Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-16398 December 14, 1921

A. CHAN LINTE, plaintiff-appellant,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., defendant-appellee.

A. CHAN LINTE, plaintiff-appellant,

vs.
TOKYO MARINE INSURANCE CO., LTD., defendant-appellee.

A. CHAN LINTE, plaintiff-appellant,

vs.
THE CHINE FIRE INSURANCE CO., LTD., defendant-appellee.

Crossfield & O'Brien for appellant.

Fisher & DeWitt for appellees.

JOHNS, J.:

The plaintiff is a resident adult of the Philippine Islands, and the defendants are fire insurance
companies duly licensed to do business here.

Plaintiff alleges that he was the owner of 30,992.50 kilos of hemp stored in the warehouse in
Calbayog, Province of Samar, Philippine Islands, which on the 25 of March, 1916, he requested
the defendant Law Union and Rock Insurance Co., Ltd., to insure against loss by fire in the sum
of P5,000, and upon the date it issued its policy No. 1,787,379 in favor of the plaintiff against
such loss until 4 o'clock p.m., of the 22nd of March, 1917, and that the policy was delivered to
the plaintiff in consideration of which he paid the company a premium of P87.50. that in
consideration of other previous payments, the policy was renewed from time to time and
continued in force and effect to and including March 22, 1919; that during the life of the policy
the hemp was destroyed by fire in the bodega where it was insured; that its value was
P21,296.27; that he at once notified the defendant of the loss, and in all other respects complied
with the terms and conditions of the policy, and made a demand for the payment of the full
amount of the insurance. That defendant refused and still refuses to pay the same or any part
thereof, and plaintiff prays for judgment for P5,000, with interest and costs.

In his amended complaint he alleges that after the commencement of the action, the defendant
requested that its liability should be submitted to arbitration, in accord with the provisions of the
policy, and that "plaintiff acceded to the requirement made by said defendant as aforesaid, but
not that the award of arbitration should be conclusive or final, or deprive the courts of
jurisdiction, and by agreement of both plaintiff and defendant Frank B. Ingersoll was named sole
arbitrator, and both parties informally presented evidence before him and he made return of
arbitration to the effect that said plaintiff had only seven bales of hemp destroyed in the fire of
April 10, 1918, as hereinbefore set forth, with which return the said plaintiff is dissatisfied, and
comes to this court for proper action under this amended complaint."1awphil.net

For answer the defendant alleges that, claiming a loss under the policy, the plaintiff made a claim
against the defendant for P5,000, that a difference arose between them as to the amount of the
alleged loss, and that, under the terms of the policy, an arbitrator was agreed upon and selected
by the mutual consent of both parties, for the purpose of deciding the alleged difference; that on
December 28, 1918, the arbitrator found that only seven bales of hemp of the grade "ovillo" were
destroyed.

For supplemental answer to the amended complaint, the defendant further alleges that on July 8,
1919, the arbitrator filed a supplemental report and award wherein he finds from the evidence
submitted that the local value of the seven bales of plaintiff's hemp destroyed by fire on April 10,
1918, was P608.34; that in addition to the defendant's policy, the same property was covered by
two other fire insurance polices, by each of which the property in question was insured to the
value of P5,000 against the loss; that defendant has offered and is now willing to pay plaintiff its
one-third of the loss in full satisfaction of its liability.

xxx xxx xxx

The other insurance companies are Tokyo Marine Insurance Co., Ltd., and the Chine Fire
Insurance Co., Ltd., defendants and appellees.

After the filing of the amended complaint, both parties agreed upon Frank B. Ingersoll as
arbitrator, and submitted to him the evidence pro and con. His first finding was made on
December 28, 1918, and on July 8, 1919, he filed a supplemental report in which he found the
value of the property destroyed to be P608.34.

It was stipulated "that the arbitration clauses of the policies of insurance issued by the Law
Union and Rock Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd., are in terms as
follows, to wit:

"If any difference arises as to the amount of any loss or damage, such difference
shall independently of all other questions be referred to the decision of an
arbitrator, to be appointed in writing by the parties in difference, or, if they cannot
agree upon a single arbitrator, to the decision of two disinterested persons as
arbitrators, of whom one shall be appointed in writing by each of the parties
within two calendar months after having been required so to do in writing by the
other party. In case either party shall refuse or fail to appoint an arbitrator within
two calendar months after receipt of notice in writing requiring appointment, the
other party shall be at liberty to appoint a sole arbitrator; and in case of
 disagreement between the arbitrators, the difference shall be referred to the
decision of an umpire who shall have been appointed by them in writing before
entering on the reference and who shall sit with the arbitrators and preside at their
meetings. The death of any party shall not revoke or affect the authority or powers
of the arbitrator, arbitrators or umpire respectively; and in the event of the death
of an arbitrator or umpire, another shall in each case be appointed in his stead by
the party or arbitrators (as the case may be), by whom the arbitrator or umpire so
dying was appointed. The costs of the reference and of the award shall be in the
discretion of the arbitrator, arbitrators or umpire making the award. And it is
hereby expressly stipulated and declared that it shall be a condition precedent to
any right of action or suit upon this policy that the award by such arbitrator,
arbitrators or umpire of the amount of the loss or damage if disputed shall be first
obtained."

That the arbitration clause in the policy issued by the Tokyo Marine Insurance Company,
Limited, is as follows, to wit:

If any difference shall arise with respect to any claim for loss or damage by fire and no
fraud be suspected, and the Company does not elect to rebuild, repair, reinstate or replace
same, such difference shall be submitted to arbitrators, indifferently chosen, whose
award, or that of their umpire, shall be conclusive.

Any liability arising out of the fire should be borne by the defendants in equal parts; that each of
them has offered in writing to pay the plaintiff its one-third of the amount of the plaintiff's loss,
as ascertained by the arbitrator.

It is understood that in making this stipulation plaintiff shall not be deemed to have
waived his right to contend, as a matter of law or fact, that the award of the arbitrator is
not conclusive upon him and that the arbitrator was without authority to supplement or
amend his findings after having once rendered decision; and that defendants have not
waived their right to contend that such arbitration is conclusive, and that no evidence of
the amount of the loss alleged to have been suffered by plaintiff should be considered, but
that his right to recover is limited to the amount of damage found by the arbitrator to have
been suffered by him.

On November 6, 1919, "it is hereby stipulated and agreed that the above entitled causes be and
they are hereby submitted to the court upon the evidence taken at the trial and the depositions
taken in Samar before the justice of the peace of the municipality of Calbayog, and by him
transmitted to the clerk of this court; provided, that nothing herein contained shall be construed
as a waiver of the contention of defendants that the award of the arbitrator is conclusive, and that
no evidence of the amount of the loss other than such award should be considered."

After the testimony was taken, the trial court rendered judgment against each of the defendants
for P202.78, and that plaintiff should pay the costs of the action, from which he appealed,
claiming that the court erred in holding that the decision of the arbitrator is conclusive or in any
way binding on the plaintiff; that the arbitrator's decision is in the main supported by the
evidence; and that it erred in not awarding judgment for the plaintiff, is prayed for in his
complaint.

It will be noted that the policies of the Law Union and Rock Insurance Co., Ltd., and The Chine
Fire Insurance Co., Ltd., provide for arbitration and expressly stipulated "that it shall be a
condition precedent to any right of action or suit upon this policy that the award by such
arbitrator, arbitrators or umpire of the amount of the loss or damage if disputed shall be first
obtained," and that the action was brought without making any effort to adjust the loss by
arbitration. The policy of Tokyo Marine Insurance Co., Ltd., provides that in the event of a
different it "shall be submitted to arbitrators, indifferently chosen, whose award, or that of their
umpire, shall be conclusive."1awphil.net

After the action was brought, and upon the request of the defendant, an arbitrator was chosen to
whom the evidence of the loss was submitted. On December 28, 1918, he found that only seven
bales of hemp of the grade "ovillo" were destroyed, but did not then make any finding as to its
value. July 8, 1919, he made and filed a supplemental report in which he found that the value of
the hemp destroyed by the fire of April 10, 1918, was P608.34.

The plaintiff contends; First, that the arbitration clauses are null and void as against public
policy; second, that the award of the arbitrator of December 28, 1918, without finding the value
of the property destroyed, was final, and that on July 8, 1919, he had no authority to make a
supplemental finding as to the value of the property; and, third, that upon the evidence the court
should have found for the plaintiff. Upon the first point he cites the case of Wahl and
Wahl vs. Donaldson, Sims and Co. (2 Phil., 301), which apparently sustains his contention. That
case holds that "a clause in a contract providing that all matters in dispute between the parties
shall be referred to arbitrators and to them alone is contrary to public policy and cannot oust the
courts of jurisdiction."

In Chang vs. Royal Exchange Assurance Corporation of London (8 Phil., 399), agreement was
very similar to the one here with the two defendants above quoted, and it was there held that
such a condition for arbitration is valid, and that, unless there was an effort to comply, no action
could be maintained.

In Allen vs. Province of Tayabas (38 Phil., 356), it is said:

. . . It would be highly improper for courts out of untoward jealousy to annul laws or
agreements which seek to oust the courts of their jurisdiction. . . . Unless the agreement is
such as absolutely to close the doors of the courts against the parties, which agreement
would be void. (Wahl and Wahl vs. Donaldson, Sims and Co. [1903], 2 Phil., 301), courts
will look with favor upon such amicable arrangements and will only with great reluctance
interfere to anticipate or nullify the action of the arbitrator. . . .

In the instant case, it will be noted that sometime after the action was commenced and upon the
request of the defendants, the plaintiff agreed to arbitrate under the terms and provisions of the
policies; that the parties mutually agreed upon an arbitrator; and that each appeared before him
and offered his or its evidence upon the questions in dispute. There is no claim or pretense that
the proceedings were not honestly and fairly conducted. Having formally agreed and submitted
to an arbitration after the action was commenced, it may well be doubted whether the plaintiff
can at this time question the validity of the proceedings, except upon the ground of fraud or
mistake.

Ruling Case Law, vol. 2, p. 359, says that when the subject-matter of a pending suit is submitted
to arbitration without rule of court "there is a conflict among the authorities as to whether or not
the mere submission effects a discontinuance of the action. The majority rule is that the parties
themselves show an intent to discontinue the pending suit by substituting another tribunal, so that
a submission furnishes ground for a discontinuance."

On page 352 of the same volume, it is said:

Arbitration as a method of settling disputes and controversies is recognized at common

law. The award of the arbitrators is binding on the parties, but, in the absence of statute,
the successful party can only enforce his rights thereunder by a suit at law. Thus the only
gain by a common law arbitration is the substitution of the definite findings of the award
as the basis of a suit, in the place of the former unsettled rights of the parties. In an action
on the award the award itself is conclusive evidence of all matters therein contained,
provided the arbitrators have not exceeded the powers delegated to them by the
agreement of submission. The courts regard matters submitted as concluded by the
award, and in an action thereon they will not review the merits of the arbitrators' findings.

Corpus Juris, vol. 5, p. 16, says:

The statement of controversies by arbitration is an ancient practice at common law. In its

broad sense it is a substitution, by consent of parties, of another tribunal for the tribunals
provided by the ordinary processes of law; a domestic tribunal, as contradistinguished
from a regularly organized court proceeding according to the course of the common law,
depending upon the voluntary act of the parties disputant in the selection of judges of
their own choice. Its object is the final disposition, in a speedy and inexpensive way, of
the matters involved, so that they may not become the subject of future litigation between
the parties.

On page 20, it is said:

APPROVED METHOD OF SETTLEMENT; FAVORED BY CONSTRUCTION.

Although arbitration was recognized at the common law as a mode of adjusting

matters in dispute, especially such as concerned personal chattels and personal wrongs,
yet, from efforts perceptible in the earlier cases to construe arbitration proceedings and
awards so as to defeat them, it would seem that they were not originally favored by the
courts. This hostility, however, has long since disappeared, and, by reason of the fact that
the proceeding represents a method of the parties' own choice and furnishes a more
expeditious and less expensive means of settling controversies than the ordinary course of
regular judicial proceedings, it is the policy of the law to favor arbitration. Therefore
 every reasonable intendment will be indulged to give effect to such proceedings, and in
favor of the regularity and integrity of the arbitrators' acts.

