G.R. No.

141833 March 26, 2003

LM POWER ENGINEERING CORPORATION, petitioner,

vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS, INC., respondent.

PANGANIBAN, J.:

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 Certiorari2 under Rule 45 of the Rules of Court, seeking to set
aside the January 28, 2000 Decision of the Court of Appeals3 (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
P6,711,813.90.8Contesting 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
Complaint10 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 Order12 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 RTC14 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 respondent’s 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 Court’s 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 Court’s 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 petitioner’s 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 petitioner’s 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:

xxx xxx xxx

‘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 petitioner’s 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

xxx xxx xxx

"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 [respondent’s]
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].

xxx xxx xxx

"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.

xxx xxx xxx

"N. OTHER CONDITIONS

xxx xxx xxx

"2. All customs duties, import duties, contractor’s 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.

Puno, (Chairman), Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.

G.R. No. 199650, June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner, v. UTILITY ASSURANCE

CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
as amended, assailing the Decision1 dated January 27, 2011 and Resolution2 dated December 8, 2011 of
the Court of Appeals (CA) in CA-G.R. SP No. 112808.

The Facts

On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman,
Joo Han Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue
Trading and Services, entered into a Construction Agreement3 whereby the latter undertook to build the
former’s 72-room condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf
& Resort in Boracay Island, Malay, Aklan. The project, costing P42,000,000.00, was to be completed
within one year or 365 days reckoned from the first calendar day after signing of the Notice of Award
and Notice to Proceed and receipt of down payment (20% of contract price). The P8,400,000.00 down
payment was fully paid on January 14, 2008.4 Payment of the balance of the contract price will be based
on actual work finished within 15 days from receipt of the monthly progress billings. Per the agreed
work schedule, the completion date of the project was December 2008.5 Mabunay also submitted the
required Performance Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the
amount equivalent to 20% down payment or P8.4 million.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7thmonthly
progress billing sent by Mabunay. As of September 16, 2008, petitioner had paid the total amount of
P15,979,472.03 inclusive of the 20% down payment. However, as of said date, Mabunay had
accomplished only 27.5% of the project.7

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch.
Elwin Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were accepted as true,
accurate and correct:cralavvonlinelawlibrary

III] STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual
percentage of accomplishment, the contracting parties, assisted by their respective technical
groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela
Botardo, concluded and agreed that as of 14 November 2008, the project is only Thirty One point
Thirty Nine Percent (31.39%) complete.
2) Furthermore, the value of construction materials allocated for the completion of the project and
currently on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND
THREE HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (P1,049,364.45)

3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th
billings, is Three point Eighty Five Percent (3.85%) with a gross value of P1,563,553.34 amount
creditable to SSB after deducting the withholding tax is P1,538,424.84

4) The unrecouped amount of the down payment is P2,379,441.53 after deducting the cost of
materials on site and the net billable amount reflected in the reconciled and consolidated 8th and
9th billings. The uncompleted portion of the project is 68.61% with an estimated value per
construction agreement signed is P27,880,419.52.9(Emphasis supplied.)

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and
respondent surety. As its demands went unheeded, petitioner filed a Request for Arbitration10 before
the Construction Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and
respondent be ordered to pay the sums of P8,980,575.89 as liquidated damages and P2,379,441.53
corresponding to the unrecouped down payment or overpayment petitioner made to Mabunay.11

In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works
ordered by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the project since
the 365 days period of completion started only on May 2, 2008 after clearing the retrofitted old
structure. Hence, the termination of the contract by petitioner was premature and the filing of the
complaint against him was baseless, malicious and in bad faith.

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of
action and the complaint states no cause of action against it. The CIAC denied the motion to dismiss.
Respondent’s motion for reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-

claims,14respondent argued that the performance bond merely guaranteed the 20% down payment and
not the entire obligation of Mabunay under the Construction Agreement. Since the value of the project’s
accomplishment already exceeded the said amount, respondent’s obligation under the performance
bond had been fully extinguished. As to the claim for alleged overpayment to Mabunay, respondent
contended that it should not be credited against the 20% down payment which was already exhausted
and such application by petitioner is tantamount to reviving an obligation that had been legally
extinguished by payment. Respondent also set up a cross-claim against Mabunay who executed in its
favor an Indemnity Agreement whereby Mabunay undertook to indemnify respondent for whatever
amounts it may be adjudged liable to pay petitioner under the surety bond.

Both petitioner and respondent submitted their respective documentary and testimonial evidence.
Mabunay failed to appear in the scheduled hearings and to present his evidence despite due notice to
his counsel of record. The CIAC thus declared that Mabunay is deemed to have waived his right to
present evidence.15
On February 2, 2010, the CIAC rendered its Decision16 and made the following
award:cralavvonlinelawlibrary

Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders
and directs:cralavvonlinelawlibrary

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the
following:cralavvonlinelawlibrary

a) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per annum
computed from the date this decision becomes final until fully paid, and

b) P2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per annum
computed from the date this decision becomes final until fully paid[.]

It being understood that respondent Utassco’s liability shall in no case exceed P8.4 million.

2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent [Mabunay’s]
share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010
until fully paid.

3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay Utassco P100,000.00 as attorney’s fees.

SO ORDERED.17

Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance
Bond did not clearly state the limitation of the surety’s liability. Pursuant to Article 137718 of the Civil
Code, the CA said that the provision should be construed in favor of petitioner considering that the
obscurely phrased provision was drawn up by respondent and Mabunay. Further, the appellate court
stated that respondent could not possibly guarantee the down payment because it is not Mabunay who
owed the down payment to petitioner but the other way around. Consequently, the completion by
Mabunay of 31.39% of the construction would not lead to the extinguishment of respondent’s liability.
The P8.4 million was a limit on the amount of respondent’s liability and not a limitation as to the
obligation or undertaking it guaranteed.

However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner
to the stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical
Industries, Inc. v. Court of Appeals,19 the appellate court said that not all requisites in order to consider
the obligor or debtor in default were present in this case. It held that it is only from December 24, 2008
(completion date) that we should reckon default because the Construction Agreement provided only for
delay in the completion of the project and not delay on a monthly basis using the work schedule
approved by petitioner as the reference point. Hence, petitioner’s termination of the contract was
premature since the delay in this case was merely speculative; the obligation was not yet demandable.

The dispositive portion of the CA Decision reads:cralavvonlinelawlibrary

WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision
dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is
hereby REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by
the same tribunal is hereby ANNULLED and SET ASIDE.

SO ORDERED.20

Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial
reconsideration. Both motions were denied.

The Issues

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims under the
Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically,
petitioner alleged that –

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE DISPUTE
RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE
STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN ISSUE
THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT
ASSIGNED AS AN ERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE
COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OFAEROSPACE CHEMICAL
INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH
CONSTRUCTION AGREEMENTS.21

Our Ruling

On the procedural issues raised, we find no merit in petitioner’s contention that with the
institutionalization of alternative dispute resolution under Republic Act (R.A.) No. 9285,22 otherwise
known as the Alternative Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review
the decisions or awards of the CIAC. Petitioner erroneously relied on the provision in said law allowing
any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition either to confirm,
correct or vacate a domestic arbitral award.

We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or
decisions of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares
that confirmation by the RTC is not required, thus:cralavvonlinelawlibrary

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by
Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the Regional Trial Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the
Rules of Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided
under E.O. No. 1008. (Emphasis supplied.)

Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion of the contract, or after the
abandonment or breach thereof. By express provision of Section 19 thereof, the arbitral award of the
CIAC is final and unappealable, except on questions of law, which are appealable to the Supreme Court.
With the amendments introduced by R.A. No. 7902 and promulgation of the 1997 Rules of Civil
Procedure, as amended, the CIAC was included in the enumeration of quasi-judicial agencies whose
decisions or awards may be appealed to the CA in a petition for review under Rule 43. Such review of
the CIAC award may involve either questions of fact, of law, or of fact and law.23

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court
and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from
domestic arbitration awards that need to be confirmed to be executory, said awards are therefore not
covered by Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO No. 1008, as
amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing
Construction Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in
Section 18 thereof, which reads:cralavvonlinelawlibrary

SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the
parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the
Rules of Court.

As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated
before the CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the
performance of his obligations under the Construction Agreement was the very first issue stipulated in
the Terms of Reference26 (TOR), which is distinct from the issue of the extent of respondent’s liability
under the Performance Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the
liquidated damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA
opined that delay should be reckoned only after the lapse of the one-year contract period, and
consequently Mabunay’s liability for liquidated damages arises only upon the happening of such
condition.

We reverse the CA.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a
cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.27

Article 1169 of the Civil Code provides:cralavvonlinelawlibrary

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation.

xxxx

It is a general rule that one who contracts to complete certain work within a certain time is liable for the
damage for not completing it within such time, unless the delay is excused or waived.28

The Construction Agreement provides in Article 10 thereof the following conditions as to completion
time for the project

1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1)
YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and
Notice to Proceed and receipt of down payment.

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER
within Seven (7) days after signing of this Agreement and full payment of 20% of the agreed
contract price. Said detailed work schedule shall follow the general schedule of activities and
shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be present in order that the debtor may be in default:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or extrajudicially.30

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform
or complete the project was not yet demandable as of November 19, 2008 when petitioner terminated
the contract, because the agreed completion date was still more than one month away (December 24,
2008). Since the parties contemplated delay in the completion of the entire project, the CA concluded
that the failure of the contractor to catch up with schedule of work activities did not constitute delay
giving rise to the contractor’s liability for damages.

