Republic of the Philippines BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to
SUPREME COURT it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
Manila
SECOND DIVISION
G.R. No. 174938 October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
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
7 of the dispute to arbitration.18
BF Corporation eventually completed the construction of the buildings. Shangri-La allegedly took
possession of the buildings while still owing BF Corporation an outstanding balance.8
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
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.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 135362 December 13, 1999
HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself and as legal
guardian of the minor FABRICE CYRILL D. SALAS, MA. CRISTINA S. LESACA, and
KARINA TERESA D. SALAS, petitioners,
vs.
LAPERAL REALTY CORPORATION, ROCKWAY REAL ESTATE CORPORATION,
SOUTH RIDGE VILLAGE, INC., MAHARAMI DEVELOPMENT CORPORATION, Spouses
THELMA D. ABRAJANO and GREGORIO ABRAJANO, OSCAR DACILLO, Spouses
VIRGINIA D. LAVA and RODEL LAVA, EDUARDO A. VACUNA, FLORANTE DE LA
CRUZ, JESUS VICENTE B. CAPELLAN, and the REGISTER OF DEEDS FOR LIPA
CITY, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Order 1 of Branch 85 of the Regional Trial Court
of Lipa City 2dismissing petitioners' complaint 3 for rescission of several sale transactions involving
land owned by Augusto L. Salas, Jr., their predecessor-in-interest, on the ground that they failed to first
resort to arbitration.
Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas spanning 1,484,354
square meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement 4 (hereinafter referred to as the
Agreement) with respondent Laperal Realty Corporation (hereinafter referred to as Laperal Realty) to
render and provide complete (horizontal) construction services on his land.
On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of respondent Laperal
Realty to exercise general control, supervision and management of the sale of his land, for cash or on
installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva Ecija. He never
returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati City a verified
petition for the declaration of presumptive death of her husband, Salas, Jr., who had then been missing
for more than seven (7) years. It was granted on December 12, 1996. 5
Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold subdivided portions
thereof to respondents Rockway Real Estate Corporation and South Ridge Village, Inc. on February
22, 1990; to respondent spouses Abrajano and Lava and Oscar Dacillo on June 27, 1991; and to
respondents Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of
whom are hereinafter referred to as respondent lot buyers).
On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court of Lipa City a
Complaint 6 for declaration of nullity of sale, reconveyance, cancellation of contract, accounting and
damages against herein respondents which was docketed as Civil Case No. 98-0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to
Dismiss 7 on the ground that petitioners failed to submit their grievance to arbitration as required under
Article VI of the Agreement which provides:
Art. VI. ARBITRATION.
All cases of dispute between CONTRACTOR and OWNER'S representative shall be
referred to the committee represented by:
a. One representative of the OWNER;
b. One representative of the CONTRACTOR;
c. One representative acceptable to both
OWNER and CONTRACTOR. 8
On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed a Joint Answer
with Counterclaim and Crossclaim 9 praying for dismissal of petitioners' Complaint for the same
reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing petitioners' Complaint
for non-compliance with the foregoing arbitration clause.
Hence this petition.
Petitioners argue, thus:
The petitioners' causes of action did not emanate from the Owner-Contractor
Agreement.
The petitioners' causes of action for cancellation of contract and accounting are
covered by the exception under the Arbitration Law.
Failure to arbitrate is not a ground for dismissal. 10
In a catena of cases 11 inspired by Justice Malcolm's provocative dissent in Vega v. San Carlos Milling WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19, 1998 of Branch
Co. 12, this Court has recognized arbitration agreements as valid, binding, enforceable and not contrary 85 of the Regional Trial Court of Lipa City is hereby NULLIFIED and SET ASIDE. Said court is
to public policy so much so that when there obtains a written provision for arbitration which is not hereby ordered to proceed with the hearing of Civil Case No. 98-0047.
complied with, the trial court should suspend the proceedings and order the parties to proceed to
arbitration in accordance with the terms of their Costs against private respondents.
agreement 13. Arbitration is the "wave of the future" in dispute resolution. 14 To brush aside a
contractual agreement calling for arbitration in case of disagreement between parties would be a step
SO ORDERED.
backward. 15

Nonetheless, we grant the petition.

A submission to arbitration is a contract. 16 As such, the Agreement, containing the stipulation on

arbitration, binds the parties thereto, as well as their assigns and heirs. 17 But only they. Petitioners, as
heirs of Salas, Jr., and respondent Laperal Realty are certainly bound by the Agreement. If respondent
Laperal Realty had assigned its rights under the Agreement to a third party, making the former, the
assignor, and the latter, the assignee, such assignee would also be bound by the arbitration provision
since assignment involves such transfer of rights as to vest in the assignee the power to enforce them to
the same extent as the assignor could have enforced them against the debtor 18 or in this case, against
the heirs of the original party to the Agreement. However, respondents Rockway Real Estate
Corporation, South Ridge Village, Inc., Maharami Development Corporation, spouses Abrajano,
spouses Lava, Oscar Dacillo, Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capellan are not
assignees of the rights of respondent Laperal Realty under the Agreement to develop Salas, Jr.'s land
and sell the same. They are, rather, buyers of the land that respondent Laperal Realty was given the
authority to develop and sell under the Agreement. As such, they are not "assigns" contemplated in
Art. 1311 of the New Civil Code which provides that "contracts take effect only between the parties,
their assigns and heirs".

Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of Salas, Jr.'s land
when respondent Laperal Realty subdivided it and sold portions thereof to respondent lot buyers. Thus,
they instituted action 19 against both respondent Laperal Realty and respondent lot buyers for rescission
of the sale transactions and reconveyance to them of the subdivided lots. They argue that rescission,
being their cause of action, falls under the exception clause in Sec. 2 of Republic Act No. 876 which
provides that "such submission [to] or contract [of arbitration] shall be valid, enforceable and
irrevocable, save upon such grounds as exist at law for the revocation of any contract".

The petitioners' contention is without merit. For while rescission, as a general rule, is an arbitrable
issue, 20 they impleaded in the suit for rescission the respondent lot buyers who are neither parties to
the Agreement nor the latter's assigns or heirs. Consequently, the right to arbitrate as provided in
Article VI of the Agreement was never vested in respondent lot buyers.

Respondent Laperal Realty, as a contracting party to the Agreement, has the right to compel petitioners
to first arbitrate before seeking judicial relief. However, to split the proceedings into arbitration for
respondent Laperal Realty and trial for the respondent lot buyers, or to hold trial in abeyance pending
arbitration between petitioners and respondent Laperal Realty, would in effect result in multiplicity of
suits, duplicitous procedure and unnecessary delay. On the other hand, it would be in the interest of
justice if the trial court hears the complaint against all herein respondents and adjudicates petitioners'
rights as against theirs in a single and complete proceeding.
 Republic of the Philippines On 16 May 2013, BCA filed before the RTC a Petition for Assistance in Taking Evidence 8 pursuant to
SUPREME COURT the Implementing Rules and Regulations (IRR) of "The Alternative Dispute Resolution Act of 2004,"
Manila or Republic Act No. 9285 (RA 9285). In its petition, BCA sought the issuance of subpoena ad
testificandum and subpoena duces tecum to the following witnesses and documents in their custody:9
SECOND DIVISION
Witnesses Documents to be produced
G.R. No. 210858 June 29, 2016
1. Secretary of Foreign a. Request for Proposal dated September 10, 1999 for
DEPARTMENT OF FOREIGN AFFAIRS, Petitioner, Affairs or his the MRP/V Project;
vs. representative/s, b. Notice of Award dated September 29, 2000
BCA INTERNATIONAL CORPORATION, Respondent. specifically awarding the MRP/V Project Company to
Undersecretary Franklin implement the MRP/V Project;
DECISION M. Ebdalin and c. Department of Foreign Affairs Machine Readable
Ambassador Belen F. Passport and Visa Project Build-Operate-Transfer
Anota Agreement dated February 8, 2001;
CARPIO, J.: d. Department of Foreign Affairs Machine Readable
Passport and Visa Project Amended Build-Operate-
The Case Transfer Agreement dated April 5, 2002;
e. Documents, records, papers and correspondence
This petition for review1 assails the Orders dated 11 October 20132 and 8 January 2014,3 as well as the between DFA and BCA regarding the negotiations
Resolution dated 2 September 2013,4 of the Regional Trial Court of Makati City (RTC), Branch 146, for the contract of lease of the PNB building,
in SP. PROC. No. M-7458. which was identified in the Request for Proposal as
the Central Facility Site, and the failure of said
The Facts negotiations;
f. Documents, records, reports, studies, papers and
correspondence between DFA and BCA regarding
In an Amended Build-Operate-Transfer Agreement dated 5 April 2002 (Agreement), petitioner
the search for alternative Central Facility Site;
Department of Foreign Affairs (DFA) awarded the Machine Readable Passport and Visa Project
g. Documents, records, papers and correspondence
(MRPN Project) to respondent BCA International Corporation (BCA), a domestic corporation. During
between DFA and BCA regarding the latter’s
the implementation of the MRPN Project, DFA sought to terminate the Agreement. However, BCA
submission of the Project Master Plan (Phase One
opposed the termination and filed a Request for Arbitration, according to the provision in the
of the MRP/V Project);
Agreement:
h. Documents, records, papers and correspondence
among DFA, DFA’s Project Planning Team,
Section 19.02. Failure to Settle Amicably - If the Dispute cannot be settled amicably within ninety (90) Questronix Corporation, MRP/V Advisory Board
days by mutual discussion as contemplated under Section 19.01 herein, the Dispute shall be settled and other related government agencies, and BCA
with finality by an arbitrage tribunal operating under International Law, hereinafter referred to as regarding the recommendation for the issuance of
the "Tribunal", under the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the Certificate of Acceptance in favor of BCA;
the United Nations General Assembly on December 15, 1976, and entitled "Arbitration Rules on the i. Certificate of Acceptance for Phase One dated June
United Nations Commission on the International Trade Law". The DFA and the BCA undertake to 9, 2004 issued by DFA;
