VIII. Katarungang Pambarangay Law (P.D. No. 1508; R.A.

7610, as amended)

A. Cases covered

Under the Katarungan Pambarangay rules, the execution of an amicable settlement or arbitration
award is started by filing a motion for execution with the Punong Barangay, who may issue a notice
of execution in the name of the Lupon Tagapamayapa. Execution itself, however, will be done by:
(2012 BAR)

a. a court-appointed sheriff. 1
b. any Barangay Kagawad.
c. Punong Barangay.
d. any member of the Pangkat ng Tagapagsundo.

What is the object of the Katarungang Pambarangay Law? (2%) (1999 Bar Question)

The object of the Katarungang Pambarangay Law is to effect an amicable settlement of disputes
among family and barangay members at the barangay level without judicial recourse and
consequently help relieve the courts of docket congestion. (Preamble of P.D. No. 1508, the
former and the first Katarungang Pambarangay Law.)

Q: Alice, a resident of Valenzuela. Metro Manila, filed with the Metropolitan Trial Court thereat a
complaint for damages against her next-door neighbor Rosa for P100,000.00 with prayer for
preliminary attachment. She alleged that Rosa intrigued against her honor by spreading unsavory
rumors about her among their co-workers at the Phoenix Knitwear factory located at Valenzuela.

After pre-trial the court motu proprio referred the case for amicable settlement between the
parties to the Lupon Tagapayapa of Barangay 2. Zone 3, of Valenzuela where the factory is
located. Rosa questioned the order contending that the court had no authority to do so as both
parties had already gone through pre-trial where amicable settlement was foreclosed and the
parties were already going to trial.

1. Comment-on Rosa’s contention. Explain.

Rosa is not correct. The Local Government Code provides that in non-criminal cases not falling
within the authority of the Lupon, the court may at any time before trial refer the case to the
Lupon concerned for amicable settlement. (Sec. 408)

2. Rosa also opposed the referral to the Lupon Tagapayapa of Barangay 2, Zone 3, claiming that
the venue was wrong as the proper Lupon was that of Barangay 1, Zone 5, where she and Alice
reside. Is Rosa’s opposition valid? Explain.

No, because the law also provides that the venue of disputes arising at the workplace of
the contending parties shall be brought in the barangay where such workplace is located.
(Sec. 409[d])

3. Suppose that the Lupon of Barangay 2. Zone 3, is successful in forging an amicable settlement
between Alice and Rosa, is the compromise immediately executory? Explain.

No, because any compromise settlement shall be submitted to the court which referred the case
for approval. (Sec. 416)

4. How, when and by whom shall the compromise agreement be enforced? Explain.

Upon approval thereof, it shall have the force and effect of a Judgment of the court and shall be
enforced in accordance with Section 6, Rule 39.
Q: For failure of the tenant, X, to pay rentals, A, the court-appointed administrator of the estate of
Henry Datu, decides to file an action against the former for the recovery of possession of the leased
premises located In Davao City and for the payment of the accrued rentals In the total amount
of P25,000.00. (1991 Bar Question)

a) Is prior referral to the Lupon under P.D. No. 1508 necessary?

No, because the law applies only to disputes between natural person, and does not apply to
juridical person such as the estate of a deceased. [Vda. de Borromeo v. Pogoy, 126 SCRA 217)
2
b) What is the court of proper jurisdiction and venue of the Intended action?

The Court of proper jurisdiction and venue is the Municipal Trial Court of Davao City, since this
is an action of illegal detainer and the leased premises are located in Dayao City.

If the action filed is for recovery of possession or accion publiciana, the Regional Trial Court of
Davao City would have jurisdiction and the venue would also be in Davao City.

c) Supposing that referral is necessary, but the complaint is filed without such referral, may it be
dismissed on the ground of lack of jurisdiction?

No, because lack of referral would merely render the action premature for failure to comply with
a condition precedent.

d) If the case is filed with the Municipal Trial Court, in Cities (MTCC), is it covered by the Rule on
Summary Procedure?

No, it is not covered by the Rule on Summary Procedure in any of the lower courts, because the
unpaid rentals exceed P20.000.00 (Sec. 1-A-l of Rule on Summary Procedure)

e) Supposing that A filed the complaint in the MTCC, and X filed an Answer wherein he
interposed a counterclaim for moral damages in the amount of P50.000 alleging that the
complaint is unfounded and malicious, would the MTCC have jurisdiction over the counterclaim?
If X did not set up the counterclaim, can he file a separate action to recover the damages? Can A
file a counterclaim to the counterclaim?

No, because the counterclaim exceeds the jurisdictional amount of P20.000.00. Since the claim
for damages is not within the jurisdiction of the MTCC, it is not a compulsory counterclaim and
X can file a separate action in the RTC to recover the damages. [Reyes v. CA, 38 SCRA 130)

The MTCC would have jurisdiction over the counterclaim if the excess of the amount thereof
over P20.000.00 is waived by X. (Agustin v. Bocalan, 135 SCRA 340)

The filing of a complaint with the Punong Barangay involving cases covered by the Katarungang
Pambarangay Rules shall: (2012 BAR)

a. not interrupt any prescriptive period.

b. interrupt the prescriptive period for 90 days.
c. interrupt the prescriptive period for 60 days.
d. interrupt the prescriptive period not exceeding 60 days.

B. Subject matter for amicable settlement

Q: An amicable settlement was signed before a Lupon Tagapamayapa on January

3, 2001. On July 6, 2001, the prevailing party asked the Lupon to execute the amicable settlement
because of the non-compliance by the other party of the terms of the agreement. The Lupon
concerned refused to execute the settlement/agreement.

a. Is the Lupon correct in refusing to execute the settlement/agreement? (3%)

 Yes, the Lupon is correct in refusing to execute the settlement/agreement because the execution
sought is already beyond the period of six months from the date of the settlement within which
the Lupon is authorized to execute. (Sec. 417, Local Government Code of 1991)

b. What should be the course of action of the prevailing party in such a case? (2%)

After the six-month period, the prevailing party should move to execute the settlement/agreement
in the appropriate city or municipal trial court. (Id.)

3
Q: (1999 Bar Question)

xxx
What is the difference, if any, between the conciliation proceedings under the Katarungang
Pambarangay Law and the negotiations for an amicable settlement during the pre-trial conference
under the Rules of Court? (2%)

xxx

The difference between the conciliation proceedings under the Katarungang Pambarangay
Law and the negotiations for an amicable settlement during the pre-trial conference under the
Rules of Court is that in the former, lawyers are prohibited from appearing for the parties. Parties
must appear in person only except minors or incompetents who may be assisted by their next of
kin who are not lawyers. (Formerly Sec. 9, P.D. No. 1508; Sec. 415, Local Government Code of
1991, R.A. 7160.) No such prohibition exists in the pre-trial negotiations under the Rules of
Court.