We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the
Construction Agreement. Article 1374 of the Civil Code requires that the various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly. Here, the work schedule approved by petitioner was intended, not only to
serve as its basis for the payment of monthly progress billings, but also for evaluation of the progress of
work by the contractor. Article 13.01 (g) (iii) of the Construction Agreement provides that the contractor
shall be deemed in default if, among others, it had delayed without justifiable cause the completion of
the project “by more than thirty (30) calendar days based on official work scheduleduly approved by the
OWNER.”31

Records showed that as early as April 2008, or within four months after Mabunay commenced work
activities, the project was already behind schedule for reasons not attributable to petitioner. In the
succeeding months, Mabunay was still unable to catch up with his accomplishment even as petitioner
constantly advised him of the delays, as can be gleaned from the following notices of delay sent by
petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:cralavvonlinelawlibrary

April 30, 2008

Seven Shades of Blue

Boracay Island
Malay, Aklan

Attention : Mr. Martin Mabunay

General Manager

Thru : Engr. Reynaldo Gapasin

Project : Villa Beatriz

Subject : Notice of Delay

Dear Mr. Mabunay:cralavvonlinelawlibrary

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding
the delay in the implementation of major activities based on your submitted construction schedule.
Substantial delay was noted in concreting works that affects your roof framing that should have been
40% completed as of this date. This delay will create major impact on your over-all schedule as the
finishing works will all be dependent on the enclosure of the building.

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical
materials on site. We would highly appreciate if you could attend our next regular meeting so we could
immediately address this matter. Thank you.
Very truly yours,

Engr. Sheila N. Botardo

Construction Manager – LMI/FEPI32

October 15, 2008

xxxx

Dear Mr. Mabunay,

We have noticed continuous absence of all the Engineers that you have assigned on-site to administer
and supervise your contracted work. For the past two (2) weeks[,] your company does not have a
Technical Representative manning the jobsite considering the critical activities that are in progress and
the delays in schedule that you have already incurred. In this regard, we would highly recommend the
immediate replacement of your Project Engineer within the week.

We would highly appreciate your usual attention on this matter.

x x x x33

November 5, 2008

xxxx

Dear Mr. Mabunay,

This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008
regarding the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use
only. We understand that you have committed to complete it November 5, 2008 but as of this date
there is no improvement or any ongoing construction activity on the said field office and stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly
needed. We will highly appreciate if this matter will be given your immediate attention.

Thank you.

x x x x34

November 6, 2008

xxxx
Dear Mr. Mabunay,

We would like to call your attention regarding the decrease in your manpower assigned on site. We
have observed that for the past three (3) weeks instead of increasing your manpower to catch up with
the delay it was reduced to only 8 workers today from an average of 35 workers in the previous months.

Please note that based on your submitted revised schedule you are already delayed by approximately
57% and this will worsen should you not address this matter properly.

We are looking forward for [sic] your cooperation and continuous commitment in delivering this project
as per contract agreement.

x x x x35

Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and
engineers of petitioner and Mabunay and it was found that as of November 14, 2008, the project was
only 31.39% complete and that the uncompleted portion was 68.61% with an estimated value per
Construction Agreement as P27,880,419.52. Instead of doubling his efforts as the scheduled completion
date approached, Mabunay did nothing to remedy the delays and even reduced the deployment of
workers at the project site. Neither did Mabunay, at anytime, ask for an extension to complete the
project. Thus, on November 19, 2008, petitioner advised Mabunay of its decision to terminate the
contract on account of the tremendous delay the latter incurred. This was followed by the claim against
the Performance Bond upon the respondent on December 18, 2008.

Petitioner’s claim against the Performance Bond included the liquidated damages provided in the
Construction Agreement, as follows:cralavvonlinelawlibrary

ARTICLE 12 – LIQUIDATED DAMAGES:

12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT
within the period stipulated herein or within the period of extension granted by the OWNER, plus One
(1) Week grace period, without any justifiable reason, the CONTRACTOR hereby agrees –

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent
(1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the One (1)
week Grace Period until completed by the CONTRACTOR.

b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or
delays shall not relieve it of the obligation to complete and finish the construction.

Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained
under Article 9 or retained by the OWNER when the works called for under this Agreement have been
finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors
collectibles without prior consent and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any
further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a)
above, from any and all money or amounts due or which will become due to the CONTRACTOR by virtue
of this Agreement and/or to collect such amounts from the Performance Bond filed by the
CONTRACTOR in this Agreement.36 (Emphasis supplied.)

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which
provide:cralavvonlinelawlibrary

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of
breach thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated
by the parties in agreeing upon the liquidated damages, the law shall determine the measure of
damages, and not the stipulation.

A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has
a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach.37 The amount agreed upon
answers for damages suffered by the owner due to delays in the completion of the project.38 As a
precondition to such award, however, there must be proof of the fact of delay in the performance of the
obligation.39

Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to
complete the project within the stipulated period or the extension granted by the owner. However, this
will not defeat petitioner’s claim for damages nor respondent’s liability under the Performance Bond.
Mabunay was clearly in default considering the dismal percentage of his accomplishment (32.38%) of
the work he contracted on account of delays in executing the scheduled work activities and repeated
failure to provide sufficient manpower to expedite construction works. The events of default and
remedies of the Owner are set forth in Article 13, which reads:cralavvonlinelawlibrary

ARTICLE 13 – DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the [part] of the CONTRACTOR.

xxxx

g. In case the CONTRACTOR has done any of the following:cralavvonlinelawlibrary

(i.) has abandoned the Project

(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress
of the Project for twenty-eight days

(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30)
calendar days based on official work schedule duly approved by the OWNER

(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations
under the Agreement.

(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the
contrary, sublet any part of the Agreement.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may
after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and
expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from
any of its obligations, and liabilities under this Agreement. Also without diminishing or affecting the
rights and powers conferred on the OWNER by this Agreement and the OWNER may himself complete
the work or may employ any other contractor to complete the work. If the OWNER shall enter and expel
the CONTRACTOR under this clause, the OWNER shall be entitled to confiscate the performance bond
of the CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses
incurred to finish the Project shall be charged to the CONTRACTOR and/or his bond. Further, the
OWNER shall not be liable to pay the CONTRACTOR until the cost of execution, damages for the delay in
the completion, if any, and all; other expenses incurred by the OWNER have been ascertained which
amount shall be deducted from any money due to the CONTRACTOR on account of this Agreement. The
CONTRACTOR will not be compensated for any loss of profit, loss of goodwill, loss of use of any
equipment or property, loss of business opportunity, additional financing cost or overhead or
opportunity losses related to the unaccomplished portions of the work.40 (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to his failure to substantially
perform the work on account of tremendous delays in executing the scheduled work activities. Where a
party to a building construction contract fails to comply with the duty imposed by the terms of the
contract, a breach results for which an action may be maintained to recover the damages sustained
thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially
in accordance with the terms of the contract.41

The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure
to complete the building. Having elected to terminate the contract and expel the contractor from the
project site under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the
bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such
stipulation allowing the confiscation of the contractor’s performance bond partakes of the nature of a
penalty clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume
greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen
the coercive force of obligation and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without
the necessity of proof on the existence and on the measure of damages caused by the breach. It is well-
settled that so long as such stipulation does not contravene law, morals, or public order, it is strictly
binding upon the obligor.42

Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the
terms of the surety bond it issued, its liability is limited to the performance by said contractor to the
extent equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the
project by Mabunay, its liability was extinguished because the value of such accomplishment already
exceeded the sum equivalent to 20% down payment (P8.4 million).

The appellate court correctly rejected this theory of respondent when it ruled that the Performance
Bond guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction
Agreement, and that nowhere in law or jurisprudence does it state that the obligation or undertaking by
a surety may be apportioned.

The pertinent portions of the Performance Bond provide:cralavvonlinelawlibrary

The conditions of this obligation are as follows:

Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND
DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and
Bluewater, Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated
sum to secure the full and faithful performance on his part of said contract.

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case
exceed the sum ofP8,400,000.00 Philippine Currency.

Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants,
terms, conditions and agreements stipulated in said contract, then this obligation shall be null and void;
otherwise to remain in full force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee is unclear, the rest of the recitals in the bond
unequivocally declare that it secures the full and faithful performance of Mabunay’s obligations under
the Construction Agreement with petitioner. By its nature, a performance bond guarantees that the
contractor will perform the contract, and usually provides that if the contractor defaults and fails to
complete the contract, the surety can itself complete the contract or pay damages up to the limit of the
bond.44Moreover, the rule is that if the language of the bond is ambiguous or uncertain, it will be
construed most strongly against a compensated surety and in favor of the obligees or beneficiaries
under the bond, in this case petitioner as the Project Owner, for whose benefit it was ostensibly
executed.45

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth
Insurance Corporation v. Court of Appeals46

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds
was made on the condition that its liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and
reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently,
in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the
principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation. The increased liability is not because
of the contract but because of the default and the necessity of judicial collection.

Petitioner’s liability under the suretyship contract is different from its liability under the law. There is no
question that as a surety, petitioner should not be made to pay more than its assumed obligation under
the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for
the payment of interest is not by reason of the suretyship agreement itself but because of the delay in
the payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and
Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are
hereby REVERSEDand SET ASIDE.

The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration
Commission is hereby REINSTATED with the following MODIFICATIONS:

“Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders
and directs:cralavvonlinelawlibrary

1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the
Performance Bond, P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December
24, 2007, with interest at the rate of 6% per annum computed from the date of the filing of the
complaint until the finality of this decision, and 12% per annum computed from the date this decision
becomes final until fully paid; and

2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay Utassco P100,000.00 as attorney’s fees.
SO ORDERED.”

With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC
Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.

No pronouncement as to costs.

SO ORDERED.

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, Jr., andReyes, JJ., concur.
G.R. No. 198075, September 04, 2013

KOPPEL, INC. (FORMERLY KNOWN AS KPL AIRCON, INC.), Petitioner, v. MAKATI ROTARY CLUB
FOUNDATION, INC., Respondent.