abide by and implement the arbitration award. The place of arbitration shall be Pasay City, Philippines, j. Documents, records, papers and correspondence
or such other place as may be mutually agreed upon by both parties. The arbitration proceeding shall between DFA and BCA regarding the approval of
be conducted in the English language.5 (Emphasis supplied) the Star Mall complex as the Central Facility Site;
k. Documents, records, papers and correspondence
On 29 June 2009, an ad hoc arbitral tribunal6 was constituted. In an Order dated 15 April 2013,7 the among DFA, Questronix Corporation, MRP/V
arbitral tribunal approved BCA's request to apply in court for the issuance of subpoena, subject to the Advisory Board and other related government
conditions that the application will not affect its proceedings and the hearing set in October 2013 will agencies, and BCA regarding the recommendation
proceed whether the witnesses attend or not. for the approval of the Stare Mall complex as the
 Central Facility Site;
l. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
request for BCA to terminate its Assignment
Agreement with Philpass, including BCA’s
compliance therewith;
m. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
demand for BCA to prove its financial capability to
implement the MRP/V Project, including the
compliance therewith by BCA;
n. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
attempt to termiante the Amended BOT
Agreement, including BCA’s response to DFA and
BCA’s attempts to mutually discuss the matter with
DFA;
o. Documents, records, papers and correspondence
among DFA and MRP/V Advisory Board, DTI-
BOT Center, Department of Finance and
Commission on Audit regarding the delays in the
implementation of the MRP/V Project, DFA’s
requirement for BCA to prove its financial
capability, and the opinions of the said government
agencies in relation to DFA’s attempt to terminate
the Amended BOT Agreement; and
p. Other related documents, records, papers and
correspondence.
2. Secretary of Finance a. Documents, records, papers and correspondence
or his representative/s, between DFA and Department of Finance
specifically former regarding the DFA’s requirement for BCA to prove
Secretary of Finance its financial capability to implement the MRP/V
Juanita D. Amatong Project and its opinion thereon;
b. Documents, records, papers and correspondence
between DFA and DOF regarding BCA’s
compliance with DFA’s demand for BCA to
further prove its financial capability to implement
the MRP/V Project;
c. Documents, records, papers and correspondence
between DFA and DOF regarding the delays in the
implementation of the MRP/V Project;
d. Documents, records, papers and correspondence
between DFA and DOF regarding the DFA’s
attempted termination of the Amended BOT
Agreement; and
e. Other related documents, records, papers and
3. Chairman of the a.
Commission on Audit
or her representative/s,
specifically Ms.
Iluminada M.V. Fabroa b.
(Director IV)
c.
d.
e.
4. Executive Director or a.
any officer or
representative of the
Department of Trade
and Industry Build-
Operate-Transfer
Center, specifically
Messrs. Noel Eli B. b.
Kintanar, Rafaelito H.
Taruc and Luisito Ucab
c.
d.
correspondence.
Documents, records, papers and correspondence
between DFA and COA regarding the COA’s
conduct of a sectoral performance audit on the
MRP/V Project;
Documents, records, papers and correspondence
between DFA and COA regarding the delays in
and its recommendation to fast-track the
implementation of the MRP/V Project;
Documents, records, papers and correspondence
between DFA and COA regarding COA’s advice to
cancel the Assignment Agreement between BCA
and Philpass "for being contrary to existing laws
and regulations and DOJ opinion";
Documents, records, papers and correspondence
between DFA and COA regarding DFA’s
attempted termination of the Amended BOT
Agreement; and
Other related documents, records, papers and
correspondence.
Documents, records, papers and correspondence
between DFA and BOT Center regarding the
delays in the implementation of the MRP/V
Project, including DFA’s delay in the issuance of
the Certificate of Acceptance for Phase One of the
MRP/V Project and in approving the Central
Facility Site at the Star Mall complex;
Documents, records, papers and correspondence
between DFA and BOT Center regarding BCA’s
financial capability and the BOT Center’s opinion
on DFA’s demand for BCA to further prove its
financial capability to implement the MRP/V
project;
Documents, records, papers and correspondence
between DFA and BOT Center regarding the
DFA’s attempt to terminate the Amended BOT
Agreement, including the BOT Center’s
unsolicited advice dated December 23, 2005 stating
that the issuance of the Notice of Termination was
"precipitate, and done without first carefully
ensuring that there were sufficient grounds to
warrant such an issuance" and was "devoid of
merit";
Documents, records, papers and correspondence
between DFA and BOT Center regarding the

5. Chairman of the DFA
MRP/V Advisory Board
or his representative/s,
specifically DFA
Undersecretary Franklin
M. Ebdalin and MRP/V
Project Manager,
specifically Atty.
