Republic of the Philippines The remaining shares of TPI shall be held by the Sponsors according to their respective equity
SUPREME COURT shares. 9
Manila
SECOND DIVISION
G.R. No. 185582 February 29, 2012
TUNA PROCESSING, INC., Petitioner,
vs.
PHILIPPINE KINGFORD, INC., Respondent.
DECISION
PEREZ, J.:Can a foreign corporation not licensed to do business in the Philippines, but which collects
royalties from entities in the Philippines, sue here to enforce a foreign arbitral award?
In this Petition for Review on Certiorari under Rule 45,1 petitioner Tuna Processing, Inc. (TPI), a foreign
corporation not licensed to do business in the Philippines, prays that the Resolution2 dated 21 November
2008 of the Regional Trial Court (RTC) of Makati City be declared void and the case be remanded to the
RTC for further proceedings. In the assailed Resolution, the RTC dismissed petitioner’s Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral Award3 against respondent Philippine
Kingford, Inc. (Kingford), a corporation duly organized and existing under the laws of the Philippines,4 on the
ground that petitioner lacked legal capacity to sue.5
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the "licensor"), co-patentee of U.S.
Patent No. 5,484,619, Philippine Letters Patent No. 31138, and Indonesian Patent No. ID0003911
(collectively referred to as the "Yamaoka Patent"),6 and five (5) Philippine tuna processors, namely, Angel
Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc.,
and respondent Kingford (collectively referred to as the "sponsors"/"licensees")7 entered into a Memorandum
of Agreement (MOA),8pertinent provisions of which read:
1. Background and objectives. The Licensor, co-owner of U.S.Patent No. 5,484,619, Philippine
Patent No. 31138, and Indonesian Patent No. ID0003911 xxx wishes to form an alliance with
Sponsors for purposes of enforcing his three aforementioned patents, granting licenses under
those patents, and collecting royalties.
The Sponsors wish to be licensed under the aforementioned patents in order to practice the
processes claimed in those patents in the United States, the Philippines, and Indonesia, enforce
those patents and collect royalties in conjunction with Licensor.
xxx
4. Establishment of Tuna Processors, Inc. The parties hereto agree to the establishment of
Tuna Processors, Inc. ("TPI"), a corporation established in the State of California, in order to
implement the objectives of this Agreement.
5. Bank account. TPI shall open and maintain bank accounts in the United States, which will be
used exclusively to deposit funds that it will collect and to disburse cash it will be obligated to
spend in connection with the implementation of this Agreement.
6. Ownership of TPI. TPI shall be owned by the Sponsors and Licensor. Licensor shall be
assigned one share of TPI for the purpose of being elected as member of the board of directors.
xxx
The parties likewise executed a Supplemental Memorandum of Agreement 10 dated 15 January 2003 and an
Agreement to Amend Memorandum of Agreement11 dated 14 July 2003.
Due to a series of events not mentioned in the petition, the licensees, including respondent Kingford,
withdrew from petitioner TPI and correspondingly reneged on their obligations. 12 Petitioner submitted the
dispute for arbitration before the International Centre for Dispute Resolution in the State of California, United
States and won the case against respondent.13 Pertinent portions of the award read:
13.1 Within thirty (30) days from the date of transmittal of this Award to the Parties, pursuant to the terms of
this award, the total sum to be paid by RESPONDENT KINGFORD to CLAIMANT TPI, is the sum of ONE
MILLION SEVEN HUNDRED FIFTY THOUSAND EIGHT HUNDRED FORTY SIX DOLLARS AND TEN
CENTS ($1,750,846.10).
(A) For breach of the MOA by not paying past due assessments, RESPONDENT
KINGFORD shall payCLAIMANT the total sum of TWO HUNDRED TWENTY NINE THOUSAND
THREE HUNDRED AND FIFTY FIVE DOLLARS AND NINETY CENTS ($229,355.90) which is
20% of MOA assessments since September 1, 2005[;]
(B) For breach of the MOA in failing to cooperate with CLAIMANT TPI in fulfilling the objectives of
theMOA, RESPONDENT KINGFORD shall pay CLAIMANT the total sum of TWO HUNDRED
SEVENTY ONE THOUSAND FOUR HUNDRED NINETY DOLLARS AND TWENTY CENTS
($271,490.20)[;]14 and
(C) For violation of THE LANHAM ACT and infringement of the YAMAOKA 619 PATENT,
RESPONDENT KINGFORD shall pay CLAIMANT the total sum of ONE MILLION TWO
HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS ($1,250,000.00). xxx
xxx15
To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for Confirmation, Recognition, and
Enforcement of Foreign Arbitral Award before the RTC of Makati City. The petition was raffled to Branch 150
presided by Judge Elmo M. Alameda.
At Branch 150, respondent Kingford filed a Motion to Dismiss. 16 After the court denied the motion for lack of
merit,17 respondent sought for the inhibition of Judge Alameda and moved for the reconsideration of the
order denying the motion.18 Judge Alameda inhibited himself notwithstanding "[t]he unfounded allegations
and unsubstantiated assertions in the motion."19 Judge Cedrick O. Ruiz of Branch 61, to which the case was
re-raffled, in turn, granted respondent’s Motion for Reconsideration and dismissed the petition on the ground
that the petitioner lacked legal capacity to sue in the Philippines.20
Petitioner TPI now seeks to nullify, in this instant Petition for Review on Certiorari under Rule 45, the order of
the trial court dismissing its Petition for Confirmation, Recognition, and Enforcement of Foreign Arbitral
Award.
Issue
The core issue in this case is whether or not the court a quo was correct in so dismissing the petition on the
ground of petitioner’s lack of legal capacity to sue.
Our Ruling
The petition is impressed with merit.
The Corporation Code of the Philippines expressly provides:
Sec. 133. Doing business without a license. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of
action recognized under Philippine laws.
It is pursuant to the aforequoted provision that the court a quo dismissed the petition. Thus:
Herein plaintiff TPI’s "Petition, etc." acknowledges that it "is a foreign corporation established in the State of
California" and "was given the exclusive right to license or sublicense the Yamaoka Patent" and "was
assigned the exclusive right to enforce the said patent and collect corresponding royalties" in the Philippines.
TPI likewise admits that it does not have a license to do business in the Philippines.
There is no doubt, therefore, in the mind of this Court that TPI has been doing business in the Philippines,
but sans a license to do so issued by the concerned government agency of the Republic of the Philippines,
when it collected royalties from "five (5) Philippine tuna processors[,] namely[,] Angel Seafood Corporation,
East Asia Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc. and respondent
Philippine Kingford, Inc." This being the real situation, TPI cannot be permitted to maintain or intervene in
any action, suit or proceedings in any court or administrative agency of the Philippines." A priori, the
"Petition, etc." extant of the plaintiff TPI should be dismissed for it does not have the legal personality to sue
in the Philippines.21
The petitioner counters, however, that it is entitled to seek for the recognition and enforcement of the subject
foreign arbitral award in accordance with Republic Act No. 9285 (Alternative Dispute Resolution Act of
2004),22the Convention on the Recognition and Enforcement of Foreign Arbitral Awards drafted during the
United Nations Conference on International Commercial Arbitration in 1958 (New York Convention), and the
UNCITRAL Model Law on International Commercial Arbitration (Model Law),23 as none of these specifically
requires that the party seeking for the enforcement should have legal capacity to sue. It anchors its argument
on the following:
In the present case, enforcement has been effectively refused on a ground not found in the [Alternative
Dispute Resolution Act of 2004], New York Convention, or Model Law. It is for this reason that TPI has
brought this matter before this most Honorable Court, as it [i]s imperative to clarify whether the Philippines’
international obligations and State policy to strengthen arbitration as a means of dispute resolution may be
defeated by misplaced technical considerations not found in the relevant laws. 24
Simply put, how do we reconcile the provisions of the Corporation Code of the Philippines on one hand, and
theAlternative Dispute Resolution Act of 2004, the New York Convention and the Model Law on the other?
In several cases, this Court had the occasion to discuss the nature and applicability of the Corporation Code
of the Philippines, a general law, viz-a-viz other special laws. Thus, in Koruga v. Arcenas, Jr.,25 this Court
rejected the application of the Corporation Code and applied the New Central Bank Act. It ratiocinated:
