration agreements as valid, binding, enforceable and not contrary to public
policy so much so that when there obtains a written provision for arbitration which is not complied with, the trial
court should suspend the proceedings and order the parties to proceed to arbitration in accordance with the
terms of their agreement[13] Arbitration is the wave of the future in dispute resolution.[14] To brush aside a
contractual agreement calling for arbitration in case of disagreement between parties would be a step
backward.[15]
Nonetheless, we grant the petition.
A submission to arbitration is a contract.[16] As such, the Agreement, containing the stipulation on
arbitration, binds the parties thereto, as well as their assigns and heirs.[17] But only they.Petitioners, as heirs of
Salas, Jr., and respondent Laperal Realty are certainly bound by the Agreement. If respondent Laperal Realty,
had assigned its rights under the Agreement to a third party, making the former, the assignor, and the latter, the
assignee, such assignee would also be bound by the arbitration provision since assignment involves such
transfer of rights as to vest in the assignee the power to enforce them to the same extent as the assignor could
have enforced them against the debtor[18] or in this case, against the heirs of the original party to the
Agreement.However, respondents Rockway Real Estate Corporation, South Ridge Village, Inc., Maharami

ADR Set 3 Page 67


Development Corporation, spouses Abrajano, spouses Lava, Oscar Dacillo, Eduardo Vacuna, Florante de la
Cruz and Jesus Vicente Capellan are not assignees of the rights of respondent Laperal Realty under the
Agreement to develop Salas, Jr.s land and sell the same. They are, rather, buyers of the land that respondent
Laperal Realty was given the authority to develop and sell under the Agreement. As such, they are not assigns
contemplated in Art. 1311 of the New Civil Code which provides that contracts take effect only between the
parties, their assigns and heirs.
Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of Salas, Jr.s land when
respondent Laperal Realty subdivided it and sold portions thereof to respondent lot buyers. Thus, they instituted
action[19]against both respondent Laperal Realty and respondent lot buyers for rescission of the sale
transactions and reconveyance to them of the subdivided lots.They argue that rescission, being their cause of
action, falls under the exception clause in Sec. 2 of Republic Act No. 876 which provides that such submission
[to] or contract [of arbitration] shall be valid, enforceable and irrevocable, save upon such grounds as exist at
law for the revocation of any contract.
The petitioners contention is without merit. For while rescission, as a general rule, is an arbitrable
issue,[20] they impleaded in the suit for rescission the respondent lot buyers who are neither parties to the
Agreement nor the latters assigns or heirs. Consequently, the right to arbitrate as provided in Article VI of the
Agreement was never vested in respondent lot buyers.
Respondent Laperal Realty, as a contracting party to the Agreement, has the right to compel petitioners to
first arbitrate before seeking judicial relief. However, to split the proceedings into arbitration for respondent
Laperal Realty and trial for the respondent lot buyers, or to hold trial in abeyance pending arbitration between
petitioners and respondent Laperal Realty, would in effect result in multiplicity of suits, duplicitous procedure and
unnecessary delay. On the other hand, it would be in the interest of justice if the trial court hears the complaint
against all herein respondents and adjudicates petitioners rights as against theirs in a single and complete
proceeding.
WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19, 1998 of Branch 85 of
the Regional Trial Court of Lipa City is hereby NULLIFIED and SET ASIDE. Said court is hereby ordered to
proceed with the hearing of Civil Case No. 98-0047.
Costs against private respondents.
SO ORDERED.

ADR Set 3 Page 68


THIRD DIVISION
[G.R. No. 120105. March 27, 1998]
BF CORPORATION, petitioner,
vs.
COURT OF APPEALS, SHANGRI-LA PROPERTIES, COLAYCO, ALFREDO C. RAMOS, INC., RUFO B.
MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents.
DECISION
ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction of
the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an
arbitration clause in case of disagreement between the parties in the implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter
engaged the former to construct the main structure of the EDSA Plaza Project, a shopping mall complex in the
City of Mandaluyong.
The construction work was in progress when SPI decided to expand the project by engaging the services of
petitioner again. Thus, the parties entered into an agreement for the main contract works after which
construction work began.
However, petitioner incurred delay in the construction work that SPI considered as serious and
substantial.[1] On the other hand, according to petitioner, the construction works progressed in faithful
compliance with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I of the
Project.[2] Hence, SPI proposed the re-negotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as
Agreement for the Execution of Builders Work for the EDSA Plaza Project. Said agreement would cover the
construction work on said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner failed to complete the construction works and abandoned the project.[3] This
resulted in disagreements between the parties as regards their respective liabilities under the contract. On July
12, 1993, upon SPIs initiative, the parties respective representatives met in conference but they failed to come
to an agreement.[4]
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint
for collection of the balance due under the construction agreement. Named defendants therein were SPI and
members of its board of directors namely, Alfredo C. Ramos, Rufo B. Colayco, Antonio B. Olbes, Gerardo O.
Lanuza, Jr., Maximo G. Licauco III and Benjamin C. Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an
answer. The motion was anchored on defendants allegation that the formal trade contract for the construction of
the project provided for a clause requiring prior resort to arbitration before judicial intervention could be invoked
in any dispute arising from the contract. The following day, SPI submitted a copy of the conditions of the contract
containing the arbitration clause that it failed to append to its motion to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although
they entered into an agreement defining their rights and obligations in undertaking the project. It emphasized
that the agreement did not provide for arbitration and therefore the court could not be deprived of jurisdiction
conferred by law by the mere allegation of the existence of an arbitration clause in the agreement between the
parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract
between petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the court of
its jurisdiction over the case and that arbitration would expedite rather than delay the settlement of the parties
respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that there was no arbitration clause in the contract between
the parties. It averred that granting that such a clause indeed formed part of the contract, suspension of the
proceedings was no longer proper. It added that defendants should be declared in default for failure to file their
answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioners admission of the due execution of the
Articles of Agreement. Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani
Fernando, president of petitioner appear, while page D/7 shows that the agreement is a public document duly
notarized on November 15, 1991 by Notary Public Nilberto R. Briones as document No. 345, page 70, book No.
LXX, Series of 1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court[6] denied the motion to
suspend proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C,
Complaint), plaintiff BF and defendant Shangri-La Properties, Inc. agreed upon the terms and
conditions of the Builders Work for the EDSA Plaza Project (Phases I, II and Carpark), subject to the
execution by the parties of a formal trade contract. Defendants have submitted a copy of the alleged