Voltaire Mauricio
On 1 July 2013, DFA filed its comment, alleging that the presentation of the witnesses and documents
was prohibited by law and protected by the deliberative process privilege.
The RTC Ruling
DFA’s unwarrented refusal to approve BCA’s
proposal to obtain the required financing by
allowing the entry of a "strategic investor"; and
e. Other related documents, records, papers and
correspondence.
a. Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA[‘s] performance of its obligations
for Phase One of the MRP/V Project, the MRP/V
Advisory Board’s recommendation for the issuance
of the Certificate of Acceptance of Phase One of
the MRP/V Project and its preparation of the draft
of the Certificate of Acceptance;
b. Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding the latter’s recommendation for the DFA
to approve the Star Mall complex as the Central
Facility Site;
c. Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA’s request to allow the investment of
S.F. Pass International in Philpass;
d. Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA’s financial capability and the
MRP/V Advisory Board’s opinion on DFA’s
demand for BCA to further prove its financial
capability to implement the MRP/V Project;
e. Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding the DFA’s attempted termination of the
Amended BOT Agreement; and
f. Other related documents, records, papers and
correspondence.
definite proposition and entered into a contract, DFA's acts, transactions or decisions were no longer
privileged.11
The dispositive portion of the RTC Resolution reads:
WHEREFORE, the petition is granted. Let subpoena ad testificandum [and subpoena] duces tecum be
issued to the persons listed in paragraph 11 of the Petition for them to appear and bring the documents
specified in paragraph 12 thereof, before the Ad Hoc Tribunal for the hearings on October 14, 15, 16,
17, 2013 at 9:00 a.m. and 2:00 p.m. at the Malcolm Hall, University of the Philippines, Diliman,
Quezon City.12
On 6 September 2013, the RTC issued the subpoena due es tecum and subpoena ad testificandum. On
12 September 2013, DFA filed a motion to quash the subpoena duces tecum and subpoena ad
testificandum, which BCA opposed.
In an Order dated 11 October 2013, the RTC denied the motion to quash and held that the motion was
actually a motion for reconsideration, which is prohibited under Rule 9.9 of the Special Rules of Court
on Alternative Dispute Resolution (Special ADR Rules).
On 14, 16, and 17 October 2013, Undersecretary Franklin M. Ebdalin (Usec. Ebdalin), Atty. Voltaire
Mauricio (Atty. Mauricio), and Luisi to Ucab (Mr. Ucab) testified before the arbitral tribunal pursuant
to the subpoena.
In an Order dated 8 January 2014, the RTC denied the motion for reconsideration filed by DFA. The
RTC ruled that the motion became moot with the appearance of the witnesses during the arbitration
hearings. Hence, DFA filed this petition with an urgent prayer for the issuance of a temporary
restraining order and/or a writ of preliminary injunction.
In a Resolution dated 2 April 2014, the Court issued a temporary restraining order enjoining the
arbitral tribunal from taking cognizance of the testimonies of Usec. Ebdalin, Atty. Mauricio, and Mr.
Ucab.
The Issues
DFA raises the following issues in this petition: (1) the 1976 UNCITRAL Arbitration Rules and the
Rules of Court apply to the present arbitration proceedings, not RA 9285 and the Special ADR Rules;
and (2) the witnesses presented during the 14, 16, and 17 October 2013 hearings before the ad
hoc arbitral tribunal are prohibited from disclosing information on the basis of the deliberative process
privilege.

In a Resolution dated 2 September 2013, the RTC ruled in favor of BCA and held that the evidence The Ruling of the Court
sought to be produced was no longer covered by the deliberative process privilege. According to the
RTC, the Court held in Chavez v. Public Estates Authority10 that acts, transactions or decisions are We partially grant the petition.
privileged only before a definite proposition is reached by the agency and since DFA already made a
Arbitration is deemed a special proceeding13 and governed by the special provisions of RA 9285, its
IRR, and the Special ADR Rules. 14 RA 9285 is the general law applicable to all matters and
controversies to be resolved through alternative dispute resolution methods. 15 While enacted only in
2004, we held that RA 9285 applies to pending arbitration proceedings since it is a procedural law,
which has retroactive effect:
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, 1998 and 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. 16 (Emphasis supplied)
The IRR of RA 9285 reiterate that RA 9285 is procedural in character and applicable to all pending
arbitration proceedings.17 Consistent with Article 2046 of the Civil Code, 18 the Special ADR Rules
were formulated and were also applied to all pending arbitration proceedings covered by RA 9285,
provided no vested rights are impaired. 19Thus, contrary to DFA's contention, RA 9285, its IRR, and
the Special ADR Rules are applicable to the present arbitration proceeding. The arbitration between
the DFA and BCA is still pending, since no arbitral award has yet been rendered. Moreover, DFA did
not allege any vested rights impaired by the application of those procedural rules.
