1. Chung Fu Industries Inc. vs. CA GR No.
96283 that may be awarded to either party as
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July 31,
1990 and August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No.
90-1335. Respondent Court of Appeals affirmed the ruling of the trial court that herein
petitioners, after submitting themselves for arbitration and agreeing to the terms and
conditions thereof, providing that the arbitration award shall be final and unappealable, are
precluded from seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for
brevity) and private respondent Roblecor Philippines, Inc. (Roblecor for short) forged a
construction agreement 1 whereby respondent contractor committed to construct and finish
on December 31, 1989, petitioner corporation's industrial/factory complex in Tanawan,
Tanza, Cavite for and in consideration of P42,000,000.00. In the event of disputes arising
from the performance of subject contract, it was stipulated therein that the issue(s) shall be
submitted for resolution before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two
(2) other ancillary contracts, to wit: one dated June 23, 1989, for the construction of a
dormitory and support facilities with a contract price of P3,875,285.00, to be completed on
or before October 31, 1989; 2 and the other dated August 12, 1989, for the installation of
electrical, water and hydrant systems at the plant site, commanding a price of P12.1 million
and requiring completion thereof one month after civil works have been finished. 3
However, respondent Roblecor failed to complete the work despite the extension of time
allowed it by Chung Fu. Subsequently, the latter had to take over the construction when it
had become evident that Roblecor was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of
P2,370,179.23, Roblecor on May 18, 1990, filed a petition for Compulsory Arbitration with
prayer for Temporary Restraining Order before respondent Regional Trial Court, pursuant to
the arbitration clause in the construction agreement. Chung Fu moved to dismiss the petition
and further prayed for the quashing of the restraining order.
Subsequent negotiations between the parties eventually led to the formulation of an
arbitration agreement which, among others, provides:
2. The parties mutually agree that the arbitration shall proceed in
accordance with the following terms and conditions: —
xxx xxx xxx
d. The parties mutually agree that they will abide by
the decision of the arbitrator including any amount
compensation, consequential damage and/or interest
thereon;
e. The parties mutually agree that the decision of the
arbitrator shall be final and unappealable.
Therefore, there shall be no further judicial recourse if
either party disagrees with the whole or any part of
the arbitrator's award.
f. As an exception to sub-paragraph (e) above, the
parties mutually agree that either party is entitled to
seek judicial assistance for purposes of enforcing the
arbitrator's award;
xxx xxx xxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration agreement thru its Order of May
30, 1990. Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent
contractor, the sum of P16,108,801.00. He further declared the award as final and
unappealable, pursuant to the Arbitration Agreement precluding judicial review of the
award.
Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung
Fu moved to remand the case for further hearing and asked for a reconsideration of the
judgment award claiming that Arbitrator Asuncion committed twelve (12) instances of grave
error by disregarding the provisions of the parties' contract.
Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek
reconsideration therefrom but to no avail. The trial court granted Roblecor's Motion for
Confirmation of Award and accordingly, entered judgment in conformity therewith.
Moreover, it granted the motion for the issuance of a writ of execution filed by respondent.
Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On
October 22,1990 the assailed resolution was issued. The respondent appellate court
concurred with the findings and conclusions of respondent trial court resolving that Chung Fu
and its officers, as signatories to the Arbitration Agreement are bound to observe the
stipulations thereof providing for the finality of the award and precluding any appeal
therefrom.
A motion for reconsideration of said resolution was filed by petitioner, but it was similarly
denied by respondent Court of Appeals thru its questioned resolution of December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
Respondents Court of Appeals and trial Judge gravely abused their
discretion and/or exceeded their jurisdiction, as well as denied due
process and substantial justice to petitioners, — (a) by refusing to
exercise their judicial authority and legal duty to review the arbitration
award, and (b) by declaring that petitioners are estopped from
questioning the arbitration award allegedly in view of the stipulations in
the parties' arbitration agreement that "the decision of the arbitrator
shall be final and unappealable" and that "there shall be no further
judicial recourse if either party disagrees with the whole or any part of
the arbitrator's award."
Second
Respondent Court of Appeals and trial Judge gravely abused their
discretion and/or exceeded their jurisdiction, as well as denied due
process and substantial justice to petitioner, by not vacating and
annulling the award dated 30 June 1990 of the Arbitrator, on the ground
that the Arbitrator grossly departed from the terms of the parties'
contracts and misapplied the law, and thereby exceeded the authority
and power delegated to him. (Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of
dispute settlement.
Because conflict is inherent in human society, much effort has been expended by men and
institutions in devising ways of resolving the same. With the progress of civilization, physical
combat has been ruled out and instead, more specific means have been evolved, such as
recourse to the good offices of a disinterested third party, whether this be a court or a
private individual or individuals.
Legal history discloses that "the early judges called upon to solve private conflicts were
primarily the arbiters, persons not specially trained but in whose morality, probity and good
sense the parties in conflict reposed full trust. Thus, in Republican
Rome, arbiter and judge (judex) were synonymous. The magistrate or praetor, after noting
down the conflicting claims of litigants, and clarifying the issues, referred them for decision
to a private person designated by the parties, by common agreement, or selected by them
from an apposite listing (the album judicium) or else by having the arbiter chosen by lot. The
judges proper, as specially trained state officials endowed with own power and jurisdiction,
and taking cognizance of litigations from beginning to end, only appeared under the Empire,
by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been an accepted alternative
to litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the
Philippines, it was nonetheless recognized in the Spanish Civil Code; specifically, the
provisions on compromises made applicable to arbitrations under Articles 1820 and
1821.7 Although said provisions were repealed by implication with the repeal of the Spanish
Law of Civil Procedure, 8 these and additional ones were reinstated in the present Civil
Code. 9
Arbitration found a fertile field in the resolution of labor-management disputes in the
Philippines. Although early on, Commonwealth Act 103 (1936) provided for compulsory
arbitration as the state policy to be administered by the Court of Industrial Relations, in time
such a modality gave way to voluntary arbitration. While not completely supplanting
compulsory arbitration which until today is practiced by government officials, the Industrial
Peace Act which was passed in 1953 as Republic Act No. 875, favored the policy of free
collective bargaining, in general, and resort to grievance procedure, in particular, as the
preferred mode of settling disputes in industry. It was accepted and enunciated more
explicitly in the Labor Code, which was passed on November 1, 1974 as Presidential Decree
No. 442, with the amendments later introduced by Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations, arbitration was
gaining wide acceptance. A consensual process, it was preferred to orders imposed by
government upon the disputants. Moreover, court litigations tended to be time-consuming,
costly, and inflexible due to their scrupulous observance of the due process of law doctrine
and their strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the courts toward
arbitration agreements is slowly crystallizing into definite and workable
form. . . . The rule now is that unless the agreement is such as absolutely
to close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable
arrangements and will only with great reluctance interfere to anticipate
or nullify the action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged
when Republic Act No. 876 (1953), otherwise known as the Arbitration Law, was passed.
"Said Act was obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that
"the provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in
force." 11
In recognition of the pressing need for an arbitral machinery for the early and expeditious
settlement of disputes in the construction industry, a Construction Industry Arbitration
Commission (CIAC) was created by Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes via a
particular mode, it is the regular courts that remain the fora to resolve such matters.
However, the parties may opt for recourse to third parties, exercising their basic freedom to
"establish such stipulation, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public
policy." 12 In such a case, resort to the arbitration process may be spelled out by them in a
contract in anticipation of disputes that may arise between them. Or this may be stipulated
in a submission agreement when they are actually confronted by a dispute. Whatever be the
case, such recourse to an extrajudicial means of settlement is not intended to completely
deprive the courts of jurisdiction. In fact, the early cases on arbitration carefully spelled out
the prevailing doctrine at the time, thus: ". . . a clause in a contract providing that all matters
in dispute between the parties shall be referred to arbitrators and to them alone is contrary
to public policy and cannot oust the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an
ongoing dispute to one is valid. Being part of a contract between the parties, it is binding and
enforceable in court in case one of them neglects, fails or refuses to arbitrate. Going a step
further, in the event that they declare their intention to refer their differences to arbitration
first before taking court action, this constitutes a condition precedent, such that where a suit
has been instituted prematurely, the court shall suspend the same and the parties shall be
directed forthwith to proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not been selected by the
parties. 15
Under present law, may the parties who agree to submit their disputes to arbitration further
provide that the arbitrators' award shall be final, unappealable and executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
Any stipulation that the arbitrators' award or decision shall be final is
valid, without prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be
final and inappealable except on questions of law which shall be appealable to the Supreme
Court." 16
Under the original Labor Code, voluntary arbitration awards or decisions were final,
unappealable and executory. "However, voluntary arbitration awards or decisions on money
claims, involving an amount exceeding One Hundred Thousand Pesos (P100,000.00) or forty-
percent (40%) of the paid-up capital of the respondent employer, whichever is lower, maybe
appealed to the National Labor Relations Commission on any of the following grounds: (a)
abuse of discretion; and (b) gross incompetence." 17 It is to be noted that the appeal in the
instances cited were to be made to the National Labor Relations Commission and not to the
courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the
voluntary arbitrator is now mandated to render an award or decision within twenty (20)
calendar days from the date of submission of the dispute and such decision shall be final and
executory after ten (10) calendar days from receipt of the copy of the award or decision by
the parties. 18
Where the parties agree that the decision of the arbitrator shall be final and unappealable as
in the instant case, the pivotal inquiry is whether subject arbitration award is indeed beyond
the ambit of the court's power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality
of the arbitrators' award is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039 and 2040 applicable to both compromises and arbitrations
are obtaining, the arbitrators' award may be annulled or rescinded. 19 Additionally, under
Sections 24 and 25 of the Arbitration Law, there are grounds for vacating, modifying or
rescinding an arbitrator's award. 20 Thus, if and when the factual circumstances referred to in
the above-cited provisions are present, judicial review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to
determine whether it is in accordance with law or within the scope of his authority? How
may the power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is
to be borne in mind, however, that this action will lie only where a grave abuse of discretion
or an act without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly
shown. For "the writ of certiorari is an extra-ordinary remedy and that certiorari jurisdiction
is not to be equated with appellate jurisdiction. In a special civil action of certiorari, the Court
will not engage in a review of the facts found nor even of the law as interpreted or applied by
the arbitrator unless the supposed errors of fact or of law are so patent and gross and
prejudicial as to amount to a grave abuse of discretion or an exces de pouvoir on the part of
the arbitrator." 21
Even decisions of administrative agencies which are declared "final" by law are not exempt
from judicial review when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al.
v. Flerida Ruth P. Romero, et al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making "final" the decisions of certain
administrative agencies, we have taken cognizance of petitions
questioning these decisions where want of jurisdiction, grave abuse of
discretion, violation of due process, denial of substantial justice or
erroneous interpretation of the lawwere brought to our attention . .
. 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a
quasi-judicial capacity. 24 It stands to reason, therefore, that their decisions should not be
beyond the scope of the power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of
which allege error on the part of the arbitrator in granting compensation for various items
which apparently are disputed by said petitioners:
1. The Honorable Arbitrator committed grave error in failing to apply the terms and
conditions of the Construction Agreement, Dormitory Contract and Electrical Contract, and in
using instead the "practices" in the construction industry;
2. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss of productivity due to adverse weather conditions;
3. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss due to delayed payment of progress billings;
4. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss of productivity due to the cement crisis;
5. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for losses allegedly sustained on account of the failed coup d'état;
6. The Honorable Arbitrator committed grave error in granting to Roblecor the amount
representing the alleged unpaid billings of Chung Fu;
7. The Honorable Arbitrator committed grave error in granting to Roblecor the amount
representing the alleged extended overhead expenses;
8. The Honorable Arbitrator committed grave error in granting to Roblecor the amount
representing expenses for change order for site development outside the area of
responsibility of Roblecor;
9. The Honorable Arbitrator committed grave error in granting to Roblecor the cost of
warehouse No. 2;
10. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct change in dimension;
11. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct plastering; and
12. The Honorable Arbitrator committed grave error in awarding to Roblecor attorney's fees.
After closely studying the list of errors, as well as petitioners' discussion of the same in their
Motion to Remand Case For Further Hearing and Reconsideration and Opposition to Motion
for Confirmation of Award, we find that petitioners have amply made out a case where the
voluntary arbitrator failed to apply the terms and provisions of the Construction Agreement
which forms part of the law applicable as between the parties, thus committing a grave
abuse of discretion. Furthermore, in granting unjustified extra compensation to respondent
for several items, he exceeded his powers — all of which would have constituted ground for
vacating the award under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case, despite prima
facie showing of the existence of grounds warranting judicial review, effectively deprived
petitioners of their opportunity to prove or substantiate their allegations. In so doing, the
trial court itself committed grave abuse of discretion. Likewise, the appellate court, in not
giving due course to the petition, committed grave abuse of discretion. Respondent courts
should not shirk from exercising their power to review, where under the applicable laws and
jurisprudence, such power may be rightfully exercised; more so where the objections raised
against an arbitration award may properly constitute grounds for annulling, vacating or
modifying said award under the laws on arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
October 22, 1990 and December 3, 1990 as well as the Orders of respondent Regional Trial
Court dated July 31, 1990 and August 23, 1990, including the writ of execution issued
pursuant thereto, are hereby SET ASIDE. Accordingly, this case is REMANDED to the court of
origin for further hearing on this matter. All incidents arising therefrom are reverted to
the status quo ante until such time as the trial court shall have passed upon the merits of this
case. No costs.