Koruga’s invocation of the provisions of the Corporation Code is misplaced. In an earlier case with similar
antecedents, we ruled that:
"The Corporation Code, however, is a general law applying to all types of corporations, while the New
Central Bank Act regulates specifically banks and other financial institutions, including the dissolution and
liquidation thereof. As between a general and special law, the latter shall prevail – generalia specialibus
non derogant." (Emphasis supplied)26
Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential Agrarian Reform Council,27 this
Court held:
Without doubt, the Corporation Code is the general law providing for the formation, organization and
regulation of private corporations. On the other hand, RA 6657 is the special law on agrarian reform. As
between a general and special law, the latter shall prevail—generalia specialibus non derogant.28
Following the same principle, the Alternative Dispute Resolution Act of 2004 shall apply in this case as
the Act,as its title - An Act to Institutionalize the Use of an Alternative Dispute Resolution System in the
Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other Purposes - would
suggest, is a law especially enacted "to actively promote party autonomy in the resolution of disputes or the
freedom of the party to make their own arrangements to resolve their disputes."29 It specifically provides
exclusive grounds available to the party opposing an application for recognition and enforcement of the
arbitral award.30
Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal law, applies in the instant petition,
we do not see the need to discuss compliance with international obligations under the New York
Convention and theModel Law. After all, both already form part of the law.
In particular, the Alternative Dispute Resolution Act of 2004 incorporated the New York Convention in the Act
by specifically providing:
SEC. 42. Application of the New York Convention. - The New York Convention shall govern the recognition
and enforcement of arbitral awards covered by the said Convention.
xxx
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a foreign arbitration proceeding may oppose an
application for recognition and enforcement of the arbitral award in accordance with the procedural rules to
be promulgated by the Supreme Court only on those grounds enumerated under Article V of the New York
Convention. Any other ground raised shall be disregarded by the regional trial court.
It also expressly adopted the Model Law, to wit:
Sec. 19. Adoption of the Model Law on International Commercial Arbitration. International commercial
arbitration shall be governed by the Model Law on International Commercial Arbitration (the "Model Law")
adopted by the United Nations Commission on International Trade Law on June 21, 1985 xxx."
Now, does a foreign corporation not licensed to do business in the Philippines have legal capacity to sue
under the provisions of the Alternative Dispute Resolution Act of 2004? We answer in the affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the opposing party in an application
for recognition and enforcement of the arbitral award may raise only those grounds that were enumerated
under Article V of the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award may be refused, at the request of the party against
whom it is invoked, only if that party furnishes to the competent authority where the recognition
and enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law applicable
to them, under some incapacity, or the said agreement is not valid under the law to
which the parties have subjected it or, failing any indication thereon, under the law of
the country where the award was made; or
(b) The party against whom the award is invoked was not given proper notice of the
appointment of the arbitrator or of the arbitration proceedings or was otherwise unable
to present his case; or
(c) The award deals with a difference not contemplated by or not falling within the
terms of the submission to arbitration, or it contains decisions on matters beyond the
scope of the submission to arbitration, provided that, if the decisions on matters
submitted to arbitration can be separated from those not so submitted, that part of the
award which contains decisions on matters submitted to arbitration may be recognized
and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was not in
accordance with the agreement of the parties, or, failing such agreement, was not in
accordance with the law of the country where the arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set aside or
suspended by a competent authority of the country in which, or under the law of which,
that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if the competent
authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration
under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the public policy
of that country.
Clearly, not one of these exclusive grounds touched on the capacity to sue of the party seeking the
recognition and enforcement of the award.
Pertinent provisions of the Special Rules of Court on Alternative Dispute Resolution,31 which was
promulgated by the Supreme Court, likewise support this position.
Rule 13.1 of the Special Rules provides that "[a]ny party to a foreign arbitration may petition the court to
recognize and enforce a foreign arbitral award." The contents of such petition are enumerated in Rule
13.5.32Capacity to sue is not included. Oppositely, in the Rule on local arbitral awards or arbitrations in
instances where "the place of arbitration is in the Philippines,"33 it is specifically required that a petition "to
determine any question concerning the existence, validity and enforceability of such arbitration
agreement"34 available to the parties before the commencement of arbitration and/or a petition for "judicial
relief from the ruling of the arbitral tribunal on a preliminary question upholding or declining its
jurisdiction"35 after arbitration has already commenced should state "[t]he facts showing that the persons
named as petitioner or respondent have legal capacity to sue or be sued."36
Indeed, it is in the best interest of justice that in the enforecement of a foreign arbitral award, we deny
availment by the losing party of the rule that bars foreign corporations not licensed to do business in the
Philippines from maintaining a suit in our courts. When a party enters into a contract containing a foreign
arbitration clause and, as in this case, in fact submits itself to arbitration, it becomes bound by the contract,
by the arbitration and by the result of arbitration, conceding thereby the capacity of the other party to enter
into the contract, participate in the arbitration and cause the implementation of the result. Although not on all
fours with the instant case, also worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting Opinion in Asset Privatization
Trust v. Court of Appeals,37 to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining adherents in legal and judicial circles here
and abroad. If its tested mechanism can simply be ignored by an aggrieved party, one who, it must be
stressed, voluntarily and actively participated in the arbitration proceedings from the very beginning, it will
destroy the very essence of mutuality inherent in consensual contracts.38
Clearly, on the matter of capacity to sue, a foreign arbitral award should be respected not because it is
favored over domestic laws and procedures, but because Republic Act No. 9285 has certainly erased any
conflict of law question.
Finally, even assuming, only for the sake of argument, that the court a quo correctly observed that the Model
Law, not the New York Convention, governs the subject arbitral award,39 petitioner may still seek recognition
and enforcement of the award in Philippine court, since the Model Law prescribes substantially identical
exclusive grounds for refusing recognition or enforcement.40
Premises considered, petitioner TPI, although not licensed to do business in the Philippines, may seek
recognition and enforcement of the foreign arbitral award in accordance with the provisions of the Alternative
Dispute Resolution Act of 2004.
II
The remaining arguments of respondent Kingford are likewise unmeritorious.
First. There is no need to consider respondent’s contention that petitioner TPI improperly raised a question
of fact when it posited that its act of entering into a MOA should not be considered "doing business" in the
Philippines for the purpose of determining capacity to sue. We reiterate that the foreign corporation’s
capacity to sue in the Philippines is not material insofar as the recognition and enforcement of a foreign
arbitral award is concerned.
Second. Respondent cannot fault petitioner for not filing a motion for reconsideration of the assailed
Resolution dated 21 November 2008 dismissing the case. We have, time and again, ruled that the prior filing
of a motion for reconsideration is not required in certiorari under Rule 45.41