ADR Set 3 Page 69


trade contract, which is entitled `Contract Documents For Builders Work Trade Contractor dated 01
May 1991, page 2 of which is entitled `Contents of Contract Documents with a list of the documents
therein contained, and Section A thereof consists of the abovementioned Letter-Agreement dated May
30, 1991. Section C of the said Contract Documents is entitled `Articles of Agreement and Conditions
of Contract which, per its Index, consists of Part A (Articles of Agreement) and B (Conditions of
Contract). The said Articles of Agreement appears to have been duly signed by President Rufo B.
Colayco of Shangri-La Properties, Inc. and President Bayani F. Fernando of BF and their witnesses,
and was thereafter acknowledged before Notary Public Nilberto R. Briones of Makati, Metro Manila on
November 15, 1991. The said Articles of Agreement also provides that the `Contract Documents'
therein listed `shall be deemed an integral part of this Agreement, and one of the said documents is the
`Conditions of Contract which contains the Arbitration Clause relied upon by the defendants in their
Motion to Suspend Proceedings.
This Court notes, however, that the `Conditions of Contract referred to, contains the following
provisions:
`3. Contract Document.
Three copies of the Contract Documents referred to in the Articles of Agreement shall
be signed by the parties to the contract and distributed to the Owner and the
Contractor for their safe keeping. (underscoring supplied)
And it is significant to note further that the said `Conditions of Contract is not duly signed by the parties
on any page thereof --- although it bears the initials of BFs representatives (Bayani F. Fernando and
Reynaldo M. de la Cruz) without the initials thereon of any representative of Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was not duly executed or
signed by the parties, and the failure of the defendants to submit any signed copy of the said
document, this Court entertains serious doubt whether or not the arbitration clause found in the said
Conditions of Contract is binding upon the parties to the Articles of Agreement. (Underscoring
supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was too
late in the day for defendants to invoke arbitration. It quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the
contract and a copy filed with the Project Manager. The demand for arbitration shall be made within a
reasonable time after the dispute has arisen and attempts to settle amicably have failed; in no case,
however, shall the demand he made be later than the time of final payment except as otherwise
expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was to
be completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay counted
from November 1, 1991 with liquified (sic) damages up to a maximum of 5% of the total contract price.
The lower court also found that after the project was completed in accordance with the agreement that
contained a provision on progress payment billing, SPI took possession and started operations thereof by
opening the same to the public in November, 1991. SPI, having failed to pay for the works, petitioner billed SPI
in the total amount of P110,883,101.52, contained in a demand letter sent by it to SPI on February 17,
1993. Instead of paying the amount demanded, SPI set up its own claim of P220,000,000.00 and scheduled a
conference on that claim for July 12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required
that `Notice of the demand for arbitration of a dispute shall be filed in writing with the other party x x x x
in no case x x x x later than the time of final payment x x x x which apparently, had elapsed, not only
because defendants had taken possession of the finished works and the plaintiffs billings for the
payment thereof had remained pending since November, 1991 up to the filing of this case on July 14,
1993, but also for the reason that defendants have failed to file any written notice of any demand for
arbitration during the said long period of one year and eight months, this Court finds that it cannot stay
the proceedings in this case as required by Sec. 7 of Republic Act No. 876, because defendants are in
default in proceeding with such arbitration.
The lower court denied SPIs motion for reconsideration for lack of merit and directed it and the other
defendants to file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules of
Court before the Court of Appeals. Said appellate court granted the petition, annulled and set aside the orders
and stayed the proceedings in the lower court. In so ruling, the Court of Appeals held:
The reasons given by the respondent Court in denying petitioners motion to suspend proceedings are
untenable.
1. The notarized copy of the articles of agreement attached as Annex A to petitioners reply dated August 26,
1993, has been submitted by them to the respondent Court (Annex G, petition). It bears the signature of
petitioner Rufo B. Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani Fernando,
president of respondent Corporation (Annex G-1, petition). At page D/4 of said articles of agreement it is
expressly provided that the conditions of contract are `deemed an integral part thereof (page 188, rollo). And it is

ADR Set 3 Page 70


at pages D/42 to D/44 of the conditions of contract that the provisions for arbitration are found (Annexes G-3 to
G-5, petition, pp. 227-229). Clause No. 35 on arbitration specifically provides:
Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on
his behalf and the Contractor, either during the progress or after the completion or abandonment of the Works
as to the construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in
connection therewith (including any matter or being left by this Contract to the discretion of the Project Manager
or the withholding by the Project Manager of any certificate to which the Contractor may claim to be entitled or
the measurement and valuation mentioned in clause 30 (5) (a) of these Conditions or the rights and liabilities of
the parties under clauses 25, 26, 32 or 33 of these Conditions), the Owner and the Contractor hereby agree to
exert all efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or
difference shall be referred to Arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent
Corporations representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of
petitioner Shangri-La Properties, Inc. does not militate against its effectivity. Said petitioner having categorically
admitted that the document, Annex A to its reply dated August 26, 1993 (Annex G, petition), is the agreement
between the parties, the initial or signature of said petitioners representative to signify conformity to arbitration is
no longer necessary. The parties, therefore, should be allowed to submit their dispute to arbitration in
accordance with their agreement.
2. The respondent Court held that petitioners `are in default in proceeding with such arbitration. It took note of
`the fact that under the supposed Arbitration Clause invoked by defendants, it is required that Notice of the
demand for arbitration of a dispute shall be filed in writing with the other party x x x in no case x x x later than the
time of final payment, which apparently, had elapsed, not only because defendants had taken possession of the
finished works and the plaintiffs billings for the payment thereof had remained pending since November, 1991
up to the filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any
written notice of any demand for arbitration during the said long period of one year and eight months, x x x.
Respondent Court has overlooked the fact that under the arbitration clause
Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and a
copy filed with the Project Manager. The demand for arbitration shall be made within a reasonable time after the
dispute has arisen and attempts to settle amicably had failed; in no case, however, shall the demand be made
later than the time of final payment except as otherwise expressly stipulated in the contract (underscoring
supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the
amount of P110,883,101.52, instead of paying, petitioners set up its own claim against respondent Corporation
in the amount of P220,000,000.00 and set a conference thereon on July 12, 1993. Said conference proved
futile. The next day, July 14, 1993, respondent Corporation filed its complaint against petitioners. On August 13,
1993, petitioners wrote to respondent Corporation requesting arbitration. Under the circumstances, it cannot be
said that petitioners resort to arbitration was made beyond reasonable time. Neither can they be considered in
default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A.
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT
OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL WAS AVAILABLE TO
RESPONDENTS.
B.
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE
FACTUAL FINDINGS OF THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO
ARBITRATE, RESPONDENTS ARE ALREADY IN DEFAULT IN INVOKING
THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to
suspend proceedings is a resolution of an incident on the merits. As such, upon the continuation of the
proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter render a
decision on the merits that may or may not sustain the existence of an arbitration clause. A decision containing a
finding that the contract has no arbitration clause can then be elevated to a higher court in an ordinary appeal
where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals should have dismissed
the petition for certiorari because the remedy of appeal would still be available to private respondents at the
proper time.[7]
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of appeal
is succinctly reiterated in Ongsitco v. Court of Appeals[8] as follows:

ADR Set 3 Page 71


x x x. Countless times in the past, this Court has held that `where appeal is the proper remedy, certiorari will not
lie. The writs of certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave abuse of
discretion equivalent to lack of jurisdiction committed by a lower court. `Where the proper remedy is appeal, the
action for certiorari will not be entertained. x x x. Certiorari is not a remedy for errors of judgment. Errors of
judgment are correctible by appeal, errors of jurisdiction are reviewable by certiorari.
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only
when `there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law x x x. That is
why they are referred to as `extraordinary. x x x.
The Court has likewise ruled that certiorari will not be issued to cure errors in proceedings or correct
erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed
in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by
timely appeal and not by a special civil action of certiorari.[9]v. Court of Appeals, 327 Phil. 1, 41-42 (1996).9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the
lower court over the controversy, the issue posed basically is whether the lower court prematurely assumed
jurisdiction over it. If the lower court indeed prematurely assumed jurisdiction over the case, then it becomes an
error of jurisdiction which is a proper subject of a petition for certiorari before the Court of Appeals. And if the
lower court does not have jurisdiction over the controversy, then any decision or order it may render may be
annulled and set aside by the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the
existence of the arbitration clause, which is a question of fact. In the instant case, the lower court found that
there exists an arbitration clause. However, it ruled that in contemplation of law, said arbitration clause does not
exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the Arbitration
Clause does not in fact exist. On its face, the question is one of fact which is not proper in a petition
for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact,
the Court of Appeals interpreted the construction of the subject contract documents containing the Arbitration
Clause in accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence which will be
extensively discussed hereunder. In effect, the issue posed before the Court of Appeals was likewise a
question of law. Being a question of law, the private respondents rightfully invoked the special civil action
of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned
by the petitioners before this Court. But at the heart of said issue is the question of whether there exists an
Arbitration Clause because if an Arbitration Clause does not exist, then private respondents took the wrong
mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode of
appeal, which, incidentally, is a question of law, then it has to answer the core issue of whether there exists an
Arbitration Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result in a
manifest failure or miscarriage of justice, the provisions of the Rules of Court which are technical rules may be
relaxed.[10] As we shall show hereunder, had the Court of Appeals dismissed the petition for certiorari, the issue
of whether or not an arbitration clause exists in the contract would not have been resolved in accordance with
evidence extant in the record of the case. Consequently, this would have resulted in a judicial rejection of a
contractual provision agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the contract
between petitioner and private respondents is a legal issue that must be determined in this petition for review on
certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts that in
contemplation of law there could not have been one considering the following points. First, the trial court found
that the conditions of contract embodying the arbitration clause is not duly signed by the parties. Second, private
respondents misrepresented before the Court of Appeals that they produced in the trial court a notarized
duplicate original copy of the construction agreement because what were submitted were mere photocopies
thereof. The contract(s) introduced in court by private respondents were therefore of dubious authenticity
because: (a) the Agreement for the Execution of Builders Work for the EDSA Plaza Project does not contain an
arbitration clause, (b) private respondents surreptitiously attached as Annexes `G-3 to `G-5 to their petition
before the Court of Appeals but these documents are not parts of the Agreement of the parties as there was no
formal trade contract executed, (c) if the entire compilation of documents is indeed a formal trade contract, then
it should have been duly notarized, (d) the certification from the Records Management and Archives Office
dated August 26, 1993 merely states that the notarial record of Nilberto Briones x x x is available in the files of
(said) office as Notarial Registry Entry only, (e) the same certification attests that the document entered in the
notarial registry pertains to the Articles of Agreement only without any other accompanying documents, and
therefore, it is not a formal trade contract, and (f) the compilation submitted by respondents are a mere hodge-
podge of documents and do not constitute a single intelligible agreement.
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the
representatives of the contracting corporations did not sign the Conditions of Contract that contained the said

ADR Set 3 Page 72


clause. Its other contentions, specifically that insinuating fraud as regards the alleged insertion of the arbitration
clause, are questions of fact that should have been threshed out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the parties
contract. Republic Act No. 876 provides for the formal requisites of an arbitration agreement as follows:
Section 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the
parties, as well as a submission to arbitrate an existing controversy, shall be in writing and subscribed by the
party sought to be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for arbitration of
any controversy, shall be deemed a consent of the parties of the province or city where any of the parties
resides, to enforce such contract of submission. (Underscoring supplied.)
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing
and (b) it must be subscribed by the parties or their representatives. There is no denying that the parties entered
into a written contract that was submitted in evidence before the lower court. To subscribe means to write
underneath, as ones name; to sign at the end of a document.[11] That word may sometimes be construed to
mean to give consent to or to attest.[12]
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in the
contract in question. The Articles of Agreement, which incorporates all the other contracts and agreements
between the parties, was signed by representatives of both parties and duly notarized. The failure of the private
respondents representative to initial the `Conditions of Contract would therefor not affect compliance with the
formal requirements for arbitration agreements because that particular portion of the covenants between the
parties was included by reference in the Articles of Agreement.
Petitioners contention that there was no arbitration clause because the contract incorporating said provision
is part of a hodge-podge document, is therefore untenable. A contract need not be contained in a single
writing. It may be collected from several different writings which do not conflict with each other and which, when
connected, show the parties, subject matter, terms and consideration, as in contracts entered into by
correspondence.[13] A contract may be encompassed in several instruments even though every instrument is not
signed by the parties, since it is sufficient if the unsigned instruments are clearly identified or referred to and
made part of the signed instrument or instruments.Similarly, a written agreement of which there are two copies,
one signed by each of the parties, is binding on both to the same extent as though there had been only one
copy of the agreement and both had signed it.[14]
The flaw in petitioners contentions therefore lies in its having segmented the various components of the
whole contract between the parties into several parts. This notwithstanding, petitioner ironically admits the
execution of the Articles of Agreement. Notably, too, the lower court found that the said Articles of Agreement
also provides that the `Contract Documents therein listed `shall be deemed an integral part of this Agreement,
and one of the said documents is the `Conditions of Contract which contains the Arbitration Clause. It is this
Articles of Agreement that was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani
F. Fernando, president of petitioner corporation. The same agreement was duly subscribed before notary public
Nilberto R. Briones. In other words, the subscription of the principal agreement effectively covered the other
documents incorporated by reference therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were not
in default in invoking the provisions of the arbitration clause which states that (t)he demand for arbitration shall
be made within a reasonable time after the dispute has arisen and attempts to settle amicably had failed. Under
the factual milieu, private respondent SPI should have paid its liabilities under the contract in accordance with its
terms. However, misunderstandings appeared to have cropped up between the parties ostensibly brought about
by either delay in the completion of the construction work or by force majeure or the fire that partially gutted the
project. The almost two-year delay in paying its liabilities may not therefore be wholly ascribed to private
respondent SPI.
Besides, private respondent SPIs initiative in calling for a conference between the parties was a step
towards the agreed resort to arbitration. However, petitioner posthaste filed the complaint before the lower
court. Thus, while private respondent SPIs request for arbitration on August 13, 1993 might appear an
afterthought as it was made after it had filed the motion to suspend proceedings, it was because petitioner also
appeared to act hastily in order to resolve the controversy through the courts.
The arbitration clause provides for a reasonable time within which the parties may avail of the relief under
that clause. Reasonableness is a relative term and the question of whether the time within which an act has to
be done is reasonable depends on attendant circumstances.[15] This Court finds that under the circumstances
obtaining in this case, a one-month period from the time the parties held a conference on July 12, 1993 until
private respondent SPI notified petitioner that it was invoking the arbitration clause, is a reasonable time.
Indeed, petitioner may not be faulted for resorting to the court to claim what was due it under the
contract. However, we find its denial of the existence of the arbitration clause as an attempt to cover up its
misstep in hurriedly filing the complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section 7
of Republic Act No. 876 provides that proceedings therein have only been stayed. After the special proceeding
of arbitration[16] has been pursued and completed, then the lower court may confirm the award[17] made by the
arbitrator.

ADR Set 3 Page 73


It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before the
approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration.[18] Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on
arbitration.[19] Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted
as the wave of the future in international relations, is recognized worldwide. To brush aside a contractual
agreement calling for arbitration in case of disagreement between the parties would therefore be a step
backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition
for certiorari DENIED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.

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SECOND DIVISION
[G.R. No. 136154. February 7, 2001]
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS
HIDALGO, petitioners,
vs.
COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in his capacity as Presiding Judge, RTC-Br. 74,
Malabon, Metro Manila, MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and SABROSA FOODS,
INC., respondents.