RA 9285, its IRR, and the Special ADR Rules provide that any party to an arbitration, whether
domestic or foreign, may request the court to provide assistance in taking evidence such as the
issuance of subpoena ad testificandum and subpoena duces tecum.20 The Special ADR Rules
specifically provide that they shall apply to assistance in taking evidence,21 and the RTC order granting
assistance in taking evidence shall be immediately executory and not subject to reconsideration or
appeal.22 An appeal with the Court of Appeals (CA) is only possible where the RTC denied a petition
for assistance in taking evidence. 23 An appeal to the Supreme Court from the CA is allowed only
under any of the grounds specified in the Special ADR Rules. 24 We rule that the DFA failed to follow
the procedure and the hierarchy of courts provided in RA 9285, its IRR, and the Special ADR Rules,
when DFA directly appealed before this Court the RTC Resolution and Orders granting assistance in
taking evidence.
DFA contends that the RTC issued the subpoenas on the premise that RA 9285 and the Special ADR
Rules apply to this case. However, we find that even without applying RA 9285 and the Special ADR
Rules, the RTC still has the authority to issue the subpoenas to assist the parties in taking evidence.
The 1976 UNCITRAL Arbitration Rules, agreed upon by the parties to govern them, state that the
"arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the
dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law determined by
the conflict of laws rules which it considers applicable. " 25 Established in this jurisdiction is the rule
that the law of the place where the contract is made governs, or lex loci contractus.26 Since there is no
law designated by the parties as applicable and the Agreement was perfected in the Philippines, "The
Arbitration Law," or Republic Act No. 876 (RA 876), applies.
RA 876 empowered arbitrators to subpoena witnesses and documents when the materiality of the
testimony has been demonstrated to them. 27 In Transfield Philippines, Inc. v. Luzon Hydro
Corporation, 28 we held that Section 14 of RA 876 recognizes the right 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.
Considering that this petition was not filed in accordance with RA 9285, the Special ADR Rules and
1976 UNCITRAL Arbitration Rules, this petition should normally be denied. However, we have held
time and again that the ends of justice are better served when cases are determined on the merits after
all parties are given full opportunity to ventilate their causes and defenses rather than on technicality or
some procedural imperfections. 29More importantly, this case is one of first impression involving the
production of evidence in an arbitration case where the deliberative process privilege is invoked.
Thus, DFA insists that we determine whether the evidence sought to be subpoenaed is covered by the
deliberative process privilege.1âwphi1 DFA contends that the RTC erred in holding that the
deliberative process privilege is no longer applicable in this case. According to the RTC, based
on Chavez v. Public Estates Authority,30 "acts, transactions or decisions are privileged only before a
definite proposition is reached by the agency," and since, in this case, DFA not only made "a definite
proposition" but already entered into a contract then the evidence sought to be produced is no longer
privileged.31
We have held in Chavez v. Public Estates Authority32 that:
Information, however, on on-going evaluation or review of bids or proposals being undertaken by the
bidding or review committee is not immediately accessible under the right to information. While the
evaluation or review is still on-going, there are no "official acts, transactions, or decisions" on the bids
or proposals. However, once the committee makes its official recommendation, there arises a "definite
proposition" on the part of the government. From this moment, the public's right to information
attaches, and any citizen can access all the non-proprietary information leading to such definite
proposition.
xxxx
The right to information, however, does not extend to matters recognized as privileged information
under the separation of powers. The right does not also apply to information on military and diplomatic
secrets, information affecting national security, and information on investigations of crimes by law
enforcement agencies before the prosecution of the accused, which courts have long recognized as
confidential. The right may also be subject to other limitations that Congress may impose by law.
There is no claim by PEA that the information demanded by petitioner is privileged information rooted
in the separation of powers. The information does not cover Presidential conversations,
correspondences, or discussions during closed-door Cabinet meetings which, like internal deliberations
of the Supreme Court and other collegiate courts, or executive sessions of either house of Congress, are
recognized as confidential. This kind of information cannot be pried open by a co-equal branch of
government. A frank exchange of exploratory ideas and assessments, free from the glare of
publicity and pressure by interested parties, is essential to protect the independence of decision-
making of those tasked to exercise Presidential, Legislative and Judicial power. This is not the
situation in the instant case.
We rule, therefore, that the constitutional right to information includes official information on on-
going negotiations before a final contract. The information, however, must constitute definite
propositions by the government and should not cover recognized exceptions like privileged
information, military and diplomatic secrets and similar matters affecting national security and public
order. Congress has also prescribed other limitations on the right to information in several legislations.