SO ORDERED.
2. Korea Technologies Co. vs. Lerma GR No. 143581
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly
in civil and commercial disputes. Arbitration along with mediation, conciliation, and
negotiation, being inexpensive, speedy and less hostile methods have long been favored by
this Court. The petition before us puts at issue an arbitration clause in a contract mutually
agreed upon by the parties stipulating that they would submit themselves to arbitration in a
foreign country.Regrettably, instead of hastening the resolution of their dispute, the parties
wittingly or unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is
engaged in the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder
manufacturing plants, while private respondent Pacific General Steel Manufacturing Corp.
(PGSMC) is a domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby KOGIES
would set up an LPG Cylinder Manufacturing Plant in Carmona, Cavite. The contract was
executed in the Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment
for Contract No. KLP-970301 dated March 5, 1997[2] amending the terms of payment. The
contract and its amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD
1,224,000. KOGIES would install and initiate the operation of the plant for which PGSMC
bound itself to pay USD 306,000 upon the plants production of the 11-kg. LPG cylinder
samples. Thus, the total contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease[3] with Worth
Properties, Inc. (Worth) for use of Worths 5,079-square meter property with a 4,032-square
meter warehouse building to house the LPG manufacturing plant. The monthly rental was
PhP 322,560 commencing on January 1, 1998 with a 10% annual increment
clause. Subsequently, the machineries, equipment, and facilities for the manufacture of LPG
cylinders were shipped, delivered, and installed in the Carmona plant. PGSMC paid KOGIES
USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January 22,
1998, after the installation of the plant, the initial operation could not be conducted as
PGSMC encountered financial difficulties affecting the supply of materials, thus forcing the
parties to agree that KOGIES would be deemed to have completely complied with the terms
and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial operation
of the plant, PGSMC issued two postdated checks: (1) BPI Check No. 0316412 dated January
30, 1998 for PhP 4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998 for PhP
4,500,000.[5]
When KOGIES deposited the checks, these were dishonored for the
reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand letter[6] to PGSMC
threatening criminal action for violation of Batas Pambansa Blg.22 in case of
nonpayment. On the same date, the wife of PGSMCs President faxed a letter dated May 7,
1998 to KOGIES President who was then staying at a Makati City hotel. She complained that
not only did KOGIES deliver a different brand of hydraulic press from that agreed upon but it
had not delivered several equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully
funded but the payments were stopped for reasons previously made known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their
Contract dated March 5, 1997 on the ground that KOGIES had altered the quantity and
lowered the quality of the machineries and equipment it delivered to PGSMC, and that
PGSMC would dismantle and transfer the machineries, equipment, and facilities installed in
the Carmona plant. Five days later, PGSMC filed before the Office of the Public Prosecutor an
Affidavit-Complaint for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang,
President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not
unilaterally rescind their contract nor dismantle and transfer the machineries and equipment
on mere imagined violations by KOGIES. It also insisted that their disputes should be settled
by arbitration as agreed upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1,
1998 letter threatening that the machineries, equipment, and facilities installed in the plant
would be dismantled and transferred on July 4, 1998.Thus, on July 1, 1998, KOGIES instituted
an Application for Arbitration before the Korean Commercial Arbitration Board (KCAB)
in Seoul, Korea pursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as
Civil Case No. 98-117[8] against PGSMC before the Muntinlupa City Regional Trial Court
(RTC). The RTC granted a temporary restraining order (TRO) on July 4, 1998, which was
subsequently extended until July 22, 1998. In its complaint, KOGIES alleged that PGSMC had
initially admitted that the checks that were stopped were not funded but later on claimed
that it stopped payment of the checks for the reason that their value was not received as the
former allegedly breached their contract by altering the quantity and lowering the quality of
the machinery and equipment installed in the plant and failed to make the plant operational
although it earlier certified to the contrary as shown in a January 22, 1998
Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as
amended, by unilaterally rescinding the contract without resorting to arbitration. KOGIES also
asked that PGSMC be restrained from dismantling and transferring the machinery and
equipment installed in the plant which the latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not
entitled to the TRO since Art. 15, the arbitration clause, was null and void for being against
public policy as it ousts the local courts of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim[9] asserting that it had the full right to dismantle and transfer the machineries
and equipment because it had paid for them in full as stipulated in the contract; that KOGIES
was not entitled to the PhP 9,000,000 covered by the checks for failing to completely install
and make the plant operational; and that KOGIES was liable for damages amounting to PhP
4,500,000 for altering the quantity and lowering the quality of the machineries and
equipment. Moreover, PGSMC averred that it has already paid PhP 2,257,920 in rent
(covering January to July 1998) to Worth and it was not willing to further shoulder the cost of
renting the premises of the plant considering that the LPG cylinder manufacturing plant
never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an
Order denying the application for a writ of preliminary injunction, reasoning that PGSMC had
paid KOGIES USD 1,224,000, the value of the machineries and equipment as shown in the
contract such that KOGIES no longer had proprietary rights over them. And finally, the RTC
held that Art. 15 of the Contract as amended was invalid as it tended to oust the trial court or
any other court jurisdiction over any dispute that may arise between the parties. KOGIES
prayer for an injunctive writ was denied.[10] The dispositive portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this Court believes
and so holds that no cogent reason exists for this Court to grant the writ
of preliminary injunction to restrain and refrain defendant from
dismantling the machineries and facilities at the lot and building of Worth
Properties, Incorporated at Carmona, Cavite and transfer the same to
another site: and therefore denies plaintiffs application for a writ of
preliminary injunction.

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the quality of the
machinery, equipment, and facilities it delivered to the plant. It claimed that it had
performed all the undertakings under the contract and had already produced certified
samples of LPG cylinders. It averred that whatever was unfinished was PGSMCs fault since it
failed to procure raw materials due to lack of funds. KOGIES, relying on Chung Fu Industries
(Phils.), Inc. v. Court of Appeals,[12] insisted that the arbitration clause was without question
valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking dismissal of
PGSMCs counterclaims, KOGIES, on August 4, 1998, filed its Motion for Reconsideration[14] of
the July 23, 1998 Order denying its application for an injunctive writ claiming that the
contract was not merely for machinery and facilities worth USD 1,224,000 but was for the
sale of an LPG manufacturing plant consisting of supply of all the machinery and facilities and
transfer of technology for a total contract price of USD 1,530,000 such that the dismantling
and transfer of the machinery and facilities would result in the dismantling and transfer of
the very plant itself to the great prejudice of KOGIES as the still unpaid owner/seller of the
plant. Moreover, KOGIES points out that the arbitration clause under Art. 15 of the Contract
as amended was a valid arbitration stipulation under Art. 2044 of the Civil Code and as held
by this Court in Chung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things[16] to determine
whether there was indeed alteration of the quantity and lowering of quality of the
machineries and equipment, and whether these were properly installed. KOGIES opposed the
motion positing that the queries and issues raised in the motion for inspection fell under the
coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMCs
motion for inspection; (2) denying KOGIES motion for reconsideration of the July 23, 1998
RTC Order; and (3) denying KOGIES motion to dismiss PGSMCs compulsory counterclaims as
these counterclaims fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration[17] of the
September 21, 1998 RTC Order granting inspection of the plant and denying dismissal of
PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court of Appeals
(CA) a petition for certiorari[18] docketed as CA-G.R. SP No. 49249, seeking annulment of the
July 23, 1998 and September 21, 1998 RTC Orders and praying for the issuance of writs of
prohibition, mandamus, and preliminary injunction to enjoin the RTC and PGSMC from
inspecting, dismantling, and transferring the machineries and equipment in the Carmona
plant, and to direct the RTC to enforce the specific agreement on arbitration to resolve the
dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for
reconsideration and directed the Branch Sheriff to proceed with the inspection of the
machineries and equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249
informing the CA about the October 19, 1998 RTC Order. It also reiterated its prayer for the
issuance of the writs of prohibition, mandamus and preliminary injunction which was not
acted upon by the CA. KOGIES asserted that the Branch Sheriff did not have the technical
expertise to ascertain whether or not the machineries and equipment conformed to the
specifications in the contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding that
the enumerated machineries and equipment were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the RTC
Orders and dismissing the petition for certiorari filed by KOGIES. The CA found that the RTC
did not gravely abuse its discretion in issuing the assailed July 23, 1998 and September 21,
1998 Orders. Moreover, the CA reasoned that KOGIES contention that the total contract
price for USD 1,530,000 was for the whole plant and had not been fully paid was contrary to
the finding of the RTC that PGSMC fully paid the price of USD 1,224,000, which was for all the
machineries and equipment. According to the CA, this determination by the RTC was a
factual finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the lower
court that an arbitration clause which provided for a final determination of the legal rights of
the parties to the contract by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of
non-forum shopping by PGSMC, the CA held that the counterclaims of PGSMC were
compulsory ones and payment of docket fees was not required since the Answer with
counterclaim was not an initiatory pleading. For the same reason, the CA said a certificate of
non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely
since KOGIES did not wait for the resolution of its urgent motion for reconsideration of the
September 21, 1998 RTC Order which was the plain, speedy, and adequate remedy
available. According to the CA, the RTC must be given the opportunity to correct any alleged
error it has committed, and that since the assailed orders were interlocutory, these cannot
be the subject of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
 a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY
AND FACILITIES AS A QUESTION OF FACT BEYOND THE AMBIT OF A
PETITION FOR CERTIORARI INTENDED ONLY FOR CORRECTION OF ERRORS
OF JURISDICTION OR GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OF (SIC) EXCESS OF JURISDICTION, AND CONCLUDING THAT THE
TRIAL COURTS FINDING ON THE SAME QUESTION WAS IMPROPERLY
RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE
15 OF THE CONTRACT BETWEEN THE PARTIES FOR BEING CONTRARY TO
PUBLIC POLICY AND FOR OUSTING THE COURTS OF JURISDICTION;
c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO BE
ALL COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET FEES AND
CERTIFICATION OF NON-FORUM SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY
WITHOUT WAITING FOR THE RESOLUTION OF THE MOTION FOR
RECONSIDERATION OF THE ORDER DATED SEPTEMBER 21, 1998 OR
WITHOUT GIVING THE TRIAL COURT AN OPPORTUNITY TO CORRECT
ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF CERTIORARI
AND PROHIBITION FOR BEING INTERLOCUTORY IN NATURE;
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN
HE (SIC) PETITION AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY
WITHOUT MERIT.[23]
The Courts Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the procedural
issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it should have
paid docket fees and filed a certificate of non-forum shopping, and that its failure to do so
was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its
Answer with Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of
Rule 11, 1997 Revised Rules of Civil Procedure, the rule that was effective at the time the
Answer with Counterclaim was filed. Sec. 8 on existing counterclaim or cross-claim states, A
compulsory counterclaim or a cross-claim that a defending party has at the time he files his
answer shall be contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said counterclaims being
compulsory in nature. We stress, however, that effective August 16, 2004 under Sec. 7, Rule
141, as amended by A.M. No. 04-2-04-SC, docket fees are now required to be paid in
compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not
an initiatory pleading which requires a certification against forum shopping under Sec. 5[24] of
Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive pleading, hence, the courts a
quo did not commit reversible error in denying KOGIES motion to dismiss PGSMCs
compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition
are neither the remedies to question the propriety of an interlocutory order of the trial
court.[26] The CA erred on its reliance on Gamboa. Gamboainvolved the denial of a motion to
acquit in a criminal case which was not assailable in an action for certiorari since the denial of
a motion to quash required the accused to plead and to continue with the trial, and whatever
objections the accused had in his motion to quash can then be used as part of his defense
and subsequently can be raised as errors on his appeal if the judgment of the trial court is
adverse to him. The general rule is that interlocutory orders cannot be challenged by an
appeal.[27] Thus, in Yamaoka v. Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the grounds
for assailing the interlocutory orders. Allowing appeals from interlocutory
orders would result in the sorry spectacle of a case being subject of a
counterproductive ping-pong to and from the appellate court as often as
a trial court is perceived to have made an error in any of its interlocutory
rulings. However, where the assailed interlocutory order was issued with
grave abuse of discretion or patently erroneous and the remedy of
appeal would not afford adequate and expeditious relief, the Court
allows certiorari as a mode of redress.[28]
Also, appeals from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus, where the interlocutory order was issued without or in
excess of jurisdiction or with grave abuse of discretion, the remedy is certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to lack of
jurisdiction in the issuance of the two assailed orders coupled with the fact that there is no
plain, speedy, and adequate remedy in the ordinary course of law amply provides the basis
for allowing the resort to a petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition
for certiorari. Note that KOGIES motion for reconsideration of the July 23, 1998 RTC Order
which denied the issuance of the injunctive writ had already been denied. Thus, KOGIES only
remedy was to assail the RTCs interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the September
21, 1998 RTC Order relating to the inspection of things, and the allowance of the compulsory