Third. While we agree that petitioner failed to observe the principle of hierarchy of courts, which, under
ordinary circumstances, warrants the outright dismissal of the case, 42 we opt to relax the rules following the
pronouncement in Chua v. Ang,43 to wit:

[I]t must be remembered that [the principle of hierarchy of courts] generally applies to cases involving
conflicting factual allegations. Cases which depend on disputed facts for decision cannot be brought
immediately before us as we are not triers of facts.44 A strict application of this rule may be excused when
the reason behind the rule is not present in a case, as in the present case, where the issues are not factual
but purely legal.1âwphi1 In these types of questions, this Court has the ultimate say so that we merely
abbreviate the review process if we, because of the unique circumstances of a case, choose to hear and
decide the legal issues outright.45

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

Sec. 2. Declaration of Policy. - It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make their own arrangements to resolve
their disputes. Towards this end, the State shall encourage and actively promote the use of Alternative
Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice and declog court
dockets. xxx

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

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

26. Admittedly, reference to "Branch 67" in petitioner TPI’s "Motion for Time to File a Petition for Review on
Certiorari under Rule 45" is a typographical error. As correctly pointed out by respondent Kingford, the order
sought to be assailed originated from Regional Trial Court, Makati City, Branch 61.

27. xxx Upon confirmation with the Regional Trial Court, Makati City, Branch 61, a copy of petitioner TPI’s
motion was received by the Metropolitan Trial Court, Makati City, Branch 67. On 8 January 2009, the motion
was forwarded to the Regional Trial Court, Makati City, Branch 61.48

All considered, petitioner TPI, although a foreign corporation not licensed to do business in the Philippines, is
not, for that reason alone, precluded from filing the Petition for Confirmation, Recognition, and Enforcement
of Foreign Arbitral Award before a Philippine court.

WHEREFORE, the Resolution dated 21 November 2008 of the Regional Trial Court, Branch 61, Makati City
in Special Proceedings No. M-6533 is hereby REVERSED and SET ASIDE. The case is REMANDED to
Branch 61 for further proceedings. SO ORDERED.
 G.R. No. 129169 November 17, 1999
NATIONAL IRRIGATION ADMINISTRATION (NIA), petitioner,
vs.
HONORABLE COURT OF APPEALS (4th Division), CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION, and HYDRO RESOURCES CONTRACTORS CORPORATION, respondents.
DAVIDE, JR., C.J.: In this special civil action for certiorari under Rule 65 of the Rules of Court, the National
Irrigation Administration (hereafter NIA), seeks to annul and set aside the Resolutions 1 of the Court of
Appeals in CA-GR. SP No. 37180 dated 28 June 1996 and 24 February 1997, which dismissed respectively
NIA's petition for certiorari and prohibition against the Construction Industry Arbitration Commission
(hereafter CIAC), and the motion for reconsideration thereafter filed.
Records show that in a competitive bidding held by NIA in August 1978, Hydro Resources Contractors
Corporation (hereafter HYDRO) was awarded Contract MPI-C-2 for the construction of the main civil works
of the Magat River Multi-Purpose Project. The contract provided that HYDRO would be paid partly in
Philippine pesos and partly in U.S. dollars. HYDRO substantially completed the works under the contract in
1982 and final acceptance by NIA was made in 1984. HYDRO thereafter determined that it still had an
account receivable from NIA representing the dollar rate differential of the price escalation for the contract. 2
After unsuccessfully pursuing its case with NIA, HYDRO, on 7 December 1994, filed with the CIAC a
Request for Adjudication of the aforesaid claim. HYDRO nominated six arbitrators for the arbitration panel,
from among whom CIAC appointed Engr. Lauro M. Cruz. On 6 January 1995, NIA filed its Answer wherein it
questioned the jurisdiction of the CIAC alleging lack of cause of action, laches and estoppel in view of
HYDRO's alleged failure to avail of its right to submit the dispute to arbitration within the prescribed period as
provided in the contract. On the same date, NIA filed a Compliance wherein it nominated six arbitrators, from
among whom CIAC appointed Atty. Custodio O. Parlade, and made a counterclaim for P1,000,000 as moral
damages; at least P100,000 as exemplary damages; P100,000 as attorney's fees; and the costs of the
arbitration. 3
The two designated arbitrators appointed Certified Public Accountant Joven B. Joaquin as Chairman of the
Arbitration Panel. The parties were required to submit copies of the evidence they intended to present during
the proceedings and were provided the draft Terms of Reference. 4
At the preliminary conference, NIA through its counsel Atty. Joy C. Legaspi of the Office of the Government
Corporate Counsel, manifested that it could not admit the genuineness of HYDRO's evidence since NIA's
records had already been destroyed. NIA requested an opportunity to examine the originals of the
documents which HYDRO agreed to provide. 5
After reaching an accord on the issues to be considered by the arbitration panel, the parties scheduled the
dates of hearings and of submission of simultaneous memoranda. 6
On 13 March 1995, NIA filed a Motion to Dismiss 7 alleging lack of jurisdiction over the disputes. NIA
contended that there was no agreement with HYDRO to submit the dispute to CIAC for arbitration
considering that the construction contract was executed in 1978 and the project completed in 1982, whereas
the Construction Industry Arbitration Law creating CIAC was signed only in 1985; and that while they have
agreed to arbitration as a mode of settlement of disputes, they could not have contemplated submission of
their disputes to CIAC. NIA further argued that records show that it had not voluntarily submitted itself to
arbitration by CIAC citing TESCO Services, Inc. v. Hon. Abraham Vera, et al., 8 wherein it was ruled:
CIAC did not acquire jurisdiction over the dispute arising from the sub-contract
agreement between petitioner TESCO and private respondent LAROSA. The records
do not show that the parties agreed to submit the disputes to arbitration by the CIAC . .
. . While both parties in the sub-contract had agreed to submit the matter to arbitration,
this was only between themselves, no request having been made by both with the
CIAC. Hence, as already stated, the CIAC, has no jurisdiction over the dispute. . . . .
Nowhere in the said article (sub-contract) does it mention the CIAC, much less, vest
jurisdiction with the CIAC.
On 11 April 1995, the arbitral body issued an order 9 which deferred the determination of the motion to
dismiss and resolved to proceed with the hearing of the case on the merits as the grounds cited by NIA did
not seem to be "indubitable." NIA filed a motion for reconsideration of the aforesaid Order. CIAC in denying
the motion for reconsideration ruled that it has jurisdiction over the HYDRO's claim over NIA pursuant to E.O
1008 and that the hearing should proceed as scheduled. 10
On 26 May 1996, NIA filed with the Court of Appeals an original action of certiorari and prohibition with
prayer for restraining order and/or injunction, seeking to annul the Orders of the CIAC for having been issued
without or in excess of jurisdiction. In support of its petition NIA alleged that:
A
RESPONDENT CIAC HAS NO AUTHORITY OR JURIDICTION TO HEAR AND TRY
THIS DISPUTE BETWEEN THE HEREIN PARTIES AS E.O. NO. 1008 HAD NO
RETROACTIVE EFFECT.
B
THE DISPUTE BETWEEN THE PARTIES SHOULD BE SETTLED IN ACCORDANCE
WITH GC NO. 25, ART. 2046 OF THE CIVIL CODE AND R.A. NO. 876 THE
GOVERNING LAWS AT THE TIME CONTRACT WAS EXECUTED AND
TERMINATED.
C
E.O. NO. 1008 IS A SUBSTANTIVE LAW, NOT MERELY PROCEDURAL AS RULED
BY THE CIAC.
D
AN INDORSEMENT OF THE AUDITOR GENERAL DECIDING A CONTROVERSY IS
A DECISION BECAUSE ALL THE ELEMENTS FOR JUDGMENT ARE THERE; THE
CONTROVERSY, THE AUTHORITY TO DECIDE AND THE DECISION. IF IT IS NOT
APPEALED SEASONABLY, THE SAME BECOMES FINAL.
E
NIA HAS TIMELY RAISED THE ISSUE OF JURISDICTION. IT DID NOT WAIVE NOR
IS IT ESTOPPED FROM ASSAILING THE SAME.
F