On page 43, it is said:

Where a contract contains a stipulation, not that all questions arising thereunder, whether
as to the validity or effect of such contract, or otherwise, shall be submitted to arbitration,
but that the decision of arbitrators on a certain question or questions, such as the quantity,
quality, or price of materials or workmanship, the value of work, the amount of loss or
damage, or the like, shall be a condition precedent to the right of action on the contract
itself, no fixed sum being stated in the contract, such stipulation will be enforced, because
the parties to a contract have a right to adopt whatever method they see fit for
determining such questions, and until the method adopted has been pursued, or some
sufficient reason given for not pursuing it, no action can be brought on the contract.
"Freedom to contract for arbitration to this extent," it has been said, "imports no invasion
of the province of the courts, and there is no ground upon which a right so essential to the
convenient transaction of modern business affairs can be denied," nor is such agreement
objectionable as being against public policy. In order to give effect to such an agreement
it must of course appear that the matter proposed to be referred is a difference, within the
meaning of the agreement.

In the instant case, there was no dispute about the policy of insurance or the fire. The only real
difference was the amount of the loss which plaintiff sustained, and that was the only question
submitted to arbitration. In December, the arbitrator found the amount of plaintiff's hemp which
was destroyed, but did not find its value.

Hence the award on the question submitted was not complete or final. In the finding of the actual
value of the hemp, there was no change or revision of any previous finding. It was simply the
completion by the arbitrator of an unfinished work. No formal notice was served on the
arbitrator, and he was not removed or discharged, and until such time as his duties were fully
performed, or he was discharged, he would have the legal right to complete his award. The
plaintiff, having agreed to arbitration after the action was commenced and submitted his proof to
the arbitrator, in the absence of fraud or mistake, is estopped and bound by the award. Where a
plaintiff has commenced an action to recover upon an insurance policy, and then voluntarily
submits the amount of his loss to arbitration, he cannot ignore or nullify the award and treat it as
void upon the ground that he is dissatisfied with the decision.

Judgment is affirmed, with costs to the appellee. So ordered.

Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.
Republic of the Philippines
SUPREME COURT
Baguio City

FIRST DIVISION
G.R. No. 189563 April 7, 2014

GILAT SATELLITE NETWORKS, LTD., Petitioner,

vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO.,
INC., Respondent.

DECISION

SERENO, CJ:

This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the
Decision2 and Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which
reversed the Decision4 of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case
No. 02-461, ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment (sic), accessories, spares, services and software, at a total
purchase price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty
Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual
promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment
schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained
defendant UCPB General Insurance Co., Inc.s surety bond dated 3 December 1999, in favor of
GILAT.

During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered
to One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of
Lading (Exhibits "F", "F-1" to "F-8"). All of the equipment (including the software components
for which payment was secured by the surety bond, was shipped by GILAT and duly received by
One Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued,
with One Virtuals conformity, an amendment to the surety bond, Annex "A" thereof, correcting
its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars
(US$400,000.00) on the due date of May 30, 2000 in accordance with the payment schedule
attached as Annex "A" to the surety bond, prompting GILAT to write the surety defendant
UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount of
US$400,000.00. No part of the amount set forth in this demand has been paid to date by either
One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment
instalment date of 30 November 2000 as set out in Annex "A" of the surety bond, prompting
GILAT to send a second demand letter dated January 24, 2001, for the payment of the full
amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses
(Exhibits "H") and which letter was received by the defendant surety on January 25, 2001.
However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof,
hence, the instant complaint."5 (Emphases in the original)

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6 against
respondent UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by
the surety bond, plus interests and expenses. After due hearing, the RTC rendered its
Decision,7 the dispositive portion of which is herein quoted:

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and
against the defendant, ordering, to wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred
Thousand Dollars (US$1,200,000.00) representing the principal debt under the Surety
Bond, with legal interest thereon at the rate of 12% per annum computed from the time
the judgment becomes final and executory until the obligation is fully settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four
Dollars and Four Cents (US$44,004.04) representing attorneys fees and litigation
expenses.

Accordingly, defendants counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the
subject equipments [sic] and the same was installed. Even with the delivery and installation
made, One Virtual failed to pay any of the payments agreed upon. Demand notwithstanding,
defendant failed and refused and continued to fail and refused to settle the obligation."8

Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond
executed by and between One Virtual as Principal, UCPB as Surety and GILAT as
Creditor/Bond Obligee,"9 respondent agreed and bound itself to pay in accordance with the
Payment Milestones. This obligation was not made dependent on any condition outside the terms
and conditions of the Surety Bond and Payment Milestones.10

Insofar as the interests were concerned, the RTC denied petitioners claim on the premise that
while a surety can be held liable for interest even if it becomes more onerous than the principal
obligation, the surety shall only accrue when the delay or refusal to pay the principal obligation
is without any justifiable cause.11 Here, respondent failed to pay its surety obligation because of
the advice of its principal (One Virtual) not to pay.12 The RTC then obligated respondent to pay
petitioner the amount of USD1,200,000.00 representing the principal debt under the Surety
Bond, with legal interest at the rate of 12% per annum computed from the time the judgment
becomes final and executory, and USD44,004.04 representing attorneys fees and litigation
expenses.
On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a
Decision14 in the following manner:

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial courts
Decision dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks
Ltd., and One Virtual are ordered to proceed to arbitration, the outcome of which shall necessary
bind the parties, including the surety, defendant-appellant United Coconut Planters Bank General
Insurance Co., Inc.

SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the complementary-contracts-construed-

together doctrine finds application." According to this doctrine, the accessory contract must be
construed with the principal agreement.15In this case, the appellate court considered the Purchase
Agreement entered into between petitioner and One Virtual as the principal contract,16 whose
stipulations are also binding on the parties to the suretyship.17 Bearing in mind the arbitration
clause contained in the Purchase Agreement18 and pursuant to the policy of the courts to
encourage alternative dispute resolution methods,19 the trial courts Decision was vacated;
petitioner and One Virtual were ordered to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral
Argument. The motion was denied for lack of merit in a Resolution20 issued by the CA on 16
September 2009.

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November
2010, petitioner filed a Reply.22

ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and One
Virtual to arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment
by respondent of its obligation under the Suretyship Agreement.

THE COURTS RULING

The existence of a suretyship agreement does not give the surety the right to intervene in the
principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a
non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a
party entitled to it applies for this relief.23 This referral, however, can only be demanded by one
who is a party to the arbitration agreement.24 Considering that neither petitioner nor One Virtual
has asked for a referral, there is no basis for the CAs order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may
proceed against the surety without having first sued the principal debtor.26 Even the Surety
Agreement itself states that respondent becomes liable upon "mere failure of the Principal to
make such prompt payment."27 Thus, petitioner should not be ordered to make a separate claim
against One Virtual (via arbitration) before proceeding against respondent.28

On the other hand, respondent maintains that a surety contract is merely an accessory contract,
which cannot exist without a valid obligation.29 Thus, the surety may avail itself of all the
defenses available to the principal debtor and inherent in the debt30 that is, the right to invoke
the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the
principal debtor. This undertaking makes a surety agreement an ancillary contract, as it
presupposes the existence of a principal contract.31 Nevertheless, although the contract of a
surety is in essence secondary only to a valid principal obligation, its liability to the creditor or
"promise" of the principal is said to be direct, primary and absolute; in other words, a surety is
directly and equally bound with the principal.32 He becomes liable for the debt and duty of the
principal obligor, even without possessing a direct or personal interest in the obligations
constituted by the latter.33Thus, a surety is not entitled to a separate notice of default or to the
benefit of excussion.34 It may in fact be sued separately or together with the principal debtor.35

After a thorough examination of the pieces of evidence presented by both parties,36 the RTC
found that petitioner had delivered all the goods to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its obligation,37 triggering respondents liability to
petitioner as the formers surety.1wphi1 In other words, the failure of One Virtual, as the
principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right
to pursue respondent as the surety.

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the
principal contract to which the Suretyship Agreement is accessory, must take precedence over
arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38 that "[the]
acceptance [of a surety agreement], however, does not change in any material way the creditors
relationship with the principal debtor nor does it make the surety an active party to the principal
creditor-debtor relationship. In other words, the acceptance does not give the surety the right to
intervene in the principal contract. The suretys role arises only upon the debtors default, at
which time, it can be directly held liable by the creditor for payment as a solidary obligor."
Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that
respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because
it is not a party to that contract.39 An arbitration agreement being contractual in nature,40 it is
binding only on the parties thereto, as well as their assigns and heirs.41

Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration
may only take place "if at least one party so requests not later than the pre-trial conference, or
upon the request of both parties thereafter." Respondent has not presented even an iota of
evidence to show that either petitioner or One Virtual submitted its contesting claim for
arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are
contracted precisely to mitigate risks of non-performance on the part of the obligor. This
responsibility necessarily places a surety on the same level as that of the principal debtor.44 The
effect is that the creditor is given the right to directly proceed against either principal debtor or
surety. This is the reason why excussion cannot be invoked.45 To require the creditor to proceed
to arbitration would render the very essence of suretyship nugatory and diminish its value in
commerce. At any rate, as we have held in Palmares v. Court of Appeals,46 "if the surety is
dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of the creditor."

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor
in the payment of the latters obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per
annum from the time of its first demand on respondent on 5 June 2000 or at most, from the
second demand on 24 January 2001 because of the latters delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run
from the time it demanded the fulfilment of respondents obligation under the suretyship
contract. Significantly, respondent does not contest this point, but instead argues that it is only
liable for legal interest of 6% per annum from the date of petitioners last demand on 24 January
2001.

In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or
the refusal of a party to pay is without any justifiable cause.48 In this case, respondents failure to
heed the demand was due to the advice of One Virtual that petitioner allegedly breached its
undertakings as stated in the Purchase Agreement.49 The CA, however, made no pronouncement
on this matter.

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of
money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply.50 Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfilment of obligations.51 It is the
nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following requisites be present: (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.53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in
thus paying, its liability becomes more than the principal obligation.54 The increased liability is
not because of the contract, but because of the default and the necessity of judicial collection.55

However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-
Shangri-la Hotel,56 citing RCPI v. Verchez,57 we held thus:

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any kind of
misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach
upon the contract confers upon the injured party a valid cause for recovering that which may
have been lost or suffered. The remedy serves to preserve the interests of the promissee that may
include his "expectation interest," which is his interest in having the benefit of his bargain by
being put in as good a position as he would have been in had the contract been performed, or his
"reliance interest," which is his interest in being reimbursed for loss caused by reliance on the
contract by being put in as good a position as he would have been in had the contract not been
made; or his "restitution interest," which is his interest in having restored to him any benefit that
he has conferred on the other party. Indeed, agreements can accomplish little, either for their
makers or for society, unless they are made the basis for action. The effect of every infraction is
to create a new duty, that is, to make RECOMPENSE to the one who has been injured by the
failure of another to observe his contractual obligation unless he can show extenuating
circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous
event, to excuse him from his ensuing liability. (Emphasis ours)

We agree with petitioner that records are bereft of proof to show that respondents delay was
indeed justified by the circumstances that is, One Virtuals advice regarding petitioners
alleged breach of obligations. The lower courts Decision itself belied this contention when it
said that "plaintiff is not disputing that it did not complete commissioning work on one of the
two systems because One Virtual at that time is already in default and has not paid
GILAT."58 Assuming arguendo that the commissioning work was not completed, respondent has
no one to blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner
would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi,
vice president of Gilat, repeatedly stated that petitioner had delivered all equipment, including
the licensed software; and that the equipment had been installed and in fact, gone into
operation.59 Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues
from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance
with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has
been an extra-judicial demand before an action for performance was filed, interest on the amount
due begins to run, not from the date of the filing of the complaint, but from the date of that extra-
judicial demand.60 Considering that respondent failed to pay its obligation on 30 May 2000 in
accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was
sent on 5 June 2000,61 we agree with the latter that interest must start to run from the time
petitioner sent its first demand letter (5 June 2000), because the obligation was already due and
demandable at that time.

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery
Frames,62 which modified the guidelines established in Eastern Shipping Lines v. CA63 in
relation to Bangko Sentral-Monetary Board Circular No. 799 (Series of 2013), to wit:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.1wphi1 In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

xxxx

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

Applying the above-discussed concepts and in the absence of an agreement as to interests, we are
hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June
2000, its first date of extra judicial demand, until the satisfaction of the debt in accordance with
the revised guidelines enunciated in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed
Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED.
The Decision of the Regional Trial Court, Branch 141, Makati City is REINSTATED, with
MODIFICATION insofar as the award of legal interest is concerned. Respondent is hereby
ordered to pay legal interest at the rate of 6% per annum from 5 June 2000 until the satisfaction
of its obligation under the Suretyship Contract and Purchase Agreement.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 204689 January 21, 2015

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,

vs.
SPOUSES RUNE and LEA STROEM, Respondents.