counterclaims has not yet been resolved, the circumstances in this case would allow an
exception to the rule that before certiorari may be availed of, the petitioner must have filed a
motion for reconsideration and said motion should have been first resolved by the court a
quo. The reason behind the rule is to enable the lower court, in the first instance, to pass
upon and correct its mistakes without the intervention of the higher court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant,
equipment, and facilities when he is not competent and knowledgeable on said matters is
evidently flawed and devoid of any legal support.Moreover, there is an urgent necessity to
resolve the issue on the dismantling of the facilities and any further delay would prejudice
the interests of KOGIES. Indeed, there is real and imminent threat of irreparable destruction
or substantial damage to KOGIES equipment and machineries. We find the resort to certiorari
based on the gravely abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:
Article 15. Arbitration.All disputes, controversies, or differences
which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall finally be
settled by arbitration in Seoul, Korea in accordance with the Commercial
Arbitration Rules of the Korean Commercial Arbitration Board. The award
rendered by the arbitration(s) shall be final and binding upon both
parties concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is
null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case was perfected here in
the Philippines. Therefore, our laws ought to govern.Nonetheless, Art. 2044 of the Civil Code
sanctions the validity of mutually agreed arbitral clause or the finality and binding effect of
an arbitral award. Art. 2044 provides, Any stipulation that the arbitrators award or decision
shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040. (Emphasis
supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043, [34] may be
voided, rescinded, or annulled, but these would not denigrate the finality of the arbitral
award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It
has not been shown to be contrary to any law, or against morals, good customs, public order,
or public policy. There has been no showing that the parties have not dealt with each other
on equal footing. We find no reason why the arbitration clause should not be respected and
complied with by both parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission
to arbitration is a contract and that a clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitration is a contract.[36] Again in Del Monte
Corporation-USA v. Court of Appeals, we likewise ruled that [t]he provision to submit to
arbitration any dispute arising therefrom and the relationship of the parties is part of that
contract and is itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the KCAB, and that
the arbitral award is final and binding, is not contrary to public policy. This Court has
sanctioned the validity of arbitration clauses in a catena of cases. In the 1957 case
of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court had occasion to rule
that an arbitration clause to resolve differences and breaches of mutually agreed contractual
terms is valid. In BF Corporation v. Court of Appeals, we held that [i]n this jurisdiction,
arbitration has been held valid and constitutional. Even before the approval on June 19,
1953of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration. Republic Act No. 876 was adopted to supplement the New Civil Codes
provisions on arbitration.[39] And in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong with mediation, conciliation and negotiationis
encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially of
the commercial kind. It is thus regarded as the wave of the future in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally construe
arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
 should be granted. Any doubt should be resolved in favor of
arbitration.[40]
Having said that the instant arbitration clause is not against public policy, we come
to the question on what governs an arbitration clause specifying that in case of any dispute
arising from the contract, an arbitral panel will be constituted in a foreign country and the
arbitration rules of the foreign country would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to arbitrate
disputes arising from contractual relations. In case a foreign arbitral body is chosen by the
parties, the arbitration rules of our domestic arbitration bodies would not be applied. As
signatory to the Arbitration Rules of the UNCITRAL Model Law on International Commercial
Arbitration[41] of the United Nations Commission on International Trade Law (UNCITRAL) in
the New York Convention on June 21, 1985, the Philippines committed itself to be bound by
the Model Law. We have even incorporated the Model Law in Republic Act No. (RA) 9285,
otherwise known as the Alternative Dispute Resolution Act of 2004 entitled An Act to
Institutionalize the Use of an Alternative Dispute Resolution System in the Philippines and to
Establish the Office for Alternative Dispute Resolution, and for Other Purposes, promulgated
on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International
Commercial Arbitration.International commercial arbitration shall be
governed by the Model Law on International Commercial Arbitration (the
Model Law) adopted by the United Nations Commission on International
Trade Law on June 21, 1985 (United Nations Document A/40/17) and
recommended for enactment by the General Assembly in Resolution No.
40/72 approved on December 11, 1985, copy of which is hereto attached
as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model
Law, regard shall be had to its international origin and to the need for
uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United
Nations Commission on International Trade Law dated March 25, 1985
entitled, International Commercial Arbitration: Analytical Commentary on
Draft Trade identified by reference number A/CN. 9/264.
While RA 9285 was passed only in 2004, it nonetheless applies in the instant case
since it is a procedural law which has a retroactive effect. Likewise, KOGIES filed its
application for arbitration before the KCAB on July 1, 1998and it is still pending because no
arbitral award has yet been rendered. Thus, RA 9285 is applicable to the instant case. Well-
settled is the rule that procedural laws are construed to be applicable to actions pending and
undetermined at the time of their passage, and are deemed retroactive in that sense and to
that extent. As a general rule, the retroactive application of procedural laws does not violate
any personal rights because no vested right has yet attached nor arisen from them.[42]
Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL
Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly
the subject of arbitration pursuant to an arbitration clause, and mandates the referral to
arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an action
is brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the arbitration
clause to be final and binding are not immediately enforceable or cannot be implemented
immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates the requirement for the
arbitral award to be recognized by a competent court for enforcement, which court under
Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement on the grounds
provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and 44 relative to Secs. 47
and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall
be filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
 The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral
Awards Not Covered by the New York Convention.The recognition and
enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, on grounds of comity
and reciprocity, recognize and enforce a non-convention award as a
convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral
award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and executory
decisions of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside,
correction or modification of an arbitral award, and any application with
a court for arbitration assistance and supervision shall be deemed as
special proceedings and shall be filed with the Regional Trial Court (i)
where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding
for recognition and enforcement of an arbitral award, the Court shall
send notice to the parties at their address of record in the arbitration, or
if any part cannot be served notice at such address, at such partys last
known address. The notice shall be sent al least fifteen (15) days before
the date set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed
not as a judgment of a foreign court but as a foreign arbitral award, and when confirmed, are
enforced as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is
similar to judgments or awards given by some of our quasi-judicial bodies, like the National
Labor Relations Commission and Mines Adjudication Board, whose final judgments are
stipulated to be final and binding, but not immediately executory in the sense that they may
still be judicially reviewed, upon the instance of any party. Therefore, the final foreign arbitral
awards are similarly situated in that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with
specific authority and jurisdiction to set aside, reject, or vacate a foreign arbitral award on
grounds provided under Art. 34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall
be filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of
an award has been made, the Regional Trial Court may, if it considers it
proper, vacate its decision and may also, on the application of the party
claiming recognition or enforcement of the award, order the party to
provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a
foreign arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the procedures
and rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the Regional Trial Court.
Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral award is subject to
judicial review by the RTC which can set aside, reject, or vacate it. In this sense, what this
Court held in Chung Fu Industries (Phils.), Inc. relied upon by KOGIES is applicable insofar as
the foreign arbitral awards, while final and binding, do not oust courts of jurisdiction since
these arbitral awards are not absolute and without exceptions as they are still judicially
reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether domestic
or foreign, are subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards
The differences between a final arbitral award from an international or foreign
arbitral tribunal and an award given by a local arbitral tribunal are the specific grounds or
conditions that vest jurisdiction over our courts to review the awards.
For foreign or international arbitral awards which must first be confirmed by the
RTC, the grounds for setting aside, rejecting or vacating the award by the RTC are provided
under Art. 34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC
pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and executory decisions of
the RTC,[45] they may only be assailed before the RTC and vacated on the grounds provided
under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an
aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or corrects an
arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A
decision of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules and procedure to be promulgated
by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to
post a counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court
through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to the
foreign arbitration as it bound itself through the subject contract. While it may have
misgivings on the foreign arbitration done in Korea by the KCAB, it has available remedies
under RA 9285. Its interests are duly protected by the law which requires that the arbitral
award that may be rendered by KCAB must be confirmed here by the RTC before it can be
enforced.
With our disquisition above, petitioner is correct in its contention that an
arbitration clause, stipulating that the arbitral award is final and binding, does not oust our
courts of jurisdiction as the international arbitral award, the award of which is not absolute
and without exceptions, is still judicially reviewable under certain conditions provided for by
the UNCITRAL Model Law on ICA as applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and binding
on the parties, and not contrary to public policy; consequently, being bound to the contract
of arbitration, a party may not unilaterally rescind or terminate the contract for whatever
cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles[47] and
reiterated in succeeding cases,[48] that the act of treating a contract as rescinded on account
of infractions by the other contracting party is valid albeit provisional as it can be judicially
assailed, is not applicable to the instant case on account of a valid stipulation on
arbitration. Where an arbitration clause in a contract is availing, neither of the parties can
unilaterally treat the contract as rescinded since whatever infractions or breaches by a party
or differences arising from the contract must be brought first and resolved by arbitration,
and not through an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on whether the
equipment and machineries delivered and installed were properly installed and
operational in the plant in Carmona, Cavite; the ownership of equipment and payment of the
contract price; and whether there was substantial compliance by KOGIES in the production of
the samples, given the alleged fact that PGSMC could not supply the raw materials required
to produce the sample LPG cylinders, are matters proper for arbitration. Indeed, we note
that on July 1, 1998, KOGIES instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is incumbent upon
PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion
for Inspection of Things on September 21, 1998, as the subject matter of the motion is under
the primary jurisdiction of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff
from the inspection made on October 28, 1998, as ordered by the trial court on October 19,
1998, is of no worth as said Sheriff is not technically competent to ascertain the actual status
of the equipment and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders
pertaining to the grant of the inspection of the equipment and machineries have to be
recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract
price of USD 1,530,000 was for the whole plant and its installation is beyond the ambit of a
Petition for Certiorari.

Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for
certiorari.[49] Whether or not there was full payment for the machineries and equipment and
installation is indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the RTC in
resolving the issue on the ownership of the plant when it is the arbitral body (KCAB) and not
the RTC which has jurisdiction and authority over the said issue. The RTCs determination of
such factual issue constitutes grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving
the way for PGSMC to dismantle and transfer the equipment and machineries, we find it to
be in order considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries
might well be under the primary jurisdiction of the arbitral body to decide, yet the RTC under
Sec. 28 of RA 9285 has jurisdiction to hear and grant interim measures to protect vested
rights of the parties. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not
incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent that
the arbitral tribunal has no power to act or is unable to act effectivity,
the request may be made with the Court. The arbitral tribunal is deemed
constituted when the sole arbitrator or the third arbitrator, who has been
nominated, has accepted the nomination and written communication of
said nomination and acceptance has been received by the party making
the request.
(b) The following rules on interim or provisional relief shall be
observed:
Any party may request that provisional relief be granted against
the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned
upon the provision of security or any act or omission specified in the
order.
(d) Interim or provisional relief is requested by written
application transmitted by reasonable means to the Court or arbitral
tribunal as the case may be and the party against whom the relief is
sought, describing in appropriate detail the precise relief, the party
against whom the relief is requested, the grounds for the relief, and the
evidence supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral
tribunal.