(Emphasis supplied)
Contrary to the RTC's ruling, there is nothing in our Chavez v. Public Estates Authority33 ruling which
states that once a "definite proposition" is reached by an agency, the privileged character of a
document no longer exists. On the other hand, we hold that before a "definite proposition" is reached
by an agency, there are no "official acts, transactions, or decisions" yet which can be accessed by the
public under the right to information. Only when there is an official recommendation can a "definite
proposition" arise and, accordingly, the public's right to information attaches. However, this right to
information has certain limitations and does not cover privileged information to protect the
independence of decision-making by the government.
Chavez v. Public Estates Authority34 expressly and unequivocally states that the right to information
"should not cover recognized exceptions like privileged information, military and diplomatic
secrets and similar matters affecting national security and public order." Clearly, Chavez v. Public
Estates Authority35 expressly mandates that "privileged information" should be outside the scope of
the constitutional right to information, just like military and diplomatic secrets and similar matters
affecting national security and public order. In these exceptional cases, even the occurrence of a
"definite proposition" will not give rise to the public's right to information.
Deliberative process privilege is one kind of privileged information, which is within the
exceptions of the constitutional right to information. In In Re: Production of Court Records and
Documents and the Attendance of Court Officials and Employees as Witnesses, 36 we held that:
Court deliberations are traditionally recognized as privileged communication. Section 2, Rule 10
of the IRSC provides:
Section 2. Confidentiality of court sessions. - Court sessions are executive in character, with only the
Members of the Court present. Court deliberations are confidential and shall not be disclosed to outside
parties, except as may be provided herein or as authorized by the Court.
Justice Abad discussed the rationale for the rule in his concurring opinion to the Court Resolution
in Arroyo v. De Lima (TRO on Watch List Order case): the rules on confidentiality will enable the
Members of the Court to "freely discuss the issues without fear of criticism for holding unpopular
positions" or fear of humiliation for one's comments. The privilege against disclosure of these kinds
of information/communication is known as deliberative process privilege, involving as it does the
deliberative process of reaching a decision. "Written advice from a variety of individuals is an
important element of the government's decision-making process and that the interchange of advice
could be stifled if courts forced the government to disclose those recommendations;" the privilege is
intended "to prevent the 'chilling' of deliberative communications."
The privilege is not exclusive to the Judiciary. We have in passing recognized the claim of this
privilege by the two other branches of government in Chavez v. Public Estates Authority (speaking
through J. Carpio) when the Court declared that -
[t]he information x x x like internal deliberations of the Supreme Court and other collegiate courts, or
executive sessions of either house of Congress, are recognized as confidential. This kind of
information cannot be pried open by a co-equal branch of government. A frank exchange of
exploratory ideas and assessments, free from the glare of publicity and pressure by interested parties, is
essential to protect the independence of decision-making of those tasked to exercise Presidential,
Legislative and Judicial power. (Emphasis supplied)
In Akbayan v. Aquino, 37 we adopted the ruling of the U.S. Supreme Court in NLRB v. Sears, Roebuck
& Co,38 which stated that the deliberative process privilege protects from disclosure "advisory
opinions, recommendations, and deliberations comprising part of a process by which governmental
decisions and policies are formulated." We explained that "[w]ritten advice from a variety of
individuals is an important element of the government's decision-making process and that the
interchange of advice could be stifled if courts forced the government to disclose those
recommendations"; thus, the privilege is intended "to prevent the 'chilling' of deliberative
communications."39
The privileged character of the information does not end when an agency has adopted a definite
proposition or when a contract has been perfected or consummated; otherwise, the purpose of the
privilege will be defeated.
The deliberative process privilege applies if its purpose is served, that is, "to protect the frank exchange
of ideas and opinions critical to the government's decision[-]making process where disclosure would
discourage such discussion in the future." 40 In Judicial Watch of Florida v. Department of
Justice, 41 the U.S. District Court for the District of Columbia held that the deliberative process
privilege's "ultimate purpose x x x is to prevent injury to the quality of agency decisions by allowing
government officials freedom to debate alternative approaches in private," and this ultimate purpose
would not be served equally well by making the privilege temporary or held to have expired. In Gwich
'in Steering Comm. v. Office of the Governor, 42 the Supreme Court of Alaska held that
communications have not lost the privilege even when the decision that the documents preceded is
finally made. The Supreme Court of Alaska held that "the question is not whether the decision has
been implemented, or whether sufficient time has passed, but whether disclosure of these preliminary
proposals could harm the agency's future decision[-]making by chilling either the submission of such
proposals or their forthright consideration."