THE LEGAL DOCTRINE THAT JURISDICTION IS DETERMINED BY THE STATUTE
IN FORCE AT THE TIME OF THE COMMENCEMENT OF THE ACTION DOES NOT
ONLY APPLY TO THE INSTANT CASE. 11
The Court of Appeals, after finding that there was no grave abuse of discretion on the part of the CIAC in
issuing the aforesaid Orders, dismissed the petition in its Resolution dated 28 June 1996. NIA's motion for
reconsideration of the said decision was likewise denied by the Court of Appeals on 26 February 1997.
On 2 June 1997, NIA filed before us an original action for certiorari and prohibition with urgent prayer for
temporary restraining order and writ of preliminary injunction, praying for the annulment of the Resolutions of
the Court of Appeals dated 28 June 1996 and 24 February 1997. In the said special civil action, NIA merely
reiterates the issues it raised before the Court of Appeals. 12
We take judicial notice that on 10 June 1997, CIAC rendered a decision in the main case in favor of
HYDRO. 13NIA assailed the said decision with the Court of Appeals. In view of the pendency of the present
petitions before us the appellate court issued a resolution dated 26 March 1998 holding in abeyance the
resolution of the same until after the instant petitions have been finally decided. 14
At the outset, we note that the petition suffers from a procedural defect that warrants its outright dismissal.
The questioned resolutions of the Court of Appeals have already become final and executory by reason of
the failure of NIA to appeal therefrom. Instead of filing this petition for certiorari under Rule 65 of the Rules of
Court, NIA should have filed a timely petition for review under Rule 45.
There is no doubt that the Court of Appeals has jurisdiction over the special civil action for certiorari under
Rule 65 filed before it by NIA. The original jurisdiction of the Court of Appeals over special civil actions
for certiorari is vested upon it under Section 9(1) of B.P. 129. This jurisdiction is concurrent with the Supreme
Court 15 and with the Regional Trial Court. 16
Thus, since the Court of Appeals had jurisdiction over the petition under Rule 65, any alleged errors
committed by it in the exercise of its jurisdiction would be errors of judgment which are reviewable by timely
appeal and not by a special civil action of certiorari. 17 If the aggrieved party fails to do so within the
reglementary period, and the decision accordingly becomes final and executory, he cannot avail himself of
the writ of certiorari, his predicament being the effect of his deliberate inaction. 18
The appeal from a final disposition of the Court of Appeals is a petition for review under Rule 45 and not a
special civil action under Rule 65 of the Rules of Court, now Rule 45 and Rule 65, respectively, of the 1997
Rules of Civil Procedure. 19 Rule 45 is clear that decisions, final orders or resolutions of the Court of Appeals
in any case, i.e., regardless of the nature of the action or proceedings involved, may be appealed to this
Court by filing a petition for review, which would be but a continuation of the appellate process over the
original case. 20 Under Rule 45 the reglementary period to appeal is fifteen (15) days from notice of judgment
or denial of motion for reconsideration. 21
In the instant case the Resolution of the Court of Appeals dated 24 February 1997 denying the motion for
reconsideration of its Resolution dated 28 June 1997 was received by NIA on 4 March 1997. Thus, it had
until 19 March 1997 within which to perfect its appeal. NIA did not appeal. What it did was to file an original
action forcertiorari before this Court, reiterating the issues and arguments it raised before the Court of
Appeals.
For the writ of certiorari under Rule 65 of the Rules of Court to issue, a petitioner must show that he has no
plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. 22 A
remedy is considered "plain, speedy and adequate" if it will promptly relieve the petitioner from the injurious
effects of the judgment and the acts of the lower court or agency. 23 In this case, appeal was not only
available but also a speedy and adequate remedy.
Obviously, NIA interposed the present special civil action of certiorari not because it is the speedy and
adequate remedy but to make up for the loss, through omission or oversight, of the right of ordinary appeal.
It is elementary that the special civil action of certiorari is not and cannot be a substitute for an appeal, where
the latter remedy is available, as it was in this case. A special civil action under Rule 65 of the Rules of Court
will not be a cure for failure to timely file a petition for review on certiorari under Rule 45 of the Rules of
Court. 24 Rule 65 is an independent action that cannot be availed of as a substitute for the lost remedy of an
ordinary appeal, including that under Rule 45,25 especially if such loss or lapse was occasioned by one's own
neglect or error in the choice of remedies. 26
For obvious reasons the rules forbid recourse to a special civil action for certiorari if appeal is available, as
the remedies of appeal and certiorari are mutually exclusive and not alternative or successive. 27 Although
there are exceptions to the rules, none is present in the case at bar. NIA failed to show circumstances that
will justify a deviation from the general rule as to make available a petition for certiorari in lieu of taking an
appropriate appeal.
Based on the foregoing, the instant petition should be dismissed.
In any case, even if the issue of technicality is disregarded and recourse under Rule 65 is allowed, the same
result would be reached since a review of the questioned resolutions of the CIAC shows that it committed no
grave abuse of discretion.
Contrary to the claim of NIA, the CIAC has jurisdiction over the controversy. Executive Order No. 1008,
otherwise known as the "Construction Industry Arbitration Law" which was promulgated on 4 February 1985,
vests upon CIAC original and exclusive jurisdiction over disputes arising from, or connected with contracts
entered into by parties involved in construction in the Philippines, whether the dispute arises before or after
the completion of the contract, or after the abandonment or breach thereof. The disputes may involve
government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to
submit the same to voluntary arbitration. 28
The complaint of HYDRO against NIA on the basis of the contract executed between them was filed on 7
December 1994, during the effectivity of E.O. No. 1008. Hence, it is well within the jurisdiction of CIAC. The
jurisdiction of a court is determined by the law in force at the time of the commencement of the action. 29
NIA's argument that CIAC had no jurisdiction to arbitrate on contract which preceded its existence is
untenable. E.O. 1008 is clear that the CIAC has jurisdiction over all disputes arising from or connected with
construction contract whether the dispute arises before or after the completion of the contract. Thus, the date
the parties entered into a contract and the date of completion of the same, even if these occurred before the
constitution of the CIAC, did not automatically divest the CIAC of jurisdiction as long as the dispute submitted
for arbitration arose after the constitution of the CIAC. Stated differently, the jurisdiction of CIAC is over the
dispute, not the contract; and the instant dispute having arisen when CIAC was already constituted, the
arbitral board was actually exercising current, not retroactive, jurisdiction. As such, there is no need to pass
upon the issue of whether E.O. No. 1008 is a substantive or procedural statute.
NIA also contended that the CIAC did not acquire jurisdiction over the dispute since it was only HYDRO that
requested for arbitration. It asserts that to acquire jurisdiction over a case, as provided under E.O. 1008, the
request for arbitration filed with CIAC should be made by both parties, and hence the request by one party is
not enough.
It is undisputed that the contracts between HYDRO and NIA contained an arbitration clause wherein they
agreed to submit to arbitration any dispute between them that may arise before or after the termination of the
agreement. Consequently, the claim of HYDRO having arisen from the contract is arbitrable. NIA's reliance
with the ruling on the case of Tesco Services Incorporated v. Vera, 30 is misplaced.