5. Alternative Dispute Resolution (ADR) (Special Rules of Court on ADR (A.M. No. 07-11-08-SC))

Q: Water Builders, a construction company based in Makati City, entered into a construction
agreement with Super Powers, Inc., an energy company based in Manila, for the construction of a
mini hydroelectric plant. Water Builders failed to complete the project within the stipulated
duration. Super Powers cancelled the contract. Water Builders filed a request for arbitration with
the Construction Industry Arbitration Commission (CIAC). After due proceedings, CIAC rendered
judgment in favor of Super Powers, Inc. ordering Water Builders to pay the former P 10 million,
the full amount of the down payment paid, and P2 million by way of liquidated damages.
Dissatisfied with the CIAC's judgment, Water Builders, pursuant to the Special Rules of Court on
Alternative Dispute Resolution (ADR Rules) filed with the RTC of Pasay City a petition to vacate
the arbitral award. Super Powers, Inc., in its opposition, moved to dismiss the petition, invoking the
ADR Rules, on the ground of improper venue as neither of the parties were doing business in Pasay
City. Should Water Builders' petition be dismissed? (2015)

YES, the petition should be dismissed on the ground of improper venue. Under the Special Rules
of Court on Alternative Dispute Resolution (ADR), the petition shall be filed with the Regional
Trial Court having jurisdiction over the place where one of the parties is doing business, where
any of the parties reside or where the arbitration proceedings were conducted (Rule 11.3, Special
Rules of Court on Alternative Dispute Resolution, A.M. No. 07-11-08-SC); hence, the venue of
the petition to vacate the arbitral award of Water Builders is improperly laid.

Which among the following is not subject to mediation for judicial dispute resolution? (2013 BAR)

(A) The civil aspect of B.P. Blg. 22 cases.

(B) The civil aspect of theft penalized under Article 308 of the Revised Penal
Code.
(C) The civil aspect of robbery.
(D) Cases cognizable by the Lupong Tagapamayapa under the Katarungang
Pambarangay Law.
(E) None of the above.
Q: Discuss the three (3) Stages of Court Diversion in connection with Alternative
Dispute Resolution. (2012 BAR)

The three stages of diversion are Court-Annexed Mediation (CAM), Judicial Dispute Resolution
(JDR), and Appeals Court Mediation (ACM). During CAM, the judge refers the parties to the
Philippine Mediation Center (PMC) for the mediation of their dispute by trained and accredited
mediators. If CAM fails, the JDR is undertaken by the JDR judge, acting as a mediator-
conciliator-early neutral evaluator. The third case is during appeal, where covered cases are
referred to ACM.
4

ADR CASES:

25.

SECOND DIVISION
[G.R. No. 147080. April 26, 2005]
CAPITOL MEDICAL CENTER, INC., petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION, JAIME IBABAO, JOSE BALLESTEROS, RONALD CENTENO,
NARCISO SARMIENTO, EDUARDO CANAVERAL, SHERLITO DELA CRUZ,
SOFRONIO COMANDAO, MARIANO GALICIA, RAMON MOLOD, CARMENCITA
SARMIENTO, HELEN MOLOD, ROSA COMANDAO, ANGELITO CUIZON, ALEX
MARASIGAN, JESUS CEDRO, ENRICO ROQUE, JAY PERILLA, HELEN MENDOZA,
MARY GLADYS GEMPEROSO, NINI BAUTISTA, ELENA MACARUBBO, MUSTIOLA
SALVACION DAPITO, ALEXANDER MANABE, MICHAEL EUSTAQUIO, ROSE
AZARES, FERNANDO MANZANO, HENRY VERA CRUZ, CHITO MENDOZA,
FREDELITA TOMAYAO, ISABEL BRUCAL, MAHALKO LAYACAN, RAINIER
MANACSA, KAREN VILLARENTE, FRANCES ACACIO, LAMBERTO CONTI,
LORENA BEACH, JUDILAH RAVALO, DEBORAH NAVE, MARILEN
CABALQUINTO, EMILIANA RIVERA, MA. ROSARIO URBANO, ROWENA ARILLA,
CAPITOL MEDICAL CENTER EMPLOYEES ASSOCIATION-AFW, GREGORIO DEL
PRADO, ARIEL ARAJA, and JESUS STA. BARBARA, JR., respondents.

DECISION
CALLEJO, SR., J.:

This is a petition for review of the Decision[1] of the Court of Appeals (CA) in CA-G.R. SP No.
57500 and its Resolution denying the motion for reconsideration thereof.

The Antecedents[2]

Whether the respondent Capitol Medical Center Employees Association-Alliance of Filipino

Workers (the Union, for brevity) was the exclusive bargaining agent of the rank-and-file employees of the
petitioner Capitol Medical Center, Inc. had been the bone of contention between the Union and the
petitioner. The petitioners refusal to negotiate for a collective bargaining agreement (CBA) resulted in a
union-led strike on April 15, 1993.
The Union had to contend with another union the Capitol Medical Center Alliance of Concerned
Employees (CMC-ACE) which demanded for a certification election among the rank-and-file employees
of the petitioner. Med-Arbiter Brigida Fadrigon granted the petition, and the matter was appealed to the
Secretary of Labor and Employment (SOLE). Undersecretary Bienvenido E. Laguesma rendered a
Resolution on November 18, 1994 granting the appeal. He, likewise, denied the motion filed by the
petitioner and the CMC-ACE. The latter thereafter brought the matter to the Court which rendered
judgment on February 4, 1997 affirming the resolution of Undersecretary Laguesma, thus:

1. Dismissing the petition for certification election filed by the Capitol Medical Center Alliance of
Concerned Employees-United Filipino Services Workers for lack of merit; and

2. Directing the management of the Capitol Medical Center to negotiate a CBA with the Capitol Medical
Center Employees Association-Alliance of Filipino Workers, the certified bargaining agent of the rank-
and-file employees.[3]
5
The decision of the Court became final and executory. Thereafter, in a Letter dated October 3, 1997
addressed to Dr. Thelma N. Clemente, the President and Director of the petitioner, the Union requested
for a meeting to discuss matters pertaining to a negotiation for a CBA, conformably with the decision of
the Court.[4] However, in a Letter to the Union dated October 10, 1997, Dr. Clemente rejected the
proposed meeting, on her claim that it was a violation of Republic Act No. 6713 and that the Union was
not a legitimate one. On October 15, 1997, the petitioner filed a Petition for the Cancellation of the
Unions Certificate of Registration with the Department of Labor and Employment (DOLE) on the
following grounds:

3) Respondent has failed for several years to submit annually its annual financial statements and other
documents as required by law. For this reason, respondent has long lost its legal personality as a union.

4) Respondent also engaged in a strike which has been declared illegal by the National Labor Relations
Commission.[5]

Apparently unaware of the petition, the Union reiterated its proposal for CBA negotiations in a
Letter dated October 16, 1997 and suggested the date, time and place of the initial meeting. The Union
further reiterated its plea in another Letter[6] dated October 28, 1997, to no avail.
Instead of filing a motion with the SOLE for the enforcement of the resolutions of Undersecretary
Laguesma as affirmed by this Court, the Union filed a Notice of Strike on October 29, 1997 with the
National Conciliation and Mediation Board (NCMB), serving a copy thereof to the petitioner. The Union
alleged as grounds for the projected strike the following acts of the petitioner: (a) refusal to bargain; (b)
coercion on employees; and (c) interference/ restraint to self-organization.[7]
A series of conferences was conducted before the NCMB (National Capital Region), but no
agreement was reached. On November 6, 1997, the petitioner even filed a Letter with the Board
requesting that the notice of strike be dismissed;[8] the Union had apparently failed to furnish the Regional
Branch of the NCMB with a copy of a notice of the meeting where the strike vote was conducted.
On November 20, 1997, the Union submitted to the NCMB the minutes[9] of the alleged strike vote
purportedly held on November 10, 1997 at the parking lot in front of the petitioners premises, at the
corner of Scout Magbanua Street and Panay Avenue, Quezon City. It appears that 178 out of the 300
union members participated therein, and the results were as follows: 156 members voted to strike; 14
members cast negative votes; and eight votes were spoiled.[10]
On November 28, 1997, the officers and members of the Union staged a strike. Subsequently, on
December 1, 1997, the Union filed an ex parte motion with the DOLE, praying for its assumption of
jurisdiction over the dispute. The Union likewise prayed for the imposition of appropriate legal sanctions,
not limited to contempt and other penalties, against the hospital director/president and other responsible
corporate officers for their continuous refusal, in bad faith, to bargain collectively with the Union, to
adjudge the same hospital director/president and other corporate officers guilty of unfair labor practices,
and for other just, equitable and expeditious reliefs in the premises.[11]
On December 4, 1997, the SOLE issued an Order, assuming jurisdiction over the ongoing labor
dispute. The decretal portion of the order reads:

WHEREFORE, this Office now assumes jurisdiction over the labor disputes at Capitol Medical Center
pursuant to Article 263(g) of the Labor Code, as amended. Consequently, all striking workers are directed
to return to work within twenty-four (24) hours from the receipt of this Order and the management to
resume normal operations and accept back all striking workers under the same terms and conditions
prevailing before the strike. Further, parties are directed to cease and desist from committing any act that
may exacerbate the situation.
Moreover, parties are hereby directed to submit within 10 days from receipt of this Order proposals and
counter-proposals leading to the conclusion of the collective bargaining agreements in compliance with
aforementioned Resolution of the Office as affirmed by the Supreme Court.

SO ORDERED.[12]

In obedience to the order of the SOLE, the officers and members of the Union stopped their strike
and returned to work.
For its part, the petitioner filed a petition[13] to declare the strike illegal with the National Labor
6
Relations Commission (NLRC), docketed as NLRC NCR Case No. 00-12-08644-97. In its position paper,
the petitioner appended the affidavit of Erwin Barbacena, the overseer of the property across the hospital
which was being used as a parking lot, at the corner of Scout Magbanua Street and Panay Avenue,
Quezon City. Also included were the affidavits of Simon J. Tingzon and Reggie B. Barawid, the
petitioners security guards assigned in front of the hospital premises. They attested to the fact that no
secret balloting took place at the said parking lot from 6:00 a.m. to 7:00 p.m. of November 10,
1997.[14] The petitioner also appended the affidavit of Henry V. Vera Cruz, who alleged that he was a
member of the Union and had discovered that signatures on the Statements of Cash Receipt Over
Disbursement submitted by the Union to the DOLE purporting to be his were not his genuine
signatures;[15] the affidavits of 17 of its employees, who declared that no formal voting was held by the
members of the Union on the said date, were also submitted. The latter employees also declared that they
were not members of any union, and yet were asked to sign documents purporting to be a strike vote
attendance and unnumbered strike vote ballots on different dates from November 8 to 11, 1997.
In their position paper, the respondents appended the joint affidavit of the Union president and those
members who alleged that they had cast their votes during the strike vote held on November 10, 1997.[16]
In the meantime, on September 30, 1998, the Regional Director of the DOLE rendered a Decision
denying the petition for the cancellation of the respondent Unions certificate of registration. The decision
was affirmed by the Director of the Bureau of Labor Relations on December 29, 1998.
In a parallel development, Labor Arbiter Facundo L. Leda rendered a Decision on December 23,
1998 in NLRC NCR Case No. 00-12-08644-97 in favor of the petitioner, and declared the strike staged by
the respondents illegal. The fallo of the decision reads:

1. Declaring as illegal the strike staged by the respondents from November 28, 1997 to December 5,
1997;

2. Declaring respondent Jaime Ibabao, in his capacity as union president, the other union officers, and
respondents Ronald Q. Centeno, Michael Eustaquio and Henry Vera Cruz to have lost their employment
status with petitioner; and

3. Ordering the above respondents to pay, jointly and severally, petitioner the amount of Two Hundred
Thousand Pesos (P200,000.00) by way of damages.[17]

The Labor Arbiter ruled that no voting had taken place on November 10, 1997; moreover, no notice
of such voting was furnished to the NCMB at least twenty-four (24) hours prior to the intended holding of
the strike vote. According to the Labor Arbiter, the affidavits of the petitioners 17 employees who alleged
that no strike vote was taken, and supported by the affidavit of the overseer of the parking lot and the
security guards, must prevail as against the minutes of the strike vote presented by the respondents. The
Labor Arbiter also held that in light of Article 263(9) of the Labor Code, the respondent Union should
have filed a motion for a writ of execution of the resolution of Undersecretary Laguesma which was
affirmed by this Court instead of staging a strike.
The respondents appealed the decision to the NLRC which rendered a Decision[18] on June 14, 1999,
granting their appeal and reversing the decision of the Labor Arbiter. The NLRC also denied the
petitioners petition to declare the strike illegal. In resolving the issue of whether the union members held a
strike vote on November 10, 1997, the NLRC ruled as follows:

We find untenable the Labor Arbiters finding that no actual strike voting took place on November 10,
1997, claiming that this is supported by the affidavit of Erwin Barbacena, the overseer of the parking lot
across the hospital, and the sworn statements of nineteen (19) (sic) union members. While it is true that no
strike voting took place in the parking lot which he is overseeing, it does not mean that no strike voting
ever took place at all because the same was conducted in the parking lot immediately/directly fronting,
not across, the hospital building (Annexes 1-J, 1-K to 1-K-6). Further, it is apparent that the nineteen (19)
(sic) hospital employees, who recanted their participation in the strike voting, did so involuntarily for fear
of loss of employment, considering that their Affidavits are uniform and pro forma (Annexes H-2 to H-
19).[19]

The NLRC ruled that under Section 7, Rule XXII of DOLE Order No. 9, Series of 1997, absent a
showing that the NCMB decided to supervise the conduct of a secret balloting and informed the union of
the said decision, or that any such request was made by any of the parties who would be affected by the
secret balloting and to which the NCMB agreed, the respondents were not mandated to furnish the NCMB
with such notice before the strike vote was conducted.[20] 7

The petitioner filed a motion for the reconsideration of the decision, but the NLRC denied the said
motion on September 30, 1999.[21]
The petitioner filed a petition for certiorari with the CA assailing the decision and resolution of the
NLRC on the following allegation:

PUBLIC RESPONDENT NATIONAL LABOR RELATIONS COMMISSION (NLRC) COMMITTED

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION,
ACTED CAPRICIOUSLY, AND CONTRAVENED THE LAW AND ESTABLISHED
JURISPRUDENCE IN REVERSING THE LABOR ARBITERS DECISION DATED DECEMBER 23,
1998 (ANNEX E) AND IN UPHOLDING THE LEGALITY OF THE STRIKE STAGED BY PRIVATE
RESPONDENTS FROM NOVEMBER 28, 1997 TO DECEMBER 5, 1997.[22]

On September 29, 2000, the CA rendered judgment dismissing the petition and affirming the assailed
decision and resolution of the NLRC.
The petitioner filed the instant petition for review on certiorari under Rule 45 of the Rules of Court
on the following ground:

THE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE NLRCS FINDING THAT
RESPONDENTS COMPLIED WITH THE LEGAL REQUIREMENTS FOR STAGING THE SUBJECT
STRIKE.[23]