(g) A party who does not comply with the order shall be liable
for all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of
protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form
of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the arbitral
tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the
dispute;
(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;
(c) Provide a means of preserving assets out of which a subsequent award
may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution
of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction
to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim
measure in relation to arbitration proceedings, irrespective of whether
their place is in the territory of this State, as it has in relation to
proceedings in courts. The court shall exercise such power in accordance
with its own procedures in consideration of the specific features of
international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation,
we were explicit that even the pendency of an arbitral proceeding does not foreclose resort
to the courts for provisional reliefs. We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the ICC,
which governs the parties arbitral dispute, allows the application of a
party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court to
take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004, allows the filing
of provisional or interim measures with the regular courts whenever the
arbitral tribunal has no power to act or to act effectively.[50]
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim
measures of protection.
Secondly, considering that the equipment and machineries are in the possession of
PGSMC, it has the right to protect and preserve the equipment and machineries in the best
way it can. Considering that the LPG plant was non-operational, PGSMC has the right to
dismantle and transfer the equipment and machineries either for their protection and
preservation or for the better way to make good use of them which is ineluctably within the
management discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment and
machineries in Worths property is not to the best interest of PGSMC due to the prohibitive
rent while the LPG plant as set-up is not operational.PGSMC was losing PhP322,560 as
monthly rentals or PhP3.87M for 1998 alone without considering the 10% annual rent
increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to
the preservation or transfer of the equipment and machineries as an interim measure, yet on
hindsight, the July 23, 1998 Order of the RTC allowing the transfer of the equipment and
machineries given the non-recognition by the lower courts of the arbitral clause, has
accorded an interim measure of protection to PGSMC which would otherwise been
irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial
amount based on the contract. Moreover, KOGIES is amply protected by the arbitral action it
has instituted before the KCAB, the award of which can be enforced in our jurisdiction
through the RTC. Besides, by our decision, PGSMC is compelled to submit to arbitration
pursuant to the valid arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and transfer
the subject equipment and machineries, it does not have the right to convey or dispose of
the same considering the pending arbitral proceedings to settle the differences of the
parties. PGSMC therefore must preserve and maintain the subject equipment and
machineries with the diligence of a good father of a family[51] until final resolution of the
arbitral proceedings and enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET
ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-
117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the arbitration of
their dispute and differences arising from the subject Contract before the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and
machineries, if it had not done so, and ORDERED to preserve and maintain them until the
finality of whatever arbitral award is given in the arbitration proceedings.
No pronouncement as to costs.

3. LM Power Engineering Corporation vs. Capitol Industrial Construction Groups, Inc.
GR No. 141833
Alternative dispute resolution methods or ADRs -- like arbitration, mediation,
negotiation and conciliation -- are encouraged by the Supreme Court. By enabling parties to
resolve their disputes amicably, they provide solutions that are less time-consuming, less
tedious, less confrontational, and more productive of goodwill and lasting relationships.[1]
The Case
Before us is a Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court,
seeking to set aside the January 28, 2000 Decision of the Court of Appeals [3] (CA) in CA-GR CV
No. 54232. The dispositive portion of the Decision reads as follows:
WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are
ORDERED to present their dispute to arbitration in accordance with their Sub-contract
Agreement. The surety bond posted by [respondent] is [d]ischarged.[4]
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent
Capitol Industrial Construction Groups Inc. entered into a Subcontract Agreement involving
electrical work at the Third Port of Zamboanga.[5]
On April 25, 1985, respondent took over some of the work contracted to
petitioner.[6] Allegedly, the latter had failed to finish it because of its inability to procure
materials.[7]
Upon completing its task under the Contract, petitioner billed respondent in the
amount of P6,711,813.90.[8] Contesting the accuracy of the amount of advances and billable
accomplishments listed by the former, the latter refused to pay. Respondent also took refuge
in the termination clause of the Agreement.[9] That clause allowed it to set off the cost of the
work that petitioner had failed to undertake -- due to termination or take-over -- against the
amount it owed the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati
(Branch 141) a Complaint[10] for the collection of the amount representing the alleged
balance due it under the Subcontract. Instead of submitting an Answer, respondent filed a
Motion to Dismiss,[11] alleging that the Complaint was premature, because there was no prior
recourse to arbitration.
In its Order[12] dated September 15, 1987, the RTC denied the Motion on the ground
that the dispute did not involve the interpretation or the implementation of the Agreement
and was, therefore, not covered by the arbitral clause.[13]
After trial on the merits, the RTC[14] ruled that the take-over of some work items by
respondent was not equivalent to a termination, but a mere modification, of the
Subcontract. The latter was ordered to give full payment for the work completed by
petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to
arbitration. The appellate court held as arbitrable the issue of whether respondents take-
over of some work items had been intended to be a termination of the original contract
under Letter K of the Subcontract. It ruled likewise on two other issues: whether petitioner
was liable under the warranty clause of the Agreement, and whether it should reimburse
respondent for the work the latter had taken over.[15]
Hence, this Petition.[16]
The Issues
In its Memorandum, petitioner raises the following issues for the Courts consideration:
A
Whether or not there exist[s] a controversy/dispute between petitioner and respondent
regarding the interpretation and implementation of the Sub-Contract Agreement dated
February 22, 1983 that requires prior recourse to voluntary arbitration;
B
In the affirmative, whether or not the requirements provided in Article III [1] of CIAC
Arbitration Rules regarding request for arbitration ha[ve] been complied with[.][17]
The Courts Ruling
The Petition is unmeritorious.
 First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the
implementation of the Agreement. Thus, without having to resort to prior arbitration, it is
entitled to collect the value of the services it rendered through an ordinary action for the
collection of a sum of money from respondent. On the other hand, the latter contends that
there is a need for prior arbitration as provided in the Agreement. This is because there are
some disparities between the parties positions regarding the extent of the work done, the
amount of advances and billable accomplishments, and the set off of expenses incurred by
respondent in its take-over of petitioners work.
We side with respondent. Essentially, the dispute arose from the parties ncongruent
positions on whether certain provisions of their Agreement could be applied to the facts. The
instant case involves technical discrepancies that are better left to an arbitral body that has
expertise in those areas. In any event, the inclusion of an arbitration clause in a contract does
not ipso facto divest the courts of jurisdiction to pass upon the findings of arbitral bodies,
because the awards are still judicially reviewable under certain conditions.[18]
In the case before us, the Subcontract has the following arbitral clause:
6. The Parties hereto agree that any dispute or conflict as regards to
interpretation and implementation of this Agreement which cannot be settled
between [respondent] and [petitioner] amicably shall be settled by means of
arbitration x x x.[19]
Clearly, the resolution of the dispute between the parties herein requires a referral to
the provisions of their Agreement. Within the scope of the arbitration clause are
discrepancies as to the amount of advances and billable accomplishments, the application of
the provision on termination, and the consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they differ on the
following questions: (1) Did a take-over/termination occur? (2) May the expenses incurred by
respondent in the take-over be set off against the amounts it owed petitioner? (3) How much
were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the provisions of the
Agreement. According to respondent, the take-over was caused by petitioners delay in
completing the work. Such delay was in violation of the provision in the Agreement as to time
schedule:
G. TIME SCHEDULE
[Petitioner] shall adhere strictly to the schedule related to the WORK and
complete the WORK within the period set forth in Annex C hereof. NO time
extension shall be granted by [respondent] to [petitioner] unless a corresponding
time extension is granted by [the Ministry of Public Works and Highways] to the
CONSORTIUM.[20]
Because of the delay, respondent alleges that it took over some of the work contracted
to petitioner, pursuant to the following provision in the Agreement:
K. TERMINATION OF AGREEMENT
[Respondent] has the right to terminate and/or take over this Agreement for any
of the following causes:
xxxxxxxxx
6. If despite previous warnings by [respondent], [petitioner] does not
execute the WORK in accordance with this Agreement, or persistently or
flagrantly neglects to carry out [its] obligations under this Agreement.[21]
Supposedly, as a result of the take-over, respondent incurred expenses in excess of the
contracted price. It sought to set off those expenses against the amount claimed by
petitioner for the work the latter accomplished, pursuant to the following provision:
If the total direct and indirect cost of completing the remaining part of the WORK exceed the
sum which would have been payable to [petitioner] had it completed the WORK, the amount
of such excess [may be] claimed by [respondent] from either of the following:
1. Any amount due [petitioner] from [respondent] at the time of the termination of this
Agreement.[22]
The issue as to the correct amount of petitioners advances and billable
accomplishments involves an evaluation of the manner in which the parties completed the
work, the extent to which they did it, and the expenses each of them incurred in connection
therewith. Arbitrators also need to look into the computation of foreign and local costs of
materials, foreign and local advances, retention fees and letters of credit, and taxes and
duties as set forth in the Agreement. These data can be gathered from a review of the
Agreement, pertinent portions of which are reproduced hereunder:
C. CONTRACT PRICE AND TERMS OF PAYMENT
xxxxxxxxx
All progress payments to be made by [respondent] to [petitioner] shall be subject
to a retention sum of ten percent (10%) of the value of the approved
quantities. Any claims by [respondent] on [petitioner] may be deducted by
[respondent] from the progress payments and/or retained amount. Any excess
from the retained amount after deducting [respondents] claims shall be released
by [respondent] to [petitioner] after the issuance of [the Ministry of Public Works
and Highways] of the Certificate of Completion and final acceptance of the WORK
by [the Ministry of Public Works and Highways].
 xxxxxxxxx
D. IMPORTED MATERIALS AND EQUIPMENT
[Respondent shall open the letters of credit for the importation of equipment
and materials listed in Annex E hereof after the drawings, brochures, and other
technical data of each items in the list have been formally approved by [the
Ministry of Public Works and Highways]. However, petitioner will still be fully
responsible for all imported materials and equipment.
All expenses incurred by [respondent], both in foreign and local currencies in
connection with the opening of the letters of credit shall be deducted from the
Contract Prices.
xxxxxxxxx
N. OTHER CONDITIONS
xxxxxxxxx
2. All customs duties, import duties, contractors taxes, income taxes, and other
taxes that may be required by any government agencies in connection with this
Agreement shall be for the sole account of [petitioner]. [23]
Being an inexpensive, speedy and amicable method of settling disputes,[24] arbitration -
- along with mediation, conciliation and negotiation -- is encouraged by the Supreme
Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution of
disputes, especially of the commercial kind.[25] It is thus regarded as the wave of the future in
international civil and commercial disputes.[26] Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.[27]
Consistent with the above-mentioned policy of encouraging alternative dispute
resolution methods, courts should liberally construe arbitration clauses. Provided such clause
is susceptible of an interpretation that covers the asserted dispute, an order to arbitrate
should be granted.[28] Any doubt should be resolved in favor of arbitration.[29]
Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to
file a formal request for arbitration with the Construction Industry Arbitration Commission
(CIAC) precluded the latter from acquiring jurisdiction over the question.To bolster its
position, petitioner even cites our ruling in Tesco Services Incorporated v. Vera.[30] We are not
persuaded.
Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration
indeed required the submission of a request for arbitration, as follows:
SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to have
recourse to arbitration by the Construction Industry Arbitration Commission (CIAC) shall
submit its Request for Arbitration in sufficient copies to the Secretariat of the CIAC;
PROVIDED, that in the case of government construction contracts, all administrative
remedies available to the parties must have been exhausted within 90 days from the time
the dispute arose.
Tesco was promulgated by this Court, using the foregoing provision as reference.
On the other hand, Section 1 of Article III of the new Rules of Procedure Governing
Construction Arbitration has dispensed with this requirement and recourse to the CIAC may
now be availed of whenever a contract contains a clause for the submission of a future
controversy to arbitration, in this wise:
SECTION 1. Submission to CIAC Jurisdiction An arbitration clause in a construction contract or
a submission to arbitration of a construction dispute shall be deemed an agreement to
submit an existing or future controversy to CIAC jurisdiction, notwithstanding the reference
to a different arbitration institution or arbitral body in such contract or submission. When a
contract contains a clause for the submission of a future controversy to arbitration, it is not
necessary for the parties to enter into a submission agreement before the claimant may
invoke the jurisdiction of CIAC.