The 1988 CIAC Rules of Procedure which were applied by this Court in Tesco case had been duly amended
by CIAC Resolutions No. 2-91 and 3-93, Section 1 of Article III of which read as follows:

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

submission to arbitration of a construction contract or a submission to arbitration of a
construction dispute shall be deemed an agreement to submit an existing or future
controversy to CIAC jurisdiction, notwithstanding the reference to a different arbitration
institution or arbitral body in such contract or submission. When a contract contains a
clause for the submission of a future controversy to arbitration, it is not necessary for
the parties to enter into a submission agreement before the claimant may invoke the
jurisdiction of CIAC.

Under the present Rules of Procedure, for a particular construction contract to fall within the jurisdiction of
CIAC, it is merely required that the parties agree to submit the same to voluntary arbitration. Unlike in the
original version of Section 1, as applied in the Tesco case, the law as it now stands does not provide that the
parties should agree to submit disputes arising from their agreement specifically to the CIAC for the latter to
acquire jurisdiction over the same. Rather, it is plain and clear that as long as the parties agree to submit to
voluntary arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties will not be
precluded from electing to submit their dispute before the CIAC because this right has been vested upon
each party by law, i.e., E.O. No. 1008. 31

Moreover, it is undeniable that NIA agreed to submit the dispute for arbitration to the CIAC. NIA through its
counsel actively participated in the arbitration proceedings by filing an answer with counterclaim, as well as
its compliance wherein it nominated arbitrators to the proposed panel, participating in the deliberations on,
and the formulation of, the Terms of Reference of the arbitration proceeding, and examining the documents
submitted by HYDRO after NIA asked for the originals of the said documents. 32

As to the defenses of laches and prescription, they are evidentiary in nature which could not be established
by mere allegations in the pleadings and must not be resolved in a motion to dismiss. Those issues must be
resolved at the trial of the case on the merits wherein both parties will be given ample opportunity to prove
their respective claims and defenses. 33 Under the rule 34 the deferment of the resolution of the said issues
was, thus, in order. An allegation of prescription can effectively be used in a motion to dismiss only when the
complaint on its face shows that indeed the action has already prescribed. 35 In the instant case, the issue of
prescription and laches cannot be resolved on the basis solely of the complaint. It must, however, be pointed
that under the new rules, 36 deferment of the resolution is no longer permitted. The court may either grant the
motion to dismiss, deny it, or order the amendment of the pleading.

WHEREFORE, the instant petition is DISMISSED for lack of merit. The Court of Appeals is hereby
DIRECTED to proceed with reasonable dispatch in the disposition of C.A. G.R. No. 44527 and include in the
resolution thereof the issue of laches and prescription.