DECISION

PEREZ, J.:

This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP
No. 116865.

The facts:

The Donation

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered
owner of a parcel of land located at Km. 16, South Superhighway, Parañaque City (subject land).3Within
the subject land are buildings and other improvements dedicated to the business of FKI.4cralaw
virtualaw library

In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of herein
respondent Makati Rotary Club Foundation, Incorporated by way of a conditional donation.6The
respondent accepted the donation with all of its conditions.7 On 26 May 1975, FKI and the respondent
executed a Deed of Donation8 evidencing their consensus.

The Lease and the Amended Deed of Donation

One of the conditions of the donation required the respondent to lease the subject land back to FKI
under terms specified in their Deed of Donation.9 With the respondent’s acceptance of the donation, a
lease agreement between FKI and the respondent was, therefore, effectively incorporated in theDeed of
Donation.

Pertinent terms of such lease agreement, as provided in the Deed of Donation, were as follows:

1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;

2. The amount of rent to be paid by FKI for the first twenty-five (25) years is P40,126.00
perannum.11

The Deed of Donation also stipulated that the lease over the subject property is renewable for another
period of twenty-five (25) years “upon mutual agreement” of FKI and the respondent.12 In which case,
the amount of rent shall be determined in accordance with item 2(g) of the Deed of
Donation, viz:chanrobles virtua1aw 1ibrary

g. The rental for the second 25 years shall be the subject of mutual agreement and in case of
disagreement the matter shall be referred to a Board of three Arbitrators appointed and with powers in
accordance with the Arbitration Law of the Philippines, Republic Act 878, whose function shall be to
decide the current fair market value of the land excluding the improvements, provided, that, any
increase in the fair market value of the land shall not exceed twenty five percent (25%) of the original
value of the land donated as stated in paragraph 2(c) of this Deed. The rental for the second 25 years
shall not exceed three percent (3%) of the fair market value of the land excluding the improvements as
determined by the Board of Arbitrators.13

In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that reiterated the
provisions of the Deed of Donation, including those relating to the lease of the subject land.

Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of
Donation, FKI was able to continue in its possession and use of the subject land.

2000 Lease Contract

Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donationwas
set to expire, or on 23 May 2000, FKI and respondent executed another contract of lease (2000 Lease
Contract)15 covering the subject land. In this 2000 Lease Contract, FKI and respondent agreed on a new
five-year lease to take effect on the 26th of May 2000, with annual rents ranging from P4,000,000 for the
first year up to P4,900,000 for the fifth year.16cralaw virtualaw library

The 2000 Lease Contract also contained an arbitration clause enforceable in the event the parties come
to disagreement about the “interpretation, application and execution” of the lease, viz:chanrobles
virtua1aw 1ibrary

19. Governing Law – The provisions of this [2000 Lease Contract] shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this [2000 Lease Contract] shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon [FKI and
respondent].17 (Emphasis supplied)

2005 Lease Contract

After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another five
(5) years. This new lease (2005 Lease Contract)18 required FKI to pay a fixed annual rent of
P4,200,000.19 In addition to paying the fixed rent, however, the 2005 Lease Contract also obligated FKI
to make a yearly “donation” of money to the respondent.20 Such donations ranged from P3,000,000 for
the first year up to P3,900,000 for the fifth year.21cralaw virtualaw library

Notably, the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease
Contract, to wit:chanrobles virtua1aw 1ibrary

19. Governing Law – The provisions of this [2005 Lease Contract] shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this [2005 Lease Contract] shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon [FKI and
respondent].22 (Emphasis supplied)

The Assignment and Petitioner’s Refusal to Pay

From 2005 to 2008, FKI faithfully paid the rentals and “donations” due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in favor of
herein petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner executed anAssignment
and Assumption of Lease and Donation25—wherein FKI, with the conformity of the respondent, formally
assigned all of its interests and obligations under the Amended Deed of Donation and the 2005 Lease
Contract in favor of petitioner.

The following year, petitioner discontinued the payment of the rent and “donation” under the
2005Lease Contract.

Petitioner’s refusal to pay such rent and “donation” emanated from its belief that the rental stipulations
of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they
violated one of the “material conditions” of the donation of the subject land, as stated in the Deed of
Donation and Amended Deed of Donation.26cralaw virtualaw library

According to petitioner, the Deed of Donation and Amended Deed of Donation actually established not
only one but two (2) lease agreements between FKI and respondent, i.e., one lease for the first twenty-
five (25) years or from 1975 to 2000, and another lease for the next twenty-five (25) years thereafter or
from 2000 to 2025.27 Both leases are material conditions of the donation of the subject land.

Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was
not fixed in the Deed of Donation and Amended Deed of Donation, both deeds nevertheless prescribed
rules and limitations by which the same may be determined. Such rules and limitations ought to be
observed in any succeeding lease agreements between petitioner and respondent for they are, in
themselves, material conditions of the donation of the subject land.28cralaw virtualaw library

In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of
Donationthat supposedly limits the amount of rent for the lease over the second twenty-five (25) years
to only “three percent (3%) of the fair market value of the [subject] land excluding the
improvements.29cralaw virtualaw library

For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease
Contractcannot be enforced as they are clearly, in view of their exorbitant exactions, in violation of the
aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of Donation.
Consequently, petitioner insists that the amount of rent it has to pay thereon is and must still be
governed by the limitations prescribed in the Deed of Donation and Amended Deed of Donation.30cralaw
virtualaw library

The Demand Letters

On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter of its
default “per Section 12 of the [2005 Lease Contract]” and demanding for the settlement of the rent and
“donation” due for the year 2009. Respondent, in the same letter, further intimated of cancelling
the 2005 Lease Contract should petitioner fail to settle the said obligations.32 Petitioner received theFirst
Demand Letter on 2 June 2009.33cralaw virtualaw library

On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the
rental stipulations of the 2005 Lease Contract—calling them “severely disproportionate,”
“unconscionable” and “in clear violation to the nominal rentals mandated by the Amended Deed of
Donation.” In lieu of the amount demanded by the respondent, which purportedly totaled to
P8,394,000.00, exclusive of interests, petitioner offered to pay only P80,502.79,35 in accordance with the
rental provisions of the Deed of Donation and Amended Deed of Donation.36 Respondent refused this
offer.37cralaw virtualaw library

On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease Contract.
The Second Demand Letter also contained a demand for petitioner to “immediately vacate the leased
premises” should it fail to pay such obligations within seven (7) days from its receipt of the letter.39The
respondent warned of taking “legal steps” in the event that petitioner failed to comply with any of the
said demands.40 Petitioner received the Second Demand Letter on 26 September 2009.41cralaw virtualaw
library

Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009,
petitioner filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission or
cancellation of the Deed of Donation and Amended Deed of Donation against the respondent. This case
is currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.

The Ejectment Suit

On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the
Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and
was docketed as Civil Case No. 2009-307.

On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it, petitioner
reiterated its objection over the rental stipulations of the 2005 Lease Contract for being violative of the
material conditions of the Deed of Donation and Amended Deed of Donation.45 In addition to the
foregoing, however, petitioner also interposed the following defenses:

1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in
view of the insufficiency of respondent’s demand.46 The First Demand Letter did not contain an
 actual demand to vacate the premises and, therefore, the refusal to comply therewith does not
give rise to an action for unlawful detainer.47cralaw virtualaw library

2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same until the
disagreement between the parties is first referred to arbitration pursuant to the arbitration
clause of the 2005 Lease Contract.48cralaw virtualaw library

3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would not lie
as the 2005 Lease Contract is void ab initio.49 The stipulation in the 2005 Lease Contractrequiring
petitioner to give yearly “donations” to respondent is a simulation, for they are, in fact, parts of
the rent.50 Such grants were only denominated as “donations” in the contract so that the
respondent—a non-stock and non-profit corporation—could evade payment of the taxes
otherwise due thereon.51

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

Rulings of the MeTC, RTC and Court of Appeals

On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to
dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the
petitioner with respect to the issues regarding the insufficiency of the respondent’s demand and the
nullity of the 2005 Lease Contract.54 The MeTC thus disposed:chanrobles virtua1aw 1ibrary

WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to

costs.

SO ORDERED.55

The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch 274 of
the RTC of Parañaque City and was docketed as Civil Case No. 10-0255.

On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from the
subject land:chanrobles virtua1aw 1ibrary

WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial Court,
Branch 77, Parañaque City, is hereby reversed, judgment is thus rendered in favor of the plaintiff-
appellant and against the defendant-appellee, and ordering the latter –

(1) to vacate the lease[d] premises made subject of the case and to restore the possession thereof to
the plaintiff-appellant;

(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two Thousand
Four Hundred Thirty Six Pesos (P9,362,436.00), penalties and net of 5% withholding tax, for the
lease period from May 25, 2009 to May 25, 2010 and such monthly rental as will accrue during the
pendency of this case;
(3) to pay attorney’s fees in the sum of P100,000.00 plus appearance fee of P3,000.00;

(4) and costs of suit.

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

SO ORDERED.57

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

1. The respondent had adequately complied with the requirement of demand as a jurisdictional
precursor to an unlawful detainer action.58 The First Demand Letter, in substance, contains a
demand for petitioner to vacate when it mentioned that it was a notice “per Section 12 of the
[2005 Lease Contract].”59 Moreover, the issue of sufficiency of the respondent’s demand ought
to have been laid to rest by the Second Demand Letter which, though not submitted in evidence,
was nonetheless admitted by petitioner as containing a “demand to eject” in itsAnswer with
Compulsory Counterclaim.60cralaw virtualaw library

2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at
the same time, impugn such contract’s validity.61 Even assuming that it can, petitioner still did
not file a formal application before the MeTC so as to render such arbitration clause
operational.62 At any rate, the MeTC would not be precluded from exercising its jurisdiction over
an action for unlawful detainer, over which, it has exclusive original jurisdiction.63cralaw
virtualaw library

3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was not able to
adduce any evidence to support its allegation that the same is void.64 There was, in this case, no
evidence that respondent is guilty of any tax evasion.65

Aggrieved, the petitioner appealed to the Court of Appeals.