The petitioner asserts that the NLRC and the CA erred in holding that the submission of a notice of a
strike vote to the Regional Branch of the NCMB as required by Section 7, Rule XXII of the Omnibus
Rules Implementing the Labor Code, is merely directory and not mandatory. The use of the word shall in
the rules, the petitioner avers, indubitably indicates the mandatory nature of the respondent Unions duty
to submit the said notice of strike vote.
The petitioner contends that the CA erred in affirming the decision of the NLRC which declared that
the respondents complied with all the requirements for a lawful strike. The petitioner insists that, as
gleaned from the affidavits of the 17 union members and that of the overseer, and contrary to the joint
affidavit of the officers and some union members, no meeting was held and no secret balloting was
conducted on November 10, 1997.
The petitioner faults the CA and the NLRC for holding that a meeting for a strike vote was held on
the said date by the respondents, despite the fact that the NLRC did not conduct an ocular inspection of
the area where the respondents members allegedly held the voting. The petitioner also points out that it
adduced documentary evidence in the form of affidavits executed by 17 members of the respondent union
which remained unrebutted. The petitioner also posits that the CA and the NLRC erred in reversing the
finding of the Labor Arbiter; furthermore, there was no need for the respondent union to stage a strike on
November 28, 1997 because it had filed an urgent motion with the DOLE for the enforcement and
execution of the decision of this Court in G.R. No. 118915.
The petition is meritorious.
We agree with the petitioner that the respondent Union failed to comply with the second paragraph
of Section 10, Rule XXII of the Omnibus Rules of the NLRC which reads:

Section 10. Strike or lockout vote. A decision to declare a strike must be approved by a majority of the
total union membership in the bargaining unit concerned obtained by secret ballot in meetings or
referenda called for the purpose. A decision to declare a lockout must be approved by a majority of the
Board of Directors of the employer, corporation or association or the partners obtained by a secret ballot
in a meeting called for the purpose.

The regional branch of the Board may, at its own initiative or upon the request of any affected party,
supervise the conduct of the secret balloting. In every case, the union or the employer shall furnish the
regional branch of the Board and notice of meetings referred to in the preceding paragraph at least
twenty-four (24) hours before such meetings as well as the results of the voting at least seven (7) days
before the intended strike or lockout, subject to the cooling-off period provided in this Rule.

Although the second paragraph of Section 10 of the said Rule is not provided in the Labor Code of 8
the Philippines, nevertheless, the same was incorporated in the Omnibus Rules Implementing the Labor
Code and has the force and effect of law.[24]
Aside from the mandatory notices embedded in Article 263, paragraphs (c) and (f) of the Labor
Code, a union intending to stage a strike is mandated to notify the NCMB of the meeting for the conduct
of strike vote, at least twenty-four (24) hours prior to such meeting. Unless the NCMB is notified of the
date, place and time of the meeting of the union members for the conduct of a strike vote, the NCMB
would be unable to supervise the holding of the same, if and when it decides to exercise its power of
supervision. In National Federation of Labor v. NLRC,[25] the Court enumerated the notices required by
Article 263 of the Labor Code and the Implementing Rules, which include the 24-hour prior notice to the
NCMB:

1) A notice of strike, with the required contents, should be filed with the DOLE, specifically the Regional
Branch of the NCMB, copy furnished the employer of the union;

2) A cooling-off period must be observed between the filing of notice and the actual execution of the
strike thirty (30) days in case of bargaining deadlock and fifteen (15) days in case of unfair labor practice.
However, in the case of union busting where the unions existence is threatened, the cooling-off period
need not be observed.

4) Before a strike is actually commenced, a strike vote should be taken by secret balloting, with a 24-hour
prior notice to NCMB. The decision to declare a strike requires the secret-ballot approval of majority of
the total union membership in the bargaining unit concerned.

5) The result of the strike vote should be reported to the NCMB at least seven (7) days before the intended
strike or lockout, subject to the cooling-off period.

A union is mandated to notify the NCMB of an impending dispute in a particular bargaining

unit via a notice of strike. Thereafter, the NCMB, through its conciliator-mediators, shall call the parties
to a conference at the soonest possible time in order to actively assist them in exploring all possibilities
for amicable settlement. In the event of the failure in the conciliation/mediation proceedings, the parties
shall be encouraged to submit their dispute for voluntary arbitration. However, if the parties refuse, the
union may hold a strike vote, and if the requisite number of votes is obtained, a strike may ensue. The
purpose of the strike vote is to ensure that the decision to strike broadly rests with the majority of the
union members in general and not with a mere minority, and at the same time, discourage wildcat strikes,
union bossism and even corruption.[26] A strike vote report submitted to the NCMB at least seven days
prior to the intended date of strike ensures that a strike vote was, indeed, taken. In the event that the report
is false, the seven-day period affords the members an opportunity to take the appropriate remedy before it
is too late.[27] The 15 to 30 day cooling-off period is designed to afford the parties the opportunity to
amicably resolve the dispute with the assistance of the NCMB conciliator/mediator, [28] while the seven-
day strike ban is intended to give the DOLE an opportunity to verify whether the projected strike really
carries the imprimatur of the majority of the union members.[29]
The requirement of giving notice of the conduct of a strike vote to the NCMB at least 24 hours
before the meeting for the said purpose is designed to (a) inform the NCMB of the intent of the union to
conduct a strike vote; (b) give the NCMB ample time to decide on whether or not there is a need to
supervise the conduct of the strike vote to prevent any acts of violence and/or irregularities attendant
thereto; and (c) should the NCMB decide on its own initiative or upon the request of an interested party
including the employer, to supervise the strike vote, to give it ample time to prepare for the deployment of
the requisite personnel, including peace officers if need be. Unless and until the NCMB is notified at least
24 hours of the unions decision to conduct a strike vote, and the date, place, and time thereof, the NCMB
cannot determine for itself whether to supervise a strike vote meeting or not and insure its peaceful and
regular conduct. The failure of a union to comply with the requirement of the giving of notice to the
NCMB at least 24 hours prior to the holding of a strike vote meeting will render the subsequent strike
staged by the union illegal.
In this case, the respondent Union failed to comply with the 24-hour prior notice requirement to the
NCMB before it conducted the alleged strike vote meeting on November 10, 1997. As a result, the
petitioner complained that no strike vote meeting ever took place and averred that the strike staged by the
respondent union was illegal.
Conformably to Article 264 of the Labor Code of the Philippines[30] and Section 7, Rule XXII of the
Omnibus Rules Implementing the Labor Code,[31] no labor organization shall declare a strike unless 9
supported by a majority vote of the members of the union obtained by secret ballot in a meeting called for
that purpose. The requirement is mandatory and the failure of a union to comply therewith renders the
strike illegal.[32] The union is thus mandated to allege and prove compliance with the requirements of the
law.
In the present case, there is a divergence between the factual findings of the Labor Arbiter, on the
one hand, and the NLRC and the CA, on the other, in that the Labor Arbiter found and declared in his
decision that no secret voting ever took place in the parking lot fronting the hospital on November 10,
1997 by and among the 300 members of the respondent Union. Erwin Barbacena, the overseer of the only
parking lot fronting the hospital, and security guards Simon Tingzon and Reggie Barawid, declared in
their respective affidavits that no secret voting ever took place on November 10, 1997; 17 employees of
the petitioner also denied in their respective statements that they were not members of the respondent
Union, and were asked to merely sign attendance papers and unnumbered votes. The NLRC and the CA
declared in their respective decisions that the affidavits of the petitioners 17 employees had no probative
weight because the said employees merely executed their affidavits out of fear of losing their jobs. The
NLRC and the CA anchored their conclusion on their finding that the affidavits of the employees were
uniform and pro forma.
We agree with the finding of the Labor Arbiter that no secret balloting to strike was conducted by the
respondent Union on November 10, 1997 at the parking lot in front of the hospital, at the corner of Scout
Magbanua Street and Panay Avenue, Quezon City. This can be gleaned from the affidavit of Barbacena
and the joint affidavit of Tingzon and Barawid, respectively:

1. That I am working as an overseer of a parking lot owned by Mrs. Madelaine Dionisio and located right
in front of the Capitol Medical Center, specifically at the corner of Scout Magbanua Street and Panay
Avenue, Quezon City;

2. That on November 10, 1997, during my entire tour of duty from 6:00 a.m. to 6:00 p.m., no voting or
election was conducted in the aforementioned parking space for employees of the Capitol Medical Center
and/or their guests, or by any other group for that matter.[33]

1. That I, Simon J. Tingzon, am a security officer of Veterans Philippine Scout Security Agency
(hereinafter referred to as VPSSA), assigned, since July 1997 up to the present, as Security Detachment
Commander at Capitol Medical Center (hereinafter referred to as CMC) located at Scout Magbanua
corner Panay Avenue, Quezon City;

2. That my (Tingzon) functions as such include over-all in charge of security of all buildings and
properties of CMC, and roving in the entire premises including the parking lots of all the buildings of
CMC;

3. That I, Reggie B. Barawid, am a security guard of VPSSA, assigned, since June 1997 up to the present,
as security guard at CMC;

4. That my (Barawid) functions as such include access control of all persons coming in and out of CMCs
buildings and properties. I also sometimes guard the parking areas of CMC;

5. That on November 10, 1997, both of us were on duty at CMC from 7:00 a.m. to 7:00 p.m., with me
(Barawid) assigned at the main door of the CMCs Main Building along Scout Magbanua St.;

6. That on said date, during our entire tour of duty, there was no voting or election conducted in any of the
four parking spaces for CMC personnel and guests.[34]
 The allegations in the foregoing affidavits belie the claim of the respondents and the finding of the
NLRC that a secret balloting took place on November 10, 1997 in front of the hospital at the corner of
Scout Magbanua Street and Panay Avenue, Quezon City. The respondents failed to prove the existence of
a parking lot in front of the hospital other than the parking lot across from it. Indeed, 17 of those who
purportedly voted in a secret voting executed their separate affidavits that no secret balloting took place
on November 10, 1997, and that even if they were not members of the respondent Union, were asked to
vote and to sign attendance papers. The respondents failed to adduce substantial evidence that the said
affiants were coerced into executing the said affidavits. The bare fact that some portions of the said
affidavits are similarly worded does not constitute substantial evidence that the petitioner forced,
intimidated or coerced the affiants to execute the same. 10
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decisions of the Court
of Appeals and NLRC are SET ASIDE AND REVERSED. The Decision of the Labor Arbiter is
REINSTATED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

24.

THIRD DIVISION
[G.R. No. 113638. November 16, 1999]
A. D. GOTHONG MANUFACTURING CORPORATION EMPLOYEES UNION-ALU, petitioner,
vs. HON. NIEVES CONFESOR, SECRETARY, DEPARTMENT OF LABOR AND
EMPLOYMENT and A. D. GOTHONG MANUFACTURING CORPORATION,
Subangdaku, Mandaue City, respondents.

DECISION
GONZAGA_REYES, J.:

Petitioner A. D. Gothong Manufacturing Corporation Employees Union-ALU seeks to reverse and

set aside the decision of the Secretary of Labor promulgated on September 30, 1993 affirming in toto the
Resolution of Mediator-Arbiter, Achilles V. Manit declaring Romulo Plaza and Paul Michael Yap as
rank- and-file employees of A. D. Gothong Manufacturing Corporation.
On May 12, 1993, petitioner A. D. Gothong Manufacturing Corporation Employees Union-ALU
(Union) filed a petition for certification election in its bid to represent the unorganized regular rank-and-
file employees of respondent A. D. Gothong Manufacturing Corporation (Company) excluding its office
staff and personnel. Respondent Company opposed the petition as it excluded office personnel who are
rank and file employees. In the inclusion-exclusion proceedings, the parties agreed to the inclusion of
Romulo Plaza and Paul Michael Yap in the list of eligible voters on condition that their votes are
considered challenged on the ground that they were supervisory employees.
The certification election was conducted as scheduled and yielded the following results:

YES - - - - - - - - - - - - - - - 20

NO - - - - - - - - - - - - - - - - 19

Spoiled - - - - - - - - - - - - - - 0

Challenged - - -- - - - - - - - _2

Total votes cast - - - - - - - -41

 Both Plaza and Yap argued that they are rank-and-file employees. Plaza claimed that he was a mere
salesman based in Cebu, and Yap argued that he is a mere expediter whose job includes the facilitation of
the processing of the bills of lading of all intended company shipments.
Petitioner Union maintains that both Plaza and Yap are supervisors who are disqualified to join the
proposed bargaining unit for rank-and-file employees. In support of its position paper, the petitioner
Union submitted the following:
1. Joint affidavit of Ricardo Caete, et al. which alleges that Michael Yap is a supervisory
employee of A. D. Gothong Manufacturing Corporation and can effectively recommend for
their suspension/dismissal. 11

2. Affidavit of Pedro Diez which alleges that the affiant is a supervisor in the production
department of A. D. Gothong Manufacturing Corporation; that the affiant knows the
challenged voters because they are also supervisory employees of the same corporation; that
the challenged voters used to attend the quarterly meeting of the staff employees of A. D.
Gothong Manufacturing Corporation;
3. Photocopy of the memorandum dated January 4, 1991 regarding the compulsory attendance
of department heads/supervisors to the regular quarterly meeting of all regular workers of A.
D. Gothong Manufacturing Corporation on January 13, 1991. Appearing therein are the
names ROMULO PLAZA and MICHAEL YAP;
4. A not-so-legible photocopy of a memorandum dated March 1, 1989 wherein the name
ROMY PLAZA is mentioned as the acting OIC of GT Marketing in Davao; and
5. Photocopy of the minutes of the regular quarterly staff meeting on August 13, 1989 at
Mandaue City wherein Michael Yap is mentioned as a shipping assistant and a newly hired
member of the staff.[1]
The Med-Arbiter declared that the challenged voters Yap and Plaza are rank-and-file employees.
Petitioner Union appealed to the Secretary of Labor insisting that Yap and Plaza are supervisor and
manager respectively of the corporation and are prohibited from joining the proposed bargaining unit of
rank-and-file employees. In an attempt to controvert the arguments of petitioner, respondent Company
stressed that Pacita Gothong is the companys corporate secretary and not Baby L. Siador, who signed the
minutes of the meeting submitted in evidence. Respondent also argued that Romulo Plaza could not
qualify as a manager of the Davao Branch the opening of which branch never materialized.
Respondent Secretary of Labor affirmed the finding of the Med-Arbiter. Motion for Reconsideration
of the above resolution having been denied, petitioner Union appeals to this Court by petition for review
on certiorari alleging the following grounds:
I. THAT THE SECRETARY OF LABOR AND EMPLOYMENT CLEARLY COMMITTED
MISAPPREHENSION OF FACTS/EVIDENCE AND IF IT WERE NOT FOR SUCH
MISAPPREHENSION IT WOULD HAVE ARRIVED AT DIFFERENT CONCLUSION
FAVORABLE TO PETITIONER.
II. THAT THE SECRETARY OF LABOR AND EMPLOYMENT ACTED WITH GRAVE
ABUSE OF DISCRETION AND CONTRARY TO LAW IN AFFIRMING IN TOTO THE
DECISION OF HONORABLE ACHILLES V. MANIT, DEPARTMENT OF LABOR AND
EMPLOYMENT, REGIONAL OFFICE No. 7, CEBU CITY IN DENYING PETITIONERS
MOTION FOR RECONSIDERATION.[2]
We find no merit in the instant petition.
The Labor Code recognizes two (2) principal groups of employees, namely, the managerial and the
rank and file groups. Article 212 (m) of the Code provides:

(m) Managerial employee is one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees. Supervisory employees are those who, in the interest of the employer, effectively recommend
such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment. All employees not falling within any of the above definitions
are considered rank-and-file employees for purposes of this Book.