SO ORDERED.
 G.R. No. 141833 March 26, 2003
LM POWER ENGINEERING CORPORATION, petitioner,
vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS, INC., respondent.
PANGANIBAN, J.: Alternative dispute resolution methods or ADRs -- like arbitration, mediation, negotiation
and conciliation -- are encouraged by the Supreme Court. By enabling parties to resolve their disputes
amicably, they provide solutions that are less time-consuming, less tedious, less confrontational, and more
productive of goodwill and lasting relationships.1
The Case
Before us is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court, seeking to set aside the
January 28, 2000 Decision of the Court of Appeals3 (CA) in CA-GR CV No. 54232. The dispositive portion of
the Decision reads as follows:
"WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are
ORDERED to present their dispute to arbitration in accordance with their Sub-contract
Agreement. The surety bond posted by [respondent] is [d]ischarged."4
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol Industrial
Construction Groups Inc. entered into a "Subcontract Agreement" involving electrical work at the Third Port
of Zamboanga.5
On April 25, 1985, respondent took over some of the work contracted to petitioner. 6 Allegedly, the latter had
failed to finish it because of its inability to procure materials.7
Upon completing its task under the Contract, petitioner billed respondent in the amount of
P6,711,813.90.8Contesting the accuracy of the amount of advances and billable accomplishments listed by
the former, the latter refused to pay. Respondent also took refuge in the termination clause of the
Agreement.9 That clause allowed it to set off the cost of the work that petitioner had failed to undertake --
due to termination or take-over -- against the amount it owed the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati (Branch 141) a
Complaint10for the collection of the amount representing the alleged balance due it under the Subcontract.
Instead of submitting an Answer, respondent filed a Motion to Dismiss, 11 alleging that the Complaint was
premature, because there was no prior recourse to arbitration.
In its Order12 dated September 15, 1987, the RTC denied the Motion on the ground that the dispute did not
involve the interpretation or the implementation of the Agreement and was, therefore, not covered by the
arbitral clause.13
After trial on the merits, the RTC14 ruled that the take-over of some work items by respondent was not
equivalent to a termination, but a mere modification, of the Subcontract. The latter was ordered to give full
payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The appellate court
held as arbitrable the issue of whether respondent’s take-over of some work items had been intended to be a
termination of the original contract under Letter "K" of the Subcontract. It ruled likewise on two other issues:
whether petitioner was liable under the warranty clause of the Agreement, and whether it should reimburse
respondent for the work the latter had taken over.15
Hence, this Petition.16
The Issues
In its Memorandum, petitioner raises the following issues for the Court’s consideration:
"A
Whether or not there exist[s] a controversy/dispute between petitioner and respondent regarding the
interpretation and implementation of the Sub-Contract Agreement dated February 22, 1983 that requires
prior recourse to voluntary arbitration;
"B
In the affirmative, whether or not the requirements provided in Article III 1 of CIAC Arbitration Rules regarding
request for arbitration ha[ve] been complied with[.]"17
The Court’s Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the implementation of the Agreement.
Thus, without having to resort to prior arbitration, it is entitled to collect the value of the services it rendered
through an ordinary action for the collection of a sum of money from respondent. On the other hand, the
latter contends that there is a need for prior arbitration as provided in the Agreement. This is because there
are some disparities between the parties’ positions regarding the extent of the work done, the amount of
advances and billable accomplishments, and the set off of expenses incurred by respondent in its take-over
of petitioner’s work.
We side with respondent. Essentially, the dispute arose from the parties’ ncongruent positions on whether
certain provisions of their Agreement could be applied to the facts. The instant case involves technical
discrepancies that are better left to an arbitral body that has expertise in those areas. In any event, the
inclusion of an arbitration clause in a contract does not ipso facto divest the courts of jurisdiction to pass
upon the findings of arbitral bodies, because the awards are still judicially reviewable under certain
conditions.18
In the case before us, the Subcontract has the following arbitral clause:
 "6. The Parties hereto agree that any dispute or conflict as regards to interpretation and
implementation of this Agreement which cannot be settled between [respondent] and [petitioner]
amicably shall be settled by means of arbitration x x x."19
Clearly, the resolution of the dispute between the parties herein requires a referral to the provisions of their
Agreement. Within the scope of the arbitration clause are discrepancies as to the amount of advances and
billable accomplishments, the application of the provision on termination, and the consequent set-off of
expenses.
A review of the factual allegations of the parties reveals that they differ on the following questions: (1) Did a
take-over/termination occur? (2) May the expenses incurred by respondent in the take-over be set off against
the amounts it owed petitioner? (3) How much were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the provisions of the Agreement. According
to respondent, the take-over was caused by petitioner’s delay in completing the work. Such delay was in
violation of the provision in the Agreement as to time schedule:
"G. TIME SCHEDULE
"[Petitioner] shall adhere strictly to the schedule related to the WORK and complete the WORK
within the period set forth in Annex C hereof. NO time extension shall be granted by [respondent]
to [petitioner] unless a corresponding time extension is granted by [the Ministry of Public Works
and Highways] to the CONSORTIUM."20
Because of the delay, respondent alleges that it took over some of the work contracted to petitioner,
pursuant to the following provision in the Agreement:
"K. TERMINATION OF AGREEMENT
"[Respondent] has the right to terminate and/or take over this Agreement for any of the following
causes:
xxx xxx xxx
‘6. If despite previous warnings by [respondent], [petitioner] does not execute the
WORK in accordance with this Agreement, or persistently or flagrantly neglects to carry
out [its] obligations under this Agreement."21
Supposedly, as a result of the "take-over," respondent incurred expenses in excess of the contracted price. It
sought to set off those expenses against the amount claimed by petitioner for the work the latter
accomplished, pursuant to the following provision:
"If the total direct and indirect cost of completing the remaining part of the WORK exceed the sum
which would have been payable to [petitioner] had it completed the WORK, the amount of such
excess [may be] claimed by [respondent] from either of the following:
‘1. Any amount due [petitioner] from [respondent] at the time of the termination of this
Agreement."22
The issue as to the correct amount of petitioner’s advances and billable accomplishments involves an
evaluation of the manner in which the parties completed the work, the extent to which they did it, and the
expenses each of them incurred in connection therewith. Arbitrators also need to look into the computation of
foreign and local costs of materials, foreign and local advances, retention fees and letters of credit, and taxes
and duties as set forth in the Agreement. These data can be gathered from a review of the Agreement,
pertinent portions of which are reproduced hereunder:
"C. CONTRACT PRICE AND TERMS OF PAYMENT
xxx xxx xxx
"All progress payments to be made by [respondent] to [petitioner] shall be subject to a retention
sum of ten percent (10%) of the value of the approved quantities. Any claims by [respondent] on
[petitioner] may be deducted by [respondent] from the progress payments and/or retained
amount. Any excess from the retained amount after deducting [respondent’s] claims shall be
released by [respondent] to [petitioner] after the issuance of [the Ministry of Public Works and
Highways] of the Certificate of Completion and final acceptance of the WORK by [the Ministry of
Public Works and Highways].
xxx xxx xxx
"D. IMPORTED MATERIALS AND EQUIPMENT
"[Respondent shall open the letters of credit for the importation of equipment and materials listed
in Annex E hereof after the drawings, brochures, and other technical data of each items in the list
have been formally approved by [the Ministry of Public Works and Highways]. However, petitioner
will still be fully responsible for all imported materials and equipment.
"All expenses incurred by [respondent], both in foreign and local currencies in connection with the
opening of the letters of credit shall be deducted from the Contract Prices.
xxx xxx xxx
"N. OTHER CONDITIONS
xxx xxx xxx
"2. All customs duties, import duties, contractor’s taxes, income taxes, and other taxes that may
be required by any government agencies in connection with this Agreement shall be for the sole
account of [petitioner]."23
Being an inexpensive, speedy and amicable method of settling disputes,24 arbitration -- along with mediation,
conciliation and negotiation -- is encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the commercial kind.25 It is thus regarded as
the "wave of the future" in international civil and commercial disputes. 26 Brushing aside a contractual
agreement calling for arbitration between the parties would be a step backward.27
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts
should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that
covers the asserted dispute, an order to arbitrate should be granted.28 Any doubt should be resolved in favor Clearly, there is no more need to file a request with the CIAC in order to vest it with jurisdiction to decide a
of arbitration.29 construction dispute.

Second Issue: The arbitral clause in the Agreement is a commitment on the part of the parties to submit to arbitration the
Prior Request for Arbitration disputes covered therein. Because that clause is binding, they are expected to abide by it in good
faith.35 And because it covers the dispute between the parties in the present case, either of them may
compel the other to arbitrate.36
According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal request
for arbitration with the Construction Industry Arbitration Commission (CIAC) precluded the latter from
acquiring jurisdiction over the question. To bolster its position, petitioner even cites our ruling in Tesco Since petitioner has already filed a Complaint with the RTC without prior recourse to arbitration, the proper
Services Incorporated v. Vera.30 We are not persuaded. procedure to enable the CIAC to decide on the dispute is to request the stay or suspension of such action,
as provided under RA 876 [the Arbitration Law].37
Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration indeed required the
submission of a request for arbitration, as follows: WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

"SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to have SO ORDERED.
recourse to arbitration by the Construction Industry Arbitration Commission (CIAC) shall submit its
Request for Arbitration in sufficient copies to the Secretariat of the CIAC; PROVIDED, that in the
case of government construction contracts, all administrative remedies available to the parties Puno, (Chairman), Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.
must have been exhausted within 90 days from the time the dispute arose."
G.R. No. 198075 September 4, 2013
Tesco was promulgated by this Court, using the foregoing provision as reference.
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,
On the other hand, Section 1 of Article III of the new Rules of Procedure Governing Construction Arbitration vs.
has dispensed with this requirement and recourse to the CIAC may now be availed of whenever a contract MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
"contains a clause for the submission of a future controversy to arbitration," in this wise:
DECISION
"SECTION 1. Submission to CIAC Jurisdiction — An arbitration clause in a construction contract
or a submission to arbitration of a construction dispute shall be deemed an agreement to submit PEREZ, J.:
an existing or future controversy to CIAC jurisdiction, notwithstanding the reference to a different
arbitration institution or arbitral body in such contract or submission. When a contract contains a
clause for the submission of a future controversy to arbitration, it is not necessary for the parties This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP
to enter into a submission agreement before the claimant may invoke the jurisdiction of CIAC." No. 116865.

