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Philippine Institute of Arbitrators

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LEGAL PROBLEM AREAS IN CONSTRUCTION ARBITRATION


by

MARIO E. VALDERRAMA AB, LLB, FCIArb, FHKIArb, FPIArb


CIArb Approved Tutor Resident Representative to the Regional Sub-Committee The Chartered Institute of Arbitrators East Asia Branch
Contact Details Tel No 367 4001; Telefax 362 1867 Mobile 0917 411 4594 E-mail <marval.law@gmail.com>

OBJECTIVES OF THIS PRESENTATION


PART ONE

To present a foundation lecture that


had been omitted from our training syllabus.

OBJECTIVES OF THIS PRESENTATION


PART TWO

To bring out, and attempt to clarify or


solve, some legal problems in the resolution of construction disputes.

Preliminaries: Part One


1. The different kinds of arbitrations are

treated in our country as if they are one and the same.

2. Confusion on the source of CIAC


jurisdiction.

PRELIMINARIES: Part Two


Also, in a case, we were confronted with the
following issues: 1. Whether or not we can use secret evidence in deciding the dispute; 2. Whether or not a general incorporation clause will suffice to incorporate the arbitration agreement contained in another instrument; and 3. Whether or not to allow a global claim, also known as a total loss claim.

THE CONFUSION: ARBITRATION AND STATUTE BASED ARBITRATIONS

There

are several processes arbitration in the Philippines. Classes:


a. Arbitration based)

called

(traditional/agreement

b. Statute based arbitrations

CLEARING THE CONFUSION


CONCEPT OF ARBITRATION (AGREEMENT BASED) Arbitration is a device whereby the settlement of a question, which is of interest for two or more persons, is entrusted to one or more other persons the arbitrator or arbitrators- who derive their powers from a private agreement, not from the authorities of a State, and who are to proceed and decide the case on the basis of such an agreement Fouchard, Gaillard, Goldman on

CLEARING THE CONFUSION

In contrast, in statute based arbitrations the arbitrator or arbitrators derive their powers from the authorities of a State.

CLEARING THE CONFUSION:


STATUTE BASED ARBITRATIONS
Sub Classification
Optional - needs stipulation to arbitrate, e.g. CIAC and voluntary labor arbitrations Imposed does not require agreement to arbitrate, e.g. consumer and

CLEARING THE CONFUSION: AGREEMENT BASED ARBITRATION

Contractual; synonymous with the concept



of party autonomy in the resolution of disputes Tribunal an instrumentality of the parties Award is product of private dispute resolution processes, hence the need for judicial recognition of confirmation Principle of finality of awards is based on contract & core component of the process Validity issues: award treated just like a

ARBITRATION
Contractual Nature
Arbitration is a creature of contract, not of law. It is based on the contract principle of party autonomy or the will of the parties, expressed as the freedom to contract.

ARBITRATION
Tribunal an Instrumentality of the Parties
In arbitration the parties create their own tribunal. They appoint their judges, craft the procedure; agree on several categories of choice. As creators they own the tribunal; as owners and creators they can shape the tribunal to what they want it to be. As owners and creators they pay the expenses of the tribunal that they created. The arbitrators are akin to temporary employees whose job description is to resolve the dispute between the parties.

ARBITRATION
Award a Product of Dispute Resolution
Process; Need for Confirmation/Recognition

A vacated award x x x was an international award which was not integrated in the legal system of that State x x x (Hilmarton v OTV, 1994 BULL CIV. A, No. 104, Court de Cassation, March 23, 1994. From Carbonneu).

ARBITRATION
Principle of Finality of Award is
Contractual x x x arbitrators are judges chosen by the parties to decide the matters submitted to . them, finally and without appeal x x x (Burchell v Marsh, 58 U.S.. 344, 15 L.Ed. 96 (1854).

The essence of the arbitration process is that an arbitral award shall put the dispute to rest x x x. Arbitral finality is a core component of the parties agreement to submit to arbitration. Thus, an arbitration

ARBITRATION
Validity Issues: Award is Treated Just Like
a Contractual Stipulation

An award is ignored or vacated if bad; recognized or confirmed and enforced if good; subject to the principle of separability.
An added saving grace is referral back to the Tribunal which was introduced by

STATUTE BASED ARBITRATIONS


Established by statute Hybrid processes Freedom of parties to select arbitrators

and craft procedure heavily curtailed Tribunal an instrumentality of Government Resultant award deemed integrated into the legal system No agreement exists that the award is final, hence a merits review is available

STATUTE BASED ARBITRATIONS


Created by statute:
There is hereby established in the CIAP a body to be known as the Construction Industry Arbitration Commission (E.O. 1008 Section 3).