The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91
and 3-93.[31]
The difference in the two provisions was clearly explained in China Chang Jiang Energy
Corporation (Philippines) v. Rosal Infrastructure Builders et al.[32] (an extended unsigned
Resolution) and reiterated in National Irrigation Administration v. Court of Appeals,[33] from
which we quote thus:
Under the present Rules of Procedure, for a particular construction contract to fall within the
jurisdiction of CIAC, it is merely required that the parties agree to submit the same to
voluntary arbitration Unlike in the original version of Section 1, as applied in the Tesco case,
the law as it now stands does not provide that the parties should agree to submit disputes
arising from their agreement specifically to the CIAC for the latter to acquire jurisdiction over
the same. Rather, it is plain and clear that as long as the parties agree to submit to voluntary
arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties
will not be precluded from electing to submit their dispute before the CIAC because this right
has been vested upon each party by law, i.e., E.O. No. 1008.[34]
Clearly, there is no more need to file a request with the CIAC in order to vest it with
jurisdiction to decide a construction dispute.
 The arbitral clause in the Agreement is a commitment on the part of the parties to
submit to arbitration the disputes covered therein. Because that clause is binding, they are
expected to abide by it in good faith.[35] And because it covers the dispute between the
parties in the present case, either of them may compel the other to arbitrate.[36]
Since petitioner has already filed a Complaint with the RTC without prior recourse to
arbitration, the proper procedure to enable the CIAC to decide on the dispute is to request the
stay or suspension of such action, as provided under RA 876 [the Arbitration Law].[37]
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
4. Lanuza vs. BF Corporation GR No. 174938
Corporate representatives may be compelled to submit to arbitration proceedings pursuant
to a contract entered into by the corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October
5, 2006 resolution. The Court of Appeals affirmed the trial court's decision holding that
petitioners, as director, should submit themselves as parties tothe arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress
billing statements.3However, by October 1991, Shangri-La started defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the
construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to pay for
its obligations with BF Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporation’s progress billing statements.6
BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly
took possession of the buildings while still owing BF Corporation an outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in
directing Shangri-La’s affairs. Therefore, they should be held jointly and severally liable with
Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a
result of Shangri-La’s default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s
failure to submit its dispute to arbitration, in accordance with the arbitration clauseprovided
in its contract, quoted in the motion as follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or
the Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising there under or inconnection therewith
(including any matter or thing left by this Contract to the discretion of the Project Manager or
the withholding by the Project Manager of any certificate to which the Contractor may claim
to be entitled or the measurement and valuation mentioned in clause 30(5)(a) of these
Conditions or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these
Conditions), the owner and the Contractor hereby agree to exert all efforts to settle their
differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may
have against the other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13
In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with
compulsory counter claim against BF Corporation and crossclaim against Shangri-La.15 They
alleged that they had resigned as members of Shangri-La’s board of directors as of July 15,
1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of
its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G.
Licauco III, and Benjamin Ramos filed a petition for certiorari with the Court of Appeals. 17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration.18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on
certiorari with this court.19On March 27, 1998, this court affirmed the Court of Appeals’
decision, directing that the dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF
Corporation and Shangri-La failed to agree as to the law that should govern the arbitration
proceedings.21 On October 27, 1998, the trial court issued the order directing the parties to
conduct the proceedings in accordance with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification,
both seeking to clarify the term, "parties," and whether Shangri-La’s directors should be
included in the arbitration proceedings and served with separate demands for arbitration. 23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and
BF Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s
directors were interested parties who "must also be served with a demand for arbitration to
give them the opportunity to ventilate their side of the controversy, safeguard their interest
and fend off their respective positions."26 Petitioners’ motion for reconsideration ofthis order
was denied by the trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La and BF Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties in the
arbitration proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and
that as directors of the defendant corporation, [they], in accordance with Art. 1217 of the
Civil Code, stand to be benefited or injured by the result of the arbitration proceedings,
hence, being necessary parties, they must be joined in order to have complete adjudication
of the controversy. Consequently, if [they were] excluded as parties in the arbitration
proceedings and an arbitral award is rendered, holding [Shangri-La] and its board of directors
jointly and solidarily liable to private respondent BF Corporation, a problem will arise, i.e.,
whether petitioners will be bound bysuch arbitral award, and this will prevent complete
determination of the issues and resolution of the controversy. 31
The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings .
. . would be contrary to the policy against multiplicity of suits."32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January
19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are
AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution.35
The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation’s
allegation that they are solidarily liable with Shangri-La.37Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40Provisions including arbitration stipulations should bind only the parties.41 Based
on our arbitration laws, parties who are strangers to an agreement cannot be compelled to
arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of
parties in resolving their disputes.43 Compelling them to submit to arbitration is against this
purpose and may be tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III,
Alfredo C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable
for Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-
La, only they should be affected by the contract’s stipulation.47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that should make them solidarily liable
with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties
should undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation Code.50Section 31
makes directors solidarily liable for fraud, gross negligence, and bad faith.51 Petitioners are
not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary
liability, they are necessary parties to the arbitration proceedings.53 The full resolution of all
disputes in the arbitration proceedings should also be done in the interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007.55 The Arbitral
Tribunal denied BF Corporation’s claims against them. 56Petitioners stated that "[they] were
included by the Arbitral Tribunal in the proceedings conducted . . . notwithstanding [their]
continuing objection thereto. . . ."57 They also stated that "[their] unwilling participation in
the arbitration case was done ex abundante ad cautela, as manifested therein on several
occasions."58 Petitioners informed the court that they already manifested with the trial court
that "any action taken on [the Arbitral Tribunal’s decision] should be without prejudice to the
resolution of [this] case."59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated
their arguments that they should not be held liable for Shangri-La’s default and made parties
to the arbitration proceedings because only BF Corporation and Shangri-La were parties to
the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code. Shangri-La added that their exclusion from
the arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of
the arbitration proceedings, which petitioners actively participated in.61 Moreover, BF
Corporation assailed only the correctness of the Arbitral Tribunal’s award and not the part
absolving Shangri-La’s directors from liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required
memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’
counterclaims were already dismissed with finality, and the claims against them were
likewise dismissed with finality, they no longer have any interest orpersonality in the
arbitration case. Thus, there is no longer any need to resolve the present Petition, which
mainly questions the inclusion of petitioners in the arbitration proceedings." 64 The court’s
decision in this case will no longer have any effect on the issue of petitioners’ inclusion in the
arbitration proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on
BF Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De la
Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case already
escaped from prison and ruled on the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is moot
and academic should not preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required.67
This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the
distinction between Shangri-La’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through
their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved
as early as 1949. It was later institutionalized by the approval of Republic Act No.
876,70 which expressly authorized, made valid, enforceable, and irrevocable parties’ decision
to submit their controversies, including incidental issues, to arbitration. This court recognized
this policy in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant
raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute
from the jurisdiction of the courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And
only recently it approved Republic Act No. 876 expressly authorizing arbitration of future
disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses
are liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along
with mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside
from unclogging judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution
methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in favor of arbitration.74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and
actively promote the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. As such, the State shall
provide means for the use of ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist active private sector
participation in the settlement of disputes through ADR. This Act shall be without prejudice
to the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means
of resolving cases pending before all courts in the Philippines which shall be governed by
such rules as the Supreme Court may approve from time to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to
the policy of the law in favor of arbitration.Where action is commenced by or against
multiple parties, one or more of whomare parties who are bound by the arbitration
agreement although the civil action may continue as to those who are not bound by such
arbitration agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that interpretation
shall be adopted. Petitioners’ main argument arises from the separate personality given to
juridical persons vis-à-vis their directors, officers, stockholders, and agents. Since they did not
sign the arbitration agreement in any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the time of the alleged
default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law.76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in
the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives,77 and other juridical
entities. The law vests in corporations rights,powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their own.78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the Corporation
Code enumerates some of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles
of incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this
Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
 9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and
powers through itsdirectors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation
through its representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither parties
to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation
on arbitration, binds the parties thereto, as well as their assigns and heirs. But only
they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
The provision to submit to arbitration any dispute arising therefrom and the relationship of
the parties is part of that contract and is itself a contract. As a rule, contracts are respected as
the law between the contracting parties and produce effect as between them, their assigns
and heirs. Clearly, only parties to the Agreement . . . are bound by the Agreement and its
arbitration clause as they are the only signatories thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84
As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is
generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this piercing
the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues."85 It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation."86
When corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain circumstances
are its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed
inhim in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
 b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with
his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "When a director or officer has consented to the issuance of watered stocks or
who, having knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation"; 88 and
c) "When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons and
the corporation should be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be pierced. Courts or tribunals
do not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between
the corporation and the persons representing it. The determination of these circumstances
must be made by one tribunal or court in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a
mere aggregation of persons undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the corporation are not acting as
separate entities. They are alleging that the acts or omissions by the corporation that
violated their rights are also the directors’ acts or omissions. 90 They are alleging that
contracts executed by the corporation are contracts executed by the directors. Complainants
effectively pray that the corporate veilbe pierced because the cause of action between the
corporation and the directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting
the cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one
suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on
the basis of the same cause of action, the filing of one or a judgment upon the merits in any
one is available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration
proceedings, we are not overturning Heirs of Augusto Salas wherein this court affirmed the
basic arbitration principle that only parties to an arbitration agreement may be compelled to
submit to arbitration. In that case, this court recognizedthat persons other than the main
party may be compelled to submit to arbitration, e.g., assignees and heirs. Assignees and
heirs may be considered parties to an arbitration agreement entered into by their assignor
because the assignor’s rights and obligations are transferred to them upon assignment. In
other words, the assignor’s rights and obligations become their own rights and obligations. In
the same way, the corporation’s obligations are treated as the representative’s obligations
when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed
its policy against multiplicity of suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay."91 This court also
intimated that the interest of justice would be best observed if it adjudicated rights in a
single proceeding.92 While the facts of that case prompted this court to direct the trial court
to proceed to determine the issues of thatcase, it did not prohibit courts from allowing the
case to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and
the incidental issue of whether piercing of the corporate veil is warranted, should be
determined in a single proceeding. Such finding would determine if the corporation is merely
an aggregation of persons whose liabilities must be treated as one with the corporation.
However, when the courts disregard the corporation’s distinct and separate personality from
its directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal acts. This is done so
that the legal fiction cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine ifsuch distinction should
indeed be disregarded and, if so, to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors
solidarily liable. It ruled that petitioners and Shangri-La’s other directors were not liable for
the contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s decision
was made with the participation of petitioners, albeit with their continuing objection. In view
of our discussion above, we rule that petitioners are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.
SO ORDERED.
MARVIC M.V.F. LEONEN
Associate Justice
5. Cargill Phils. Inc. vs. San Fernando Regala Trading, Inc. GR No. 175404
PERALTA, J.:
Before us is a petition for review on certiorari seeking to reverse and set aside the
Decision[1] dated July 31, 2006 and the Resolution[2] dated November 13, 2006 of the Court of
Appeals (CA) in CA G.R. SP No. 50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with the Regional Trial
Court (RTC) of Makati City a Complaint for Rescission of Contract with Damages[3] against
petitioner Cargill Philippines, Inc. In its Complaint, respondent alleged that it was engaged in
buying and selling of molasses and petitioner was one of its various sources from whom it
purchased molasses. Respondent alleged that it entered into a contract dated July 11, 1996
with petitioner, wherein it was agreed upon that respondent would purchase from petitioner
12,000 metric tons of Thailand origin cane blackstrap molasses at the price of US$192 per
metric ton; that the delivery of the molasses was to be made in January/February 1997 and
payment was to be made by means of an Irrevocable Letter of Credit payable at sight, to be
opened by September 15, 1996; that sometime prior to September 15, 1996, the parties
agreed that instead of January/February 1997, the delivery would be made in April/May 1997
and that payment would be by an Irrevocable Letter of Credit payable at sight, to be opened
upon petitioner's advice. Petitioner, as seller, failed to comply with its obligations under the
contract, despite demands from respondent, thus, the latter prayed for rescission of the
contract and payment of damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings and To Refer
Controversy to Voluntary Arbitration,[4] wherein it argued that the alleged contract between
the parties, dated July 11, 1996, was never consummated because respondent never
returned the proposed agreement bearing its written acceptance or conformity nor did
respondent open the Irrevocable Letter of Credit at sight. Petitioner contended that the
controversy between the parties was whether or not the alleged contract between the
parties was legally in existence and the RTC was not the proper forum to ventilate such issue.