The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91 and 3-93.31 The facts:

The difference in the two provisions was clearly explained in China Chang Jiang Energy Corporation The Donation
(Philippines) v. Rosal Infrastructure Builders et al.32 (an extended unsigned Resolution) and reiterated
inNational Irrigation Administration v. Court of Appeals,33 from which we quote thus:
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered owner of
a parcel of land located at Km. 16, South Superhighway, Parañaque City (subject land). 3 Within the subject
"Under the present Rules of Procedure, for a particular construction contract to fall within the land are buildings and other improvements dedicated to the business of FKI.4
jurisdiction of CIAC, it is merely required that the parties agree to submit the same to voluntary
arbitration Unlike in the original version of Section 1, as applied in the Tesco case, the law as it
In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of herein
now stands does not provide that the parties should agree to submit disputes arising from their
respondent Makati Rotary Club Foundation, Incorporated by way of a conditional donation.6 The respondent
agreement specifically to the CIAC for the latter to acquire jurisdiction over the same. Rather, it is
accepted the donation with all of its conditions.7 On 26 May1975, FKI and the respondent executed a Deed
plain and clear that as long as the parties agree to submit to voluntary arbitration, regardless of
of Donation8evidencing their consensus.
what forum they may choose, their agreement will fall within the jurisdiction of the CIAC, such
that, even if they specifically choose another forum, the parties will not be precluded from electing
to submit their dispute before the CIAC because this right has been vested upon each party by The Lease and the Amended Deed of Donation
law, i.e., E.O. No. 1008."34
One of the conditions of the donation required the respondent to lease the subject land back to FKI under
terms specified in their Deed of Donation.9 With the respondent’s acceptance of the donation, a lease
agreement between FKI and the respondent was, therefore, effectively incorporated in 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
toP4,900,000 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 Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease Contract. 23 But
in June of 2008, FKI sold all its rights and properties relative to its business in favor of herein petitioner
Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner executed 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.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental stipulations of the
2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they violated
one of the" material conditions " of the donation of the subject land, as stated in the Deed of Donation and
Amended Deed of Donation.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 Parañaque City a complaint42 for the rescission or cancellation of
the Deed of Donation and Amended Deed of Donation against the respondent. This case is currently
pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the
Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and was
docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim. 44 In it, petitioner reiterated
its objection over the rental stipulations of the 2005 Lease Contract for being violative of the material
conditions of the Deed of Donation and Amended Deed of Donation. 45 In addition to the foregoing, however,
petitioner also interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in
view of the insufficiency of respondent’s demand.46 The First Demand Letter did not contain an
actual demand to vacate the premises and, therefore, the refusal to comply 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
respondent—anon-stock and non-profit corporation—could evade payment of the taxes otherwise
due thereon.51
In due course, petitioner and respondent both submitted their position papers, together with their other
documentary evidence.52 Remarkably, however, respondent failed to submit the Second Demand Letter as
part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to
dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the
petitioner with respect to the issues regarding the insufficiency of the respondent’s demand and the nullity of
the 2005 Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch 274 of the
RTC of Parañaque City and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from the
subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial Court,
Branch 77, Parañaque City, is hereby reversed, judgment is thus rendered in favor of the plaintiff-appellant
and against the defendant-appellee, and ordering the latter –
(1) to vacate the lease[d] premises made subject of the case and to restore the possession
thereof to the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two Thousand
Four Hundred Thirty Six Pesos (P9,362,436.00), penalties and net of 5% withholding tax, for the
lease period from May 25, 2009 to May 25, 2010 and such monthly rental as will accrue during
the pendency of this case;
(3) to pay attorney’s fees in the sum of P100,000.00 plus appearance fee of P3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-appellee, as these were built in good faith, the
provisions of Art. 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 respondent’s demand ought to have
been laid to rest by the Second Demand Letter which, though not submitted in evidence, was
nonetheless admitted by petitioner as containing a" demand to eject " in 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 contract’s validity.61 Even assuming that it can, petitioner still did not
file a formal application before the MeTC so as to render such arbitration clause operational.62 At
any rate, the MeTC would not be precluded from exercising its jurisdiction over an action for
unlawful detainer, over which, it has exclusive original jurisdiction.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 Parañaque
City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary Restraining
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 petitioner’s apparent breach of the 2005 Lease Contract that respondent filed the instant unlawful
detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the petitioner
and respondent arose from the application or execution of the 2005 Lease Contract . Undoubtedly, such
kinds of dispute are covered by the arbitration clause of the 2005 Lease 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 contract’s 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 contract’s rental stipulations would have to be determined, the same would not render such
disagreement non-arbitrable. The quotation from Gonzales that was used to justify the contrary position was
taken out of context. A rereading of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and
Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance Agreement and
other mining related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud and unconstitutionality. 83 The pivotal
issue that confronted the Court then was whether the PA-MGB has jurisdiction over that particular arbitration
complaint. Stated otherwise, the question was whether the complaint for arbitration raises arbitrable issues
that the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to
take cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or
the Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only over mining
disputes, i.e., disputes involving " rights to mining areas," "mineral agreements or permits," and " surface
owners, occupants, 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 Contract 96 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 party’s
case."98 Thus in JDR, the JDR judge lacks the authority to render a resolution of the dispute that is binding
upon the parties in conflict. In arbitration, on the other hand, the dispute is submitted to an arbitrator/s —a
neutral third person or a group of thereof— who shall have the authority to render a resolution binding upon
the parties.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 Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its consideration and,
the 2005 Lease Contract. possible, application to Civil Case No. CV 09-0346.

This Court is not unaware of the apparent harshness of the Decision that it is about to make. Nonetheless, No costs.
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 SO ORDERED.
valid arbitration agreements with disdain and hostility, if not outright " jealousy,"105 and then get away with it.
Courts should instead learn to treat alternative means of dispute resolution as effective partners in the
administration of justice and, in the case of arbitration agreements, to afford them judicial restraint.106 Today,
this Court only performs its part in upholding a once disregarded state policy.

Civil Case No. CV 09-0346

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

This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve
matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract. However, since the
records of Civil Case No. CV 09-0346 are not before this Court, We can never know with true certainty and
only speculate. In this light, let a copy of this Decision be also served to Branch 257of the RTC of Parañaque
for its consideration and, possible, application to Civil Case No. CV 09-0346.