DECISION
BELLOSILLO, J.:

This Petition for Review on certiorari assails the 17 July 1998 Decision[1] of the Court of Appeals affirming
the 11 November 1997 Order[2] of the Regional Trial Court which denied petitioners Motion to Suspend
Proceedings in Civil Case No. 2637-MN. It also questions the appellate courts Resolution[3] of 30 October 1998
which denied petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)
appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive distributor of its Del
Monte products in the Philippines for a period of five (5) years, renewable for two (2) consecutive five (5) year
periods with the consent of the parties. The Agreement provided, among others, for an arbitration clause which
states -

12. GOVERNING LAW AND ARBITRATION[4]

This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United States
of America. All disputes arising out of or relating to this Agreement or the parties relationship, including the
termination thereof, shall be resolved by arbitration in the City of San Francisco, State of California, under the
Rules of the American Arbitration Association. The arbitration panel shall consist of three members, one of
whom shall be selected by DMC-USA, one of whom shall be selected by MMI, and third of whom shall be
selected by the other two members and shall have relevant experience in the industry x x x x

In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country. Immediately after its
appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of petitioner DMC-
USA, as MMIs marketing arm to concentrate on its marketing and selling function as well as to manage its
critical relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director Liong Liong C. Sy (LILY
SY) filed a Complaint[5] against petitioners DMC-USA, Paul E. Derby, Jr.,[6]Daniel Collins[7] and Luis
Hidalgo,[8] and Dewey Ltd.[9] before the Regional Trial Court of Malabon, Metro Manila. Private respondents
predicated their complaint on the alleged violations by petitioners of Arts. 20,[10] 21[11] and 23[12] of the Civil
Code. According to private respondents, DMC-USA products continued to be brought into the country by parallel
importers despite the appointment of private respondent MMI as the sole and exclusive distributor of Del Monte
products thereby causing them great embarrassment and substantial damage. They alleged that the products
brought into the country by these importers were aged, damaged, fake or counterfeit, so that in March 1995 they
had to cause, after prior consultation with Antonio Ongpin, Market Director for Special Markets of Del Monte
Philippines, Inc., the publication of a "warning to the trade" paid advertisement in leading
newspapers. Petitioners DMC-USA and Paul E. Derby, Jr., apparently upset with the publication, instructed
private respondent MMI to stop coordinating with Antonio Ongpin and to communicate directly instead with
petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal with the
former in bad faith by involving disinterested third parties and by proposing solutions which were entirely out of
their control. Private respondents claimed that they had exhausted all possible avenues for an amicable
resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice and wanton attitude
of petitioners, they should be held responsible for all the actual expenses incurred by private respondents in the
delayed shipment of orders which resulted in the extra handling thereof, the actual expenses and cost of money
for the unused Letters of Credit (LCs) and the substantial opportunity losses due to created out-of-stock
situations and unauthorized shipments of Del Monte-USA products to the Philippine Duty Free Area and
Economic Zone; that the bad faith, fraudulent acts and willful negligence of petitioners, motivated by their
determination to squeeze private respondents out of the outstanding and ongoing Distributorship Agreement in
favor of another party, had placed private respondent LILY SY on tenterhooks since then; and, that the shrewd
and subtle manner with which petitioners concocted imaginary violations by private respondent MMI of the
Distributorship Agreement in order to justify the untimely termination thereof was a subterfuge. For the
foregoing, private respondents claimed, among other reliefs, the payment of actual damages, exemplary
damages, attorneys fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking the arbitration clause in
their Agreement with private respondents.

ADR Set 3 Page 75


In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of petitioners Motion to
Suspend Proceedings as the grounds alleged therein did not constitute the suspension of the proceedings
considering that the action was for damages with prayer for the issuance of Writ of Preliminary Attachment and
not on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which private respondents filed
their Comment/Opposition. On 31 January 1997 petitioners filed their Reply.Subsequently, private respondents
filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This Motion was admitted,
over petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the ground that
it "will not serve the ends of justice and to allow said suspension will only delay the determination of the issues,
frustrate the quest of the parties for a judicious determination of their respective claims, and/or deprive and
delay their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners causes of action, required the interpretation of Art. 21 of
the Civil Code[16] and that in determining whether petitioners had violated it "would require a full blown trial"
making arbitration "out of the question."[17] Petitioners Motion for Reconsideration of the affirmation was
denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties warrants an order
compelling them to submit to arbitration.
Petitioners contend that the subject matter of private respondents causes of action arises out of or relates
to the Agreement between petitioners and private respondents. Thus, considering that the arbitration clause of
the Agreement provides that all disputes arising out of or relating to the Agreement or the parties relationship,
including the termination thereof, shall be resolved by arbitration, they insist on the suspension of the
proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876[18] -

Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an agreement
providing for arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until
an arbitration has been had in accordance with the terms of the agreement. Provided, That the applicant for the
stay is not in default in proceeding with such arbitration.

Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and 23 of
the Civil Code,[19] the determination of which demands a full blown trial, as correctly held by the Court of
Appeals. Moreover, they claim that the issues before the trial court were not joined so that the Honorable Judge
was not given the opportunity to satisfy himself that the issue involved in the case was referable to
arbitration. They submit that, apparently, petitioners filed a motion to suspend proceedings instead of sending a
written demand to private respondents to arbitrate because petitioners were not sure whether the case could be
a subject of arbitration. They maintain that had petitioners done so and private respondents failed to answer the
demand, petitioners could have filed with the trial court their demand for arbitration that would warrant a
determination by the judge whether to refer the case to arbitration. Accordingly, private respondents assert that
arbitration is out of the question.
Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition on the
same date[20] petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate before the
United States District Court in Northern California, docketed as Case No. C-98-4446. They insist that the filing of
the petition to compel arbitration in the United States made the petition filed before this Court an alternative
remedy and, in a way, an abandonment of the cause they are fighting for here in the Philippines, thus warranting
the dismissal of the present petition before this Court.
There is no doubt that arbitration is valid and constitutional in our jurisdiction. [21] Even before the enactment
of RA 876, this Court has countenanced the settlement of disputes through arbitration. Unless the agreement is
such as absolutely to close the doors of the courts against the parties, which agreement would be void, the
courts will look with favor upon such amicable arrangement and will only interfere with great reluctance to
anticipate or nullify the action of the arbitrator.[22] Moreover, as RA 876 expressly authorizes arbitration of
domestic disputes, foreign arbitration as a system of settling commercial disputes was likewise recognized when
the Philippines adhered to the United Nations "Convention on the Recognition and the Enforcement of Foreign
Arbitral Awards of 1958" under the 10 May 1965 Resolution No. 71 of the Philippine Senate, giving reciprocal
recognition and allowing enforcement of international arbitration agreements between parties of different
nationalities within a contracting state.[23]
A careful examination of the instant case shows that the arbitration clause in the Distributorship Agreement
between petitioner DMC-USA and private respondent MMI is valid and the dispute between the parties is
arbitrable. However, this Court must deny the petition.

ADR Set 3 Page 76


The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision to
submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that contract and
is itself a contract. As a rule, contracts are respected as the law between the contracting parties and produce
effect as between them, their assigns and heirs.[24]Clearly, only parties to the Agreement, i.e., petitioners DMC-
USA and its Managing Director for Export Sales Paul E. Derby, Jr., and private respondents MMI and its
Managing Director LILY SY are bound by the Agreement and its arbitration clause as they are the only
signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and private respondent SFI, not parties to the
Agreement and cannot even be considered assigns or heirs of the parties, are not bound by the Agreement and
the arbitration clause therein. Consequently, referral to arbitration in the State of California pursuant to the
arbitration clause and the suspension of the proceedings in Civil Case No. 2637-MN pending the return of the
arbitral award could be called for[25] but only as to petitioners DMC-USA and Paul E. Derby, Jr., and private
respondents MMI and LILY SY, and not as to the other parties in this case, in accordance with the recent case
of Heirs of Augusto L. Salas, Jr. v. Laperal Realty Corporation,[26] which superseded that of Toyota Motor
Philippines Corp. v. Court of Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become dysfunctional
because of the presence of third parties is untenable ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"[28] and that "[a]s such, the parties are thereby expected to abide with good faith
in their contractual commitments."[29] However, in Salas, Jr., only parties to the Agreement, their assigns or heirs
have the right to arbitrate or could be compelled to arbitrate. The Court went further by declaring that in
recognizing the right of the contracting parties to arbitrate or to compel arbitration, the splitting of the
proceedings to arbitration as to some of the parties on one hand and trial for the others on the other hand, or the
suspension of trial pending arbitration between some of the parties, should not be allowed as it would, in effect,
result in multiplicity of suits, duplicitous procedure and unnecessary delay.[30]
The object of arbitration is to allow the expeditious determination of a dispute.[31] Clearly, the issue before
us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration proceedings
and trial, or suspension of trial pending arbitration. Accordingly, the interest of justice would only be served if the
trial court hears and adjudicates the case in a single and complete proceeding.[32]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the Order of the
Regional Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied petitioners Motion to
Suspend Proceedings, is AFFIRMED. The Regional Trial Court concerned is directed to proceed with the
hearing of Civil Case No. 2637-MN with dispatch.No costs.
SO ORDERED.