Traditionally, U.S. courts have established two fundamental requirements, both of which must be met,
for the deliberative process privilege to be invoked.43 First, the communication must
be predecisional, i.e., "antecedent to the adoption of an agency policy." Second, the communication
must be deliberative, i.e., "a direct part of the deliberative process in that it makes recommendations
or expresses opinions on legal or policy matters." It must reflect the "give-and-take of the consultative
process."44 The Supreme Court of Colorado also took into account other considerations:
Courts have also looked to other considerations in assessing whether material is predecisional and
deliberative. The function and significance of the document in the agency's decision-making process
are relevant. Documents representing the ideas and theories that go into the making of policy, which
are privileged, should be distinguished from "binding agency opinions and interpretations" that are
"retained and referred to as precedent" and constitute the policy itself.
Furthermore, courts examine the identity and decision-making authority of the office or person issuing
the material. A document from a subordinate to a superior official is more likely to be predecisional,
"while a document moving in the opposite direction is more likely to contain instructions to staff
explaining the reasons for a decision already made."
Finally, in addition to assessing whether the material is predecisional and deliberative, and in order to
determine if disclosure of the material is likely to adversely affect the purposes of the privilege, courts
inquire whether "the document is so candid or personal in nature that public disclosure is likely in the
future to stifle honest and frank communication within the agency." As a consequence, the
deliberative process privilege typically covers recommendations, advisory opinions, draft
documents, proposals, suggestions, and other subjective documents that reflect the personal
opinions of the writer rather than the policy of the agency. 45 (Emphasis supplied)
Thus, "[t]he deliberative process privilege exempts materials that are 'predecisional' and 'deliberative,'
but requires disclosure of policy statements and final opinions 'that have the force of law or explain
actions that an agency has already taken."’46
In City of Colorado Springs v. White, 47 the Supreme Court of Colorado held that the outside
consultant's evaluation report of working environment and policies was covered by the deliberative
process privilege because the report contained observations on current atmosphere and suggestions on
how to improve the division rather than an expression of final agency decision.
In Strang v. Collyer,48 the U.S. District Court for the District of Columbia held that the meeting notes
that reflect the exchange of opinions between agency personnel or divisions of agency are covered by
the deliberative process privilege because they "reflect the agency's group thinking in the process of
working out its policy" and are part of the deliberative process in arriving at the final position.
In Judicial Watch v. Clinton,49 the U.S. District Court for the District of Columbia held that
handwritten notes reflecting preliminary thoughts of agency personnel were properly withheld under
the deliberative process privilege. The U.S. District Court reasoned that "disclosure of this type of
deliberative material inhibits open debate and discussion, and has a chilling effect on the free exchange
of ideas."
This Court applied the deliberative process privilege in In Re: Production of Court Records and
Documents and the Attendance of Court Officials and Employees as Wltnesses50 and found that court
records which are "predecisional" and "deliberative" in nature - in particular, documents and other
communications which are part of or related to the deliberative process, i.e., notes, drafts, research
papers, internal discussions, internal memoranda, records of internal deliberations, and similar papers -
are protected and cannot be the subject of a subpoena if judicial privilege is to be preserved. We further
held that this privilege is not exclusive to the Judiciary and cited our ruling in Chavez v. Public Estates
Authority.51
The deliberative process privilege can also be invoked in arbitration proceedings under RA 9285.
"Deliberative process privilege contains three policy bases: first, the privilege protects candid
discussions within an agency; second, it prevents public confusion from premature disclosure of
agency opinions before the agency establishes final policy; and third, it protects the integrity of an
agency's decision; the public should not judge officials based on information they considered prior to
issuing their final decisions."52 Stated differently, the privilege serves "to assure that subordinates
within an agency will feel free to provide the decision[-]maker with their uninhibited opinions and
recommendations without fear of later being subject to public ridicule or criticism; to protect against
premature disclosure of proposed policies before they have been finally formulated or adopted; and to
protect against confusing the issues and misleading the public by dissemination of documents
suggesting reasons and rationales for a course of action which were not in fact the ultimate reasons for
the agency's action."53
Under RA 9285,54 orders of an arbitral tribunal are appealable to the courts. If an official is compelled
to testify before an arbitral tribunal and the order of an arbitral tribunal is appealed to the courts, such
official can be inhibited by fear of later being subject to public criticism, preventing such official from
making candid discussions within his or her agency. The decision of the court is widely published,
including details involving the privileged information. This disclosure of privileged information can
inhibit a public official from expressing his or her candid opinion. Future quality of deliberative
process can be impaired by undue exposure of the decision-making process to public scrutiny after the
court decision is made.
Accordingly, a proceeding in the arbitral tribunal does not prevent the possibility of the purpose of the
privilege being defeated, if it is not allowed to be invoked. In the same manner, the disclosure of an
information covered by the deliberative process privilege to a court arbitrator will defeat the policy
bases and purpose of the privilege.