STATUTE BASED ARBITRATIONS


Hybrid Processes
A perusal of the procedures will show a combination of the precepts of agreement based arbitration and litigation.

STATUTE BASED ARBITRATIONS


Curtailment of freedom to choose
arbitrators:

Generally, only CIAC accredited arbitrators may be appointed in CIAC panels.

STATUTE BASED ARBITRATIONS


Curtailment of freedom to craft procedure:
The Arbitral Tribunal shall at all times adopt the most expeditious procedure for the introduction and reception of evidence, and SHALL HAVE COMPLETE CONTROL OVER THE PROCEEDINGS, but in any case shall afford full and equal opportunity to all parties to present relevant evidence (CIAC Rules Sec. 13.4).

STATUTE BASED ARBITRATIONS


Tribunal an instrumentality of the
Government

Obviously, as CIAC was created by statute.

STATUTE BASED ARBITRATIONS


Resultant award integrated into the legal
system

No need for confirmation for enforceability.

STATUTE BASED ARBITRATIONS


Award subject to appeal
Rule 43 Section 1. Scope. This Rule shall apply to appeals from awards x x x. Among these agencies are the x x x Construction Industry Arbitration Commission.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


Jurisprudence Involved:

William Golangco Construction Corporation v Ray Burton

Development Corporation, G.R. No. 163582, 9 August 2010 No. 167022, 4 April 2011

Licomcen Incorporated v Foundation Specialists, Inc., G.R.


China Chiang Jiang Energy Corp. v Court of Appeals, G.R.
No. 125706, 30 September 1996

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


CIAC Jurisdiction defined by law:
The CIAC shall have 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. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to the dispute must agree to submit the same to voluntary arbitration. (E.O. 1008, Chapter IV, Sec. 4).

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


The approach taken in:
William Golangco Construction Corporation vs. Ray Burton Development Corporation (G.R. No. 163582, 9 August 2010) is the approach in defining the jurisdiction of an arbitral tribunal constituted under agreement based arbitration rules.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


The contract involved in GOLANGCO was a contract for the construction of Elizabeth Place. The contract has an arbitration clause. The issue involved was whether or not CIAC has jurisdiction to resolve disputes involving claims for payment of money.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


In determining whether or not CIAC has jurisdiction over suits for collection of money, the Supreme Court focused on the arbitration clause.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


Clause in GOLANCO: Any dispute arising in the course of the execution of this Contract y reason of differences in interpretation of the Contract Documents which the OWNER and the CONTRACTOR are unable to resolve between themselves, shall be submitted by either party for resolution of decision to a Board of Arbitrators x x x.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


Ruling of the GOLANGCO Court:
x x x petitioners claims that it is entitled to payment for several items under their contract x x x involves a dispute arising from differences in interpretation of the contract. Verily, the matter of ascertaining the duties and obligations of the parties under their contract all involve interpretation of the contract.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


Unintended Consequence of GOLANGCO Ruling:

The ruling implied that the parties can increase or decrease by contract the jurisdiction of the CIAC.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


In contrast, the approach taken in:
Licomcen Incorporated v. Foundation Specialists, Inc. (G.R. No. 16y7022, 4 April 2011) is the approach in defining the jurisdiction of an arbitral tribunal constituted under statute based arbitration rules.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


In LICOMCEN the parties provided for a condition precedent before a matter could be elevated for arbitration, to wit: referral to Licomcen for decision.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


Ruling in LICOMCEN: The jurisdiction of the CIAC cannot be altered by stipulations restricting the nature of construction disputes, appointing another arbitral body, or making that bodys decision final and binding. If the CIACs jurisdiction can neither be enlarged nor diministed by the parties, it also cannot be subjected to a condition precedent.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


In short, the determining factor is whether or not the contract involved is a construction contract with an arbitration clause. The payments, demand and disputed issues x x x all arose because of the construction activities and/or are connected or related to these activities. x x x Attorneys fees and interests payment, on the other hand, are costs directly incidental to the dispute.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


The Problem Posed by China Chiang Jiang:
Parties may continue to stipulate as regards their preferred forum in case of voluntary arbitration, but in so doing, they may not divest the CIAC of jurisdiction as provided by law. x x x. The law in effect, automatically gives the parties an ALTERNATIVE forum before whom they may submit their disputes x x x the CIAC.

CONFLICTING APPROACHES IN DEFINING CIAC JURISDICTION


The Problem Posed by China Chiang Jiang China Chiang Jiang is merely an extended minute resolution. We cannot find it in the SCRA and a search in the web will not reveal it. Unfortunately, it was published in a book on construction arbitration.