ADR Set 3 Page 77


Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 103200 August 31, 1994

LA NAVAL DRUG CORPORATION, petitioner,


vs.
THE HONORABLE COURT OF APPEALS and WILSON C. YAO, respondents.

VITUG, J.:

In an effort to declog the courts of an increasing volume of work load and, most importantly, in order to accord
contending parties with expenditious alternatives for settling disputes, the law authorities, indeed encourages,
out of court settlements or adjudications. Compromises and arbitration are widely known and used as such
acceptable methods of resolving adversarial claims.

Arbitrations, in particular, is governed by a special law, Republic Act 876, suppletory to which are laws and rules
of general application. This case before us concerns the jurisdiction of courts, in relation to the provisions of
Section 6 of Republic Act No. 876, and, in that respect, the applicability of the doctrine of estoppel. The law
(R.A. 876), specifically Section 6 thereof, provides:

Sec. 6. Hearing by court. — A party aggrieved by the failure, neglect or refusal of another to
perform under an agreement in writing providing for arbitration may petition the court for an order
directing that such arbitration proceed in the manner provided for in such agreement. Five days
notice in writing of the hearing of such application shall be served either personally or by
registered mail upon the party in default. The court shall hear the parties, and upon being
satisfied that the making of the agreement or such failure to comply therewith is not in issue,
shall make an order directing the parties to proceed to arbitration in accordance with the terms of
the agreement. If the making of the agreement or default be in issue the court shall proceed to
summarily hear such issue. If the finding be that no agreement in writing providing for arbitration
was made, or that there is no default in the proceeding thereunder, the proceeding shall be
dismissed. If the finding be that a written provision for arbitration was made and there is a default
in proceeding thereunder, an order shall be made summarily directing the parties to proceed with
the arbitration in accordance with the terms thereof.

The court shall decide all motions, petitions or application filed under the provisions of this Act,
within ten days after such motions, petitions, or applications have been heard by it.

In chronology, the events that have led to the case at bench are detailed in the appealed decision of respondent
appellate court, which we here reproduce in toto.

Original action for Certiorari and Prohibition for Annulment of the Orders, dated April 26, 1990
and June 22, 1990, respectively, of Branch LXI, Regional Trial Court, Angeles City, in Special
Case No. 6024 for Enforcement of ARBITRATION Agreement with Damages. Petitioner assails
that portion of subject Order of April 26, 1990, stating as follows:

(1) Petitioner's claim for damages predicated on alleged tortuous acts of


respondents La Naval Drug corporation such as their alleged interference and
dilatory tactics, etc. in the implementation of the Arbitration Agreement in the
Contract of Lease, thereby compelling among others the petitioner to go to Court
for redress; and respondent La Naval Drug Corporation's counterclaim for
damages may be entertained by this Court in a hearing — not summary — for
the purpose, under the Rules of Court.

(2) A preliminary hearing of the special and affirmative defense to show that
Petitioner has not cause of action against respondent's claim for damages is
denied; a resolution on this issue is deferred after the trial of the case on the
merits.

And challenges the Order of June 22, 1990 denying its motion for reconsideration of the said
earlier Order.

From the petition below of respondent Yao, it appears that he is the present owner of a
commercial building a portion of which is leased to petitioner under a contract of lease executed
on December 23, 1993 with the former owner thereof, La Proveedora, Inc., which contract
expired on April 30, 1989. However, petitioner exercised its option to lease the same building for

ADR Set 3 Page 78


another five years. But petitioner and respondent Yao disagreed on the rental rate, and to
resolve the controversy, the latter, thru written notices to the former, expressed his intention to
submit their disagreement to arbitration, in accordance with Republic Act 876, otherwise known
as the Arbitration Law, and paragraph 7 of their lease contract, providing that:

7. . . . Should the parties fail to agree on the rate of rentals, the same shall be
submitted to a group of Arbitrators composed of three (3) members, one to be
appointed by LESSOR, another by LESSEE and the third one to be agreed upon
by the two arbitrators previously chosen and the parties hereto shall submit to the
decision of the arbitrators.

Thus, on May 6, 1989, respondent Yao appointed Domingo Alamarez, Jr. as his arbitrator, while
on June 5, 1989, petitioner chose Atty. Casiano Sabile as its arbitrator. The confirmation of the
appointment of Aurelio Tupang, as third arbitrator, was held in abeyance because petitioner
instructed Atty. Sabile to defer the same until its Board of Directors could convene and approve
Tupang's appointment. Respondent Yao theorizes that this was petitioner's design to delay the
arbitration proceedings, in violation of the Arbitration Law, and the governing stipulation of their
contract of lease.

On the basis of the aforesaid allegations, respondent Yao prayed that after summary hearing
pursuant to Section 6 of the Arbitration Law, Atty. Casiano Sabile and Domingo Alamarez be
directed to proceed with the arbitration in accordance with Section 7 of subject Contract of Lease
and the applicable provisions of the Arbitration law, by appointing and confirming the
appointment of the Third Arbitrator; and that the Board of Three Arbitrators be ordered to
immediately convene and resolve the controversy before it, pursuant to Section 12 and the
succeeding sections of the Arbitration Law. (Annex "A," Petition.)

In its Answer with Counterclaim (Annex "C," Petition), petitioner here specifically denied the
averments of the petition below; theorizing that such petition is premature since respondent Yao
has not yet formally required arbitrators Alamarez and Sabile to agree on the third arbitrator,
within ten (10) days from notice, and that the delay in the arbitration was due to respondent
Yao's failure to perform what is incumbent upon him, of notifying and thereafter, requiring both
arbitrators to appoint the third member of the Board of Arbitrators. According to petitioner, it
actually gave arbitrators Sabile and Alamarez a free hand in choosing the third arbitrator; and,
therefore, respondent Yao has no cause of action against it (petitioner). By way of Counterclaim,
petitioner alleged that it suffered actual damages of P100,000.00; and incurred attorney's fees of
P50,000.00, plus P500.00 for every court appearance of its counsel.

On October 20, 1989, respondent Yao filed an amended petition for "Enforcement of Arbitration
Agreement with Damages;" praying that petitioner be ordered to pay interest on the unpaid rents,
at the prevailing rate of interest in commercial banks, and exemplary damages of at least
P250,000.00.

On October 24, 1989, despite petitioner's opposition to the motion to admit the amended petition,
the respondent court admitted the same.

On October 31, 1989, petitioner answered the amended petition; contending, among others, that
the amended petition should be dismissed on the ground of non-payment of the requisite filing
fees therefor; and it being in the nature of an ordinary civil action, a full blown and regular trial, is
necessary; so that respondent Yao's proposition for a summary hearing of the arbitration issue
and separate trial for his claim for damages is procedurally untenable and implausible.