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

1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of
Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of 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
Parañaque City in Civil Case No. 10-0255,

c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of
Parañaque City in Civil Case No. 2009-307; and

4. REFERRING the petitioner and the respondent to arbitration pursuant to the arbitration clause
of the 2005 Lease Contract, repeatedly included in the 2000 Lease Contract and in the 1976
Amended Deed of Donation.
 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 isP27,880,419.52.9 (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 Arbitration 10 before the
Construction Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and respondent be
ordered to pay the sums of P8,980,575.89 as liquidated damages and P2,379,441.53 corresponding to the
unrecouped down payment or overpayment petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered
by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the project since the 365 days
period of completion started only on May 2, 2008 after clearing the retrofitted old structure. Hence, the
termination of the contract by petitioner was premature and the filing of the complaint against him was
baseless, malicious and in bad faith.
Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action
and the complaint states no cause of action against it. The CIAC denied the motion to dismiss. Respondent’s
motion for reconsideration was likewise denied.13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims,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 project’s accomplishment already
exceeded the said amount, respondent’s obligation under the performance bond had been fully extinguished.
As to the claim for alleged overpayment to Mabunay, respondent contended that it should not be credited
against the 20% down payment which was already exhausted and such application by petitioner is
tantamount to reviving an obligation that had been legally extinguished by payment. Respondent also set up
a cross-claim against Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay
undertook to indemnify respondent for whatever amounts it may be adjudged liable to pay petitioner under
the surety bond.
Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay
failed to appear in the scheduled hearings and to present his evidence despite due notice to his counsel of
record. The CIAC thus declared that Mabunay is deemed to have waived his right to present evidence. 15
On February 2, 2010, the CIAC rendered its Decision16 and made the following award:
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 Utassco’s liability shall in no case exceed P8.4 million.
2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent
Mabunay’s share in the arbitration cost claimant had advanced, with legal interest thereon from
January 8, 2010 until fully paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco
will have paid to claimant under this decision, plus interest thereon at the rate of 12% per annum
computed from the date he is notified of such payment made by respondent Utassco to claimant
until fully paid, and to pay Utassco P100,000.00 as attorney’s fees.
SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended.
In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond
did not clearly state the limitation of the surety’s liability. Pursuant to Article 1377 18 of the Civil Code, the CA
said that the provision should be construed in favor of petitioner considering that the obscurely phrased
provision was drawn up by respondent and Mabunay. Further, the appellate court stated that respondent
could not possibly guarantee the down payment because it is not Mabunay who owed the down payment to
petitioner but the other way around. Consequently, the completion by Mabunay of 31.39% of the construction
would not lead to the extinguishment of respondent’s liability. The P8.4 million was a limit on the amount of
respondent’s liability and not a limitation as to the obligation or undertaking it guaranteed.
However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner to the
stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v.
Court of Appeals,19 the appellate court said that not all requisites in order to consider the obligor or debtor in
default were present in this case. It held that it is only from December 24, 2008 (completion date) that we
should reckon default because the Construction Agreement provided only for delay in the completion of the
project and not delay on a monthly basis using the work schedule approved by petitioner as the reference
point. Hence, petitioner’s termination of the contract was premature since the delay in this case was merely
speculative; the obligation was not yet demandable.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision
dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby
REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the
same tribunal is hereby ANNULLED and SET ASIDE.
SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial
reconsideration. Both motions were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims under the
Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner
alleged that –
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE
ALTERNATIVE DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE
DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO
REVIEW ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD
ON AN ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS
OF REFERENCE, NOT ASSIGNED AS 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 petitioner’s contention that with the institutionalization of
alternative dispute resolution under Republic Act (R.A.) No. 9285, 22 otherwise known as the Alternative
Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review the decisions or awards of the
CIAC. Petitioner erroneously relied on the provision in said law allowing any party to a domestic arbitration to
file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions of
the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation
by the RTC is not required, thus:
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 respondent’s liability under the
Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the liquidated
damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA opined that delay
should be reckoned only after the lapse of the one-year contract period, and consequently Mabunay’s liability
for liquidated damages arises only upon the happening of such condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. It is the non-fulfillment of an obligation with respect to time.27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable for the
damage for not completing it within such time, unless the delay is excused or waived. 28
The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for
the project
1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1)
YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and
Notice to Proceed and receipt of down payment.
2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by
OWNER within Seven (7) days after signing of this Agreement and full payment of 20% of the
agreed contract price. Said detailed work schedule shall follow the general schedule of activities
and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially.30
In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or
complete the project was not yet demandable as of November 19, 2008 when petitioner terminated the
contract, because the agreed completion date was still more than one month away (December 24, 2008).
Since the parties contemplated delay in the completion of the entire project, the CA concluded that the failure
of the contractor to catch up with schedule of work activities did not constitute delay giving rise to the
contractor’s liability for damages.
We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction
Agreement. Article 1374 of the Civil Code requires that the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them taken
jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the
payment of monthly progress billings, but also for evaluation of the progress of work by the contractor. Article
13.01 (g) (iii) of the Construction Agreement provides that the contractor shall be deemed in default if,
among others, it had delayed without justifiable cause the completion of the project "by more than thirty (30)
calendar days based on official work 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
petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:
April 30, 2008
Seven Shades of Blue
Boracay Island
Malay, Aklan
1âwphi1
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.
Petitioner’s 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 petitioner’s claim for damages nor respondent’s liability under the Performance Bond. Mabunay was
clearly in default considering the dismal percentage of his accomplishment (32.38%) of the work he
contracted on account of delays in executing the scheduled work activities and repeated failure to provide
sufficient manpower to expedite construction works. The events of default and remedies of the Owner are
set forth in Article 13, which reads:
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 Owner’s instructions to the
contrary, sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may
after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel
the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from any of
its obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights and
powers conferred on the OWNER by this Agreement and the OWNER may himself complete the work or
may employ any other contractor to complete the work. If the OWNER shall enter and expel the
CONTRACTOR under this clause, the OWNER shall be entitled to confiscate the performance bond of the
CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses incurred to
finish the Project shall be charged to the CONTRACTOR and/or his bond. Further, the OWNER shall not be
liable to pay the CONTRACTOR until the cost of execution, damages for the delay in the completion, if any,
and all; other expenses incurred by the OWNER have been ascertained which amount shall be deducted
from any money due to the CONTRACTOR on account of this Agreement. The CONTRACTOR will not be
compensated for any loss of profit, loss of goodwill, loss of use of any equipment or property, loss of
business opportunity, additional financing cost or overhead or opportunity losses related to the
unaccomplished portions of the work.40 (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform
the work on account of tremendous delays in executing the scheduled work activities. Where a party to a
building construction contract fails to comply with the duty imposed by the terms of the contract, a breach
results for which an action may be maintained to recover the damages sustained thereby, and of course, a
breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of
the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to
complete the building. Having elected to terminate the contract and expel the contractor from the project site
under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing
the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause. A penalty
clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of
the obligor in case of breach of an obligation. It functions to strengthen the coercive force of obligation and to
provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would
then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. It is well-settled that so long as such stipulation does not
contravene law, morals, or public order, it is strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms
of the surety bond it issued, its liability is limited to the performance by said contractor to the extent
equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the project by
Mabunay, its liability was extinguished because the value of such accomplishment already exceeded the liability becomes more than the principal obligation. The increased liability is not because of the contract but
sum equivalent to 20% down payment (P8.4 million). because of the default and the necessity of judicial collection.

The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond
guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction Agreement, and
that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be
apportioned.
The pertinent portions of the Performance Bond provide:
The conditions of this obligation are as follows:
Petitioner’s liability under the suretyship contract is different from its liability under the law.1âwphi1 There is
no question that as a surety, petitioner should not be made to pay more than its assumed obligation under
the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the
payment of interest is not by reason of the suretyship agreement itself but because of the delay in the
payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and
Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby
REVERSED and SET ASIDE.

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 Mabunay’s obligations under the Construction
Agreement with petitioner. By its nature, a performance bond guarantees that the contractor will perform the
contract, and usually provides that if the contractor defaults and fails to complete the contract, the surety can
itself complete the contract or pay damages up to the limit of the bond. 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
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.

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

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

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and
reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in
Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the
principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its