THE MORAL LESSONS


We will never learn unless if we know and
understand the basics. and the wrong ideas.

Training with flaws in it results to gaps

END OF PART ONE

SECRET EVIDENCE
In arbitration (agreement based), the use by the
Tribunal of so-called secret evidence in deciding a dispute results to due process and right to be heard issues, hence providing for a ground to vacate the award.

That is so because arbitration is evidentiary. Or,


as frequently stated: The Tribunal is not allowed to use its expertise in deciding a dispute.

SECRET EVIDENCE
When the Tribunal used its legal or

technical expertise in deciding a dispute instead of just relying on the evidence on record, then the Tribunal is said to have used its expertise in deciding the dispute. In effect, it used secret evidence

SECRET EVIDENCE
The use by the Tribunal of secret evidence may
result to due process and right to be heard issues, hence providing for a ground to vacate the award. pertinent and material to the controversy in domestic arbitration (R.A. 876 Sec. 24) or a party being otherwise unable to present his case in international arbitration (Model Law Art. 34.2 (ii)). Similar provisions in R.A. 9285 and New York Convention

It amounts to refusing to hear evidence

Examples

SECRET EVIDENCE
In a dispute then before us, we were

confronted with a situation where we may have to use secret evidence in deciding an issue.

Details

SECRET EVIDENCE
We have no problem about using secret

evidence because the issue is legal, not technical. CIAC awards are appealable on issues of law and we can expect the reviewing authority, the Court of Appeals, to use its legal expertise in deciding the matter.

SECRET EVIDENCE
While we may use secret evidence on legal

issues because we may take judicial notice of laws, we would have a problem if the issue then before us were technical rather than legal. No rule exists in the Rules of Court to the effect that we may take judicial notice of technical matters.

SECRET EVIDENCE
The issue, then, that we should consider:
Can we use secret evidence in deciding technical issues?

INCORPORATION CLAUSES
Another issue that we encountered refers
to the incorporation in a contract of an arbitration agreement contained in another instrument.

Details

INCORPORATION CLAUSES
In the Philippines and by a 1990 jurisprudence, a general
incorporation clause in a incorporate an arbitration another instrument. contract will suffice agreement contained to in

Clearly, the Bill of Lading incorporates by reference the terms of the Charter Party. x x x. This should include the provision on arbitration even without a specific stipulation to that effect. (National Union Fire Insurance Company of Pittsburg, PA/American International Underwriter (Phil.) Inc., vs. Stolt-Nielsen Philippines, Inc. and Court of Appeals, G.R. No. 87958, April 26, 1990, on page 2).

INCORPORATION CLAUSES
The rule outside the Philippines is different.
The liberal view is that a mere reference to a contract containing an arbitration clause would not of itself be sufficient to incorporate and arbitration clause.

The strict view, said to be the prevalent view, requires a specific reference to an arbitration clause for an arbitration agreement to be validly incorporated by reference.

INCORPORATION CLAUSES
Reasons for requiring specificity:
Autonomy of arbitration clauses Arbitration clauses amount to a waiver of the right to go court, hence the waiver must be clear Arbitration clauses are merely ancilliary or collateral, hence not germane, to the main contract With respect to transferable documents of title, the transferee could not reasonably be assumed to know that the incorporated instrument has an arbitration clause (innumerable foreign cases).

INCORPORATION CLAUSES
Cases (some only; there are more)
Carob Ind. Pty. Ltd. v Simto Pty. Ltd (1996) TW Thomas & Co. Ltd. V Portsea Steamship Co. Ltd (1912) Aughton Ltd. V MF Kent Services Ltd (1991) Roche Products Ltd v Freeman Process Systems Ltd (1975) Lexair Ltd v Edgar W. Taylor Ltd (1993) Quantas Airways v Dillingham Corp (1985)

INCORPORATION CLAUSES
The strict view the incorporation must be
specific was uniformly applied to documents of title and insurance contracts with incorporation clauses The liberal view is being applied, by jurisprudence, to other contracts.
[I]t is (still) a matter of construing each individual contract to determine whether or not it was contractually agreed the disputes should be resolved by way of arbitration. (Carob Industries v Simto, others).

INCORPORATION CLAUSES
Philippine Arbitration Law mutated in 2004
with the passage of R.A. 9285.

Relevantly, R.A. 9285s Chapter 4 Sec. 19


states: International commercial arbitration shall be governed by the Model Law on International Arbitration x x x.

INCORPORATION CLAUSES
Model Law (1985) Chapter II Art. 7 (2) states in
its last sentence:

The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and THE REFERENCE IS SUCH AS TO MAKE THAT CLAUSE PART OF THE CONTRACT. (Capitals provided).