It claimed that the contract contained an arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before
the American Arbitration Association. The Arbitration Award shall be final
and binding on both parties.[5]
that respondent must first comply with the arbitration clause before resorting to court, thus,
the RTC must either dismiss the case or suspend the proceedings and direct the parties to
proceed with arbitration, pursuant to Sections 6 [6] and 7[7] of Republic Act (R.A.) No. 876, or
the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has jurisdiction over the
action for rescission of contract and could not be changed by the subject arbitration clause. It
cited cases wherein arbitration clauses, such as the subject clause in the contract, had been
struck down as void for being contrary to public policy since it provided that the arbitration
award shall be final and binding on both parties, thus, ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already inapplicable, having
been rendered prior to the effectivity of the New Civil Code in 1950 and the Arbitration Law
in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by petitioner is
invalid and unenforceable, considering that the requirements imposed by the provisions of
the Arbitration Law had not been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even clarified that the
issue boiled down to whether the arbitration clause contained in the contract subject of the
complaint is valid and enforceable; that the arbitration clause did not violate any of the cited
provisions of the Arbitration Law.
On September 17, 1998, the RTC rendered an Order,[8] the dispositive portion of which reads:
Premises considered, defendant's Motion To Dismiss/Suspend Proceedings
and To Refer Controversy To Voluntary Arbitration is hereby DENIED.
Defendant is directed to file its answer within ten (10) days from receipt of
a copy of this order.[9]
In denying the motion, the RTC found that there was no clear basis for petitioner's plea to
dismiss the case, pursuant to Section 7 of the Arbitration Law. The RTC said that the provision
directed the court concerned only to stay the action or proceeding brought upon an issue
arising out of an agreement providing for the arbitration thereof, but did not impose the
sanction of dismissal. However, the RTC did not find the suspension of the proceedings
warranted, since the Arbitration Law contemplates an arbitration proceeding that must be
conducted in the Philippines under the jurisdiction and control of the RTC; and before an
arbitrator who resides in the country; and that the arbitral award is subject to court approval,
disapproval and modification, and that there must be an appeal from the judgment of the
RTC. The RTC found that the arbitration clause in question contravened these
procedures, i.e., the arbitration clause contemplated an arbitration proceeding in New
York before a non-resident arbitrator (American Arbitration Association); that the arbitral
award shall be final and binding on both parties. The RTC said that to apply Section 7 of the
Arbitration Law to such an agreement would result in disregarding the other sections of the
same law and rendered them useless and mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC denied in an
Order[10] dated November 25, 1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that the RTC acted in
excess of jurisdiction or with grave abuse of discretion in refusing to dismiss or at least
suspend the proceedings a quo, despite the fact that the party's agreement to arbitrate had
not been complied with.
Respondent filed its Comment and Reply. The parties were then required to file their
respective Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition and affirming the
RTC Orders.
In denying the petition, the CA found that stipulation providing for arbitration in contractual
obligation is both valid and constitutional; that arbitration as an alternative mode of dispute
resolution has long been accepted in our jurisdiction and expressly provided for in the Civil
Code; that R.A. No. 876 (the Arbitration Law) also expressly authorized the arbitration of
domestic disputes. The CA found error in the RTC's holding that Section 7 of R.A. No. 876 was
inapplicable to arbitration clause simply because the clause failed to comply with the
requirements prescribed by the law. The CA found that there was nothing in the Civil Code,
or R.A. No. 876, that require that arbitration proceedings must be conducted only in
the Philippines and the arbitrators should be Philippine residents. It also found that the RTC
ruling effectively invalidated not only the disputed arbitration clause, but all other
agreements which provide for foreign arbitration. The CA did not find illegal or against public
policy the arbitration clause so as to render it null and void or ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be brought under the
Arbitration Law for the purpose of suspending the proceedings before the RTC, since in its
Motion to Dismiss/Suspend proceedings, petitioner alleged, as one of the grounds
thereof, that the subject contract between the parties did not exist or it was invalid; that the
said contract bearing the arbitration clause was never consummated by the parties, thus, it
was proper that such issue be first resolved by the court through an appropriate trial; that
the issue involved a question of fact that the RTC should first resolve. Arbitration is not
proper when one of the parties repudiated the existence or validity of the contract.
Petitioner's motion for reconsideration was denied in a Resolution dated November 13,
2006.
Hence, this petition.
Petitioner alleges that the CA committed an error of law in ruling that arbitration
cannot proceed despite the fact that: (a) it had ruled, in its assailed decision, that the
arbitration clause is valid, enforceable and binding on the parties; (b) the case of Gonzales v.
Climax Mining Ltd.[11] is inapplicable here; (c) parties are generally allowed, under the Rules
of Court, to adopt several defenses, alternatively or hypothetically, even if such
defenses are inconsistent with each other; and (d) the complaint filed by respondent with the
trial court is premature.
Petitioner alleges that the CA adopted inconsistent positions when it found the arbitration
clause between the parties as valid and enforceable and yet in the same breath decreed that
the arbitration cannot proceed because petitioner assailed the existence of the entire
agreement containing the arbitration clause. Petitioner claims the inapplicability of the
cited Gonzales case decided in 2005, because in the present case, it was respondent who had
filed the complaint for rescission and damages with the RTC, which based its cause of action
against petitioner on the alleged agreement dated July 11, 2006 between the parties; and
that the same agreement contained the arbitration clause sought to be enforced by
petitioner in this case. Thus, whether petitioner assails the genuineness and due execution of
the agreement, the fact remains that the agreement sued upon provides for an arbitration
clause; that respondent cannot use the provisions favorable to him and completely disregard
those that are unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two alternative
defenses, i.e., the parties had not entered into any agreement upon which respondent as
plaintiff can sue upon; and, assuming that such agreement existed, there was an arbitration
clause that should be enforced, thus, the dispute must first be submitted to arbitration
before an action can be instituted in court. Petitioner argues that under Section 1(j) of Rule
16 of the Rules of Court, included as a ground to dismiss a complaint is when a condition
precedent for filing the complaint has not been complied with; and that submission to
arbitration when such has been agreed upon is one such condition precedent. Petitioner
submits that the proceedings in the RTC must be dismissed, or at least suspended, and the
parties be ordered to proceed with arbitration.
On March 12, 2007, petitioner filed a Manifestation[12] saying that the CA's rationale in
declining to order arbitration based on the 2005 Gonzales ruling had been modified upon a
motion for reconsideration decided in 2007; that the CA decision lost its legal basis, because
it had been ruled that the arbitration agreement can be implemented notwithstanding that
one of the parties thereto repudiated the contract which contained such agreement based
on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the remedy
against an order denying a Motion to Dismiss/Suspend Proceedings and To Refer Controversy
to Voluntary Arbitration. It claims that the Arbitration Law which petitioner invoked as basis
for its Motion prescribed, under its Section 29, a remedy, i.e., appeal by a petition for review
on certiorari under Rule 45. Respondent contends that the Gonzales case, which was decided
in 2007, is inapplicable in this case, especially as to the doctrine of separability enunciated
therein. Respondent argues that even if the existence of the contract and the arbitration
clause is conceded, the decisions of the RTC and the CA declining referral of the dispute
between the parties to arbitration would still be correct. This is so because respondent's
complaint filed in Civil Case No. 98-1376 presents the principal issue of whether under the
facts alleged in the complaint, respondent is entitled to rescind its contract with petitioner
and for the latter to pay damages; that such issue constitutes a judicial question or one that
requires the exercise of judicial function and cannot be the subject of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a defendant to
adopt in the same action several defenses, alternatively or hypothetically, even if such
defenses are inconsistent with each other refers to allegations in the pleadings, such as
complaint, counterclaim, cross-claim, third-party complaint, answer, but not to a motion to
dismiss. Finally, respondent claims that petitioner's argument is premised on the existence of
a contract with respondent containing a provision for arbitration. However, its reliance on
the contract, which it repudiates, is inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission and damages on
the basis of the contract, thus, respondent admitted the existence of all the provisions
contained thereunder, including the arbitration clause; that if respondent relies on said
contract for its cause of action against petitioner, it must also consider itself bound by the
rest of the terms and conditions contained thereunder notwithstanding that respondent may
find some provisions to beadverse to its position; that respondents citation of
the Gonzales case, decided in 2005, to show that the validity of the contract cannot be the
subject of the arbitration proceeding and that it is the RTC which has the jurisdiction to
resolve the situation between the parties herein, is not correct since in the resolution of the
Gonzales' motion for reconsideration in 2007, it had been ruled that an arbitration
agreement is effective notwithstanding the fact that one of the parties thereto repudiated
the main contract which contained it.
We first address the procedural issue raised by respondent that petitioners petition
for certiorari under Rule 65 filed in the CA against an RTC Order denying a Motion to
Dismiss/Suspend Proceedings and to Refer Controversy to Voluntary Arbitration was a wrong
remedy invoking Section 29 of R.A. No. 876, which provides:
Section 29.
x x x An appeal may be taken from an order made in a proceeding under
this Act, or from a judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to
question of law. x x x.
To support its argument, respondent cites the case of Gonzales v. Climax Mining
Ltd.[13] (Gonzales case), wherein we ruled the impropriety of a petition for certiorari under
Rule 65 as a mode of appeal from an RTC Order directing the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition to compel
arbitration under R.A. No. 876, pursuant to the arbitration clause found in the Addendum
Contract it entered with Gonzales. Judge Oscar Pimentel of the RTC of Makati then directed
the parties to arbitration proceedings. Gonzales filed a petition for certiorari with
Us contending that Judge Pimentel acted with grave abuse of discretion in immediately
ordering the parties to proceed with arbitration despite the proper, valid and timely raised
argument in his Answer with counterclaim that the Addendum Contract containing the
arbitration clause was null and void. Climax-Arimco assailed the mode of review availed of by
Gonzales, citing Section 29 of R.A. No. 876 contending that certiorari under Rule 65 can be
availed of only if there was no appeal or any adequate remedy in the ordinary course of law;
that R.A. No. 876 provides for an appeal from such order. We then ruled that Gonzales'
petition for certiorari should be dismissed as it was filed in lieu of an appeal
by certiorari which was the prescribed remedy under R.A. No. 876 and the petition was filed
far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question of law, but not a question of
jurisdiction; that Judge Pimentel acted in accordance with the procedure prescribed in R.A.
No. 876 when he ordered Gonzales to proceed with arbitration and appointed a sole
arbitrator after making the determination that there was indeed an arbitration agreement. It
had been held that as long as a court acts within its jurisdiction and does not gravely abuse
its discretion in the exercise thereof, any supposed error committed by it will amount to
nothing more than an error of judgment reviewable by a timely appeal and not assailable by
a special civil action of certiorari.[14]
In this case, petitioner raises before the CA the issue that the respondent Judge acted in
excess of jurisdiction or with grave abuse of discretion in refusing to dismiss, or at least
suspend, the proceedings a quo, despite the fact that the partys agreement to arbitrate had
not been complied with. Notably, the RTC found the existence of the arbitration clause, since
it said in its decision that hardly disputed is the fact that the arbitration clause in question
contravenes several provisions of the Arbitration Law x x x and to apply Section 7 of the
Arbitration Law to such an agreement would result in the disregard of the afore-cited
sections of the Arbitration Law and render them useless and mere surplusages.However,
notwithstanding the finding that an arbitration agreement existed, the RTC denied
petitioner's motion and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,[15] it was held that R.A. No. 876
explicitly confines the courts authority only to the determination of whether or not there is
an agreement in writing providing for arbitration. In the affirmative, the statute ordains that
the court shall issue an order summarily directing the parties to proceed with the arbitration
in accordance with the terms thereof. If the court, upon the other hand, finds that no such
agreement exists, the proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend
Proceedings and to Refer Controversy to Voluntary Arbitration, the RTC went beyond its
authority of determining only the issue of whether or not there is an agreement in writing
providing for arbitration by directing petitioner to file an answer, instead of ordering the
parties to proceed to arbitration. In so doing, it acted in excess of its jurisdiction and since
there is no plain, speedy, and adequate remedy in the ordinary course of law, petitioners
resort to a petition for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding that
this case cannot be brought under the arbitration law for the purpose of suspending the
proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been recognized
and accepted in our jurisdiction.[16] R.A. No. 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:
x x x The adjudication of the petition in G.R. No. 167994 effectively
modifies part of the Decision dated 28 February 2005 in G.R. No. 161957.