DECISION

LEONEN, J.:

For resolution is a Petition for Review1 under Rule 45 of the Rules of Court assailing the
Decision2 dated November 20, 2012 of the Court of Appeals in CA-G.R. CV No. 96017. The
Court of Appeals ;iffirmed the Decision3 of the Regional Trial Court of Makati, Branch 133 in
Civil Case No. 02-1108 for collection of a sum of money.

This case involves the proper invocation of the Construction Industry Arbitration Committee's
(CIAC) jurisdiction through an arbitration clause in a construction contract. The main issue here
is whether the dispute liability of a surety under a performance bond is connected to a
construction contract and, therefore, falls under the exclusive jurisdiction of the CIAC.

Spouses Rune and Lea Stroem (Spouses Stroem) entered into an Owners-Contractor
Agreement4 with Asis-Leif & Company, Inc. (Asis-Leif) for the construction of a two-storey
house on the lot owned by Spouses Stroem. The lot was located at Lot 4A, Block 24, Don Celso
Tuason Street, Valley Golf Subdivision, Barangay Mayamot, Antipolo, Rizal.5

On November 15, 1999, pursuant to the agreement, Asis-Leif secured Performance Bond No.
LP/G(13)83056 in the amount of P4,500,000.00 from Stronghold Insurance Company, Inc.
(Stronghold).6 Stronghold and Asis-Leif, through Ms. Ma. Cynthia Asis-Leif, bound themselves
jointly and severally to pay the Spouses Stroem the agreed amount in the event that the
construction project is not completed.7

Asis-Leif failed to finish the projecton time despite repeated demands of the Spouses Stroem.8

Spouses Stroem subsequently rescinded the agreement.9 They then hired an independent
appraiser to evaluate the progress of the construction project.10

Appraiser Asian Appraisal Company, Inc.s evaluation resulted in the following percentage of
completion: 47.53% of the residential building, 65.62% of the garage, and 13.32% of the
swimming pool, fence, gate, and land development.11

On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting that the company settle its
obligations withthe Spouses Stroem. No response was received from Asis-Leif.12

On September 12, 2002, the Spouses Stroem filed a Complaint (with Prayer for Preliminary
Attachment)13 for breach of contract and for sum of money with a claim for damages against
Asis-Leif, Ms. Cynthia Asis-Leif, and Stronghold.14 Only Stronghold was served summons. Ms.
Cynthia Asis-Leif allegedly absconded and moved out of the country.15

On July 13, 2010, the Regional Trial Court rendered a judgment in favor of the Spouses Stroem.
The trial court ordered Stronghold to pay the Spouses Stroem P4,500,000.00 with 6% legal
interest from the time of first demand.16 The dispositive portion of the trial court Decision reads:

WHEREFORE, finding plaintiffs cause of action to be sufficiently established being supported

by evidence on records, judgement is hereby rendered in favor of the plaintiff spouses Rune and
Lea Stroem and against the defendant Stronghold Insurance Company Incorporated ordering the
latter topay the plaintiff the sums of:

1) Php4,500,000.00 with six (6%) percent legal interest from the time of first demand and
interest due shall earn legal interest from the time of judicial demand until fully paid.

2) Php35,000.00 by way of attorneys fees and other litigation expenses.

Defendant is further ordered topay the costs of this suit.

SO ORDERED.17

Both Stronghold and the Spouses Stroem appealed to the Court of Appeals.18

The Court of Appeals affirmed with modification the trial courts Decision. It increased the
amount of attorneys fees to P50,000.00.19

The dispositive portion of the Court of Appeals Decision reads:

WHEREFORE,the appeal of Stronghold Company, Inc[.] is DISMISSED, while the appeal of

spouses Rune and Lea Stroem is PARTLY GRANTED. The November 27, 2009 Decision of the
Regional Trial Court of Makati City is AFFIRMED with MODIFICATION that the award of
attorneys fees is increased to P50,000.00

SO ORDERED.20

On March 20, 2013, this court required the Spouses Stroem to submit their Comment on the
Petition.21 We noted the Spouses Stroems Comment on July 31, 2013.22 We also required
Stronghold to file its Reply to the Comment,23 which was noted on December 9, 2013.24

Stronghold argues that the trial court did not acquire jurisdiction over the case and, therefore, the
Court of Appeals committed reversible error when it upheld the Decision of the Regional Trial
Court.25 The lower courts should have dismissed the case in viewof the arbitration clause in the
agreement and considering that "[Republic Act No. 876] explicitly confines the courts authority
only to pass upon the issue of whether there is [an] agreement . . . providing for arbitration. In
the affirmative, the statute ordains that the court shall issue an order summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof."26 Moreover, "the
stipulations in said Agreement are part and parcel of the conditions in the bond. Were it not for
such stipulations in said agreement, [Stronghold] would not have agreed to issue a bond in favor
of the Spouses Stroem. The parties tothe bond are ALB/Ms. Asis-[L]eif, Spouses Stroem and
[Stronghold] suchthat ALB/Ms. Asis-[L]eif never ceased to be a party to the surety agreement."27

In any case, Strongholds liability under the performance bond is limited only to additional costs
for the completion of the project.28 In addition, the Court of Appeals erred inholding that
Stronghold changed its theory with regard to the notice requirement29 and in modifying the trial
courts award of attorneys fees.30

On the other hand, the Spouses Stroem argue that Stronghold committed forum shopping
warranting dismissal of the case.31 According to the Spouses Stroem, Stronghold deliberately
committed forum shopping when it filed the present petition despite the pendency of the Spouses
Stroems Motion for Partial Reconsideration of the Court of Appeals Decision dated November
20, 2012.32

More importantly, the Owners-Contractor Agreement is "separate and distinct from the Bond.
The parties to the Agreement are ALB/Ms. Asis-Leif and Spouses Stroem, while the parties to
the Bond are Spouses Stroem and Stronghold. The considerations for the two contracts are
likewise distinct. Thus, the arbitration clause in the Agreement is binding only on the parties
thereto, specifically ALB/Ms. Asis-Leif and Spouses Stroem[.]"33

Contrary to Strongholds argument, Spouses Stroem argues that stronghold is liable for the full
amountof the performance bond. The terms of the bond clearly show that Stronghold is liable as
surety.34 Verily, notice to Stronghold is not required for its liability to attach.35

The issues for consideration are:

(1) Whether the dispute involves a construction contract;

(2) Whether the CIAC has exclusive jurisdiction over the controversy between the
parties;

(3) Whether the Regional Trial Court should have dismissed the petition outright as
required by law and jurisprudence and referred the matter to the CIAC; and

(4) Whether petitioner Stronghold Insurance Company, Inc. is liable under Performance
Bond No. LP/G(13)83056.

(a) Whether petitioner Stronghold Insurance Company, Inc. is only liable as to the extent
of any additional cost for the completion of the project due toany increase in prices for
labor and materials.

(b) Whether the case involves ordinary suretyship or corporate suretyship.

After considering the parties arguments and the records of this case, this court resolves to deny
the Petition.

On forum-shopping

Respondents argue that petitioner committed forum shopping; hence, the case should have been
dismissed outright.

Records show that petitioner received a copy of the Decision of the Court of Appeals on
December 5, 2012.36Petitioner did not file a Motion for Reconsideration of the assailed Decision.
It filed before this court a Motion for Extension of Time To File Petition for Review requesting
an additional period of 30 days from December 20, 2012 or until January 19, 2013 to file the
Petition.37

Respondents filed their Motion for Partial Reconsideration of the Court of Appeals Decision on
December 11, 2012.38 They sought the modification of the Decision as to the amounts of moral
damages, exemplary damages, attorneys fees, and costs of the suit.39

Respondents alleged in their Comment that as early as January 9, 2013, petitioner received a
copy of the Court of Appeals Resolution requiring Comment on the Motion for Partial
Reconsideration.40 Still, petitioner did not disclose in its Verification and Certification Against
Forum Shopping the pendency of respondents Motion for Partial Reconsideration.41

For its part, petitioner claims that it did not commit forum shopping. It fully disclosed in its
Petition that what it sought to be reviewed was the Decision dated November 20, 2012 of the
Court of Appeals. "Petitioner merely exercised its available remedy with respect to the Decision
of the Court of Appeals by filing [the] Petition."42 What the rules mandate to be stated in the
Certification Against Forum Shopping is the status of "any other action." This other action
involves the same issues and parties but is an entirely different case.

Indeed, petitioner is guilty of forum shopping.

There is forum shopping when:

as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by
appeal or certiorari) in another. The principle applies not only with respect to suits filed in the
courts but also in connection with litigations commenced in the courts while an administrative
proceeding is pending[.]43 (Citation omitted)

This court has enumerated the elements of forum-shopping: "(a) identity of parties, or at least
such parties as represent the same interests in both actions; (b) identity of rights asserted and
reliefs prayed for, the reliefs being founded on the same facts; and (c) the identity with respect to
the two preceding particulars in the two cases issuch that any judgment rendered in the pending
cases, regardless of which party is successful, amount to res judicatain the other case."44 Rule 42,
Section 245 in relation to Rule 45, Section 4 of the Rules of Court mandates petitioner to submit a
Certification Against Forum Shopping and promptly inform this court about the pendency of any
similar action or proceeding before other courts or tribunals. The rules purpose is to deter the
unethical practice of pursuing simultaneous remedies in different forums, which "wreaks havoc
upon orderly judicial procedure."46 Failure to comply with the rule is a sufficient ground for the
dismissal of the petition.47

Records show that petitioners duly authorized officer certified the following on January 21,
2013: 4. I further certify that: (a) I have not commenced any other action or proceeding involving
the same issues in the Supreme Court, Court of Appeals, or any other tribunal or agency; (b) to
the best of my knowledge, no such action or proceeding is pending in the Supreme Court, the
Court of Appeals or different Divisions thereof, or any tribunal or agency; (c) if I should
thereafter learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different Divisions thereof, or any other tribunal or
agency, I undertake to promptly inform the aforesaid courts and such tribunal or agency of the
fact within five (5) days therefrom.48

Petitioner failed to carry out its duty of promptly informing this court of any pending action or
proceeding before this court,the Court of Appeals, or any other tribunal or agency. This court
cannot countenance petitioners disregard of the rules.

This court has held before that:

[u]ltimately, what is truly important to consider in determining whether forum-shopping exists or

not is the vexation caused the courts and parties-litigant by a party who asks different courts
and/or administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions
being rendered by the different fora upon the same issue.49 (Emphasis supplied)

On this basis, this case should be dismissed.

On arbitration and the CIACs jurisdiction

Petitioner changed the theory of its case since its participation in the trial court proceedings. It
raised the issue of lack of jurisdiction in view of an arbitration agreement for the first time.
Generally, parties may not raise issues for the first time on appeal.50 Such practice is violative of
the rules and due process and is frowned upon by the courts. However, it is also well-settled that
jurisdiction can never be waived or acquired by estoppel.51 Jurisdiction is conferred by the
Constitution or by law.52 "Lack of jurisdiction of the court over an action or the subject matter of
an action cannot be cured by the silence, by acquiescence, or even by express consent of the
parties."53

Section 4 of Executive Order No. 100854 is clear in defining the exclusive jurisdiction of the
CIAC:

SECTION 4. Jurisdiction 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 a dispute must agree to
submit the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for
materials and workmanship; violation of the terms of agreement; interpretation and/or
application of contractual timeand delays; maintenance and defects; payment, default of
employer or contractor and changes in contract cost.

Excluded from the coverage of thislaw are disputes arising from employer-employee
relationships which shall continue to be covered by the Labor Code of the Philippines.
(Emphasis supplied)

Similarly, Section 35 of RepublicAct No. 9285 or the Alternative Dispute Resolution Act of
2004 states:

SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and
exclusive jurisdiction of the Construction Industry Arbitration Commission (the "Commission")
shall include those between or among parties to, or who are otherwise bound by, an arbitration
agreement, directly or by reference whether such parties are project owner, contractor,
subcontractor, quantity surveyor, bondsman or issuer of an insurance policy in a construction
project.

The Commission shall continue to exercise original and exclusive jurisdiction over construction
disputes although the arbitration is "commercial" pursuant to Section 21 of this Act. (Emphasis
supplied)

In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation,55 this court held that "there are two
acts which may vest the CIAC with jurisdiction over a construction dispute. One is the presence
of an arbitration clause in a construction contract, and the other is the agreement by the parties to
submit the dispute to the CIAC."56

This court has ruled that when a dispute arises from a construction contract, the CIAC has
exclusive and original jurisdiction.57 Construction has been defined as referring to "all on-site
works on buildings or altering structures, from land clearance through completion including
excavation, erection and assembly and installation of components and equipment."58

In this case, there is no dispute asto whether the Owners-Contractor Agreement between Asis-
Leif and respondents is a construction contract. Petitioner and respondents recognize that CIAC
has jurisdiction over disputes arising from the agreement.