On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:chanrobles virtua1aw
1ibrary

WHEREFORE, the petition is DENIED. The assailed Decision of the Regional Trial Court of Parañaque City,
Branch 274, in Civil Case No. 10-0255 is AFFIRMED.

xxxx

SO ORDERED. 67

Hence, this appeal.

On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary Restraining
Order68 staying the immediate implementation of the decisions adverse to it.

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

For this reason, We grant the petition.

Present Dispute is Arbitrable Under the Arbitration Clause of the 2005 Lease Agreement Contract

Going back to the records of this case, it is discernable that the dispute between the petitioner and
respondent emanates from the rental stipulations of the 2005 Lease Contract. The respondent insists
upon the enforceability and validity of such stipulations, whereas, petitioner, in substance, repudiates
them. It is from petitioner’s apparent breach of the 2005 Lease Contract that respondent filed the
instant unlawful detainer action.

One cannot escape the conclusion that, under the foregoing premises, the dispute between the
petitioner and respondent arose from the application or execution of the 2005 Lease Contract.
Undoubtedly, such kinds of dispute are covered by the arbitration clause of the 2005 Lease Contractto
wit:chanrobles virtua1aw 1ibrary

19. Governing Law – The provisions of this [2005 Lease Contract] shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this [2005 Lease Contract] shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon [FKI and
respondent].69 (Emphasis supplied)

The arbitration clause of the 2005 Lease Contract stipulates that “any disagreement” as to the
“interpretation, application or execution” of the 2005 Lease Contract ought to be submitted to
arbitration.70 To the mind of this Court, such stipulation is clear and is comprehensive enough so as to
include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contractincluding the
one that presently besets petitioner and respondent.

The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain
legal effects. However, before discussing what these legal effects are, We shall first deal with the
challenges posed against the application of such arbitration clause.

Challenges Against the Application of the Arbitration Clause of the 2005 Lease Contract

Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as well
as the MeTC, RTC and the Court of Appeals, vouched for the non-application of the same in the instant
case. A plethora of arguments was hurled in favor of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against the
application of the arbitration clause of the 2005 Lease Contract:

1. The disagreement between the petitioner and respondent is non-arbitrable as it will inevitably
touch upon the issue of the validity of the 2005 Lease Contract.71 It was submitted that one of
the reasons offered by the petitioner in justifying its failure to pay under the 2005 Lease
Contract was the nullity of such contract for being contrary to law and public policy.72 The
Supreme Court, in Gonzales v. Climax Mining, Ltd.,73 held that “the validity of contract cannot
be subject of arbitration proceedings” as such questions are “legal in nature and require the
application and interpretation of laws and jurisprudence which is necessarily a judicial
function.”74cralaw virtualaw library

2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at
the same time, impugn such contract’s validity.75cralaw virtualaw library

3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the 2005
Lease Contract, petitioner still did not file a formal application before the MeTC so as to render
such arbitration clause operational.76 Section 24 of Republic Act No. 9285 requires the party
seeking arbitration to first file a “request” or an application therefor with the court not later
than the preliminary conference.77cralaw virtualaw library

4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR) proceedings
before the RTC.78 Hence, a further referral of the dispute to arbitration would only be
circuitous.79 Moreover, an ejectment case, in view of its summary nature, already fulfills the
prime purpose of arbitration, i.e., to provide parties in conflict with an expedient method for the
resolution of their dispute.80 Arbitration then would no longer be necessary in this case.81

None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the petitioner and
respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease Contract.
While it may be conceded that in the arbitration of such disagreement, the validity of the2005 Lease
Contract, or at least, of such contract’s rental stipulations would have to be determined, the same would
not render such disagreement non-arbitrable. The quotation from Gonzales that was used to justify the
contrary position was taken out of context. A rereading of Gonzales would fix its relevance to this case.

In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and
Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance Agreement
and other mining related agreements entered into by private parties.82 Grounds invoked for the
nullification of such agreements include fraud and unconstitutionality.83 The pivotal issue that
confronted the Court then was whether the PA-MGB has jurisdiction over that particular arbitration
complaint. Stated otherwise, the question was whether the complaint for arbitration raises arbitrable
issues that the PA-MGB can take cognizance of.

Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to
take cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No.
7942, or the Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only
over mining disputes, i.e., disputes involving “rights to mining areas,” “mineral agreements or permits,”
and “surface owners, occupants, claimholders or concessionaires” requiring the technical knowledge and
experience of mining authorities in order to be resolved.84 Accordingly, since the complaint for
arbitration in Gonzales did not raise mining disputes as contemplated under R.A. No. 7942 but only
issues relating to the validity of certain mining related agreements, this Court held that such complaint
could not be arbitrated before the PA-MGB.85 It is in this context that we made the pronouncement now
in discussion:chanrobles virtua1aw 1ibrary

Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the
parties as to some provisions of the contract between them, which needs the interpretation and the
application of that particular knowledge and expertise possessed by members of that Panel. It is not
proper when one of the parties repudiates the existence or validity of such contract or agreement on
the ground of fraud or oppression as in this case. The validity of the contract cannot be subject of
arbitration proceedings. Allegations of fraud and duress in the execution of a contract are matters
within the jurisdiction of the ordinary courts of law. These questions are legal in nature and require the
application and interpretation of laws and jurisprudence which is necessarily a judicial
function.86 (Emphasis supplied)

The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground
that the issue raised therein, i.e., the validity of contracts, is per se non-arbitrable. The real
consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon the
jurisdiction of the PA-MGB as an arbitral body. Gonzales rejected the complaint for arbitration because
the issue raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason, and only for
this reason, that such issue is rendered non-arbitrable before the PA-MGB. As stated beforehand, R.A.
No. 7942 clearly limited the jurisdiction of the PA-MGB only to mining disputes.87cralaw virtualaw library

Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc.
v. San Fernando Regal Trading, Inc.88 In Cargill, this Court answered the question of whether issues
involving the rescission of a contract are arbitrable. The respondent in Cargill argued against
arbitrability, also citing therein Gonzales. After dissecting Gonzales, this Court ruled in favor of
arbitrability.89 Thus, We held:chanrobles virtua1aw 1ibrary

Respondent contends that assuming that the existence of the contract and the arbitration clause is
conceded, the CA's decision declining referral of the parties' dispute to arbitration is still correct. It
claims that its complaint in the RTC presents the issue of whether under the facts alleged, it is entitled to
rescind the contract with damages; and that issue constitutes a judicial question or one that requires the
exercise of judicial function and cannot be the subject of an arbitration proceeding. Respondent cites
our ruling in Gonzales, wherein we held that a panel of arbitrator is bereft of jurisdiction over the
complaint for declaration of nullity/or termination of the subject contracts on the grounds of fraud and
oppression attendant to the execution of the addendum contract and the other contracts emanating
from it, and that the complaint should have been filed with the regular courts as it involved issues which
are judicial in nature.

Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90 (Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding the
fact that it assails the validity of such contract. This is due to the doctrine of separability.91cralaw
virtualaw library

Under the doctrine of separability, an arbitration agreement is considered as independent of the main
contract.92 Being a separate contract in itself, the arbitration agreement may thus be invoked regardless
of the possible nullity or invalidity of the main contract.93cralaw virtualaw library

Once again instructive is Cargill, wherein this Court held that, as a further consequence of the doctrine
of separability, even the very party who repudiates the main contract may invoke its arbitration
clause.94cralaw virtualaw library

Third. The operation of the arbitration clause in this case is not at all defeated by the failure of the
petitioner to file a formal “request” or application therefor with the MeTC. We find that the filing of a
“request” pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an arbitration clause
may be validly invoked in a pending suit.

Section 24 of R.A. No. 9285 reads:chanrobles virtua1aw 1ibrary

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

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

RULE 4: REFERRAL TO ADR

Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration
agreement, whether contained in an arbitration clause or in a submission agreement, may request the
court to refer the parties to arbitration in accordance with such agreement.

Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action is filed. -
The request for referral shall be made not later than the pre-trial conference. After the pre-trial
conference, the court will only act upon the request for referral if it is made with the agreement of all
parties to the case.

(B) Submission agreement. - If there is no existing arbitration agreement at the time the case is filed but
the parties subsequently enter into an arbitration agreement, they may request the court to refer their
dispute to arbitration at any time during the proceedings.

Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which shall
state that the dispute is covered by an arbitration agreement.
Apart from other submissions, the movant shall attach to his motion an authentic copy of the arbitration
agreement.

The request shall contain a notice of hearing addressed to all parties specifying the date and time when
it would be heard. The party making the request shall serve it upon the respondent to give him the
opportunity to file a comment or opposition as provided in the immediately succeeding Rule before the
hearing. [Emphasis ours; italics original]

Attention must be paid, however, to the salient wordings of Rule 4.1. It reads: “[a] party to a pending
action filed in violation of the arbitration agreement x x x may request the court to refer the parties to
arbitration in accordance with such agreement.”