Invoking Section 5, Rule 16 of the Rules of Court, petitioner presented a "Motion to Set Case for
Preliminary Hearing" of its special and affirmative defenses, which are grounds fro a motion to
dismiss.

In its Order of November 14, 1989, the respondent court announced that the two arbitrators
chose Mrs. Eloisa R. Narciso as the third arbitrator. And on November 21, 1989, it ordered the
parties to submit their position papers on the issue as to whether or not respondent Yao's claim
for damages may be litigated upon in the summary proceeding for enforcement of arbitration
agreement. It likewise informed the parties that petitioner's Motion to Set Case for Preliminary
Hearing" of Special and Affirmative Defenses would be resolved together with the question of
damages.

On April 26, 1990, the aforequoted assailed Order issued. In moving for reconsideration of the
said Order, petitioner argued that in Special Case No. 6024, the respondent court sits as a
special court exercising limited jurisdiction and is not competent to act on respondent Yao's
claim for damages, which poses an issue litigable in an ordinary civil action. But the respondent

ADR Set 3 Page 79


court was not persuaded by petitioner's submission. On June 22, 1990, it denied the motion for
reconsideration. (Rollo, pp. 89-93).

While the appellate court has agreed with petitioner that, under Section 6 of Republic Act No. 876, a court,
acting within the limits of its special jurisdiction, may in this case solely determine the issue of whether the
litigants should proceed or not to arbitration, it, however, considered petitioner in estoppel from questioning the
competence of the court to additionally hear and decide in the summary proceedings private respondent's claim
for damages, it (petitioner) having itself filed similarly its own counterclaim with the court a quo.

It is hardly disputable that when a court is called upon to exercise limited and special jurisdiction, that court
cannot stray to matters outside the area of its declared authority or beyond what has been expressly invested by
law (Elumbaring vs. Elumbaring, 12 Phil. 384, 387), particularly, such as in this instance, where the proceedings
are summary in nature.

Prefatorily, recalling the distinctions, pertinent to the case, between the court's lack of jurisdiction over
the person of the defendant, on the one hand, and its lack of jurisdiction over the subject matter or the nature of
the action, upon the other hand, should be useful.

The lack of jurisdiction over the person of the defendant may be waived either expressly or impliedly. When a
defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of the court. If he so
wishes not to waive this defense, he must do so seasonably by motion for the purpose of objecting to the
jurisdiction of the court; otherwise, he shall be deemed to have submitted himself to that jurisdiction. The
decisions promulgated heretofore by this Court would likewise seemingly apply estoppel to bar the defendant
from pursuing that defense by alleging in his answer any other issue for dismissing the action.

A citation of a few of our decisions might be apropos.

In Wang Laboratories, Inc., vs. Mendoza (156 SCRA 44), this Court has ruled that if the defendant, besides
setting up in a motion to dismiss his objection to the jurisdiction of the court, alleges at the same time any other
ground for dismissing the action, he is deemed to have submitted himself to the jurisdiction of the court. In the
process, it has equated the matter to a situation where, such as in Immaculata vs. Judge Navarro, et al. (146
SCRA 5), the defendant invokes an affirmative relief against his opponent.

In De Midgely vs. Judge Ferandos (64 SCRA 23, 31), the Court elaborated thusly:

We are of the opinion that the lower court has acquired jurisdiction over the person of Mrs.
Midgely by reason of her voluntary appearance. The reservation in her motion to dismiss that
she was making a special appearance to contest the court's jurisdiction over her person may be
disregarded.

It may be disregarded because it was nullified by the fact that in her motion to dismiss she relied
not only on the ground of lack of jurisdiction over her person but also on the ground that there
was no showing that earnest efforts were exerted to compromise the case and because she
prayed "for such other relief as" may be deemed "appropriate and proper."

xxx xxx xxx

When the appearance is by motion for the purpose of objecting to the jurisdiction of the court
over the person, it must be for the sole and separate purpose of objecting to the jurisdiction of
the court. If his motion is for any other purpose than to object to the jurisdiction of the court over
his person, he thereby submits himself to the jurisdiction of the court. A special appearance by
motion made for the purpose of objecting to the jurisdiction of the court over the person will be
held to be a general appearance, if the party in said motion should, for example, ask for a
dismissal of the action upon the further ground that the court had no jurisdiction over the subject
matter. (Syllabus, Flores vs. Zurbito, supra, at page 751. That rule was followed in Ocampo vs.
Mina and Arejola, 41 Phil. 308).

The justification for the rule was expressed in Republic vs. Ker and Companry, Ltd. (18 SCRA 207, 213-214), in
this wise:

We observed that the motion to dismiss filed on April 14, 1962, aside from disputing the lower
court's jurisdiction over defendant's person, prayed for dismissal of the complaint on the ground
that plaintiff's cause of action had prescribed. By interposing such second ground in its motion to
dismiss, Ker & Co., Ltd. availed of an affirmative defense on the basis of which it prayed the
court to resolve controversy in its favor. For the court to validly decide the said plea of defendant
Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who, being the
proponent of the affirmative defense, should be deemed to have abandoned its special
appearance and voluntarily submitted itself to the jurisdiction of the court.

ADR Set 3 Page 80


Voluntary appearance cures defects of summons, if any, Such defect, if any, was further cured
when defendant filed its answer to the complaint. A defendant can not be permitted to speculate
upon the judgment of the court by objecting to the court's jurisdiction over its person if the
judgment is adverse to it, and acceding to jurisdiction over its person if and when the judgment
sustains its defenses.

The doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according
to natural law and right. It is a principle intended to avoid a clear case of injustice. The term is hardly
distinguishable from a waiver of right. Estoppel, like its said counterpart, must be unequivocal and intentional for,
when misapplied, it can easily become a most convenient and effective means of injustice. Estoppel is not
understood to be a principle that, as a rule, should prevalently apply but, such as it concededly is, as a mere
exception from the standard legal norms of general application that can be invoked only in highly exceptional
and justifiable cases.

Tested by the above criteria, the Court sees it propitious to re-examine specifically the question of whether or
not the submission of other issues in a motion to dismiss, or of an affirmative defense (as distinguished from an
affirmative relief) in an answer, would necessarily foreclose, and have the effect of a waiver of, the right of a
defendant to set up the court's lack of jurisdiction over the person of the defendant.

Not inevitably.

Section 1, Rule 16, of the Rules of Court, provides that a motion to dismiss may be made on the following
grounds:

(a) That the court has no jurisdiction over the person of the defendant or over the subject of the
action or suit;

(b) That the court has no jurisdiction over the nature of the action or suit;

(c) The venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by statute of limitations;

(g) That the complaint states no cause of action;

(h) That the claim or demand set forth in the plaintiff's pleading has been paid, waived,
abandoned, or otherwise extinguished;

( i ) That the claim on which the action or suit is founded is unenforceable under the provisions of
the statute of frauds;

( j ) That the suit is between members of the same family and no earnest efforts towards a
compromise have been made.

Any ground for dismissal in a motion to dismiss, except improper venue, may, as further set forth in Section 5 of
the same rule, be pleaded as an affirmative defense and a preliminary hearing may be had thereon as if a
motion to dismiss had been filed. An answer itself contains the negative, as well as affirmative, defenses upon
which the defendant may rely (Section 4, Rule 6, Rules of Court). A negative defense denies the material facts
averred in the complaint essential to establish the plaintiff's cause of action, while an affirmative defense in an
allegation of a new matter which, while admitting the material allegations of the complaint, would, nevertheless,
prevent or bar recovery by the plaintiff. Inclusive of these defenses are those mentioned in Rule 16 of the Rules
of Court which would permit the filing of a motion to dismiss.