What is at issue in this case is the parties agreement, or lack thereof, to submit the case to
arbitration. Respondents argue that petitioner is not a party to the arbitration agreement.
Petitioner did not consent to arbitration. It is only respondent and Asis-Leif thatmay invoke the
arbitration clause in the contract.
This court has previously held that a performance bond, which is meant "to guarantee the supply
of labor,materials, tools, equipment, and necessary supervision to complete the project[,]"59 is
significantly and substantially connected to the construction contract and, therefore, falls under
the jurisdiction of the CIAC.60

Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc.61 involved circumstances similar
to the present case. In Prudential, property owner Anscor Land, Inc. (ALI) entered into a contract
for the construction of an eight-unit townhouse located inCapitol Hills, Quezon City with
contractor Kraft Realty and Development Corporation (KRDC).62 KRDC secured the completion
of the construction project through a surety and performance bond issued by Prudential
Guarantee and Assurance Inc. (PGAI).63

The delay in the construction project resulted in ALIs termination of the contract and claim
against the performance bond.64 "ALI [subsequently] commenced arbitration proceedings against
KRDC and PGAI in the CIAC."65 PGAI, however, argued that it was not a party to the
construction contract.66

The CIAC ruled that PGAI was not liable under the performance bond.67 Upon review, the Court
of Appeals held that PGAI was jointly and severally liable with KRDC under the performance
bond.68

PGAI appealed the Court of Appeals Decision and claimed that CIAC did not have jurisdiction
over the performance bond.69 This court ruled:

A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is an
accessory contract because it is dependent for its existence upon the principal obligation
guaranteed by it.

In fact, the primary and only reason behind the acquisition of the performance bond by KRDC
was to guarantee to ALI that the construction project would proceed in accordance with the
contract terms and conditions. In effect, the performance bond becomes liable for the completion
of the construction project in the event KRDC fails in its contractual undertaking. Because of the
performance bond, the construction contract between ALI and KRDC is guaranteed to be
performed even if KRDC fails in its obligation. In practice, a performance bond is usually a
condition or a necessary component of construction contracts. In the case at bar, the performance
bond was so connected with the construction contract that the former was agreed by the parties to
be a condition for the latter to push through and at the same time, the former is reliant on the
latter for its existence as an accessory contract.

Although not the construction contract itself, the performance bond is deemed as an associate of
the main construction contract that it cannot be separated or severed from its principal. The
Performance Bond is significantly and substantially connected to the construction contract that
there can be no doubt it is the CIAC, under Section 4 of EO No. 1008, which has jurisdiction
over any dispute arising from or connected with it.70(Emphasis supplied, citations omitted)
At first look, the Owners-Contractor Agreement and the performance bond reference each other;
the performance bond was issued pursuant to the construction agreement.

A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement

"whereby a party, called the surety, guarantees the performance by another party, called the
principal or obligor, of an obligation or undertaking in favor of another party, called the
obligee."71 In the same vein, a performance bond is "designed to afford the project owner
security that the . . . contractor, will faithfully comply with the requirements of the contract . . .
and make good [on the] damages sustained by the project owner in case of the contractors
failure to so perform."72

It is settled that the suretys solidary obligation for the performance of the principal debtors
obligation is indirect and merely secondary.73 Nevertheless, the suretys liability tothe "creditor
or promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal."74

Verily, "[i]n enforcing a surety contract, the complementary contracts-construed-together

doctrine finds application. According to this principle, an accessory contract must beread in its
entirety and together with the principal agreement."75 Article 1374 of the Civil Code provides:

ART. 1374. 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.

Applying the "complementary-contracts-construed-together" doctrine, this court in Prudential

held that the surety willingly acceded to the terms of the construction contract despite the silence
of the performance bond as to arbitration:

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand,
the construction contract was clear as to arbitration in the event of disputes. Applying the said
doctrine, we rule that the silence of the accessory contract in this case could only be construed as
acquiescence to the main contract. The construction contract breathes life into the performance
bond. We are not ready to assume that the performance bond contains reservations with regard to
some of the terms and conditions in the construction contract where in fact it is silent. On the
other hand, it is more reasonable to assume that the party who issued the performance bond
carefully and meticulously studied the construction contract that it guaranteed, and if it had
reservations, it would have and should have mentioned them in the surety contract.76 (Emphasis
supplied)

This court, however, cannot apply the ruling in Prudential to the present case. Several factors
militate against petitioners claim.

The contractual stipulations in this case and in Prudential are different. The relevant provisions
of the Owners-Contractor Agreement in this case state:

ARTICLE 5. THE CONTRACT DOCUMENTS

The following documents prepared by the CONTRACTOR shall constitute an integral part of
this contract as fully as if hereto attached or herein stated, except asotherwise modified by
mutual agreement of parties, and attached to this agreement.

Attachment 5.1 Working Drawings

Attachment 5.2 Outline Specifications

Attachment 5.3 Bill of Quantities

Attachment 5.4 CONTRACTOR Business License

....

ARTICLE 7. PERFORMANCE (SURETY) BOND

7.1 Within 30 days of the signing of this agreement, CONTRACTOR shall provide to
OWNERS a performance bond, issued by a duly licensed authority acceptable to the
OWNERS, and equal to the amount of PHP 4,500,000.00 (Four Million and Five
Hundred Thousand Philippine Pesos),with the OWNERS as beneficiary.

7.2 The performance bond will guarantee the satisfactory and faithful performance by the
CONTRACTOR of all provisions stated within this contract.

ARTICLE 8. ARBITRATION

8.1 Any dispute between the parties hereto which cannot be amicably settled shall be finally
settled by arbitration in accordance with the provision of Republic Act 876, of The Philippines,
as amended by the Executive Order 1008 dated February 4, 1985.77 (Emphasis in the original)

In contrast, the provisions of the construction contract in Prudential provide:

Article 1

CONTRACT DOCUMENTS

1.1 The following shall form part of this Contractand together with this Contract, are known as
the "Contract Documents":

a. Bid Proposal

....

d. Notice to proceed

....
 j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of
Materials by the Developer)78 (Emphasis supplied)

This court in Prudential held that the construction contract expressly incorporated the
performance bond into the contract.79 In the present case, Article 7 of the Owners-Contractor
Agreement merely stated that a performance bond shall be issued in favor of respondents, in
which case petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia Asis-Leif shall
pay P4,500,000.00 in the event that Asis-Leif fails to perform its duty under the Owners-
Contractor Agreement.80 Consequently, the performance bond merely referenced the contract
entered into by respondents and Asis-Leif, which pertained to Asis-Leifs duty toconstruct a two-
storey residence building with attic, pool, and landscaping over respondents property.81

To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is

found.1wphi1 The construction agreement was signed only by respondents and the contractor,
Asis-Leif, as represented by Ms. Ma. Cynthia Asis-Leif. It is basic that "[c]ontracts take effect
only between the parties, their assigns and heirs[.]"82 Not being a party to the construction
agreement, petitioner cannot invoke the arbitration clause. Petitioner, thus, cannot invoke the
jurisdiction of the CIAC.

Moreover, petitioners invocation of the arbitration clause defeats the purpose of arbitration in
relation to the construction business. The state has continuously encouraged the use of dispute
resolution mechanisms to promote party autonomy.83 In LICOMCEN, Incorporated v.
Foundation Specialists, Inc.,84 this court upheld the CIAC's jurisdiction in line with the state's
policy to promote arbitration:

The CIAC was created through Executive Order No. 1008 (E. 0. 1008), in recognition of the
need to establish an arbitral machinery that would expeditiously settle construction industry
disputes. The prompt resolution of problems arising from or connected with the construction
industry was considered of necessary and vital for the fulfillment of national development goals,
as the construction industry provides employment to a large segment of the national labor force
and is a leading contributor to the gross national product.85 (Citation omitted)

However, where a surety in a. construction contract actively participates in a collection suit, it is

estopped from raising jurisdiction later. Assuming that petitioner is privy to the construction
agreement, we cannot allow petitioner to invoke arbitration at this late stage of the proceedings
since to do so would go against the law's goal of prompt resolution of cases in the construction
industry.

WHEREFORE, the petition is DENIED. The case is DISMISSED. Petitioner's counsel is

STERNLY WARNED that a repetition or similar violation of the rule on Certification Against
Forum Shopping will be dealt with more severely.

SO ORDERED.
 FIRST DIVISION

G.R. No. 212081, February 23, 2015

DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES

(DENR), Petitioner, v. UNITED PLANNERS CONSULTANTS, INC. (UPCI), Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 is the Decision2 dated March 26, 2014 of the
Court of Appeals (CA) in CA-G.R. SP No. 126458 which dismissed the petition
for certiorari filed by petitioner the Department of Environment and Natural Resources
(petitioner).chanroblesvirtuallawlibrary

The Facts

On July 26, 1993, petitioner, through the Land Management Bureau (LMB), entered into an
Agreement for Consultancy Services3 (Consultancy Agreement) with respondent United
Planners Consultants, Inc. (respondent) in connection with the LMBs Land Resource
Management Master Plan Project (LRMMP).4 Under the Consultancy Agreement, petitioner
committed to pay a total contract price of P4,337,141.00, based on a predetermined percentage
corresponding to the particular stage of work accomplished.5 In December 1994, respondent
completed the work required, which petitioner formally accepted on December 27,
1994.6 However, petitioner was able to pay only 47% of the total contract price in the amount of
P2,038,456.30.7cralawred

On October 25, 1994, the Commission on Audit (COA) released the Technical Services Office
Report8(TSO) finding the contract price of the Agreement to be 84.14% excessive.9 This
notwithstanding, petitioner, in a letter dated December 10, 1998, acknowledged its liability to
respondent in the amount of P2,239,479.60 and assured payment at the soonest possible
time.10cralawred

For failure to pay its obligation under the Consultancy Agreement despite repeated demands,
respondent instituted a Complaint11 against petitioner before the Regional Trial Court of Quezon
City, Branch 222 (RTC), docketed as Case No. Q-07-60321.12cralawred

Upon motion of respondent, the case was subsequently referred to arbitration pursuant to the
arbitration clause of the Consultancy Agreement,13 which petitioner did not oppose.14 As a result,
Atty. Alfredo F. Tadiar, Architect Armando N. Alli, and Construction Industry Arbitration
Commission (CIAC) Accredited Arbitrator Engr. Ricardo B. San Juan were appointed as
members of the Arbitral Tribunal. The court-referred arbitration was then docketed as
Arbitration Case No. A-001.15cralawred

During the preliminary conference, the parties agreed to adopt the CIAC Revised Rules
Governing Construction Arbitration16 (CIAC Rules) to govern the arbitration
proceedings.17 They further agreed to submit their respective draft decisions in lieu of
memoranda of arguments on or before April 21, 2010, among others.18cralawred

On the due date for submission of the draft decisions, however, only respondent complied with
the given deadline,19 while petitioner moved for the deferment of the deadline which it followed
with another motion for extension of time, asking that it be given until May 11, 2010 to submit
its draft decision.20cralawred

In an Order21 dated April 30, 2010, the Arbitral Tribunal denied petitioners motions and deemed
its non-submission as a waiver, but declared that it would still consider petitioners draft decision
if submitted before May 7, 2010, or the expected date of the final awards
promulgation.22 Petitioner filed its draft decision23 only on May 7, 2010.