In using the word “may” to qualify the act of filing a “request” under Section 24 of R.A. No. 9285, the
Special ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a pending
suit solely via such “request.” After all, non-compliance with an arbitration agreement is a valid defense
to any offending suit and, as such, may even be raised in an answer as provided in our ordinary rules of
procedure.95cralaw virtualaw library

In this case, it is conceded that petitioner was not able to file a separate “request” of arbitration before
the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with
Counterclaim, had already apprised the MeTC of the existence of the arbitration clause in the 2005
Lease Contract96 and, more significantly, of its desire to have the same enforced in this case.97 This act of
petitioner is enough valid invocation of his right to arbitrate.

Fourth. The fact that the petitioner and respondent already underwent through JDR proceedings before
the RTC, will not make the subsequent conduct of arbitration between the parties unnecessary or
circuitous. The JDR system is substantially different from arbitration proceedings.

The JDR framework is based on the processes of mediation, conciliation or early neutral evaluationwhich
entails the submission of a dispute before a “JDR judge” who shall merely “facilitate settlement”
between the parties in conflict or make a “non-binding evaluation or assessment of the chances of each
party’s case.”98 Thus in JDR, the JDR judge lacks the authority to render a resolution of the dispute that is
binding upon the parties in conflict. In arbitration, on the other hand, the dispute is submitted to
an arbitrator/s—a neutral third person or a group of thereof—who shall have the authority to render a
resolution binding upon the parties.99cralaw virtualaw library

Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the
subsequent conduct of arbitration a mere surplusage. The failure of the parties in conflict to reach an
amicable settlement before the JDR may, in fact, be supplemented by their resort to arbitration where a
binding resolution to the dispute could finally be achieved. This situation precisely finds application to
the case at bench.

Neither would the summary nature of ejectment cases be a valid reason to disregard the enforcement
of the arbitration clause of the 2005 Lease Contract. Notwithstanding the summary nature of ejectment
cases, arbitration still remains relevant as it aims not only to afford the parties an expeditious method of
resolving their dispute.

A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and
foremost, a product of party autonomy or the freedom of the parties to “make their own arrangements
to resolve their own disputes.”100 Arbitration agreements manifest not only the desire of the parties in
conflict for an expeditious resolution of their dispute. They also represent, if not more so, the parties’
mutual aspiration to achieve such resolution outside of judicial auspices, in a more informal and less
antagonistic environment under the terms of their choosing. Needless to state, this critical feature can
never be satisfied in an ejectment case no matter how summary it may be.

Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease
Agreement in this case, We shall now proceed with the discussion of its legal effects.

Legal Effect of the Application of the Arbitration Clause

Since there really are no legal impediments to the application of the arbitration clause of the 2005
Contract of Lease in this case, We find that the instant unlawful detainer action was instituted in
violation of such clause. The Law, therefore, should have governed the fate of the parties and this
suit:chanrobles virtua1aw 1ibrary

R.A. No. 876

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

R.A. No. 9285

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

It is clear that under the law, the instant unlawful detainer action should have been stayed;101 the
petitioner and the respondent should have been referred to arbitration pursuant to the arbitration
clause of the 2005 Lease Contract. The MeTC, however, did not do so in violation of the law—which
violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.

The violation by the MeTC of the clear directives under R.A. Nos. 876 and 9285 renders invalid all
proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with
Counterclaim—the point when the petitioner and the respondent should have been referred to
arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said point.
Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated and set aside.

The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration
clause of the 2005 Lease Contract.

This Court is not unaware of the apparent harshness of the Decision that it is about to make.
Nonetheless, this Court must make the same if only to stress the point that, in our jurisdiction, bona
fide arbitration agreements are recognized as valid;102 and that laws,103 rules and regulations104 do exist
protecting and ensuring their enforcement as a matter of state policy. Gone should be the days when
courts treat otherwise valid arbitration agreements with disdain and hostility, if not outright
“jealousy,”105 and then get away with it. Courts should instead learn to treat alternative means of
dispute resolution as effective partners in the administration of justice and, in the case of arbitration
agreements, to afford them judicial restraint.106 Today, this Court only performs its part in upholding a
once disregarded state policy.

Civil Case No. CV 09-0346

This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. The case is currently pending before Branch 257 of the RTC, docketed
as Civil Case No. CV 09-0346.

This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve
matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract. However,
since the records of Civil Case No. CV 09-0346 are not before this Court, We can never know with true
certainty and only speculate.

In this light, let a copy of this Decision be also served to Branch 257 of the RTC of Parañaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.

WHEREFORE, premises considered, the petition is hereby GRANTED. Accordingly, We hereby render a
Decision:

1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of
Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of itsAnswer
with Counterclaim;

2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by
petitioner of its Answer with Counterclaim;

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865,

b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of Parañaque
City in Civil Case No. 10-0255,
 c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of Parañaque
City in Civil Case No. 2009-307; and

4. REFERRING the petitioner and the respondent to arbitration pursuant to the arbitration clause
of the 2005 Lease Contract, repeatedly included in the 2000 Lease Contract and in the 1976
Amended Deed of Donation.

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

No costs.chanroblesvirtualawlibrary

SO ORDERED.

Brion, Del Castillo, Abad,* and Perlas-Bernabe, JJ., concur.

 TUNA PROCESSING, INC., G.R. No. 185582
Petitioner,

Present:

CARPIO, J.,
-versus- Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.

PHILIPPINE KINGFORD, INC., Promulgated:

Respondent.
February 29, 2012

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

DECISION

PEREZ, J.:

Can a foreign corporation not licensed to do business in the Philippines, but

which collects royalties from entities in the Philippines, sue here to enforce a foreign
arbitral award?

In this Petition for Review on Certiorari under Rule 45,[1] petitioner Tuna
Processing, Inc. (TPI), a foreign corporation not licensed to do business in the
Philippines, prays that the Resolution[2] dated 21 November 2008 of the Regional
Trial Court (RTC) of Makati City be declared void and the case be remanded to the
RTC for further proceedings. In the assailed Resolution, the RTC dismissed
petitionersPetition for Confirmation, Recognition, and Enforcement of Foreign
Arbitral Award[3] against respondent Philippine Kingford, Inc. (Kingford), a
corporation duly organized and existing under the laws of the Philippines, [4] on the
ground that petitioner lacked legal capacity to sue.[5]
 The Antecedents

On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the

licensor), co-patentee of U.S. Patent No. 5,484,619, Philippine Letters Patent No.
31138, and Indonesian Patent No. ID0003911 (collectively referred to as the
Yamaoka Patent),[6] and five (5) Philippine tuna processors, namely, Angel Seafood
Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz
Seafoods, Inc., and respondent Kingford (collectively referred to as the
sponsors/licensees)[7] entered into a Memorandum of Agreement
[8]
(MOA), pertinent provisions of which read:

1. Background and objectives. The Licensor, co-owner of U.S.Patent No.

5,484,619, Philippine Patent No. 31138, and Indonesian Patent No.
ID0003911 xxx wishes to form an alliance with Sponsors for purposes of
enforcing his three aforementioned patents, granting licenses under those
patents, and collecting royalties.

The Sponsors wish to be licensed under the aforementioned patents in

order to practice the processes claimed in those patents in the United
States, the Philippines, and Indonesia, enforce those patents and collect
royalties in conjunction with Licensor.

xxx

4. Establishment of Tuna Processors, Inc. The parties hereto agree to the

establishment of Tuna Processors, Inc. (TPI), a corporation established
in the State of California, in order to implement the objectives of this
Agreement.
5. Bank account. TPI shall open and maintain bank accounts in the United
States, which will be used exclusively to deposit funds that it will collect
and to disburse cash it will be obligated to spend in connection with the
implementation of this Agreement.

6. Ownership of TPI. TPI shall be owned by the Sponsors and

Licensor. Licensor shall be assigned one share of TPI for the purpose of
being elected as member of the board of directors. The remaining shares
of TPI shall be held by the Sponsors according to their respective equity
shares. [9]

xxx
The parties likewise executed a Supplemental Memorandum of Agreement[10] dated
15 January 2003 and an Agreement to Amend Memorandum of Agreement[11] dated
14 July 2003.

Due to a series of events not mentioned in the petition, the licensees, including
respondent Kingford, withdrew from petitioner TPI and correspondingly reneged on
their obligations.[12] Petitioner submitted the dispute for arbitration before the
International Centre for Dispute Resolution in the State of California, United States
and won the case against respondent.[13] Pertinent portions of the award read:

13.1 Within thirty (30) days from the date of transmittal of this Award to
the Parties, pursuant to the terms of this award, the total sum to be paid
by RESPONDENT KINGFORD to CLAIMANT TPI, is the sum
of ONE MILLION SEVEN HUNDRED FIFTY THOUSAND EIGHT
HUNDRED FORTY SIX DOLLARS AND TEN CENTS
($1,750,846.10).
(A) For breach of the MOA by not paying past due
assessments, RESPONDENT KINGFORD shall pay CLAIMANT the
total sum of TWO HUNDRED TWENTY NINE THOUSAND THREE
HUNDRED AND FIFTY FIVE DOLLARS AND NINETY CENTS
($229,355.90) which is 20% of MOA assessments since September 1,
2005[;]

(B) For breach of the MOA in failing to cooperate with CLAIMANT

TPI in fulfilling the objectives of the MOA, RESPONDENT
KINGFORD shall pay CLAIMANT the total sum of TWO HUNDRED
SEVENTY ONE THOUSAND FOUR HUNDRED NINETY
DOLLARS AND TWENTY CENTS ($271,490.20)[;][14] and

(C) For violation of THE LANHAM ACT and infringement of

the YAMAOKA 619 PATENT, RESPONDENT KINGFORD shall
pay CLAIMANT the total sum of ONE MILLION TWO HUNDRED
FIFTY THOUSAND DOLLARS AND NO CENTS
($1,250,000.00). xxx

xxx[15]
 To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before the
RTC of Makati City. The petition was raffled to Branch 150 presided by Judge Elmo
M. Alameda.