Under Rule I, Section 2 (c), Book III of the Implementing Rules of the Labor Code, to be a member
of managerial staff, the following elements must concur or co-exist, to wit: (1) that his primary duty
consists of the performance of work directly related to management policies; (2) that he customarily and
regularly exercises discretion and independent judgment in the performance of his functions; (3) that he
regularly and directly assists in the management of the establishment; and (4) that he does not devote
more than twenty percent of his time to work other than those described above.
In the case of Franklin Baker Company of the Philippines vs. Trajano[3], this Court stated:

The test of supervisory or managerial status depends on whether a person possess authority to act in the
interest of his employer in the matter specified in Article 212 (k) of the Labor Code and Section 1 (m) of
its Implementing Rules and whether such authority is not merely routinary or clerical in nature, but
12
requires the use of independent judgment. Thus, where such recommendatory powers as in the case at bar,
are subject to evaluation, review and final action by the department heads and other higher executives of
the company, the same, although present, are not exercise of independent judgment as required by law.[4]

It has also been established that in the determination of whether or not certain employees are
managerial employees, this Court accords due respect and therefore sustains the findings of fact made by
quasi-judicial agencies which are supported by substantial evidence considering their expertise in their
respective fields.[5]
The petition has failed to show reversible error in the findings of the Med-Arbiter and the Secretary
of the Department of Labor.
In ruling against petitioner Union, the Med-Arbiter ruled that the petitioner Union failed to present
concrete and substantial evidence to establish the fact that challenged voters are either managerial or
supervising employees; the Med-Arbiter evaluated the evidence as follows:

The said joint affidavit of Ricardo Caete, et al. and that of Pedro Diez merely tagged the challenged voters
as supervisors, but nothing is mentioned about their respective duties, powers and prerogatives as
employees which would have indicated that they are indeed supervisory employees. There is no statement
about an instance where the challenged voters effectively recommended such managerial action which
required the use of independent judgment.

The aforementioned documents have not been properly identified which renders them inadmissible in
evidence. But, granting that they are the exact replica of a genuine and authentic original copy, there is
nothing in them which specifically and precisely tells that the challenged voters can exercise the powers
and prerogatives to effectively recommended such managerial actions which require the use of
independent judgment.[6]

In upholding the above findings, the respondent Secretary of Labor rationalized:

Based on the foregoing, Romulo Plaza and Paul Michael Yap can not qualify as managerial and
supervisory employees, respectively, because there is nothing in the documentary evidence offered by
herein petitioner-appellant showing that they are actually conferred or actually exercising the said
managerial/supervisory attributes.

In the case of Romulo Plaza, we note that indeed there is nothing in the minutes of the staff meeting held
on 05 March 1993, particularly on the report of the Sales Department, indicating that said appellee had
been exercising managerial prerogatives by hiring workers and issuing a check for the payment of rentals
of a warehouse, relative to the company branch in Davao City. The imputation on the exercise of the said
prerogative is misleading if not malicious because a plain reading of that portion of the report shows in
clear and simple language that one who made the said hiring and payment was no other than Mr. John
Chua, the Sales Manager. The only instance when the name of Romy Plaza was mentioned in the said
report was in reference to his designation as an OIC of the Davao City Branch while all the aspect of the
creation of the said branch is awaiting final approval by the Company president and general manager (p.
197, last paragraph, records). The setting up of said branch however, did not materialize, as evidenced by
the certification issued by the Revenue District Office and Office of the Mayor in Davao City (pp. 198-
199, records).

Likewise, evidence pinpointing that Paul Michael Yap is a supervisory employee is altogether
lacking. The fact that he was designated as shipping assistant/expediter is of no moment, because titles or
nomenclatures attached to the position is not controlling.
Finally, the job descriptions extant on records vividly exhibit no trace of the performance of managerial
or supervisory functions (pp. 124-126, records).[7]

In this petition, petitioner Union claims that the documentary evidence was misapprehended by
public respondent. Petitioner Union reiterates that: (1) in minutes of the staff meeting of respondent
Company on August 13, 1989, duly signed by the President Albino Gothong and attested by Jose F.
Loseo presiding officer/VP and Gertrudo Lao, Assistant General Manager, Paul Michael Yap was listed
as one of the staff; (2) in the regular quarterly meeting on January 4, 1991, the names of Yap and Plaza
are listed under the heading Department Heads/Supervisors duly signed by President/General Manager
Albino Gothong and Asst. General Manager Gertrudo Lao; and (3) in the staff meeting of March 5, 1993, 13
Plaza was assigned as officer-in-charge of the companys branch in Davao.
We find no cogent reason to disturb the finding of the Med-Arbiter and the Secretary of Labor that
the copies of the minutes presented in evidence do not prove that Yap and Plaza were managerial or
supervisory employees. We have examined the documentary evidence, and nowhere is there a statement
therein about any instance where the challenged voters effectively recommended any managerial action
which would require the use of independent judgment. The last piece of evidence was not discussed by
the Med-Arbiter; however a perusal thereof would show that while one J. Chua of the Sales Department
reported that Romy Plaza was in Davao right now acting as OIC, the same document states that the Davao
operations still had to be finalized. On the other hand, the claim of respondent Company that Plaza is the
head of the Davao branch is belied by the certification of the City Treasurer of Davao and of the Bureau
of Internal Revenue of Mandaue City that the plan to open a branch in Davao City did not materialize.[8]
The reliance of petitioner on the affidavit of Jose Loseo, Personnel Manager, that Plaza and Yap
were hired by him as department head and supervisor of the respondent Company cannot be sustained in
light of the affidavit of said Loseo dated September 28, 1993, attesting that he was forced to sign the
earlier memorandum on the job assignment of Yap and Plaza. This affidavit is sought to be discarded by
respondent Company for being perjurious and ill-motivated.[9] Petitioner Union however reiterates that
Loseos affidavit is corroborated by the other public documents indicating that Plaza and Yap are not rank-
and-file employees.[10]
The issue raised herein is basically one of fact: whether in the light of the evidence submitted by
both parties, Plaza and Yap are managerial employees or rank-and-file employees.
This Court is not a trier of facts. As earlier stated, it is not the function of this Court to examine and
evaluate the probative value of all evidence presented to the concerned tribunal which formed the basis of
its impugned decision or resolution. Following established precedents, it is inappropriate to review that
factual findings of the Med-Arbiter regarding the issue whether Romulo Plaza and Paul Michael Yap are
or are not rank-and-file employees considering that these are matters within their technical
expertise.[11] They are binding on this Court as we are satisfied that they are supported by substantial
evidence, and we find no capricious exercise of judgment warranting reversal by certiorari.
WHEREFORE, the petition is denied for lack of merit.
No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

23.