DFA did not waive the privilege in arbitration proceedings under the Agreement. The Agreement does
not provide for the waiver of the deliberative process privilege by DFA. The Agreement only provides
that:
Section 20.02 None of the parties shall, at any time, before or after the expiration or sooner termination
of this Amended BOT Agreement, without the consent of the other party, divulge or suffer or permit
its officers, employees, agents or contractors to divulge to any person, other than any of its or their
respective officers or employees who require the same to enable them properly to carry out their
duties, any of the contents of this Amended BOT Agreement or any information relating to the
negotiations concerning the operations, contracts, commercial or financial arrangements or
affair[s] of the other parties hereto. Documents marked "CONFIDENTIAL" or the like, providing
that such material shall be kept confidential, and shall constitute prima facieevidence that such
information contained therein is subject to the terms of this provision.
Section 20.03 The restrictions imposed in Section 20.02 herein shall not apply to the disclosure of
any information:
xxxx
C. To a court arbitrator or administrative tribunal the course of proceedings before it to which
the disclosing party is party; x x x55 (Emphasis supplied)
Section 20.02 of the Agreement merely allows, with the consent of the other party, disclosure by a
party to a court arbitrator or administrative tribunal of the contents of the "Amended BOT Agreement
or any information relating to the negotiations concerning the operations, contracts, commercial or
financial arrangements or affair[s]of the other parties hereto." There is no express waiver of
information forming part of DFA's predecisional deliberative or decision-making process. Section
20.02 does not state that a party to the arbitration is compelled to disclose to the tribunal privileged
information in such party's possession.
On the other hand, Section 20.03 merely allows a party, if it chooses, without the consent of the
other party, to disclose to the tribunal privileged information in such disclosing party's
possession. In short, a party can disclose privileged information in its possession, even without
the consent of the other party, if the disclosure is to a tribunal. However, a party cannot be
compelled by the other party to disclose privileged information to the tribunal, where such
privileged information is in its possession and not in the possession of the party seeking the
compulsory disclosure.
Nothing in Section 20.03 mandates compulsory disclosure of privileged information. Section 20.03
merely states that "the restrictions imposed in Section 20.02," referring to the "consent of the other
party," shall not apply to a disclosure of privileged information by a party in possession of a privileged
information. This is completely different from compelling a party to disclose privileged information in
its possession against its own will.
As a qualified privilege, the burden falls upon the government agency asserting the deliberative
process privilege to prove that the information in question satisfies both requirements - predecisional
and deliberative. 59 "The agency bears the burden of establishing the character of the decision, the
deliberative process involved, and the role played by the documents in the course of that process." 60 It
may be overcome upon a showing that the discoverant's interests in disclosure of the materials
outweigh the government's interests in their confidentiality. 61 "The determination of need must be
made flexibly on a case-by-case, ad hoc basis," and the "factors relevant to this balancing include: the
relevance of the evidence, whether there is reason to believe the documents may shed light on
government misconduct, whether the information sought is available from other sources and can be
obtained without compromising the government's deliberative processes, and the importance of the
material to the discoverant's case."62
In the present case, considering that the RTC erred in applying our ruling in Chavez v. Public Estates
Authority,63and both BCA's and DFA's assertions of subpoena of evidence and the deliberative process
privilege are broad and lack specificity, we will not be able to determine whether the evidence sought
to be produced is covered by the deliberative process privilege. The parties are directed to specify their
claims before the RTC and, thereafter, the RTC shall determine which evidence is covered by the
deliberative process privilege, if there is any, based on the standards provided in this Decision. It is
necessary to consider the circumstances surrounding the demand for the evidence to determine whether
or not its production is injurious to the consultative functions of government that the privilege of non-
disclosure protects.
WHEREFORE, we resolve to PARTIALLY GRANT the petition and REMAND this case to the
Regional Trial Court of Makati City, Branch 146, to determine whether the documents and records
sought to be subpoenaed are protected by the deliberative process privilege as explained in this
Decision. The Resolution dated 2 April 2014 issuing a Temporary Restraining Order is superseded by
this Decision.
SO ORDERED.

Rights cannot be waived if it is contrary to law, public order, public policy, morals, or good customs,
or prejudicial to a third person with a right recognized by law. 56 There is a public policy involved in a
claim of deliberative process privilege - "the policy of open, frank discussion between subordinate and
chief concerning administrative action." 57Thus, the deliberative process privilege cannot be waived. As
we have held in Akbayan v. Aquino, 58 the deliberative process privilege is closely related to the
presidential communications privilege and protects the public disclosure of information that can
compromise the quality of agency decisions:

Closely related to the "presidential communications" privilege is the deliberative process

privilegerecognized in the United States. As discussed by the U.S. Supreme Court in NLRB v. Sears,
Roebuck & Co, deliberative process covers documents reflecting advisory opinions, recommendations
and deliberations comprising part of a process by which governmental decisions and policies are
formulated. Notably, the privileged status of such documents rests, not on the need to protect national
security but, on the "obvious realization that officials will not communicate candidly among
themselves if each remark is a potential item of discovery and front page news," the objective of
the privilege being to enhance the quality of agency decisions. (Emphasis supplied)