At Branch 150, respondent Kingford filed a Motion to Dismiss.[16] After the

court denied the motion for lack of merit,[17] respondent sought for the inhibition of
Judge Alameda and moved for the reconsideration of the order denying the
motion.[18] Judge Alameda inhibited himself notwithstanding [t]he unfounded
allegations and unsubstantiated assertions in the motion.[19] Judge Cedrick O. Ruiz
of Branch 61, to which the case was re-raffled, in turn, granted respondents Motion
for Reconsideration and dismissed the petition on the ground that the petitioner
lacked legal capacity to sue in the Philippines.[20]

Petitioner TPI now seeks to nullify, in this instant Petition for Review on
Certiorari under Rule 45, the order of the trial court dismissing its Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral Award.

Issue

The core issue in this case is whether or not the court a quo was correct in so
dismissing the petition on the ground of petitioners lack of legal capacity to sue.

Our Ruling

The petition is impressed with merit.

The Corporation Code of the Philippines expressly provides:

Sec. 133. Doing business without a license. - No foreign corporation

transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under
Philippine laws.
It is pursuant to the aforequoted provision that the court a quo dismissed the
petition. Thus:
Herein plaintiff TPIs Petition, etc. acknowledges that it is a foreign
corporation established in the State of California and was given the
exclusive right to license or sublicense the Yamaoka Patent and was
assigned the exclusive right to enforce the said patent and collect
corresponding royalties in the Philippines. TPI likewise admits that it does
not have a license to do business in the Philippines.

There is no doubt, therefore, in the mind of this Court that TPI has
been doing business in the Philippines, but sans a license to do so issued by
the concerned government agency of the Republic of the Philippines, when
it collected royalties from five (5) Philippine tuna processors[,] namely[,]
Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna
Resources, Santa Cruz Seafoods, Inc. and respondent Philippine Kingford,
Inc. This being the real situation, TPI cannot be permitted to maintain or
intervene in any action, suit or proceedings in any court or administrative
agency of the Philippines. A priori, the Petition, etc. extant of the plaintiff
TPI should be dismissed for it does not have the legal personality to sue in
the Philippines.[21]

The petitioner counters, however, that it is entitled to seek for the recognition
and enforcement of the subject foreign arbitral award in accordance with Republic
Act No. 9285 (Alternative Dispute Resolution Act of 2004),[22] the Convention on
the Recognition and Enforcement of Foreign Arbitral Awards drafted during the
United Nations Conference on International Commercial Arbitration in 1958 (New
York Convention), and the UNCITRAL Model Law on International Commercial
Arbitration (Model Law),[23] as none of these specifically requires that the party
seeking for the enforcement should have legal capacity to sue. It anchors its
argument on the following:

In the present case, enforcement has been effectively refused on a ground

not found in the [Alternative Dispute Resolution Act of 2004], New York
Convention, or Model Law. It is for this reason that TPI has brought this
matter before this most Honorable Court, as it [i]s imperative to clarify
whether the Philippines international obligations and State policy to
strengthen arbitration as a means of dispute resolution may be defeated by
misplaced technical considerations not found in the relevant laws.[24]
 Simply put, how do we reconcile the provisions of the Corporation Code of
the Philippines on one hand, and the Alternative Dispute Resolution Act of 2004,
the New York Convention and the Model Lawon the other?

In several cases, this Court had the occasion to discuss the nature and
applicability of the Corporation Code of the Philippines, a general law, viz-a-viz
other special laws. Thus, in Koruga v. Arcenas, Jr.,[25] this Court rejected the
application of the Corporation Code and applied the New Central Bank Act. It
ratiocinated:

Korugas invocation of the provisions of the Corporation Code is

misplaced. In an earlier case with similar antecedents, we ruled that:
The Corporation Code, however, is a general law
applying to all types of corporations, while the New Central
Bank Act regulates specifically banks and other financial
institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter shall
prevail generalia specialibus non derogant. (Emphasis
supplied)[26]

Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential

Agrarian Reform Council,[27] this Court held:

Without doubt, the Corporation Code is the general law providing for
the formation, organization and regulation of private corporations. On the
other hand, RA 6657 is the special law on agrarian reform. As between a
general and special law, the latter shall prevailgeneralia specialibus non
derogant.[28]

Following the same principle, the Alternative Dispute Resolution Act of

2004 shall apply in this case as the Act, as its title - An Act to Institutionalize the Use
of an Alternative Dispute Resolution System in the Philippines and to Establish the
Office for Alternative Dispute Resolution, and for Other Purposes - would suggest,
is a law especially enacted to actively promote party autonomy in the resolution of
disputes or the freedom of the party to make their own arrangements to resolve their
disputes.[29] It specifically provides exclusive grounds available to the party
opposing an application for recognition and enforcement of the arbitral award.[30]
 Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal
law, applies in the instant petition, we do not see the need to discuss compliance with
international obligations under the New York Convention and the Model Law. After
all, both already form part of the law.

In particular, the Alternative Dispute Resolution Act of 2004 incorporated

the New York Convention in the Act by specifically providing:

SEC. 42. Application of the New York Convention. - The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by the said Convention.

xxx
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a
foreign arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the procedural
rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the regional trial court.

It also expressly adopted the Model Law, to wit:

Sec. 19. Adoption of the Model Law on International Commercial

Arbitration. International commercial arbitration shall be governed by the
Model Law on International Commercial Arbitration (the Model Law)
adopted by the United Nations Commission on International Trade Law on
June 21, 1985 xxx.
Now, does a foreign corporation not licensed to do business in the Philippines
have legal capacity to sue under the provisions of the Alternative Dispute Resolution
Act of 2004? We answer in the affirmative.

Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the
opposing party in an application for recognition and enforcement of the arbitral
award may raise only those grounds that were enumerated under Article V of
the New York Convention, to wit:

Article V
 1. Recognition and enforcement of the award may be refused, at the request
of the party against whom it is invoked, only if that party furnishes to the
competent authority where the recognition and enforcement is sought,
proof that:
(a) The parties to the agreement referred to in article II were, under the law
applicable to them, under some incapacity, or the said agreement is not
valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was made;
or
(b) The party against whom the award is invoked was not given proper
notice of the appointment of the arbitrator or of the arbitration proceedings
or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions
on matters beyond the scope of the submission to arbitration, provided that,
if the decisions on matters submitted to arbitration can be separated from
those not so submitted, that part of the award which contains decisions on
matters submitted to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was
not in accordance with the agreement of the parties, or, failing such
agreement, was not in accordance with the law of the country where the
arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set
aside or suspended by a competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be refused
if the competent authority in the country where recognition and
enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by
arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the
public policy of that country.

Clearly, not one of these exclusive grounds touched on the capacity to sue of the
party seeking the recognition and enforcement of the award.

Pertinent provisions of the Special Rules of Court on Alternative Dispute

Resolution,[31] which was promulgated by the Supreme Court, likewise support this
position.
 Rule 13.1 of the Special Rules provides that [a]ny party to a foreign arbitration
may petition the court to recognize and enforce a foreign arbitral award. The
contents of such petition are enumerated in Rule 13.5.[32] Capacity to sue is not
included. Oppositely, in the Rule on local arbitral awards or arbitrations in instances
where the place of arbitration is in the Philippines,[33] it is specifically required that
a petition to determine any question concerning the existence, validity and
enforceability of such arbitration agreement[34] available to the parties before the
commencement of arbitration and/or a petition for judicial relief from the ruling of
the arbitral tribunal on a preliminary question upholding or declining its
jurisdiction[35] after arbitration has already commenced should state [t]he facts
showing that the persons named as petitioner or respondent have legal capacity to
sue or be sued.[36]

Indeed, it is in the best interest of justice that in the enforecement of a

foreign arbitral award, we deny availment by the losing party of the rule that bars
foreign corporations not licensed to do business in the
Philippines from maintaining a suit in our courts. When a party enters
into a contract containing a foreign arbitration clause and, as in this
case, in fact submits itself to arbitration, it becomes bound by the contract, by the
arbitration and by the result of arbitration, conceding thereby the capacity of
the other party to enter into the contract, participate in the arbitration and cause the
implementation of the result.Although not on all fours with the instant case, also
worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting
Opinion in Asset Privatization Trust v. Court of Appeals,[37] to wit:

xxx Arbitration, as an alternative mode of settlement, is gaining

adherents in legal and judicial circles here and abroad. If its tested
mechanism can simply be ignored by an aggrieved party, one who, it must
be stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very essence of
mutuality inherent in consensual contracts.[38]
Clearly, on the matter of capacity to sue, a foreign arbitral award should be
respected not because it is favored over domestic laws and procedures, but because
Republic Act No. 9285 has certainly erased any conflict of law question.
 Finally, even assuming, only for the sake of argument, that the court a
quo correctly observed that the Model Law, not the New York Convention, governs
the subject arbitral award,[39] petitioner may still seek recognition and enforcement
of the award in Philippine court, since the Model Law prescribes substantially
identical exclusive grounds for refusing recognition or enforcement.[40]
Premises considered, petitioner TPI, although not licensed to do business in
the Philippines, may seek recognition and enforcement of the foreign arbitral award
in accordance with the provisions of theAlternative Dispute Resolution Act of 2004.

II

The remaining arguments of respondent Kingford are likewise unmeritorious.

First. There is no need to consider respondents contention that petitioner TPI

improperly raised a question of fact when it posited that its act of entering into a
MOA should not be considered doing business in the Philippines for the purpose of
determining capacity to sue. We reiterate that the foreign corporations capacity to
sue in the Philippines is not material insofar as the recognition and enforcement of a
foreign arbitral award is concerned.