THIRD DIVISION

G.R. No. 149763 July 7, 2009

EDUARDO J. MARIÑO, JR., MA. MELVYN P. ALAMIS, NORMA P. COLLANTES, and

FERNANDO PEDROSA,Petitioners,
vs.
GIL Y. GAMILLA, RENE LUIS TADLE, NORMA S. CALAGUAS, MA. LOURDES C. MEDINA,
EDNA B. SANCHEZ, REMEDIOS GARCIA, MAFEL YSRAEL, ZAIDA GAMILLA, and
AURORA DOMINGO, Respondents.
DECISION

CHICO-NAZARIO, J.:

Assailed in this Petition for Review on Certiorari,1 under Rule 45 of the Rules of Court, are (1) the
Decision2 dated 16 March 2001 of the Court of Appeals in CA-G.R. SP No. 60657, dismissing
petitioners’ Petition for Certiorari under Rule 65 of the Rules of Court; and (2) the Resolution3 dated 30
August 2001 of the appellate court in the same case denying petitioners’ Motion for Reconsideration.

I 14
FACTS

The Petition at bar arose from the following factual and procedural antecedents.

(1) Case No. NCR-OD-M-9412-022

At the time when the numerous controversies in the instant case first came about, petitioners Atty.
Eduardo J. Mariño, Jr., Ma. Melvyn P. Alamis, Norma P. Collantes, and Fernando Pedrosa were among
the executive officers and directors (collectively called the Mariño Group) of the University of Sto.
Tomas Faculty Union (USTFU), a labor union duly organized and registered under the laws of the
Republic of the Philippines and the bargaining representative of the faculty members of the University of
Santo Tomas (UST).4

Respondents Gil Y. Gamilla, Rene Luis Tadle, Norma S. Calaguas, Ma. Lourdes C. Medina, Edna B.
Sanchez, Remedios Garcia, Mafel Ysrael, Zaida Gamilla, and Aurora Domingo were UST professors and
USTFU members.

The 1986 Collective Bargaining Agreement (CBA) between UST and USTFU expired on 31 May 1988.
Thereafter, bargaining negotiations ensued between UST and the Mariño Group, which represented
USTFU. As the parties were not able to reach an agreement despite their earnest efforts, a bargaining
deadlock was declared and USTFU filed a notice of strike. Subsequently, then Secretary of the
Department of Labor and Employment (DOLE) Franklin Drilon assumed jurisdiction over the dispute,
which was docketed as NCMB-NCR-NS-02-117-89. The DOLE Secretary issued an Order on 19 October
1990, laying the terms and conditions for a new CBA between the UST and USTFU. In accordance with
said Order, the UST and USTFU entered into a CBA in 1991, which was to be effective for the period of
1 June 1988 to 31 May 1993 (hereinafter 1988-1993 CBA). In keeping with Article 253-A5of the Labor
Code, as amended, the economic provisions of the 1988-1993 CBA were subject to renegotiation for the
fourth and fifth years.

Accordingly, on 10 September 1992, UST and USTFU executed a Memorandum of Agreement

(MOA),6 whereby UST faculty members belonging to the collective bargaining unit were granted
additional economic benefits for the fourth and fifth years of the 1988-1993 CBA, specifically, the period
from 1 June 1992 up to 31 May 1993. The relevant portions of the MOA read:

MEMORANDUM OF AGREEMENT

xxxx

1.0. The University hereby grants additional benefits to Faculty Members belonging to the
collective bargaining unit as defined in Article I, Section 1 of the Collective Bargaining
Agreement entered into between the parties herein over and above the benefits now enjoyed by
the said faculty members, which additional benefits shall amount in the aggregate to
₱42,000,000.00[.]

2.0. Under this Agreement the University shall grant salary increases, to wit:

2.1. THIRTY (₱30.00) PESOS per lecture unit per month to covered faculty members retroactive
to June 1, 1991;

2.2. Additional THIRTY (₱30.00) PESOS per lecture unit per month on top of the salary increase
granted in [paragraph] 2.1 hereof to the said faculty members effective June 1, 1992;
2.3. In the case of a covered faculty member whose compensation is computed on a basis other
than lecture unit per month, he shall receive salary increases that are equivalent to those provided
in paragraphs 2.1 and 2.2 hereof, with the amount of salary increases being arrived at by using the
usual method of computing the said faculty member’s basic pay;

3.0. The UNIVERSITY shall likewise restore to the faculty members the amounts corresponding
to the deductions in salary that were taken from the pay checks in the second half of June, 1989
and in the first half of July, 1989, provided that said deductions in salary relate to the union
activities that were held in the aforestated payroll periods, and provided further that the amounts
involved shall be taken from the ₱42 Million (sic) economic package. 15

4.0. A portion of the ₱42,000,000.00 economic package amounting to ₱2,000,000.00 shall be

used to satisfy all obligations that remained outstanding and unpaid in the May 17, 1986
Collective Bargaining Agreement.

5.0. Any unspent balance of the aggregate of ₱42,000,000.00 as of October 15, 1992, shall,
within two weeks, be remitted to the Union[:]

5.1. The unspent balance mentioned in paragraph 5.0 inclusive of earnings but exclusive of
check-offs, shall be used for the salary increases herein granted up to May 31, 1993, for increases
in hospitalization, educational and retirement benefits, and for other economic benefits.

6.0. The benefits herein granted constitute the entire and complete package of economic benefits
granted by the UNIVERSITY to the covered faculty members for the balance of the term of the
existing collective bargaining agreement.

7.0. It is clearly understood and agreed upon that the aggregate sum of ₱42 million is chargeable
against the share of the faculty members in the incremental proceeds of tuition fees collected and
still to be collected; Provided, however, that he (sic) commitment of the UNIVERSITY to pay the
aggregate sum of ₱42 million shall subsist even if the said amount exceeds the proportionate
share that may accrue to the faculty members in the tuition fee increases that the UNIVERSITY
may be authorized to collect in School-Year 1992-1993, and, Provided, finally, that the covered
faculty members shall still be entitled to their proportionate share in any undistributed portion of
the incremental proceeds of the tuition fee increases in School-Year 1992-1993, and incremental
proceeds are, by law and pertinent Department of Education Culture and Sports (DECS)
regulations, required to be allotted for the payment of salaries, wages, allowances and other
benefits of teaching and non-teaching personnel for the UNIVERSITY.

8.0. With this Agreement, the parties confirm that[:]

8.1. the University has complied with the requirements of the law relative to the release and
distribution of the incremental proceeds of tuition fee increases as these incremental proceeds
pertain to the faculty share in the tuition fee increase collected during the School-Year 1991-
1992; and,

8.2. the economic benefits herein granted constitute the full and complete financial obligation of
the UNIVERSITY to the members of its faculty for the period June 1, 1991 to May 31, 1993,
pursuant to the provisions of the existing Collective Bargaining Agreement.

9.0. Subject to the provisions of law, and without reducing the amounts of salary increases
granted under paragraphs 2.0, 2.1, 2.2 and 2.3[,] the UNION shall have the right to a pro-rata
lump sum check-off of all sums of money due and payable to it from the package of economic
benefits granted under this Agreement, provided that there is an authorization of a majority of the
members of the UNION and provided, further, that the ₱42 million economic package herein
granted shall not in any way be exceeded.