The Arbitral Tribunal rendered its Award24 dated May 7, 2010 (Arbitral Award) in favor of
respondent, directing petitioner to pay the latter the amount of (a) P2,285,089.89 representing the
unpaid progress billings, with interest at the rate of 12% per annum from the date of finality of
the Arbitral Award upon confirmation by the RTC until fully paid; (b) P2,033,034.59 as accrued
interest thereon; (c) ?500,000.00 as exemplary damages; and (d) P150,000.00 as attorneys
fees.25 It also ordered petitioner to reimburse respondent its proportionate share in the arbitration
costs as agreed upon in the amount of P182,119.44.26cralawred

Unconvinced, petitioner filed a motion for reconsideration,27 which the Arbitral Tribunal merely
noted without any action, claiming that it had already lost jurisdiction over the case after it had
submitted to the RTC its Report together with a copy of the Arbitral Award.28cralawred

Consequently, petitioner filed before the RTC a Motion for Reconsideration29 dated May 19,
2010 (May 19, 2010 Motion for Reconsideration) and a Manifestation and Motion30 dated June
1, 2010 (June 1, 2010 Manifestation and Motion), asserting that it was denied the opportunity
to be heard when the Arbitral Tribunal failed to consider its draft decision and merely noted its
motion for reconsideration.31 It also denied receiving a copy of the Arbitral Award by either
electronic or registered mail.32 For its part, respondent filed an opposition thereto and moved for
the confirmation33 of the Arbitral Award in accordance with the Special Rules of Court on
Alternative Dispute Resolution (Special ADR Rules).34cralawred

In an Order35 dated March 30, 2011, the RTC merely noted petitioners aforesaid motions,
finding that copies of the Arbitral Award appear to have been sent to the parties by the Arbitral
Tribunal, including the OSG, contrary to petitioners claim. On the other hand, the RTC
confirmed the Arbitral Award pursuant to Rule 11.2 (A)36 of the Special ADR Rules and ordered
petitioner to pay respondent the costs of confirming the award, as prayed for, in the total amount
of P50,000.00. From this order, petitioner did not file a motion for reconsideration.
Thus, on June 15, 2011, respondent moved for the issuance of a writ of execution, to which no
comment/opposition was filed by petitioner despite the RTCs directive therefor. In an
Order37 dated September 12, 2011, the RTC granted respondents motion.38cralawred

Petitioner moved to quash39 the writ of execution, positing that respondent was not entitled to its
monetary claims. It also claimed that the issuance of said writ was premature since the RTC
should have first resolved its May 19, 2010 Motion for Reconsideration and June 1, 2010
Manifestation and Motion, and not merely noted them, thereby violating its right to due
process.40cralawred

The RTC Ruling

In an Order41 dated July 9, 2012, the RTC denied petitioners motion to quash.

It found no merit in petitioners contention that it was denied due process, ruling that its May 19,
2010 Motion for Reconsideration was a prohibited pleading under Section 17.2,42 Rule 17 of the
CIAC Rules. It explained that the available remedy to assail an arbitral award was to file a
motion for correction of final award pursuant to Section 17.143 of the CIAC Rules, and not a
motion for reconsideration of the said award itself.44 On the other hand, the RTC found
petitioners June 1, 2010 Manifestation and Motion seeking the resolution of its May 19, 2010
Motion for Reconsideration to be defective for petitioners failure to observe the three-day notice
rule.45 Having then failed to avail of the remedies attendant to an order of confirmation, the
Arbitral Award had become final and executory.46cralawred

On July 12, 2012, petitioner received the RTCs Order dated July 9, 2012 denying its motion to
quash.47cralawred

Dissatisfied, it filed on September 10, 2012 a petition for certiorari48 before the CA, docketed
as CA-G.R. SP No. 126458, averring in the main that the RTC acted with grave abuse of
discretion in confirming and ordering the execution of the Arbitral
Award.chanroblesvirtuallawlibrary

The CA Ruling

In a Decision49 dated March 26, 2014, the CA dismissed the certiorari petition on two (2)
grounds, namely: (a) the petition essentially assailed the merits of the Arbitral Award which
is prohibited under Rule 19.750 of the Special ADR Rules;51 and (b) the petition was filed out of
time, having been filed way beyond 15 days from notice of the RTCs July 9, 2012 Order, in
violation of Rule 19.2852 in relation to Rule 19.853 of said Rules which provide that a special
civil action for certiorari must be filed before the CA within 15 days from notice of the
judgment, order, or resolution sought to be annulled or set aside (or until July 27, 2012).

Aggrieved, petitioner filed the instant petition.chanroblesvirtuallawlibrary

The Issue Before the Court

The core issue for the Courts resolution is whether or not the CA erred in applying the
provisions of the Special ADR Rules, resulting in the dismissal of petitioners special civil action
for certiorari.

The Courts Ruling

The petition lacks merit.chanroblesvirtuallawlibrary

I.

Republic Act No. (RA) 9285,54 otherwise known as the Alternative Dispute Resolution Act of
2004, institutionalized the use of an Alternative Dispute Resolution System (ADR System)55 in
the Philippines. The Act, however, was without prejudice to the adoption by the Supreme Court
of any ADR system as a means of achieving speedy and efficient means of resolving cases
pending before all courts in the Philippines.56cralawred

Accordingly, A.M. No. 07-11-08-SC was created setting forth the Special Rules of Court on
Alternative Dispute Resolution (referred herein as Special ADR Rules) that shall govern the
procedure to be followed by the courts whenever judicial intervention is sought in ADR
proceedings in the specific cases where it is allowed.57cralawred

Rule 1.1 of the Special ADR Rules lists down the instances when the said rules shall apply,
namely: (a) Relief on the issue of Existence, Validity, or Enforceability of the Arbitration
Agreement; (b) Referral to Alternative Dispute Resolution (ADR); (c) Interim Measures of
Protection; (d) Appointment of Arbitrator; (e) Challenge to Appointment of Arbitrator; (f)
Termination of Mandate of Arbitrator; (g) Assistance in Taking Evidence; (h) Confirmation,
Correction or Vacation of Award in Domestic Arbitration; (i) Recognition and Enforcement or
Setting Aside of an Award in International Commercial Arbitration; (j) Recognition and
Enforcement of a Foreign Arbitral Award; (k) Confidentiality/Protective Orders; and (l) Deposit
and Enforcement of Mediated Settlement Agreements.58cralawred

Notably, the Special ADR Rules do not automatically govern the arbitration proceedings itself.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is a product
of party autonomy or the freedom of the parties to make their own arrangements to resolve their
own disputes.59 Thus, Rule 2.3 of the Special ADR Rules explicitly provides that parties are
free to agree on the procedure to be followed in the conduct of arbitral proceedings. Failing
such agreement, the arbitral tribunal may conduct arbitration in the manner it considers
appropriate.60cralawred

In the case at bar, the Consultancy Agreement contained an arbitration clause.61 Hence,
respondent, after it filed its complaint, moved for its referral to arbitration62 which was not
objected to by petitioner.63 By its referral to arbitration, the case fell within the coverage of the
Special ADR Rules. However, with respect to the arbitration proceedings itself, the parties had
agreed to adopt the CIAC Rules before the Arbitral Tribunal in accordance with Rule 2.3 of the
Special ADR Rules.
On May 7, 2010, the Arbitral Tribunal rendered the Arbitral Award in favor of
respondent. Under Section 17.2, Rule 17 of the CIAC Rules, no motion for reconsideration or
new trial may be sought, but any of the parties may file a motion for correction64 of the final
award, which shall interrupt the running of the period for appeal,65 based on any of the following
grounds, to wit:chanRoblesvirtualLawlibrary

a. an evident miscalculation of figures, a typographical or arithmetical

error;ChanRoblesVirtualawlibrary

b. an evident mistake in the description of any party, person, date, amount, thing or
property referred to in the award;ChanRoblesVirtualawlibrary

c. where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter
submitted;ChanRoblesVirtualawlibrary

d. where the arbitrators have failed or omitted to resolve certain issue/s formulated
by the parties in the Terms of Reference (TOR) and submitted to them for
resolution, and

e. where the award is imperfect in a matter of form not affecting the merits of the
controversy.

The motion shall be acted upon by the Arbitral Tribunal or the surviving/remaining
members.66cralawlawlibrary

Moreover, the parties may appeal the final award to the CA through a petition for review under
Rule 43 of the Rules of Court.67cralawred

Records do not show that any of the foregoing remedies were availed of by petitioner. Instead, it
filed the May 19, 2010 Motion for Reconsideration of the Arbitral Award, which was a
prohibited pleading under the Section 17.2,68 Rule 17 of the CIAC Rules, thus rendering the
same final and executory.

Accordingly, the case was remanded to the RTC for confirmation proceedings pursuant to Rule
11 of the Special ADR Rules which requires confirmation by the court of the final arbitral award.
This is consistent with Section 40, Chapter 7 (A) of RA 9285 which similarly requires a judicial
confirmation of a domestic award to make the same enforceable:chanRoblesvirtualLawlibrary

SEC. 40. Confirmation of Award. The confirmation of a domestic arbitral award shall be
governed by Section 2369 of R.A. 876.70cralawred

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. (Emphases supplied)cralawlawlibrary

During the confirmation proceedings, petitioners did not oppose the RTCs confirmation by
filing a petition to vacate the Arbitral Award under Rule 11.2 (D)71 of the Special ADR
Rules. Neither did it seek reconsideration of the confirmation order in accordance with Rule
19.1 (h) thereof. Instead, petitioner filed only on September 10, 2012 a special civil action
for certiorari before the CA questioning the propriety of (a) the RTC Order dated September 12,
2011 granting respondents motion for issuance of a writ of execution, and (b) Order dated July
9, 2012 denying its motion to quash. Under Rule 19.26 of the Special ADR Rules, [w]hen the
Regional Trial Court, in making a ruling under the Special ADR Rules, has acted without or in
excess of its jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law, a party may file a special civil action for certiorari to annul or set aside
a ruling of the Regional Trial Court. Thus, for failing to avail of the foregoing remedies before
resorting to certiorari, the CA correctly dismissed its petition.chanroblesvirtuallawlibrary

II.

Note that the special civil action for certiorari described in Rule 19.26 above may be filed to
annul or set aside the following orders of the Regional Trial Court.

a. Holding that the arbitration agreement is inexistent, invalid or

unenforceable;ChanRoblesVirtualawlibrary

b. Reversing the arbitral tribunals preliminary determination upholding its

jurisdiction;ChanRoblesVirtualawlibrary

c. Denying the request to refer the dispute to

arbitration;ChanRoblesVirtualawlibrary

d. Granting or refusing an interim relief;ChanRoblesVirtualawlibrary

e. Denying a petition for the appointment of an

arbitrator;ChanRoblesVirtualawlibrary

f. Confirming, vacating or correcting a domestic arbitral

award;ChanRoblesVirtualawlibrary

g. Suspending the proceedings to set aside an international commercial arbitral

award and referring the case back to the arbitral
tribunal;ChanRoblesVirtualawlibrary

h. Allowing a party to enforce an international commercial arbitral award pending

appeal;ChanRoblesVirtualawlibrary
 i. Adjourning or deferring a ruling on whether to set aside, recognize and or enforce
an international commercial arbitral award;ChanRoblesVirtualawlibrary

j. Allowing a party to enforce a foreign arbitral award pending appeal; and

k. Denying a petition for assistance in taking evidence. (Emphasis supplied)

cralawlawlibrary

Further, Rule 19.772 of the Special ADR Rules precludes a party to an arbitration from filing a
petition for certiorari questioning the merits of an arbitral award.

If so falling under the above-stated enumeration, Rule 19.28 of the Special ADR Rules provide
that said certiorari petition should be filed with the [CA] within fifteen (15) days from notice of
the judgment, order or resolution sought to be annulled or set aside. No extension of time to file
the petition shall be allowed.

In this case, petitioner asserts that its petition is not covered by the Special ADR Rules
(particularly, Rule 19.28 on the 15-day reglementary period to file a petition for certiorari) but
by Rule 65 of the Rules of Court (particularly, Section 4 thereof on the 60-day reglementary
period to file a petition for certiorari), which it claimed to have suppletory application in
arbitration proceedings since the Special ADR Rules do not explicitly provide for a procedure on
execution.

The position is untenable.

Execution is fittingly called the fruit and end of suit and the life of the law. A judgment, if left
unexecuted, would be nothing but an empty victory for the prevailing party.73cralawred

While it appears that the Special ADR Rules remain silent on the procedure for the execution of
a confirmed arbitral award, it is the Courts considered view that the Rules procedural
mechanisms cover not only aspects of confirmation but necessarily extend to a confirmed
awards execution in light of the doctrine of necessary implication which states that every
statutory grant of power, right or privilege is deemed to include all incidental power, right or
privilege. In Atienza v. Villarosa,74 the doctrine was explained,
thus:chanRoblesvirtualLawlibrary

No statute can be enacted that can provide all the details involved in its application. There is
always an omission that may not meet a particular situation. What is thought, at the time of
enactment, to be an all-embracing legislation may be inadequate to provide for the unfolding of
events of the future. So-called gaps in the law develop as the law is enforced. One of the rules of
statutory construction used to fill in the gap is the doctrine of necessary implication. The doctrine
states that what is implied in a statute is as much a part thereof as that which is expressed. Every
statute is understood, by implication, to contain all such provisions as may be necessary to
effectuate its object and purpose, or to make effective rights, powers, privileges or
jurisdiction which it grants, including all such collateral and subsidiary consequences as
may be fairly and logically inferred from its terms. Ex necessitate legis. And every
statutory grant of power, right or privilege is deemed to include all incidental power, right
or privilege. This is so because the greater includes the lesser, expressed in the maxim, in eo
plus sit, simper inest et minus.75 (Emphases supplied)cralawlawlibrary

As the Court sees it, execution is but a necessary incident to the Courts confirmation of an
arbitral award. To construe it otherwise would result in an absurd situation whereby the
confirming court previously applying the Special ADR Rules in its confirmation of the arbitral
award would later shift to the regular Rules of Procedure come execution. Irrefragably, a courts
power to confirm a judgment award under the Special ADR Rules should be deemed to include
the power to order its execution for such is but a collateral and subsidiary consequence that may
be fairly and logically inferred from the statutory grant to regional trial courts of the power to
confirm domestic arbitral awards.