INCORPORATION CLAUSES
With the change in the law, it is now reasonable to assume that, at least in international arbitration, there would be a change in the prevailing jurisprudence involving incorporation clauses.

In interpreting the Model law, regard shall be had to its international origin and to the need for uniformity in its interpretation x x x. (Model Law Sec. 20)

INCORPORATION CLAUSES
Model Law Art. 7 was not one of the provisions

made applicable to our domestic arbitration law. Arts. 8, 10, 11, 12, 13, 14, 18 and 19 and 29 to 32 of the Model Law and Sections 22 to 31 of the preceding Chapter 4 shall apply to domestic arbitration. (R.A. 9285 Sec. 33).

INCORPORATION CLAUSES
I submit that it would be absurd if we were to
retain the prevailing rule if the arbitration were domestic, and adopt the new rule as provided for in the Model law if the arbitration were international.

Alternatively, are we to retain the prevailing rule


even if the arbitration were international?

INCORPORATION CLAUSES
The issues are submitted for your kind consideration.

GLOBAL CLAIMS
A third issue that we encountered refers
to global claims.

GLOBAL CLAIMS
Concept
If losses and expenses result from delay/s and/or disruption/s caused by a number of different events in such a way that it is impossible to separate out the consequences of each of those events, the contractor does not need to establish causal links between individual events and particular loss if he can demonstrate that all of the events relied upon are in law the responsibility of the employer (Laing Management (Scotland) Ltd v John Doyle Construction Ltd, Building Law Reports (2004) p 296. Global Claims are known as Total Loss Claims in the United States.

GLOBAL CLAIMS
Rationale (from Laing)
Normally, individual causal links must be demonstrated between each of the events for which the employer is responsible and particular items of loss and expense. Frequently, however, the loss and expense results from delay and disruption caused by a number of different events, in such a way that it is impossible to separate out the consequences of each of those events. x x x the events may interact in such a way as to produce a cumulative effect x x x

GLOBAL CLAIMS
Essence and Nature of a Global Claim
If all of the causative events are matters for which the employer is responsible, any loss and expense that is caused by those events and no others must necessarily be the responsibility of the employer Hence, it is not necessary for the claiming party to demonstrate causal links between individual events and particular heads of loss. (from Laing)

GLOBAL CLAIMS
Example (from Laing):
A common example occurs when a contractor contends that delay and disruption have resulted from a combination of the late provision of drawings and information and design changes instructed on the employers behalf; in such a case all of the matters relied on are the legal responsibility of the employer. x x x it is impractical to disentangle that part of the loss which is attributable to each head of claim.

GLOBAL CLAIMS
In the dispute then before us, we have to
deal with several so-called modified global claims, that is, separate composite losses arising out of separate sets of several alleged breaches.

GLOBAL CLAIMS
Fortunately for us, we were saved from
dealing directly with the issue on whether or not to allow a global claim. We found that the party who made the global claims was responsible for some events that caused the damages, hence the global claims could not succeed.

GLOBAL CLAIMS
What we did, instead, was to rely on the

provisions of law on temperate and moderate damages. Doing so is compatible with the rules involving global claims and also with Philippine law. That is, asserting a global claim will not deprive the Tribunal of its jurisdiction to make the necessary assessment, based on the concept of reasonableness and apportionment as far as practicable.

GLOBAL CLAIMS
The issue then: are we to allow the
assertion of global claims?
On one hand, the claim may appear to be inconsistent with the cause and effect concept of damages under Philippine law.

GLOBAL CLAIMS
Are we to allow global claims?
On the other hand, asserting a global claim will not violate the proposition that there should be a cause and effect link between the breaches and the loss. The claimant will still have to allege and prove that the other party committed several breaches and that the claimant suffered loss and damage as a result. However, due to the interaction and complexity of the several breaches, it may be difficult, if not impossible, to identify which loss could be attributed to each breach.

GLOBAL CLAIMS
Parting Shot: In a way, the following provisions

of law appear to allow something similar to a global claim:

If the person obliged to do something fails to do it, the same shall be executed at his cost (NCC Art. 1167).
The same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (NCC Art. 1168).

GLOBAL CLAIMS
The issue is submitted for your kind
consideration.

ISSUES
Our position on how CIAC jurisdiction is to be

determined. Our position on the use of secret evidence, with particular emphasis on technical matters. Our position on incorporation clauses. Our position on the assertion of global claims.

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Philippine Institute of Arbitrators


c/o Atty. Mario E. Valderrama Tel. No. (632) 367 4001 Telefax (632) 362 1867 E-mail: marval.law@gmail.com