Second. Respondent cannot fault petitioner for not filing a motion for
reconsideration of the assailed Resolution dated 21 November 2008 dismissing the
case. We have, time and again, ruled that the prior filing of a motion for
reconsideration is not required in certiorari under Rule 45.[41]

Third. While we agree that petitioner failed to observe the principle of

hierarchy of courts, which, under ordinary circumstances, warrants the outright
dismissal of the case,[42] we opt to relax the rules following the pronouncement
in Chua v. Ang,[43] to wit:

[I]t must be remembered that [the principle of hierarchy of courts]

generally applies to cases involving conflicting factual allegations. Cases
which depend on disputed facts for decision cannot be brought
immediately before us as we are not triers of facts.[44] A strict
application of this rule may be excused when the reason behind the rule is
 not present in a case, as in the present case, where the issues are not factual
but purely legal. In these types of questions, this Court has the ultimate say
so that we merely abbreviate the review process if we, because of the
unique circumstances of a case, choose to hear and decide the legal issues
outright.[45]

Moreover, the novelty and the paramount importance of the issue herein raised
should be seriously considered.[46] Surely, there is a need to take cognizance of the
case not only to guide the bench and the bar, but if only to strengthen arbitration as
a means of dispute resolution, and uphold the policy of the State embodied in
the Alternative Dispute Resolution Act of 2004, to wit:

Sec. 2. Declaration of Policy. - It is hereby declared the policy of

the State to actively promote party autonomy in the resolution of disputes
or the freedom of the party to make their own arrangements to resolve their
disputes. Towards this end, the State shall encourage and actively promote
the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. xxx

Fourth. As regards the issue on the validity and enforceability of the foreign
arbitral award, we leave its determination to the court a quo where its recognition
and enforcement is being sought.

Fifth. Respondent claims that petitioner failed to furnish the court of origin a
copy of the motion for time to file petition for review on certiorari before the
petition was filed with this Court.[47] We, however, find petitioners reply in
order. Thus:

26. Admittedly, reference to Branch 67 in petitioner TPIs Motion

for Time to File a Petition for Review on Certiorari under Rule 45 is a
typographical error. As correctly pointed out by respondent Kingford, the
order sought to be assailed originated from Regional Trial Court, Makati
City, Branch 61.

27. xxx Upon confirmation with the Regional Trial Court, Makati
City, Branch 61, a copy of petitioner TPIs motion was received by the
Metropolitan Trial Court, Makati City, Branch 67. On 8 January 2009, the
motion was forwarded to the Regional Trial Court, Makati City, Branch
61.[48]
 All considered, petitioner TPI, although a foreign corporation not licensed to
do business in the Philippines, is not, for that reason alone, precluded from filing
the Petition for Confirmation, Recognition, and Enforcement of Foreign Arbitral
Award before a Philippine court.

WHEREFORE, the Resolution dated 21 November 2008 of the Regional

Trial Court, Branch 61, Makati City in Special Proceedings No. M-6533 is
hereby REVERSED and SET ASIDE. The case isREMANDED to Branch 61 for
further proceedings.
SO ORDERED.
NATIONAL IRRIGATION ADMINISTRATION (NIA), petitioner,
vs. HONORABLE COURT OF APPEALS (4th Division),
CONSTRUCTION INDUSTRY ARBITRATION COMMISSION, and
HYDRO RESOURCES CONTRACTORS
CORPORATION, respondents.

DECISION
DAVIDE, JR., C.J.:

In this special civil action for certiorari under Rule 65 of the Rules of Court, the
National Irrigation Administration (hereafter NIA), seeks to annul and set aside the
Resolutions[1]of the Court of Appeals in CA-GR. SP No. 37180 dated 28 June 1996 and
24 February 1997, which dismissed respectively NIAs petition
for certiorari and prohibition against the Construction Industry Arbitration
Commission (hereafter CIAC), and the motion for reconsideration thereafter filed.
Records show that in a competitive bidding held by NIA in August 1978, Hydro
Resources Contractors Corporation (hereafter HYDRO) was awarded Contract MPI-C-
2 for the construction of the main civil works of the Magat River Multi-Purpose
Project. The contract provided that HYDRO would be paid partly in Philippine pesos
and partly in U.S. dollars. HYDRO substantially completed the works under the
contract in 1982 and final acceptance by NIA was made in 1984.HYDRO thereafter
determined that it still had an account receivable from NIA representing the dollar rate
differential of the price escalation for the contract.[2]
After unsuccessfully pursuing its case with NIA, HYDRO, on 7 December 1994,
filed with the CIAC a Request for Adjudication of the aforesaid claim. HYDRO
nominated six arbitrators for the arbitration panel, from among whom CIAC appointed
Engr. Lauro M. Cruz. On 6 January 1995, NIA filed its Answer wherein it questioned
the jurisdiction of the CIAC alleging lack of cause of action, laches and estoppel in
view of HYDROs alleged failure to avail of its right to submit the dispute to arbitration
within the prescribed period as provided in the contract. On the same date, NIA filed a
Compliance wherein it nominated six arbitrators, from among whom CIAC appointed
Atty. Custodio O. Parlade, and made a counterclaim for P1,000,000 as moral damages;
at least P100,000 as exemplary damages; P100,000 as attorneys fees; and the costs of
the arbitration.[3]
The two designated arbitrators appointed Certified Public Accountant Joven B.
Joaquin as Chairman of the Arbitration Panel. The parties were required to submit
copies of the evidence they intended to present during the proceedings and were
provided the draft Terms of Reference.[4]
 At the preliminary conference, NIA through its counsel Atty. Joy C. Legaspi of the
Office of the Government Corporate Counsel, manifested that it could not admit the
genuineness of HYDROs evidence since NIAs records had already been
destroyed. NIA requested an opportunity to examine the originals of the documents
which HYDRO agreed to provide.[5]
After reaching an accord on the issues to be considered by the arbitration panel, the
parties scheduled the dates of hearings and of submission of simultaneous memoranda.[6]
On 13 March 1995, NIA filed a Motion to Dismiss[7]alleging lack of jurisdiction
over the disputes. NIA contended that there was no agreement with HYDRO to submit
the dispute to CIAC for arbitration considering that the construction contract was
executed in 1978 and the project completed in 1982, whereas the Construction Industry
Arbitration Law creating CIAC was signed only in 1985; and that while they have
agreed to arbitration as a mode of settlement of disputes, they could not have
contemplated submission of their disputes to CIAC. NIA further argued that records
show that it had not voluntarily submitted itself to arbitration by CIAC citing TESCO
Services, Inc. v. Hon. Abraham Vera, et al.,[8]wherein it was ruled:

CIAC did not acquire jurisdiction over the dispute arising from the sub-contract
agreement between petitioner TESCO and private respondent LAROSA. The records
do not show that the parties agreed to submit the disputes to arbitration by the CIAC
xxxx. While both parties in the sub-contract had agreed to submit the matter to
arbitration, this was only between themselves, no request having been made by both
with the CIAC. Hence, as already stated, the CIAC, has no jurisdiction over the
dispute. xxxx. Nowhere in the said article (sub-contract) does it mention the CIAC,
much less, vest jurisdiction with the CIAC.

On 11 April 1995, the arbitral body issued an order [9] which deferred the
determination of the motion to dismiss and resolved to proceed with the hearing of the
case on the merits as the grounds cited by NIA did not seem to be indubitable. NIA filed
a motion for reconsideration of the aforesaid Order. CIAC in denying the motion for
reconsideration ruled that it has jurisdiction over the HYDROs claim over NIA pursuant
to E.O 1008 and that the hearing should proceed as scheduled.[10]
On 26 May 1996, NIA filed with the Court of Appeals an original action
of certiorari and prohibition with prayer for restraining order and/or injunction, seeking
to annul the Orders of the CIAC for having been issued without or in excess of
jurisdiction. In support of its petition NIA alleged that:
A
RESPONDENT CIAC HAS NO AUTHORITY OR JURIDICTION TO HEAR AND
TRY THIS DISPUTE BETWEEN THE HEREIN PARTIES AS E.O. NO. 1008 HAD
NO RETROACTIVE EFFECT.
B

THE DISPUTE BETWEEN THE PARTIES SHOULD BE SETTLED IN

ACCORDANCE WITH GC NO. 25, ART. 2046 OF THE CIVIL CODE AND R.A.
NO. 876 THE GOVERNING LAWS AT THE TIME CONTRACT WAS
EXECUTED AND TERMINATED.
C

E.O. NO. 1008 IS A SUBSTANTIVE LAW, NOT MERELY PROCEDURAL AS

RULED BY THE CIAC.
D

AN INDORSEMENT OF THE AUDITOR GENERAL DECIDING A

CONTROVERSY IS A DECISION BECAUSE ALL THE ELEMENTS FOR
JUDGMENT ARE THERE; THE CONTROVERSY, THE AUTHORITY TO
DECIDE AND THE DECISION. IF IT IS NOT APPEALED SEASONABLY, THE
SAME BECOMES FINAL.
E

NIA HAS TIMELY RAISED THE ISSUE OF JURISDICTION. IT DID NOT

WAIVE NOR IS IT ESTOPPED FROM ASSAILING THE SAME.
F

THE LEGAL DOCTRINE THAT JURISDICTION IS DETERMINED BY THE STATUTE IN

FORCE AT THE TIME OF THE COMMENCEMENT OF THE ACTION DOES NOT ONLY
APPLY TO THE INSTANT CASE.[11]