All the more is such interpretation warranted under the principle of ratio legis est anima which
provides that a statute must be read according to its spirit or intent,76 for what is within the spirit
is within the statute although it is not within its letter, and that which is within the letter but not
within the spirit is not within the statute.77 Accordingly, since the Special ADR Rules are
intended to achieve speedy and efficient resolution of disputes and curb a litigious
culture,78 every interpretation thereof should be made consistent with these objectives.

Thus, with these principles in mind, the Court so concludes that the Special ADR Rules, as far as
practicable, should be made to apply not only to the proceedings on confirmation but also to the
confirmed awards execution.

Further, let it be clarified that contrary to petitioners stance resort to the Rules of Court even
in a suppletory capacity is not allowed. Rule 22.1 of the Special ADR Rules explicitly provides
that [t]he provisions of the Rules of Court that are applicable to the proceedings enumerated in
Rule 1.1 of these Special ADR Rules have either been included and incorporated in these
Special ADR Rules or specifically referred to herein.79 Besides, Rule 1.13 thereof provides
that [i]n situations where no specific rule is provided under the Special ADR Rules, the court
shall resolve such matter summarily and be guided by the spirit and intent of the Special ADR
Rules and the ADR Laws.

As above-mentioned, the petition for certiorari permitted under the Special ADR Rules must be
filed within a period of fifteen (15) days from notice of the judgment, order or resolution sought
to be annulled or set aside.80 Hence, since petitioners filing of its certiorari petition in CA-G.R.
SP No. 126458 was made nearly two months after its receipt of the RTCs Order dated July 9,
2012, or on September 10, 2012,81 said petition was clearly dismissible.82cralawred

III.

Discounting the above-discussed procedural considerations, the Court still finds that
the certiorari petition had no merit.

Indeed, petitioner cannot be said to have been denied due process as the records undeniably show
that it was accorded ample opportunity to ventilate its position. There was clearly nothing out of
line when the Arbitral Tribunal denied petitioners motions for extension to file its submissions
having failed to show a valid reason to justify the same or in rendering the Arbitral Award sans
petitioners draft decision which was filed only on the day of the scheduled promulgation of final
award on May 7, 2010.83 The touchstone of due process is basically the opportunity to be heard.
Having been given such opportunity, petitioner should only blame itself for its own procedural
blunder.

On this score, the petition for certiorari in CA-G.R. SP No. 126458 was likewise properly
dismissed.chanroblesvirtuallawlibrary

IV.

Nevertheless, while the Court sanctions the dismissal by the CA of the petition for certiorari due
to procedural infirmities, there is a need to explicate the matter of execution of the confirmed
Arbitral Award against the petitioner, a government agency, in the light of Presidential Decree
No. (PD) 144584 otherwise known as the Government Auditing Code of the Philippines.

Section 26 of PD 1445 expressly provides that execution of money judgment against the
Government or any of its subdivisions, agencies and instrumentalities is within the primary
jurisdiction of the COA, to wit:chanRoblesvirtualLawlibrary

SEC. 26. General jurisdiction. The authority and powers of the Commission shall extend to
and comprehend all matters relating to auditing procedures, systems and controls, the keeping
of the general accounts of the Government, the preservation of vouchers pertaining thereto for a
period of ten years, the examination and inspection of the books, records, and papers
relating to those accounts; and the audit and settlement of the accounts of all persons
respecting funds or property received or held by them in an accountable capacity, as well
as the examination, audit, and settlement of all debts and claims of any sort due from or
owing to the Government or any of its subdivisions, agencies and instrumentalities. The said
jurisdiction extends to all government-owned or controlled corporations, including their
subsidiaries, and other self-governing boards, commissions, or agencies of the Government, and
as herein prescribed, including non-governmental entities subsidized by the government, those
funded by donation through the government, those required to pay levies or government share,
and those for which the government has put up a counterpart fund or those partly funded by the
government. (Emphases supplied)
cralawlawlibrary

From the foregoing, the settlement of respondents money claim is still subject to the primary
jurisdiction of the COA despite finality of the confirmed arbitral award by the RTC pursuant to
the Special ADR Rules.85 Hence, the respondent has to first seek the approval of the COA of
their monetary claim. This appears to have been complied with by the latter when it filed a
Petition for Enforcement and Payment of Final and Executory Arbitral Award86 before the
COA. Accordingly, it is now the COA which has the authority to rule on this latter petition.

WHEREFORE, the petition is DENIED. The Decision dated March 26, 2014 of the Court of
Appeals in CA-G.R. SP No. 126458 which dismissed the petition for certiorari filed by
petitioner the Department of Environment and Natural Resources is hereby AFFIRMED.

SO ORDERED.cralawlawlibrary

SECOND DIVISION
 G.R. No. 174938, October 01, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners, v. BF

CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a

contract entered into by the corporation they represent if there are allegations of bad faith or
malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5,
2006 resolution. The Court of Appeals affirmed the trial court's decision holding that petitioners,
as directors, should submit themselves as parties to the arbitration proceedings between BF
Corporation and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-La and the members of its board of directors: Alfredo C. Ramos, Rufo B. Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C.
Ramos.1cralawred

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered
into agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a
multilevel parking structure along EDSA.2cralawred

Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3 However, by October 1991, Shangri-La started defaulting in payment.4cralawred

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La's
default.5 According to BF Corporation, Shangri-La misrepresented that it had funds to pay for its
obligations with BF Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporation's progress billing statements.6cralawred

BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly

took possession of the buildings while still owing BF Corporation an outstanding
balance.8cralawred

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance
owed to it.9 It also alleged that the Shangri-La's directors were in bad faith in directing Shangri-
La's affairs. Therefore, they should be held jointly and severally liable with Shangri-La for its
obligations as well as for the damages that BF Corporation incurred as a result of Shangri-La's
default.10cralawred
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III,
and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation's
failure to submit its dispute to arbitration, in accordance with the arbitration clause provided in
its contract, quoted in the motion as follows:11cralawred

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or the
Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising thereunder or in connection therewith (including any
matter or thing left by this Contract to the discretion of the Project Manager or the withholding
by the Project Manager of any certificate to which the Contractor may claim to be entitled or the
measurement and valuation mentioned in clause 30(5)(a) of these Conditions or the rights and
liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the
Contractor hereby agree to exert all efforts to settle their differences or dispute amicably. Failing
these efforts then such dispute or difference shall be referred to arbitration in accordance with the
rules and procedures of the Philippine Arbitration Law.

xxx xxx xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may have
against the other. . . .12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13cralawred

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14cralawred

On December 8, 1993, petitioners filed an answer to BF Corporation's complaint, with

compulsory counterclaim against BF Corporation and cross-claim against Shangri-La.15 They
alleged that they had resigned as members of Shangri-La's board of directors as of July 15,
1991.16cralawred

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco
III, and Benjamin Ramos filed a petition for certiorari with the Court of Appeals.17cralawred

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration.18cralawred

Aggrieved by the Court of Appeals' decision, BF Corporation filed a petition for review on
certiorari with this court.19 On March 27, 1998, this court affirmed the Court of Appeals'
decision, directing that the dispute be submitted for arbitration.20cralawred
Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation
and Shangri-La failed to agree as to the law that should govern the arbitration proceedings.21 On
October 27, 1998, the trial court issued the order directing the parties to conduct the proceedings
in accordance with Republic Act No. 876.22cralawred

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both
seeking to clarify the term, "parties," and whether Shangri-La's directors should be included in
the arbitration proceedings and served with separate demands for arbitration.23cralawred

Petitioners filed their comment on Shangri-La's and BF Corporation's motions, praying that they
be excluded from the arbitration proceedings for being non-parties to Shangri-La's and BF
Corporation's agreement.24cralawred

On July 28, 2003, the trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation's complaint.25 According to the trial court, Shangri-La's
directors were interested parties who "must also be served with a demand for arbitration to give
them the opportunity to ventilate their side of the controversy, safeguard their interest and fend
off their respective positions."26 Petitioners' motion for reconsideration of this order was denied
by the trial court on January 19, 2005.27cralawred

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings despite
being third parties to the contract between Shangri-La and BF Corporation.28cralawred

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners' petition for certiorari.
The Court of Appeals ruled that Shangri-La's directors were necessary parties in the arbitration
proceedings.30 According to the Court of Appeals:chanRoblesvirtualLawlibrary

[They were] deemed not third-parties to the contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and that
as directors of the defendant corporation, [they], in accordance with Art. 1217 of the Civil Code,
stand to be benefited or injured by the result of the arbitration proceedings, hence, being
necessary parties, they must be joined in order to have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in the arbitration proceedings and an arbitral
award is rendered, holding [Shangri-La] and its board of directors jointly and solidarity liable to
private respondent BF Corporation, a problem will arise, i.e., whether petitioners will be bound
by such arbitral award, and this will prevent complete determination of the issues and resolution
of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . .
would be contrary to the policy against multiplicity of suits."32cralawred

The dispositive portion of the Court of Appeals' decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and
January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400,
are AFFIRMED.33

The Court of Appeals denied petitioners' motion for reconsideration in the October 5, 2006
resolution.34cralawred

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution.35cralawred

The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF Corporation
and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation's
allegation that they are solidarity liable with Shangri-La.37 Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La's obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part.39cralawred

Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40 Provisions including arbitration stipulations should bind only the parties.41 Based
on our arbitration laws, parties who are strangers to an agreement cannot be compelled to
arbitrate.42cralawred

Petitioners point out that our arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to submit to arbitration is against this purpose and
may be tantamount to stipulating for the parties.44cralawred

Separate comments on the petition were filed by BF Corporation, and Maximo G. Licauco III,
Alfredo C. Ramos and Benjamin C. Ramos.45cralawred

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La's directors, being non-parties to the contract, should not be made personally liable for
Shangri-La's acts.46 Since the contract was executed only by BF Corporation and Shangri-La,
only they should be affected by the contract's stipulation.47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that should make them solidarity liable with
Shangri-La for its obligations.48cralawred

Meanwhile, in its comment, BF Corporation argued that the courts' ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49cralawred

BF Corporation also argued that while petitioners were not parties to the agreement, they were
still impleaded under Section 31 of the Corporation Code.50 Section 31 makes directors solidarity
liable for fraud, gross negligence, and bad faith.51 Petitioners are not really third parties to the
agreement because they are being sued as Shangri-La's representatives, under Section 31 of the
Corporation Code.52cralawred

BF Corporation further argued that because petitioners were impleaded for their solidary
liability, they are necessary parties to the arbitration proceedings.53 The full resolution of all
disputes in the arbitration proceedings should also be done in the interest of justice.54cralawred

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied
BF Corporation's claims against them.56 Petitioners stated that "[they] were included by the
Arbitral Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection
thereto. . . ."57They also stated that "[their] unwilling participation in the arbitration case was
done ex abundante ad cautela, as manifested therein on several occasions."58 Petitioners
informed the court that they already manifested with the trial court that "any action taken on [the
Arbitral Tribunal's decision] should be without prejudice to the resolution of [this]
case."59cralawred

Upon the court's order, petitioners and Shangri-La filed their respective memoranda. Petitioners
and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their
arguments that they should not be held liable for Shangri-La's default and made parties to the
arbitration proceedings because only BF Corporation and Shangri-La were parties to the
contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability
under Section 31 of the Corporation Code. Shangri-La added that their exclusion from the
arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated in.61 Moreover, BF Corporation
assailed only the correctness of the Arbitral Tribunal's award and not the part absolving Shangri-
La's directors from liability.62cralawred

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required

memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners' counterclaims

were already dismissed with finality, and the claims against them were likewise dismissed with
finality, they no longer have any interest or personality in the arbitration case. Thus, there is no
longer any need to resolve the present Petition, which mainly questions the inclusion of
petitioners in the arbitration proceedings."64 The court's decision in this case will no longer have
any effect on the issue of petitioners' inclusion in the arbitration proceedings.65cralawred

The petition must fail.