Hence, we now hold that the validity of the contract containing the
agreement to submit to arbitration does not affect the applicability of
the arbitration clause itself. A contrary ruling would suggest that a party's
mere repudiation of the main contract is sufficient to avoid arbitration.
That is exactly the situation that the separability doctrine, as well as
jurisprudence applying it, seeks to avoid. We add that when it was
declared in G.R. No. 161957 that the case should not be brought for
arbitration, it should be clarified that the case referred to is the case
actually filed by Gonzales before the DENR Panel of Arbitrators, which was
for the nullification of the main contract on the ground of fraud, as it had
already been determined that the case should have been brought before
the regular courts involving as it did judicial issues.[26]
In so ruling that the validity of the contract containing the arbitration agreement does not
affect the applicability of the arbitration clause itself, we then applied the doctrine of
separability, thus:
The doctrine of separability, or severability as other writers call it,
enunciates that an arbitration agreement is independent of the main
contract. The arbitration agreement is to be treated as a separate
agreement and the arbitration agreement does not automatically
terminate when the contract of which it is a part comes to an end.
The separability of the arbitration agreement is especially significant to the
determination of whether the invalidity of the main contract also nullifies
the arbitration clause. Indeed, the doctrine denotes that the invalidity of
the main contract, also referred to as the "container" contract, does not
affect the validity of the arbitration agreement. Irrespective of the fact that
the main contract is invalid, the arbitration clause/agreement still remains
valid and enforceable.[27]
Respondent argues that the separability doctrine is not applicable in petitioner's
case, since in the Gonzales case, Climax-Arimco sought to enforce the arbitration clause of its
contract with Gonzales and the former's move was premised on the existence of a valid
contract; while Gonzales, who resisted the move of Climax-Arimco for arbitration, did not
deny the existence of the contract but merely assailed the validity thereof on the ground of
fraud and oppression. Respondent claims that in the case before Us, petitioner who is the
party insistent on arbitration also claimed in their Motion to Dismiss/Suspend Proceedings
that the contract sought by respondent to be rescinded did not exist or was not
consummated; thus, there is no room for the application of the separability doctrine, since
there is no container or main contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of the
main contract shall not be regarded as invalid or non-existent just because the main contract
is invalid or did not come into existence, since the arbitration agreement shall be treated as a
separate agreement independent of the main contract. To reiterate. a contrary ruling would
suggest that a party's mere repudiation of the main contract is sufficient to avoid arbitration
and that is exactly the situation that the separability doctrine sought to avoid. Thus, we find
that even the party who has repudiated the main contract is not prevented from enforcing its
arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission of
contract and damages with the RTC. In so doing, respondent alleged that a contract exists
between respondent and petitioner. It is that contract which provides for an arbitration
clause which states that any dispute which the Buyer and Seller may not be able to settle by
mutual agreement shall be settled before the City of New York by the American Arbitration
Association. The arbitration agreement clearly expressed the parties' intention that any
dispute between them as buyer and seller should be referred to arbitration. It is for the
arbitrator and not the courts to decide whether a contract between the parties exists or is
valid.
Respondent contends that assuming that the existence of the contract and the arbitration
clause is conceded, the CA's decision declining referral of the parties' dispute to arbitration is
still correct. It claims that its complaint in the RTC presents the issue of whether under the
facts alleged, it is entitled to rescind the contract with damages; and that issue constitutes a
judicial question or one that requires the exercise of judicial function and cannot be the
subject of an arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we
held that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of
nullity/or termination of the subject contracts on the grounds of fraud and oppression
attendant to the execution of the addendum contract and the other contracts emanating
from it, and that the complaint should have been filed with the regular courts as it involved
issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of Arbitrators, Region II,
Mines and Geosciences Bureau, of the Department of Environment and Natural Resources
(DENR) against respondents Climax- Mining Ltd, Climax-Arimco and Australasian Philippines
Mining Inc, seeking the declaration of nullity or termination of the addendum contract and
the other contracts emanating from it on the grounds of fraud and oppression. The Panel
dismissed the complaint for lack of jurisdiction. However, the Panel, upon petitioner's motion
for reconsideration, ruled that it had jurisdiction over the dispute maintaining that it was a
mining dispute, since the subject complaint arose from a contract between the parties which
involved the exploration and exploitation of minerals over the disputed area. Respondents
assailed the order of the Panel of Arbitrators via a petition for certiorari before the CA. The
CA granted the petition and declared that the Panel of Arbitrators did not have jurisdiction
over the complaint, since its jurisdiction was limited to the resolution of mining disputes,
such as those which raised a question of fact or matter requiring the technical knowledge
and experience of mining authorities and not when the complaint alleged fraud and
oppression which called for the interpretation and application of laws. The CA further ruled
that the petition should have been settled through arbitration under R.A. No. 876 − the
Arbitration Law − as provided under the addendum contract.
On a review on certiorari, we affirmed the CAs finding that the Panel of Arbitrators who,
under R.A. No. 7942 of the Philippine Mining Act of 1995, has exclusive and original
jurisdiction to hear and decide mining disputes, such as mining areas, mineral agreements,
FTAAs or permits and surface owners, occupants and claimholders/concessionaires, is bereft
of jurisdiction over the complaint for declaration of nullity of the addendum contract; thus,
the Panels' jurisdiction is limited only to those mining disputes which raised question of facts
or matters requiring the technical knowledge and experience of mining authorities. We then
said:
In Pearson v. Intermediate Appellate Court, this Court observed
that the trend has been to make the adjudication of mining cases a purely
administrative matter. Decisions of the Supreme Court on mining disputes
have recognized a distinction between (1) the primary powers granted by
pertinent provisions of law to the then Secretary of Agriculture and Natural
Resources (and the bureau directors) of an executive or administrative
nature, such as granting of license, permits, lease and contracts, or
approving, rejecting, reinstating or canceling applications, or deciding
conflicting applications, and (2) controversies or disagreements of civil or
contractual nature between litigants which are questions of a judicial
nature that may be adjudicated only by the courts of justice. This
distinction is carried on even in Rep. Act No. 7942.[28]
We found that since the complaint filed before the DENR Panel of Arbitrators
charged respondents with disregarding and ignoring the addendum contract, and acting in a
fraudulent and oppressive manner against petitioner, the complaint filed before the Panel
was not a dispute involving rights to mining areas, or was it a dispute involving claimholders
or concessionaires, but essentially judicial issues. We then said that the Panel of Arbitrators
did not have jurisdiction over such issue, since it does not involve the application of technical
knowledge and expertise relating to mining. It is in this context that we said that:
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.
6. Jorge Gonzales vs. Climax Mining Ltd., GR No. 161957
Petitioner Jorge Gonzales, as claimowner of mineral deposits located within the
Addendum Area of Influence in Didipio, in the provinces of Quirino and Nueva Vizcaya,
entered into a co-production, joint venture and/or production-sharing letter-agreement
designated as the May 14, 1987 Letter of Intent with Geophilippines, Inc, and Inmex Ltd.
Under the agreement, petitioner, as claimowner, granted to Geophilippines, Inc. and Inmex
Ltd. collectively, the exclusive right to explore and survey the mining claims for a period of
thirty-six (36) months within which the latter could decide to take an operating agreement
on the mining claims and/or develop, operate, mine and otherwise exploit the mining claims
and market any and all minerals that may be derived therefrom.
On 28 February 1989, the parties to the May 14, 1987 Letter of Intent renegotiated the
same into the February 28, 1989 Agreement whereby the exploration of the mining claims
was extended for another period of three years.
On 9 March 1991, petitioner Gonzales, Arimco Mining Corporation, Geophilippines Inc.,
Inmex Ltd., and Aumex Philippines, Inc. signed a document designated as the Addendum to
the May 14, 1987 Letter of Intent and February 28, 1989 Agreement with Express Adhesion
Thereto (hereafter, the Addendum Contract).[1] Under the Addendum Contract, Arimco
Mining Corporation would apply to the Government of the Philippines for permission to mine
the claims as the Governments contractor under a Financial and Technical Assistance
Agreement (FTAA). On 20 June 1994, Arimco Mining Corporation obtained the FTAA [2] and
carried out work under the FTAA.
Respondents executed the Operating and Financial Accommodation
Contract[3] (between Climax-Arimco Mining Corporation and Climax Mining Ltd., as first
parties, and Australasian Philippines Mining Inc., as second party) dated 23 December 1996
and Assignment, Accession Agreement[4] (between Climax-Arimco Mining Corporation and
Australasian Philippines Mining Inc.) dated 3 December 1996. Respondent Climax Mining
Corporation (Climax) and respondent Australasian Philippines Mining Inc. (APMI) entered
into a Memorandum of Agreement[5] dated 1 June 1991 whereby the former transferred its
FTAA to the latter.
On 8 November 1999, petitioner Gonzales filed before the Panel of Arbitrators, Region
II, Mines and Geosciences Bureau of the Department of Environment and Natural Resources,
against respondents Climax-Arimco Mining Corporation (Climax-Arimco), Climax, and
APMI,[6] a Complaint[7] seeking the declaration of nullity or termination of the Addendum
Contract, the FTAA, the Operating and Financial Accommodation Contract, the Assignment,
Accession Agreement, and the Memorandum of Agreement. Petitioner Gonzales prayed for
an unspecified amount of actual and exemplary damages plus attorneys fees and for the
issuance of a temporary restraining order and/or writ of preliminary injunction to restrain or
enjoin respondents from further implementing the questioned agreements. He sought said
releifs on the grounds of FRAUD, OPPRESSION and/or VIOLATION of Section 2, Article XII of
the CONSTITUTION perpetrated by these foreign RESPONDENTS, conspiring and
confederating with one another and with each other.[8]
On 21 February 2001, the Panel of Arbitrators dismissed the Complaint for lack of
jurisdiction. Petitioner moved for reconsideration and this was granted on 18 October 2001,
the Panel believing that the case involved a dispute involving rights to mining areas and a
dispute involving surface owners, occupants and claim owners/concessionaires. According to
the Panel, although the issue raised in the Complaint appeared to be purely civil in nature
and should be within the jurisdiction of the regular courts, a ruling on the validity of the
assailed contracts would result to the grant or denial of mining rights over the properties;
therefore, the question on the validity of the contract amounts to a mining conflict or
dispute. Hence, the Panel granted the Motion for Reconsideration with regard to the issues of
nullity, termination, withdrawal or damages, but with regard to the constitutionality of
the Addendum Agreement and FTAA, it held that it had no jurisdiction.[9]
Respondents filed their motion for reconsideration but this was denied on 25 June
2002. The Panel of Arbitrators maintained that there was a mining dispute between the
parties since the subject matter of the Complaint arose from contracts between the parties
which involve the exploration and exploitation of minerals over the disputed area.[10]
Respondents assailed the orders of the Panel of Arbitrators via a petition for certiorari
before the Court of Appeals.
On 30 July 2003, the Court of Appeals granted the petition, declaring that the Panel of
Arbitrators did not have jurisdiction over the complaint filed by petitioner.[11] The jurisdiction
of the Panel of Arbitrators, said the Court of Appeals, is limited only to the resolution of
mining disputes, defined as those which raise a question of fact or matter requiring the
technical knowledge and experience of mining authorities. It was found that the complaint
alleged fraud, oppression and violation of the Constitution, which called for the
interpretation and application of laws, and did not involve any mining dispute. The Court of
Appeals also observed that there were no averments relating to particular acts constituting
fraud and oppression. It added that since the Addendum Contract was executed in 1991, the
action to annul it should have been brought not later than 1995, as the prescriptive period
for an action for annulment is four years from the time of the discovery of the
fraud.[12] When petitioner filed his complaint before the Panel in 1999, his action had already
prescribed. Also, the Court of Appeals noted that fraud and duress only make a contract
voidable,[13] not inexistent, hence the contract remains valid until annulled. The Court of
Appeals was of the opinion that the petition should have been settled through arbitration
under Republic Act No. 876 (The Arbitration Law) as stated in Clause 19.1 of the Addendum
Contract. The Court of Appeals therefore declared as invalid the orders dated 18 October
2001 and 25 June 2002 issued by the Panel of Arbitrators. On 28 January 2004, the Court of
Appeals denied petitioners motion for reconsideration for lack of merit.[14]
Petitioner filed on 22 March 2004 this Petition for Review on Certiorari Under Rule
45 assailing the decision and resolution of the Court of Appeals. Petitioner raises the
following issues:
A.