In the same manner that the plaintiff may assert two or more causes of action in a court suit, a defendant is
likewise expressly allowed, under Section 2, Rule 8, of the Rules of Court, to put up his own defenses
alternatively or even hypothetically. Indeed, under Section 2, Rule 9, of the Rules of Court, defenses and
objections not pleaded either in a motion to dismiss or in an answer, except for the failure to state a cause of
action, are deemed waived. We take this to mean that a defendant may, in fact, feel enjoined to set up, along
with his objection to the court's jurisdiction over his person, all other possible defenses. It thus appears that it is
not the invocation of any of such defenses, but the failure to so raise them, that can result in waiver or estoppel.
By defenses, of course, we refer to the grounds provided for in Rule 16 of the Rules of Court that must be
asserted in a motion to dismiss or by way of affirmative defenses in an answer.

ADR Set 3 Page 81


Mindful of the foregoing, in Signetics Corporation vs. Court of Appeals and Freuhauf Electronics Phils., Inc. (225
SCRA 737, 738), we lately ruled:

This is not to say, however, that the petitioner's right to question the jurisdiction of the court over
its person is now to be deemed a foreclosed matter. If it is true, as Signetics claims, that its only
involvement in the Philippines was through a passive investment in Sigfil, which it even later
disposed of, and that TEAM Pacific is not its agent, then it cannot really be said to be doing
business in the Philippines. It is a defense, however, that requires the contravention of the
allegations of the complaint, as well as full ventilation, in effect, of the main merits of the case,
which should not thus be within the province of a mere motion to dismiss. So, also, the issue
posed by the petitioner as to whether a foreign corporation which has done business in the
country, but which has ceased to do business at the time of the filing of a complaint, can still be
made to answer for a cause of action which accrued while it was doing business, is another
matter that would yet have to await the reception and admission of evidence. Since these points
have seasonably been raised by the petitioner, there should be no real cause for what may
understandably be its apprehension, i.e., that by its participation during the trial on the merits, it
may, absent an invocation of separate or independent reliefs of its own, be considered to have
voluntarily submitted itself to the court's jurisdiction.

Lack of jurisdiction over the subject matter of the suit is yet another matter. Whenever it appears that the court
has no jurisdiction over the subject matter, the action shall be dismissed (Section 2, Rule 9, Rules of Court).
This defense may be interposed at any time, during appeal (Roxas vs. Rafferty, 37 Phil. 957) or even after final
judgment (Cruzcosa vs. Judge Concepcion, et al., 101 Phil. 146). Such is understandable, as this kind of
jurisdiction is conferred by law and not within the courts, let alone the parties, to themselves determine or
conveniently set aside. In People vs. Casiano (111 Phil. 73 93-94), this Court, on the issue of estoppel, held:

The operation of the principle of estoppel on the question of jurisdiction seemingly depends upon
whether the lower court actually had jurisdiction or not. If it had no jurisdiction, but the case was
tried and decided upon the theory that it had jurisdiction, the parties are not barred, on appeal,
from assailing such jurisdiction, for the same "must exist as a matter of law, and may not be
conferred by consent of the parties or by estoppel" (5 C.J.S., 861-863). However, if the lower
court had jurisdiction, and the case was heard and decided upon a given theory, such, for
instance, as that the court had no jurisdiction, the party who induced it to adopt such theory will
not be permitted, on appeal, to assume an inconsistent position — that the lower court had
jurisdiction. Here, the principle of estoppel applies. The rule that jurisdiction is conferred by law,
and does not depend upon the will of the parties, has not bearing thereon.

The rule was reiterated in Calimlim vs. Ramirez (118 SCRA 399, 406), and quite recently, in Southeast Asian
Fisheries Development Center-Aquaculture Department vs. National Labor Relations Commission (206 SCRA
283).

Jurisdiction over the nature of the action, in concept, differs from jurisdiction over the subject matter. Illustrated,
lack of jurisdiction over the nature of the action is the situation that arises when a court, which ordinarily would
have the authority and competence to take a case, is rendered without it either because a special law has
limited the exercise of its normal jurisdiction on a particular matter or because the type of action has been
reposed by law in certain other courts or quasi-judicial agencies for determination. Nevertheless, it can hardly be
questioned that the rules relating to the effects of want of jurisdiction over the subject matter should apply with
equal vigor to cases where the court is similarly bereft of jurisdiction over the nature of the action.

In summary, it is our considered view, as we now so hereby express,


that —

(1) Jurisdiction over the person must be seasonably raised, i.e., that it is pleaded in a motion to dismiss or by
way of an affirmative defense in an answer. Voluntary appearance shall be deemed a waiver of this defense.
The assertion, however, of affirmative defenses shall not be constructed as an estoppel or as a waiver of such
defense.

(2) Where the court itself clearly has no jurisdiction over the subject matter or the nature of the action, the
invocation of this defense may be done at any time. It is neither for the courts nor the parties to violate or
disregard that rule, let alone to confer that jurisdiction, this matter being legislative in character. Barring highly
meritorious and exceptional circumstances, such as hereinbefore exemplified, neither estoppel nor waiver shall
apply.

In the case at bench, the want of jurisdiction by the court is indisputable, given the nature of the controversy.
The arbitration law explicitly confines the court's authority only to pass upon the issue of whether there is or
there is no 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 proceeding shall be
dismissed." The proceedings are summary in nature.

ADR Set 3 Page 82


All considered, the court a quo must then refrain from taking up the claims of the contending parties for
damages, which, upon the other hand, may be ventilated in separate regular proceedings at an opportune time
and venue. The circumstances obtaining in this case are far, we hold, from justifying the application of estoppel
against either party.

WHEREFORE, the decision of the Court of Appeals and the orders of the trial court in question are SET ASIDE.
The court a quo, in the instant proceedings, is ordered to DESIST from further hearing private respondent's
claim, as well as petitioner's counterclaim, for damages. No costs.

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-27283 July 29, 1977

SOLEDAD F. BENGSON, plaintiff-appellant,


vs.
MARIANO M. CHAN, UNIVERSAL CONSTRUCTION SUPPLY and LEONCIO CHAN, both of San Fernando,
La Union; MUTUAL SECURITY INSURANCE CORPORATION and KRAUSE A. IGNACIO of
Manila, defendants-appellees.

AQUINO, J.:

This is a case involving arbitration. On June 21, 1966 Soledad F. Bengson and Mariano M. Chan entered into a
contract for the construction of a six-story building on Bengson's lot located at Rizal Avenue, San Fernando, La
Union. In that contract Soledad F. Bengson found herself to pay Chan, the contractor, the sum of P352,000 for
the materials, labor and construction expenses.

It was stipulated inter alia that the construction would start on July 5, 1965; that the first and second stories,
together with the theater, should be completed and available for use within five months from July 5, 1965, and
that the construction should be finished within twelve calendar months from that date in conformity with the
plans and specifications signed by the parties. The contract contains the following arbitration clause:

15. Any and all questions, disputes or differences arising between the parties hereto relative to
the construction of the BUILDING shall be determined by arbitration of two persons, each
chosen by the parties themselves. The determination of said arbitration shall be final, conclusive
and binding upon both parties hereto, unless they choose to go to court, in which case the
determination by arbitration is a condition precedent for taking any court action. The expenses of
arbitration shall be borne by both parties equally.