The Court of Appeals, after finding that there was no grave abuse of discretion on
the part of the CIAC in issuing the aforesaid Orders, dismissed the petition in its
Resolution dated 28 June 1996. NIAs motion for reconsideration of the said decision
was likewise denied by the Court of Appeals on 26 February 1997.
On 2 June 1997, NIA filed before us an original action for certiorari and prohibition
with urgent prayer for temporary restraining order and writ of preliminary injunction,
praying for the annulment of the Resolutions of the Court of Appeals dated 28 June
1996 and 24 February 1997. In the said special civil action, NIA merely reiterates the
issues it raised before the Court of Appeals. [12]
We take judicial notice that on 10 June 1997, CIAC rendered a decision in the main
case in favor of HYDRO.[13] NIA assailed the said decision with the Court of Appeals. In
view of the pendency of the present petitions before us the appellate court issued a
resolution dated 26 March 1998 holding in abeyance the resolution of the same until
after the instant petitions have been finally decided.[14]
At the outset, we note that the petition suffers from a procedural defect that warrants
its outright dismissal. The questioned resolutions of the Court of Appeals have already
become final and executory by reason of the failure of NIA to appeal therefrom. Instead
of filing this petition for certiorari under Rule 65 of the Rules of Court, NIA should
have filed a timely petition for review under Rule 45.
There is no doubt that the Court of Appeals has jurisdiction over the special civil
action for certiorari under Rule 65 filed before it by NIA. The original jurisdiction of
the Court of Appeals over special civil actions for certiorari is vested upon it under
Section 9(1) of B.P. 129. This jurisdiction is concurrent with the Supreme Court[15] and
with the Regional Trial Court.[16]
Thus, since the Court of Appeals had jurisdiction over the petition under Rule 65,
any alleged errors committed by it in the exercise of its jurisdiction would be errors of
judgment which are reviewable by timely appeal and not by a special civil action
of certiorari.[17] If the aggrieved party fails to do so within the reglementary period, and
the decision accordingly becomes final and executory, he cannot avail himself of the
writ of certiorari, his predicament being the effect of his deliberate inaction.[18]
The appeal from a final disposition of the Court of Appeals is a petition for review
under Rule 45 and not a special civil action under Rule 65 of the Rules of Court, now
Rule 45 and Rule 65, respectively, of the 1997 Rules of Civil Procedure. [19] Rule 45 is
clear that decisions, final orders or resolutions of the Court of Appeals in any case, i.e.,
regardless of the nature of the action or proceedings involved, may be appealed to this
Court by filing a petition for review, which would be but a continuation of the appellate
process over the original case.[20] Under Rule 45 the reglementary period to appeal is
fifteen (15) days from notice of judgment or denial of motion for reconsideration.[21]
In the instant case the Resolution of the Court of Appeals dated 24 February 1997
denying the motion for reconsideration of its Resolution dated 28 June 1997 was
received by NIA on 4 March1997. Thus, it had until 19 March 1997 within which to
perfect its appeal. NIA did not appeal. What it did was to file an original action
for certiorari before this Court, reiterating the issues and arguments it raised before the
Court of Appeals.
 For the writ of certiorari under Rule 65 of the Rules of Court to issue, a petitioner
must show that he has no plain, speedy and adequate remedy in the ordinary course of
law against its perceived grievance.[22] A remedy is considered plain, speedy and
adequate if it will promptly relieve the petitioner from the injurious effects of the
judgment and the acts of the lower court or agency.[23] In this case, appeal was not only
available but also a speedy and adequate remedy.
Obviously, NIA interposed the present special civil action of certiorari not because
it is the speedy and adequate remedy but to make up for the loss, through omission or
oversight, of the right of ordinary appeal. It is elementary that the special civil action
of certiorari is not and cannot be a substitute for an appeal, where the latter remedy is
available, as it was in this case. A special civil action under Rule 65 of the Rules of
Court will not be a cure for failure to timely file a petition for review on certiorari under
Rule 45 of the Rules of Court. [24] Rule 65 is an independent action that cannot be availed
of as a substitute for the lost remedy of an ordinary appeal, including that under Rule
45,[25] especially if such loss or lapse was occasioned by ones own neglect or error in the
choice of remedies.[26]
For obvious reasons the rules forbid recourse to a special civil action
for certiorari if appeal is available, as the remedies of appeal and certiorari are
mutually exclusive and not alternative or successive.[27] Although there are exceptions
to the rules, none is present in the case at bar. NIA failed to show circumstances that
will justify a deviation from the general rule as to make available a petition
for certiorari in lieu of taking an appropriate appeal.
Based on the foregoing, the instant petition should be dismissed.
In any case, even if the issue of technicality is disregarded and recourse under Rule
65 is allowed, the same result would be reached since a review of the questioned
resolutions of the CIAC shows that it committed no grave abuse of discretion.
Contrary to the claim of NIA, the CIAC has jurisdiction over the
controversy. Executive Order No.1008, otherwise known as the Construction Industry
Arbitration Law which was promulgated on 4 February 1985, vests upon CIAC original
and exclusive jurisdiction over disputes arising from, or connected with contracts
entered into by parties involved in construction in the Philippines, whether the dispute
arises before or after the completion of the contract, or after the abandonment or breach
thereof. The disputes may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary
arbitration.[28]
The complaint of HYDRO against NIA on the basis of the contract executed
between them was filed on 7 December 1994, during the effectivity of E.O. No.
1008. Hence, it is well within the jurisdiction of CIAC. The jurisdiction of a court is
determined by the law in force at the time of the commencement of the action.[29]
NIAs argument that CIAC had no jurisdiction to arbitrate on contract which
preceded its existence is untenable. E.O. 1008 is clear that the CIAC has jurisdiction
over all disputes arising from or connected with construction contract whether the
dispute arises before or after the completion of the contract. Thus, the date the parties
entered into a contract and the date of completion of the same, even if these occurred
before the constitution of the CIAC, did not automatically divest the CIAC of
jurisdiction as long as the dispute submitted for arbitration arose after the constitution
of the CIAC. Stated differently, the jurisdiction of CIAC is over the dispute, not the
contract; and the instant dispute having arisen when CIAC was already constituted, the
arbitral board was actually exercising current, not retroactive, jurisdiction. As such,
there is no need to pass upon the issue of whether E.O. No. 1008 is a substantive or
procedural statute.
NIA also contended that the CIAC did not acquire jurisdiction over the dispute since
it was only HYDRO that requested for arbitration. It asserts that to acquire jurisdiction
over a case, as provided under E.O. 1008, the request for arbitration filed with CIAC
should be made by both parties, and hence the request by one party is not enough.
It is undisputed that the contracts between HYDRO and NIA contained an
arbitration clause wherein they agreed to submit to arbitration any dispute between them
that may arise before or after the termination of the agreement.Consequently, the claim
of HYDRO having arisen from the contract is arbitrable. NIAs reliance with the ruling
on the case of Tesco Services Incorporated v. Vera,[30] is misplaced.
The 1988 CIAC Rules of Procedure which were applied by this Court in Tesco case
had been duly amended by CIAC Resolutions No. 2-91 and 3-93, Section 1 of Article
III of which read as follows:

Submission to CIAC Jurisdiction - An arbitration clause in a construction contract or a

submission to arbitration of 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.

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.[31]
Moreover, it is undeniable that NIA agreed to submit the dispute for arbitration to
the CIAC. NIA through its counsel actively participated in the arbitration proceedings
by filing an answer with counterclaim, as well as its compliance wherein it nominated
arbitrators to the proposed panel, participating in the deliberations on, and the
formulation of, the Terms of Reference of the arbitration proceeding, and examining
the documents submitted by HYDRO after NIA asked for the originals of the said
documents.[32]
As to the defenses of laches and prescription, they are evidentiary in nature which
could not be established by mere allegations in the pleadings and must not be resolved
in a motion to dismiss. Those issues must be resolved at the trial of the case on the
merits wherein both parties will be given ample opportunity to prove their respective
claims and defenses.[33] Under the rule[34] the deferment of the resolution of the said
issues was, thus, in order. An allegation of prescription can effectively be used in a
motion to dismiss only when the complaint on its face shows that indeed the action has
already prescribed.[35] In the instant case, the issue of prescription and laches cannot be
resolved on the basis solely of the complaint.It must, however, be pointed that under
the new rules,[36] deferment of the resolution is no longer permitted. The court may either
grant the motion to dismiss, deny it, or order the amendment of the pleading.
WHEREFORE, the instant petition is DISMISSED for lack of merit. The Court of
Appeals is hereby DIRECTED to proceed with reasonable dispatch in the disposition
of C.A. G.R. No. 44527 and include in the resolution thereof the issue of laches and
prescription.
SO ORDERED.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
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
Co. 12, this Court has recognized arbitration agreements as valid, binding, enforceable and not contrary to
public policy so much so that when there obtains a written provision for arbitration which is not complied
with, the trial court should suspend the proceedings and order the parties to proceed to arbitration in
accordance with the terms of their
agreement 13. Arbitration is the "wave of the future" in dispute resolution. 14 To brush aside a contractual
agreement calling for arbitration in case of disagreement between parties would be a step backward. 15

Nonetheless, we grant the petition.

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

arbitration, binds the parties thereto, as well as their assigns and heirs. 17 But only they. Petitioners, as
heirs of Salas, Jr., and respondent Laperal Realty are certainly bound by the Agreement. If respondent
Laperal Realty had assigned its rights under the Agreement to a third party, making the former, the
assignor, and the latter, the assignee, such assignee would also be bound by the arbitration provision
since assignment involves such transfer of rights as to vest in the assignee the power to enforce them to
the same extent as the assignor could have enforced them against the debtor 18 or in this case, against
the heirs of the original party to the Agreement. However, respondents Rockway Real Estate Corporation,
South Ridge Village, Inc., Maharami 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.

WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19, 1998 of
Branch 85 of the Regional Trial Court of Lipa City is hereby NULLIFIED and SET ASIDE. Said court
is hereby ordered to proceed with the hearing of Civil Case No. 98-0047.

Costs against private respondents.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing and Buena, JJ., concur.