PROCEDURAL GROUND
THE HONORABLE COURT OF APPEALS SHOULD HAVE SUMMARILY DISMISSED RESPONDENTS
PETITION A QUO FOR FAILURE TO COMPLY WITH PROCEDURAL REQUIREMENTS.
i.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO DESPITE
RESPONDENTS FAILURE TO COMPLY WITH THE RULES ON DISCLOSURE IN THE VERIFICATION
AND CERTIFICATION PORTION OF THEIR PETITION A QUO.
ii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO FILED BY
RESPONDENT CLIMAX DESPITE THE LACK OF THE REQUISITE AUTHORITY TO FILE THE
PETITION A QUO.
B.
SUBSTANTIVE GROUND
THE HONORABLE COURT OF APPEALS ERRED IN GRANTING THE PETITION A QUO FILED BY
RESPONDENTS AND IN DENYING MOTION FOR RECONSIDERATION FILED BY PETITIONER FOR
UTTER LACK OF BASIS IN FACT AND IN LAW.
i.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER CEDED HIS CLAIMS OVER
THE MINERAL DEPOSITS LOCATED WITHIN THE ADDENDUM AREA OF INFLUENCE.
ii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE PANEL OF ARBITRATORS IS BEREFT
OF JURISDICTION OVER THE SUBJECT MATTER OF CASE NO. 058.
iii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE COMPLAINT FILED BY THE
PETITIONER FAILED TO ALLEGE ULTIMATE FACTS OR PARTICULARS OF FRAUD.
iv.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER AND RESPONDENTS SHOULD
SUBMIT TO ARBITRATION UNDER R.A. 876.
v.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE ACTION TO DECLARE THE NULLITY
OF THE ADDENDUM CONTRACT, FTAA, OFAC AND AAAA ON THE GROUND OF FRAUD HAS
PRESCRIBED.
The issues for resolution in this petition for review are:
(a) Whether there was forum-shopping on the part of respondents for their failure to
disclose to this Court their filing of a Petition to Compel for Arbitration before the Regional
Trial Court of Makati City, Branch 148, which is currently pending.
(b) Whether counsel for respondent Climax had authority to file the petition for
certiorari before the Court of Appeals considering that the signor of the petition for
certioraris Verification and Certification of Non-forum Shopping was not authorized to sign
the same in behalf of respondent Climax.
(c) Whether the complaint filed by petitioner raises a mining dispute over which the
Panel of Arbitrators has jurisdiction, or a judicial question which should properly be brought
before the regular courts.
(d) Whether the dispute between the parties should be brought for arbitration under
Rep. Act No. 876.
Let us deal first with procedural matters.
Petitioner claims that respondents are guilty of forum-shopping for failing to disclose
before this Court that they had filed a Petition to Compel for Arbitration before the RTC of
Makati City. However, it cannot be determined from petitioners mere allegations in
the Petition that the Petition to Compel for Arbitration instituted by respondent Climax-
Arimco, involves related causes of action and the grant of the same or substantially the same
reliefs as those involved in the instant case. Petitioner did not attach copies of the Petition to
Compel for Arbitration or any order or resolution of the RTC of Makati City related to that
case.
Furthermore, it can be gleaned from the nature of the two actions that the issues in the
case before the RTC of Makati City and in the petition for certiorari before the Court of
Appeals are different. A petition for certiorari raises the issue of whether or not there was
grave abuse of discretion, while the Petition to Compel for Arbitration seeks the
implementation of the arbitration clause in the agreement between the parties.
Petitioner next alleges that there was no authority granted by respondent Climax to the
law firm of Sycip Salazar Hernandez & Gatmaitan to file the petition before the Court of
Appeals. There is allegedly no Secretarys Certificate from respondent Climax attached to the
petition. The Verification and Certification only contains a statement made by one Marianne
M. Manzanas that she is also the authorized representative of [respondent Climax] without
presenting further proof of such authority. Hence, it is argued that as to respondent Climax,
the petition filed before the Court of Appeals is an unauthorized act and the assailed orders
of the Panel of Arbitrators have become final.
Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit,
together with the petition, a sworn certification of non-forum shopping, and failure to
comply with this requirement is sufficient ground for dismissal of the petition. The
requirement that petitioner should sign the certificate of non-forum shopping applies even to
corporations, the Rules of Court making no distinction between natural and juridical persons.
The signatory in the case of the corporation should be a duly authorized director or officer of
the corporation who has knowledge of the matter being certified.[15] If, as in this case, the
petitioner is a corporation, a board resolution authorizing a corporate officer to execute the
certification against forum-shopping is necessary. A certification not signed by a duly
authorized person renders the petition subject to dismissal. [16]
On this point, we have to agree with petitioner. There appears to be no subsequent
compliance with the requirement to attach a board resolution authorizing the signor
Marianne M. Manzanas to file the petition in behalf of respondent Climax. Respondent also
failed to refute this in its Comment.[17] However, this latter issue becomes irrelevant in the
light of our decision to deny this petition for review for lack of jurisdiction by the Panel of
Arbitrators over the complaint filed by petitioner, as will be discussed below.
We now come to the meat of the case which revolves mainly around the question of
jurisdiction by the Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over
the complaint for declaration of nullity and/or termination of the subject contracts on the
ground of fraud, oppression and violation of the Constitution? This issue may be distilled into
the more basic question of whether the Complaint raises a mining dispute or a judicial
question.
A judicial question is a question that is proper for determination by the courts, as
opposed to a moot question or one properly decided by the executive or legislative
branch.[18] A judicial question is raised when the determination of the question involves the
exercise of a judicial function; that is, the question involves the determination of what the
law is and what the legal rights of the parties are with respect to the matter in
controversy.[19]
On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b)
mineral agreements, FTAAs, or permits, and (c) surface owners, occupants and
claimholders/concessionaires.[20] Under Republic Act No. 7942 (otherwise known as the
Philippine Mining Act of 1995), the Panel of Arbitrators has exclusive and original jurisdiction
to hear and decide these mining disputes.[21] The Court of Appeals, in its questioned decision,
correctly stated that the Panels jurisdiction is limited only to those mining disputes which
raise questions of fact or matters requiring the application of technological knowledge and
experience.[22]
In Pearson v. Intermediate Appellate Court,[23] this Court observed that the trend has
been to make the adjudication of mining cases a purely administrative
matter.[24] Decisions[25] of the Supreme Court on mining disputes have recognized a
distinction between (1) the primary powers granted by pertinent provisions of law to the
then Secretary of Agriculture and Natural Resources (and the bureau directors) of an
executive or administrative nature, such as granting of license, permits, lease and contracts,
or approving, rejecting, reinstating or canceling applications, or deciding conflicting
applications, and (2) controversies or disagreements of civil or contractual nature between
litigants which are questions of a judicial nature that may be adjudicated only by the courts
of justice. This distinction is carried on even in Rep. Act No. 7942.
The Complaint charged respondents with disregarding and ignoring the provisions of
the Addendum Contract, violating the purpose and spirit of the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement, and acting in a fraudulent and oppressive manner
against petitioner and practicing fraud and deception against the Government. [26] Petitioner
alleged in his Complaint that under the original agreements (the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement) respondent Climax-Arimco had committed to
complete the Bankable Feasibility Study by 28 February 1992, but the same was not
accomplished. Instead, respondent Climax-Arimco, through false and insidious
representations and machinations by alleging technical and financial capacity, induced
petitioner to enter into the Addendum Contract and the FTAA in order to repeatedly extend
the option period within which to conduct the feasibility study. In essence, petitioner alleges
that respondents, conspiring and confederating with one another, misrepresented under
the Addendum Contract and FTAA that respondent Climax-Arimco possessed financial and
technical capacity to put the project into commercial production, when in truth it had no
such qualification whatsoever to do so. By so doing, respondents have allegedly caused
damage not only to petitioner but also to the Republic of the Philippines.[27]
It is apparent that the Panel of Arbitrators is bereft of jurisdiction over
the Complaint filed by petitioner. The basic issue in petitioners Complaint is the presence of
fraud or misrepresentation allegedly attendant to the execution of the Addendum
Contract and the other contracts emanating from it, such that the contracts are rendered
invalid and not binding upon the parties. It avers that petitioner was misled by respondents
into agreeing to the Addendum Contract. This constitutes fraud which vitiated petitioners
consent, and under Article 1390 of the Civil Code, is one of the grounds for the annulment of
a voidable contract. Voidable or annullable contracts, before they are set aside, are existent,
valid, and binding, and are effective and obligatory between the parties.[28] They can be
ratified.[29]
Petitioner insists that the Complaint is actually one for the declaration of nullity of void
contracts. He argues that respondents, by their lack of financial and technical competence to
carry out the mining project, do not qualify to enter into a co-production, joint venture or
production sharing agreement with the Government, in circumvention of and in patent
violation of the spirit and purpose of the Constitution, particularly Section 2, Article XII
thereof. Petitioner relies on the Civil Code for support:[30]
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;
....
(7) Those expressly prohibited or declared void by law.
....
Petitioner asserts that for circumventing and being in patent violation of the Constitution,
the Addendum Contract, the FTAA and the other contracts are void contracts. As such, they
do not produce any effect and cannot be ratified.
However, whether the case involves void or voidable contracts is still a judicial
question. It may, in some instances, involve questions of fact especially with regard to the
determination of the circumstances of the execution of the contracts. But the resolution of
the validity or voidness of the contracts remains a legal or judicial question as it requires the
exercise of judicial function. It requires the ascertainment of what laws are applicable to the
dispute, the interpretation and application of those laws, and the rendering of a judgment
based thereon. Clearly, the dispute is not a mining conflict. It is essentially judicial. The
complaint was not merely for the determination of rights under the mining contracts since
the very validity of those contracts is put in issue.
The Complaint is not about a dispute involving rights to mining areas, nor is it a dispute
involving claimholders or concessionaires. The main question raised was the validity of
the Addendum Contract, the FTAA and the subsequent contracts. The question as to the
rights of petitioner or respondents to the mining area pursuant to these contracts, as well as
the question of whether or not petitioner had ceded his mining claims in favor of
respondents by way of execution of the questioned contracts, is merely corollary to the main
issue, and may not be resolved without first determining the main issue.
The Complaint is also not what is contemplated by Rep. Act No. 7942 when it says the
dispute should involve FTAAs. The Complaint is not exclusively within the jurisdiction of the
Panel of Arbitrators just because, or for as long as, the dispute involves an FTAA.
The Complaint raised the issue of the constitutionality of the FTAA, which is definitely a
judicial question. The question of constitutionality is exclusively within the jurisdiction of the
courts to resolve as this would clearly involve the exercise of judicial power. The Panel of
Arbitrators does not have jurisdiction over such an issue since it does not involve the
application of technical knowledge and expertise relating to mining. This the Panel of
Arbitrators has even conceded in its Orders dated 18 October 2001 and 25 June 2002. At this
juncture, it is worthy of note that in a case,[31] which was resolved only on 1 December 2004,
this Court upheld the validity of the FTAA entered into by the Republic of the Philippines and
WMC (Philippines), Inc. and constitutionality of Rep. Act No. 7942 and DENR Administrative
Order 96-40.[32] In fact, the Court took the case on an original petition, recognizing the
exceptional character of the situation and the paramount public interest involved, as well as
the necessity for a ruling to put an end to the uncertainties plaguing the mining industry and
the affected communities as a result of doubts case upon the constitutionality and validity of
the Mining Act, the subject FTAA and future FTAAs, and the need to avert a multiplicity of
suits.[33]
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.
Petitioner also disagrees with the Court of Appeals ruling that the case should be
brought for arbitration under Rep. Act 876, pursuant to the arbitration clause in
the Addendum Contract which states that [a]ll disputes arising out of or in connection with
the Contract, which cannot be settled amicably among the Parties, shall finally be settled
under R.A. 876. He points out that respondents Climax and APMI are not parties to
the Addendum Contract and are thus not bound by the arbitration clause in said contract.
We agree that the case should not be brought under the ambit of the Arbitration Law,
but for a different reason. 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 discussed, the complaint should have been filed before the regular
courts as it involved issues which are judicial in nature.
WHEREFORE, in view of the foregoing, the Petition for Review on Certiorari Under Rule
45 is DENIED. The Orders dated 18 October 2001 and 25 June 2002 of the Panel of Arbitrators
are SET ASIDE. Costs against petitioner Jorge Gonzales.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.