On May 24, 1966 Soledad F. Bengson filed an action for damages against Mariano M. Chan and the sureties on
his performance bond. She alleged that Mariano M. Chan violated the contract by not constructing the first and
second stories within the stipulated five- month period; that because the contractor admitted at a conference on
May 8, 1966 that he was unable to continue or complete the construction, Soledad F. Bengson terminated the
contract; that she suffered damages amounting to P85,000 as a consequence of Chan's failure to construct the
commercial building, and that Chan did not comply with clauses 7 and 8 of the contract in not attending to his
work and in not submitting periodic reports of the work done as a basis for the payment of the laborers' wages.
The damages claimed totalled P183,800.

Mariano M. Chan and his sureties, Leoncio Chan (the owner of the Universal Construction Supply) and Mutual
Security Insurance Corporation, alleged in their answer that the contractor stopped the construction use Soledad
F. Bengson refused to pay for ninety percent of the work already accomplished; that the construction actually
started in February, 1966 because of the changes requested by Bengson; that the demolition of the old building
was effected from July to December, 1965, and that the stipulation for the construction of the first and second
stories within five months was novated b the parties.

The contractor and his sureties further alleged that Soledad F. Bengson had paid him P74,750 but refused to
pay on May 8, 1966 the additional sum of P31,450 as the balance of ninety percent of the work already
accomplished worth P118,000; that by reason of Bengson's failure to pay the balance, Chan notified her that he
would stop the construction, and that he actually stopped the construction on May 30, 1966 when he was served
with a copy of the complaint.

Mariano M. Chan filed counterclaims for P45,223.23 as the balance due on the contract; P15,000 as the value
of the materials in the construction yard; P5,000 as reimbursement of the expenses for the demolition of the old
building, P5,000 as the value of his construction equipment under Bengson's control and P35,000 as damages.

On November 16, 1966 the defendants filed an amended answer wherein they alleged as an additional
affirmative defense that the complaint states no cause of action because Soledad F. Bengson did not submit the
controversy for arbitration as required in the aforequoted paragraph 15 of the construction contract.

After holding a hearing, the trial court in its order of November 24, 1966 sustained that new defense and
dismissed the complaint. Bengson appealed.

Appellant Bengson's five assignments of errors may be reduced to the issues of whether the trial court erred (1)
in allowing the defendants to plead a new affirmative defense in their amended answer and (2) in holding that

ADR Set 3 Page 84


the cause of action in plaintiff's complaint are embraced in the requirement for arbitration as a condition
precedent to a court action.

(1) We hold that there is no merit in appellant Bengson's contention that the defendants waived the defense of
lack of cause of action. It is true that the defendants did not interpose as a defense in their original answer
Bengson's failure to resort to arbitration before going to court or the defense that her complaint does not state a
cause of action. The omission did not constitute a waiver of that defense because section 2, Rule 9 of the Rules
of Court explicitly provides that "defenses and objections not pleaded either in a motion to dismiss or in the
answer are deemed waived; except the failure to state a cause of action which may be alleged in a later
pleading, if one is permitted".

(2) Appellant Bengson's other contention that her causes of action do not involve disputes relative to the
construction of the building and, consequently, should not be submitted for arbitration, is not well-taken.

The trial court sensibly said that "all the causes of action alleged in the plaintiff's amended complaint are based
upon the supposed violations committed by the defendants of the 'Contract for the Construction of a Building"'
and that "the provisions of paragraph 15 hereof leave very little room for doubt that the said causes of action are
embraced within the phrase 'any and all questions, disputes or differences between the parties hereto relative to
the construction of the building', which must be determined by arbitration of two persons and such determination
by the arbitrators shall be 'final, conclusive and binding upon both parties' unless they go to court, in which case
the determination by arbitration is ' a condition precedent for taking any court action'."

Appellant Bengson argues that paragraph 15 refers to disputes as to "the technical process of putting up the
building", meaning whether there was an adherence to the plans and specifications, and that her causes of
action for damages do not involve questions as to the construction of the building but refer to disputes "based on
violation of the contract for construction".

She points out that the contract for the construction of the building and the construction of the building are
different concepts, just as the Constitution and the formation of the government under the Constitution are
different concepts; that a dispute relating to the construction contract is not necessarily a dispute relative to the
construction of the building; that the parties did not have any dispute prior to the filing of the complaint, and that
it was only after the filing of the case that a dispute arose between them.

Appellant Bengson alternatively argues that if arbitration is proper, then the trial court in conformity with section
6 of the Arbitration Law, Republic Act No. 876, should have required the parties to proceed to arbitration.

On the other hand, the defendants argue that the broad and inclusive terms of paragraph 15 embrace all
breaches of the contract regarding submission to arbitration of the contractor's request for extensions shows
that arbitration is not restricted to disputes relative to "the technical process of putting up the building".

We hold that the terms of paragraph 15 clearly express the intention of the parties that all disputes between
them should first be arbitrated before court action can be taken by the aggrieved party.

Bengson's interpretation of paragraph 15 as being limited to controversies with respect "to the joining together of
stones, steel, wood and other material to put up a building" has a sophistical flavor. Her superfine distinction
between the contract for the construction of the building and the construction of the building is specious but not
convincing.

However, although the causes of action in Bengson's complaint are covered by paragraph 15, her failure to
resort to arbitration does not warrant the dismissal of her complaint. We agree with her alternative contention
that arbitration may be resorted to during the pendency of the case. The Arbitration Law provides:

SEC. 6. Hearing by court. — A party aggrieved by the failure, neglect or refusal of another to
perform under an agreement in writing providing for arbitration may petition the court for an order
directing that such arbitration proceed in the manner provided for in such agreement. Five days
notice in writing of the hearing of such application shall be served either personally or by
registered mail upon the party in default. The court shall hear the parties, and upon being
satisfied that the making of the agreement or such failure to comply therewith is not in issue,
shall make an order directing the parties to proceed to arbitration in accordance with the terms of
the agreement. If the making of the agreement or default be in issue the court shall proceed to
summarily hear such issue. If the finding be that no agreement in writing providing for arbitration
was made, or that there is no default in the proceeding thereunder, the proceeding shall be
dismissed. If the finding be that a written provision for arbitration was made and there is a default
in proceeding thereunder, an order shall be made summarily directing the parties to proceed with
arbitration in accordance with the terms thereof.

The court shall decide all motions, petitions or applications filed under the provisions of this Act,
within ten days after such motions, petitions, or applications have been heard by it.

ADR Set 3 Page 85


SEC. 7. Stay of civil action. — If any suit or proceeding be brought upon an issue arising out of
an agreement providing for the arbitration thereof, the court in which such quit or proceeding is
pending, upon being satisfied that the issue involved in such suit or proceeding is referable to
arbitration, shall stay the action or proceeding until an arbitration has been had in accordance
with the terms of the agreement: Provided, That the applicant for the stay is not in default in
proceeding with such arbitration.

Within the meaning of section 6, the failure of Soledad F. Bengson to resort to arbitration may be regarded as a
refusal to comply with the stipulation for arbitration. And defendants p interposition of the defense that arbitration
is a condition precedent to the institution of a court action may be interpreted as a petition for an order that
arbitration should proceed as contemplated in section 15.

Therefore, instead of dismissing the case, the proceedings therein should be suspended and the parties should
be directed to go through the motions of arbitration at least within a sixty-day period. With the consent of the
parties, the trial court may appoint a third arbitrator to prevent a deadlock between the two arbitrators. In the
event that the disputes between the parties could not be settled definitively by arbitration, then the hearing of the
instant case should be resumed.

WHEREFORE, the trial court's order of dismissal is reversed and set aside. If the parties cannot reach an
amicable settlement at this late hour, then the trial court should give them at least sixty days from notice within
which to settle their disputes by arbitration and, if no settlement is finalized within that period, it should hold a
pre-trial and try the case. No costs.

SO ORDERED.

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