The Arbitral Tribunal's decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that principles
may be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon.
Enage,66 this court disregarded the fact that petitioner in that case already escaped from prison
and ruled on the issue of excessive bails:chanRoblesvirtualLawlibrary

While under the circumstances a ruling on the merits of the petition for certiorari is not
warranted, still, as set forth at the opening of this opinion, the fact that this case is moot and
academic should not preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required.67

This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68cralawred

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-La and BF Corporation's agreement, in order to determine if the
distinction between Shangri-La's personality and their personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through their
choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as
early as 1949. It was later institutionalized by the approval of Republic Act No. 876,70 which
expressly authorized, made valid, enforceable, and irrevocable parties' decision to submit their
controversies, including incidental issues, to arbitration. This court recognized this policy
in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71cralawred

As a corollary to the question regarding the existence of an arbitration agreement, defendant

raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute
from the jurisdiction of the courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a clause in a contract providing that
all matters in dispute between the parties shall be referred to arbitrators and to them alone, is
contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the old Code on
Arbitration. And only recently it approved Republic Act No. 876 expressly authorizing
arbitration of future disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are
liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc.,73 this court said:chanRoblesvirtualLawlibrary

Being an inexpensive, speedy and amicable method of settling disputes, arbitration along with
mediation, conciliation and negotiation is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in international civil and
commercial disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution

methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of arbitration.74 (Emphasis
supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in Republic
Act No. 9285:75cralawred

SEC. 2. Declaration of Policy. - It is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes, or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and
actively promote the use of Alternative Dispute Resolution (ADR) as an important means
to achieve speedy and impartial justice and declog court dockets. As such, the State shall
provide means for the use of ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist active private sector participation
in the settlement of disputes through ADR. This Act shall be without prejudice to the adoption
by the Supreme Court of any ADR system, such as mediation, conciliation, arbitration, or any
combination thereof as a means of achieving speedy and efficient means of resolving cases
pending before all courts in the Philippines which shall be governed by such rules as the
Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act. - In interpreting the Act, the court shall have due regard to
the policy of the law in favor of arbitration. Where action is commenced by or against
multiple parties, one or more of whom are parties who are bound by the arbitration agreement
although the civil action may continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes of
avoiding litigation and expediting resolution of the dispute, that interpretation shall be adopted.

Petitioners' main argument arises from the separate personality given to juridical persons vis-a-
vis their directors, officers, stockholders, and agents. Since they did not sign the arbitration
agreement in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration
Tribunal in accordance with the arbitration agreement. Moreover, they had already resigned as
directors of Shangri-La at the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and
distinct from Shangri-La.

A corporation is an artificial entity created by fiction of law.76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the
legal sense, is an individual with a personality that is distinct and separate from other persons
including its stockholders, officers, directors, representatives,77 and other juridical entities.

The law vests in corporations rights, powers, and attributes as if they were natural persons with
physical existence and capabilities to act on their own.78 For instance, they have the power to sue
and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of
a corporation's powers, thus:chanRoblesvirtualLawlibrary

Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code
has the power and capacity:chanroblesvirtuallawlibrary

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the corporation if
it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of
any political party or candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (13a)

Because a corporation's existence is only by fiction of law, it can only exercise its rights and
powers through its directors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.

A consequence of a corporation's separate personality is that consent by a corporation through its

representatives is not consent of the representative, personally. Its obligations, incurred through
official acts of its representatives, are its own. A stockholder, director, or representative does not
become a party to a contract just because a corporation executed a )C contract through that
stockholder, director or representative.

Hence, a corporation's representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties' autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither parties to the
contract nor assignees of previous parties, thus:chanRoblesvirtualLawlibrary

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

arbitration, binds the parties thereto, as well as their assigns and heirs. But only they.80 (Citations
omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court

ruled:chanRoblesvirtualLawlibrary

The provision to submit to arbitration any dispute arising therefrom and the relationship of the
parties is part of that contract and is itself a contract. As a rule, contracts are respected as the law
between the contracting parties and produce effect as between them, their assigns and heirs.
Clearly, only parties to the Agreement . . . are bound by the Agreement and its arbitration clause
as they are the only signatories thereto.82(Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83and Stanfilco Employees v. DOLE Philippines, Inc., et al.84cralawred

As a general rule, therefore, a corporation's representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings
made pursuant to an agreement entered into by the corporation. He or she is generally not
considered a party to that agreement.

However, there are instances when the distinction between personalities of directors, officers,
and representatives, and of the corporation, are disregarded. We call this piercing the veil of
corporate fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used
as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues."85 It is also warranted in
alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation."86cralawred

When corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.

Among the persons who may be treated as the corporation itself under certain circumstances are
its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:chanRoblesvirtualLawlibrary

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation, (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or members,
and other persons in any of the following cases:chanroblesvirtuallawlibrary

a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate
affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her
duties as director or trustee.
Solidary liability with the corporation will also attach in the following
instances:chanroblesvirtuallawlibrary

a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarity liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action."89

When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should
be treated as one. Without a trial, courts and tribunals have no basis for determining whether the
veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge.
Thus, the courts or tribunals must first determine whether circumstances exist to warrant the
courts or tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one tribunal or court
in a proceeding participated in by all parties involved, including current representatives of the
corporation, and those persons whose personalities are impliedly the same as the corporation.
This is because when the court or tribunal finds that circumstances exist warranting the piercing
of the corporate veil, the corporate representatives are treated as the corporation itself and should
be held liable for corporate acts. The corporation's distinct personality is disregarded, and the
corporation is seen as a mere aggregation of persons undertaking a business under the collective
name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging
malice or bad faith on their part in directing the affairs of the corporation, complainants are
effectively alleging that the directors and the corporation are not acting as separate entities. They
are alleging that the acts or omissions by the corporation that violated their rights are also the
directors' acts or omissions.90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate veil be
pierced because the cause of action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the parties.
Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.
Institution of more than one suit for the same cause of action constitutes splitting the cause of
action, which is a ground for the dismissal of the others. Thus, in Rule
2:chanRoblesvirtualLawlibrary

Section 3. One suit for a single cause of action. A party may not institute more than one suit
for a single cause of action. (3a)

Section 4. Splitting a single cause of action; effect of. If two or more suits are instituted on
the basis of the same cause of action, the filing of one or a judgment upon the merits in any one
is available as a ground for the dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings,
we are not overturning Heirs of Angus to Salas wherein this court affirmed the basic arbitration
principle that only parties to an arbitration agreement may be compelled to submit to arbitration.

In that case, this court recognized that persons other than the main party may be compelled to
submit to arbitration, e.g., assignees and heirs. Assignees and heirs may be considered parties to
an arbitration agreement entered into by their assignor because the assignor's rights and
obligations are transferred to them upon assignment. In other words, the assignor's rights and
obligations become their own rights and obligations. In the same way, the corporation's
obligations are treated as the representative's obligations when the corporate veil is pierced.

Moreover, in Heirs of Angus to Salas, this court affirmed its policy against multiplicity of suits
and unnecessary delay. This court said that "to split the proceeding into arbitration for some
parties and trial for other parties would "result in multiplicity of suits, duplicitous procedure and
unnecessary delay."91 This court also intimated that the interest of justice would be best observed
if it adjudicated rights in a single proceeding.92 While the facts of that case prompted this court to
direct the trial court to proceed to determine the issues of that case, it did not prohibit' courts
from allowing the case to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation's acts in violation of complainant's rights, and the
incidental issue of whether piercing of the corporate veil is warranted, should be determined in a
single proceeding. Such finding would determine if the corporation is merely an aggregation of
persons whose liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation's distinct and separate personality from its
directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons composing or representing
it. Courts merely discount the distinction and treat them as one, in relation to a specific act, in
order to extend the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation's illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine if such distinction should indeed
be disregarded and, if so, to determine the extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors solidarity
liable. It ruled that petitioners and Shangri-La's other directors were not liable for the contractual
obligations of Shangri-La to BF Corporation. The Arbitral Tribunal's decision was made with the
participation of petitioners, albeit with their continuing objection. In view of our discussion
above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.cralawlawlibrary

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 198075 September 4, 2013

KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,

vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.

DECISION

PEREZ, J.:

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

The facts:
 The Donation

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the

registered owner of a parcel of land located at Km. 16, South Superhighway, Paraaque City
(subject land).3 Within the subject land are buildings and other improvements dedicated to the
business of FKI.4

In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of
herein respondent Makati Rotary Club Foundation, Incorporated by way of a conditional
donation.6 The respondent accepted the donation with all of its conditions.7 On 26 May1975, FKI
and the respondent executed a Deed of Donation8evidencing their consensus.

The Lease and the Amended Deed of Donation

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

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

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

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

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

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

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

Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed
of Donation , FKI was able to continue in its possession and use of the subject land.
2000 Lease Contract

Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of
Donation was set to expire, or on 23 May 2000, FKI and respondent executed another contract of
lease ( 2000 Lease Contract )15covering the subject land. In this 2000 Lease Contract, FKI and
respondent agreed on a new five-year lease to take effect on the 26th of May 2000, with annual
rents ranging from P4,000,000 for the first year up to P4,900,000 for the fifth year.16 The 2000
Lease Contract also contained an arbitration clause enforceable in the event the parties come to
disagreement about the" interpretation, application and execution" of the lease, viz :

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

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

2005 Lease Contract

After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for
another five (5) years. This new lease (2005 Lease Contract )18 required FKI to pay a fixed
annual rent of 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 P3,900,000for the fifth year.21 Notably,
the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease
Contract, to wit:

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

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 Petitioners Refusal to Pay

From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in
favor of herein petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner
executed an Assignment and Assumption of Lease and Donation25 wherein FKI, with the
conformity of the respondent, formally assigned all of its interests and obligations under the
Amended Deed of Donation and the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the
2005 Lease Contract.

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

According to petitioner, the Deed of Donation and Amended Deed of Donation actually
established not only one but two (2) lease agreements between FKI and respondent, i.e. , one
lease for the first twenty-five (25)years or from 1975 to 2000, and another lease for the next
twenty-five (25)years thereafter or from 2000 to 2025. 27 Both leases are material conditions of
the donation of the subject land.

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

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

For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease
Contract cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation
of the aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of
Donation . Consequently, petitioner insists that the amount of rent it has to pay thereon is and
must still be governed by the limitations prescribed in the Deed of Donation and Amended Deed
of Donation.30

The Demand Letters

On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter
of its default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of
the rent and " donation " due for the year 2009. Respondent, in the same letter, further intimated
of canceling the 2005 Lease Contract should petitioner fail to settle the said
obligations.32 Petitioner received the First Demand Letter on2 June 2009.33

On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over
the rental stipulations of the 2005 Lease Contract calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals mandated by the Amended Deed
of Donation." In lieu of the amount demanded by the respondent, which purportedly totaled
to 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.37

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

Petitioner refused to comply with the demands of the respondent. Instead, on 30 September
2009, petitioner filed with the Regional Trial Court (RTC) of Paraaque 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 Paraaque 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 respondents demand.46 The First Demand
Letter did not contain an actual demand to vacate the premises and, therefore, the refusal
to comply there with does not give rise to an action for unlawful detainer.47

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

3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still
would not lie as the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005
Lease Contract requiring petitioner to give yearly " donations " to respondent is a
simulation, for they are, in fact, parts of the rent. 50 Such grants were only denominated
as " donations " in the contract so that the respondentanon-stock and non-profit
corporationcould 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 respondents
demand and the nullity of the 2005 Lease Contract.54 The MeTC thus disposed:

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

as to costs.

SO ORDERED.55

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

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

WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan
Trial Court, Branch 77, Paraaque 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 attorneys 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. 1678of the Civil Code shall apply.

SO ORDERED.57

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

 1. The respondent had adequately complied with the requirement of demand as a
jurisdictional precursor to an unlawful detainer action.58 The First Demand Letter, in
substance, contains a demand for petitioner to vacate when it mentioned that it was a
notice " per Section12 of the 2005 Lease Contract."59 Moreover, the issue of sufficiency
of the respondents demand ought to have been laid to rest by the Second Demand Letter
which, though not submitted in evidence, was nonetheless admitted by petitioner as
containing a" demand to eject " in its Answer with Compulsory Counterclaim.60

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

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

Aggrieved, the petitioner appealed to the Court of Appeals.

On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:

WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of
Paraaque 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 petitioners prayer for the issuance of a Temporary
Restraining Order68staying 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 enforce ability and validity of such stipulations, whereas, petitioner, in
substance, repudiates them. It is from petitioners apparent breach of the 2005 Lease Contract
that respondent filed the instant unlawful detainer action.

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

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

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

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

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

Challenges Against the Application of the

Arbitration Clause of the 2005 Lease
Contract

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

At different points in the proceedings of this case, the following arguments were offered against
the application of the arbitration clause of the 2005 Lease Contract:

1. The disagreement between the petitioner and respondent is non-arbitrable as it will

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

2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract
while, at the same time, impugn such contracts validity.75

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

4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR)

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

None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the petitioner and
respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such disagreement, the validity of
the 2005 Lease Contract, or at least, of such contracts 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, claim holders
or concessionaires" requiring the technical knowledge and experience of mining authorities in
order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise
mining disputes as contemplated under R.A. No. 7942 but only issues relating to the validity of
certain mining related agreements, this Court held that such complaint could not be arbitrated
before the PA-MGB.85 It is in this context that we made the pronouncement now in discussion:

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

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

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

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

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

Under the doctrine of separability, an arbitration agreement is considered as independent of the

main contract.92Being a separate contract in itself, the arbitration agreement may thus be invoked
regardless of the possible nullity or invalidity of the main contract.93

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

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

Section 24 of R.A. No. 9285 reads:

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

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

RULE 4: REFERRAL TO ADR

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

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

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

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

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

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

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

In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration
before the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer
with Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in
the 2005 Lease 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 under went through JDR proceedings before the RTC,
will not make the subsequent conduct of arbitration between the parties unnecessary or
circuitous. The JDR system is substantially different from arbitration proceedings.

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

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

Neither would the summary nature of ejectment cases be a valid reason to disregard the
enforcement of the arbitration clause of the 2005 Lease Contract . Notwithstanding the summary
nature of ejectment cases, arbitration still remains relevant as it aims not only to afford the
parties an expeditious method of resolving their dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and
foremost, a product of party autonomy or the freedom of the parties to " make their own
arrangements to resolve their own disputes."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:

R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue
arising out of an agreement providing for the arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue involved in such suit or proceeding is
referable to arbitration, shall stay the action or proceeding until an arbitration has been had in
accordance with the terms of the agreement: Provided, That the applicant for the stay is not in
default in proceeding with such arbitration.[Emphasis supplied]

R.A. No. 9285

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

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

The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid
all proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with
Counterclaim the point when the petitioner and the respondent should have been referred to
arbitration. This case must, therefore, 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 Paraaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. The case is currently pending before Branch 257 of the RTC,
docketed as Civil Case No. CV 09-0346.

This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may
involve matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease
Contract. However, since the records of Civil Case No. CV 09-0346 are not before this Court,
We can never know with true certainty and only speculate. In this light, let a copy of this
Decision be also served to Branch 257of the RTC of Paraaque 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 Paraaque City in relation to Civil Case No. 2009-307 after the filing by
petitioner of its Answer with Counterclaim ;

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

3. SETTING ASIDE the following:

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

116865,

b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of
Paraaque City in Civil Case No. 10-0255,
 c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of
Paraaque 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 Paraaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.

No costs. SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 196171 January 15, 2014

RCBC CAPITAL CORPORATION, Petitioner,

vs.
BANCO DE ORO UNIBANK, INC. (now BDO UNIBANK, INC.), Respondent.

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

G.R. No. 199238

BANCO DE ORO UNIBANK, INC., Petitioner,

vs.
COURT OF APPEALS and RCBC CAPITAL CORPORATION, Respondents.

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

G.R. No. 200213

BANCO DE ORO UNIBANK, INC., Petitioner,

vs.
RCBC CAPITAL CORPORATION and THE ARBITRAL TRIBUNAL IN ICC
ARBITRATION REF. NO. 13290/MS/JEM AND/OR RICHARD IAN BARKER, NEIL
KAPLAN AND SANTIAGO KAPUNAN, in their official capacity as Members of THE
ARBITRATION TRIBUNAL, Respondents.

RESOLUTION

VILLARAMA, JR., J.:

Before the Court are: (1) the Joint Motion and Manifestation dated October 1, 2013 filed in G.R.
Nos. 196171 & 199238 by RCBC Capital Corporation ("RCBC Capital"), BDO Unibank, Inc.
("BDO"), and George L. Go, in his personal capacity and as attorney-in-fact of the individual
stockholders as listed in the Share Purchase Agreement dated May 27, 2000
("Go/Shareholders"), thru their respective counsels; and (2) the Joint Motion and Manifestation
dated October 1, 2013 filed in G.R. No. 200213 by BDO and RCBC Capital thru their respective
counsel.

All three petitions emanated from arbitration proceedings commenced by RCBC Capital
pursuant to the arbitration clause under its Share Purchase Agreement (SPA) with EPCIB
involving the latters shares in Bankard, Inc. In the course of arbitration conducted by the
Tribunal constituted and administered by the International Chamber of Commerce-International
Commercial Arbitration (ICC-ICA), EPCIB was merged with BDO which assumed all its
liabilities and obligations.

G.R. No. 196171 is a petition for review under Rule 45 seeking to reverse the Court of Appeals
(CA) Decision dated December 23, 2010 in CA-G.R. SP No. 113525 which reversed and set
aside the June 24, 2009 Order of the Regional Trial Court (RTC) of Makati City, Branch 148 in
SP Proc. Case No. M-6046. The RTC confirmed the Second Partial Award issued by the
Arbitration Tribunal ordering BDO to pay RCBC Capital proportionate share in the advance
costs and dismissing BDOs counterclaims.

G.R. No. 199238 is a petition for certiorari under Rule 65 assailing the September 13, 2011
Resolution in CA-G.R. SP No. 120888 which denied BDOs application for the issuance of a
stay order and/or temporary restraining order (TRO)/preliminary injunction against the RTC of
Makati City, Branch 148 in Sp. Proc. Case No. M-6046. Acting upon RCBC Capitals urgent
motion, the RTC issued on August 22, 2011 a writ of execution for the implementation of the
courts order confirming the Final Award rendered by the Arbitration Tribunal on June 16, 2010.

On the other hand, G.R. No. 200213, filed on February 6, 2012, is a petition for review under
Rule 45 praying for the reversal of the CAs Decision dated February 24, 2011 and Resolution
dated January 13, 2012 in CA-G.R. SP No. 113402. The CA denied BDOs petition for certiorari
and prohibition with application for issuance of a TRO and/or writ of preliminary injunction
against the RTC of Makati City, Branch 148 in Sp. Proc. Case No. M-6046. By Order dated June
24, 2009, the RTC denied BDOs motion for access of the computerized accounting system of
Bankard, Inc. after Chairman Richard Ian Barker had denied BDOs request that it be given
access to the said source of facts or data used in preparing the accounting summaries submitted
in evidence before the Arbitration Tribunal.

G.R. Nos. 196171 & 199238 were consolidated and a Decision was rendered by this Court on
December 10, 2012, the dispositive portion of which states:

WHEREFORE, premises considered, the petition in G.R. No. 199238 is DENIED. The
Resolution dated September 13, 2011 of the Court of Appeals in CA-G.R. SP No. 120888 is
AFFIRMED.
The petition in G.R. No. 196171 is DENIED. The Decision dated December 23, 2010 of the
Court of Appeals in CA-G.R. SP No. 113525 is hereby AFFIRMED.

SO ORDERED.1

Both RCBC Capital and BDO filed motions for partial reconsideration of the above decision.

Meanwhile, in G.R. No. 200213, RCBC Capital filed its Comment, to which a Reply was filed
by BDO. By Resolution dated July 22, 2013, both parties were directed to submit their respective
memoranda within 30 days from notice.

In their Joint Motion and Manifestation filed in G.R. Nos. 196171 & 199238, the parties submit
and pray that

5. After negotiations, the Parties have mutually agreed that it is in their best interest and
general benefit to settle their differences with respect to their respective causes of action,
claims or counterclaims in the RCBC Capital Petition and the BDO Petition, with a view
to a renewal of their business relations.

6. Thus, the parties have reached a complete, absolute and final settlement of their claims,
demands, counterclaims and causes of action arising, directly or indirectly, from the facts
and circumstances giving rise to, surrounding or arising from both Petitions, and have
agreed to jointly terminate and dismiss the same in accordance with their agreement.

7. In view of the foregoing compromise between the Parties, BDO, RCBC Capital and
Go/Shareholders, with the assistance of their respective counsels, have decided to jointly
move for the termination and dismissal of the above-captioned cases with prejudice.

PRAYER

WHEREFORE, RCBC CAPITAL CORPORATION, BDO UNIBANK, INC. and GEORGE L.

GO, IN HIS PERSONAL CAPACITY AND AS ATTORNEY-IN-FACT OF THE
INDIVIDUAL STOCKHOLDERS AS LISTED IN THE SHARE PURCHASE AGREEMENT
DATED 27 MAY 2000 respectfully pray that this Honorable Court order the termination and
dismissal of the above-captioned cases, with prejudice. RCBC Capital BDO and
Go/Shareholders respectfully pray for such other relief as may be deemed just or equitable under
the premises.2

BDO and RCBC Capital likewise submit and pray in their Joint Motion and Manifestation in
G.R. No. 200213 that

3. After negotiations, the Parties have mutually agreed that it is in their best interest and
general benefit to settle their differences with respect to their respective causes of action,
claims or counterclaims in the above-captioned case, with a view to a renewal of their
business relations.
 4. Thus, the Parties have reached a complete, absolute and final settlement of their
claims, demands, counterclaims and causes of action arising, directly or indirectly, from
the facts and circumstances giving rise to, surrounding or arising from the present
Petition, and have agreed to jointly terminate and dismiss the present Petition in
accordance with their agreement.

5. In view of the foregoing compromise between the Parties, BDO and RCBC Capital,
with the assistance of their respective counsels, have decided to jointly move for the
termination and dismissal of the above-captioned case with prejudice.1wphi1

PRAYER

WHEREFORE, BDO UNIBANK, INC. and RCBC CAPITAL CORPORATION respectfully

pray that this Honorable Court order the termination and dismissal of the above-captioned case,
with prejudice.

BDO and RCBC Capital respectfully pray for such other relief as may be deemed just or
equitable under the premises.3

Under this Court s Resolution dated November 27, 2013, G.R. No. 200213 is ordered
consolidated with G.R. Nos. 196171 199238.

IN VIEW OF THE FOREGOING and as prayed for, G.R. Nos. 196171, 199238 and 200213 are
hereby ordered DISMISSED with prejudice and are deemed CLOSED and TERMINATED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 199650 June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,

vs.
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, 2008.4Payment 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 Mabuhay 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 7th
monthly 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:

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. Respondents motion for reconsideration was likewise denied.13

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

claims,14 respondent 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 projects accomplishment already exceeded the said amount, respondents 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:

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

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:
 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 Utasscos 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 Mabunays 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
attorneys 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 suretys 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 respondents liability. The P8.4 million was a limit on
the amount of respondents liability and not a limitation as to the obligation or undertaking it
guaranteed.

However, the CA reversed the CIACs 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,
petitioners 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:

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 petitioners 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
ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE
THE COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE

OF AEROSPACE 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 petitioners 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:

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 quasijudicial 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:

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 respondents liability under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioners right to the
liquidated damages pursuant to the Construction Agreement. Contrary to the CIACs findings,
the CA opined that delay should be reckoned only after the lapse of the one-year contract period,
and consequently Mabunays 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:

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 contractors liability for damages.
We cannot sustain the appellate courts 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 schedule duly 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 petitioners engineer and construction manager, Engr. Sheila N. Botardo:

April 30, 2008

Seven Shades of Blue

Boracay Island
Malay, Aklan

1wphi1

Attention : Mr. Martin Mabunay

General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay

Dear Mr. Mabunay:

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.

Petitioners claim against the Performance Bond included the liquidated damages provided in the
Construction Agreement, as follows:

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:

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 petitioners claim for damages nor respondents 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:

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:

 (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 Owners 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 contractors 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 contractors 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 contractors
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 Mabunays 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:

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 of P8,400,000.00 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 Mabunays 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.44 Moreover, 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. Petitioners 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.

Petitioners liability under the suretyship contract is different from its liability under the
law.1wphi1 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 petitioners 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 REVERSED and 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:

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.