10.0. This Agreement shall be effective for a period of two (2) years, starting June 1, 1991 and
ending on May 31, 1993, provided, however, that if for any reason no new collective bargaining
agreement is entered into at the expiration date hereof, this Agreement, together with the March
18, 1991 Collective Bargaining Agreement, shall remain in full force and effect until such time as
a new collective bargaining agreement shall have been executed by the parties.
 xxxx

UNIVERSITY OF SANTO TOMAS UST FACULTY UNION

BY: BY:

(signed) (signed)
FR. TERESO M. CAMPILLO, JR., O.P. ATTY. EDUARDO J. MARINO, JR.
Treasurer President

Attested by[:] 16

(signed)
REV. FR. ROLANDO DELA ROSA, O.P. (Emphasis ours.)

On 12 September 1992, the majority of USTFU members signed individual instruments of

ratification,7 which purportedly signified their consent to the economic benefits granted under the MOA.
Said instruments uniformly recited:

RATIFICATION OF THE UST-USTFU MEMORANDUM OF AGREEMENT DATED SEPTEMBER

10, 1992 GRANTING A PACKAGE OF THE ₱42 MILLION FACULTY BENEFITS WITH
PROVISION FOR CHECK-OFF.

September 12, 1992

Date

TO WHOM IT MAY CONCERN:

I, the undersigned UST faculty member, aware that the law requires ratification and that without
ratification by majority of all faculty members belonging to the collective bargaining unit, the
Memorandum of Agreement between the University of Santo Tomas and the UST Faculty Union (or
USTFU) dated September 10, 1992 may be questioned and all the faculty benefits granted therein may be
cancelled, do hereby ratify the said agreement.

Under the Agreement, the University shall pay ₱42 million over a period of two (2) years from June 1,
1991 up to May 31, 1992.

In consideration of the efforts of the UST Faculty Union as the faculty members’ sole and exclusive
collective bargaining representative in obtaining the said ₱42 million package of economic benefits, a
check-off of ten percent thereof covering union dues, and special assessment for Labor Education Fund
and attorney’s fees from USTFU members and agency fee from non-members for the period of the
Agreement is hereby authorized to be made in one lump sum effective immediately, provided that two per
cent (sic) shall be for [the] administration of the Agreement and the balance of eight per cent (sic) shall be
for attorney’s fees to be donated, as pledged by the USTFU lawyer to the Philippine Foundation for the
Advancement of the Teaching Profession, Inc. whose principal purpose is the advancement of the
teaching profession and teacher’s welfare, and provided further that the deductions shall not be taken
from my individual monthly salary but from the total package of ₱42 million due under the Agreement.

_________________________
Signature of Faculty Member (Emphasis ours.)

USTFU, through its President, petitioner Atty. Mariño, wrote a letter8 dated 1 October 1992 to the UST
Treasurer requesting the release to the union of the sum of ₱4.2 million, which was 10% of the ₱42
million economic benefits package granted by the MOA to faculty members belonging to the collective
bargaining unit. The ₱4.2 million was sought by USTFU in consideration of its efforts in obtaining the
said ₱42 million economic benefits package. UST remitted the sum of ₱4.2 million to USTFU on 9
October 1992.9

After deducting from the ₱42 million economic benefits package the ₱4.2 million check-off to USTFU,
the amounts owed to UST, and the salary increases and bonuses of the covered faculty members, a net
amount of ₱6,389,145.04 remained. The remaining amount was distributed to the faculty members on 18
November 1994.
On 15 December 1994, respondents10 filed with the Med-Arbiter, DOLE-National Capital Region (NCR),
a Complaint for the expulsion of the Mariño Group as USTFU officers and directors, which was docketed
as Case No. NCR-OD-M-9412-022.11 Respondents alleged in their Complaint that the Mariño Group
violated the rights and conditions of membership in USTFU, particularly by: 1) investing the unspent
balance of the ₱42 million economic benefits package given by UST without prior approval of the general
membership; 2) simultaneously holding elections viva voce; 3) ratifying the CBA involving the ₱42
million economic benefits package; and 4) approving the attorney’s/agency fees worth ₱4.2 million in the
form of check-off. Respondents prayed that the Mariño Group be declared jointly and severally liable for
refunding all collected attorney’s/agency fees from individual members of USTFU and the collective
bargaining unit; and that, after due hearing, the Mariño group be expelled as USTFU officers and 17
directors.

(2) Case No. NCR-OD-M-9510-028

On 16 December 1994, UST and USTFU, represented by the Mariño Group, entered into a new CBA,
effective 1 June 1993 to 31 May 1998 (1993-1998 CBA). This new CBA was registered with the DOLE
on 20 February 1995.

Respondents12 filed with the Med-Arbiter, DOLE-NCR, on 18 October 1995, another Complaint against
the Mariño Group for violation of the rights and conditions of union membership, which was docketed as
Case No. NCR-OD-M-9510-028.13 The Complaint primarily sought to invalidate certain provisions of the
1993-1998 CBA negotiated by the Mariño Group for USTFU and the registration of said CBA with the
DOLE.

(3) Case No. NCR-OD-M-9610-001

On 24 September 1996, petitioner Norma Collantes, as USTFU Secretary-General, posted notices in some
faculty rooms at UST, informing the union members of a general assembly to be held on 5 October 1996.
Part of the agenda for said date was the election of new USTFU officers. The following day, 25
September 1996, respondents wrote a letter14 to the USTFU Committee on Elections, urging the latter to
re-schedule the elections to ensure a free, clean, honest, and orderly election and to afford the union
members the time to prepare themselves for the same. The USTFU Committee on Elections failed to act
positively on respondents’ letter, and neither did they adopt and promulgate the rules and regulations for
the conduct of the scheduled election.

Thus, on 1 October 1996, respondents15 filed with the Med-Arbiter, DOLE-NCR, an Urgent Ex-Parte
Petition/Complaint, which was docketed as Case No. NCR-OD-M-9610-001.16 Respondents alleged in
their Petition/Complaint that the general membership meeting called by the USTFU Board of Directors
on 5 October 1996, the agenda of which included the election of union officers, was in violation of the
provisions of the Constitution and By-Laws of USTFU. Respondents prayed that the DOLE supervise the
conduct of the USTFU elections, and that they be awarded attorney’s fees.

On 4 October 1996, the Med-Arbiter DOLE-NCR, issued a Temporary Restraining Order (TRO)
enjoining the holding of the USTFU elections scheduled the next day.

(4) Case No. NCR-OD-M-9610-016

Also on 4 October 1996, the UST Secretary General headed a general faculty assembly attended by
USTFU members, as well as USTFU non-members, but who were members of the collective bargaining
unit. During said assembly, respondents were among the elected officers of USTFU (collectively referred
to as the Gamilla Group). Petitioners filed with the Med-Arbiter, DOLE-NCR, a Petition seeking
injunctive reliefs and the nullification of the results of the 4 October 1994 election. The Petition was
docketed as Case No. NCR-OD-M-9610-016.

In a Decision dated 11 February 1997 in Case No. NCR-OD-M-9610-016, the Med-Arbiter DOLE-NCR,
nullified the election of the Gamilla Group as USTFU officers on 4 October 1996 for having been
conducted in violation of the Constitution and By-Laws of the union. This ruling of the Med-Arbiter was
affirmed on appeal by the Bureau of Labor Relations (BLR) in a Resolution issued on 15 August 1997.
Respondents were, thus, prompted to file a Petition for Certiorari before this Court, docketed as G.R. No.
131235.
While G.R. No. 131235 was pending, the term of office of the Gamilla Group as USTFU officers expired
on 4 October 1999. The Gamilla Group then scheduled the next election of USTFU officers on 14 January
2000.

On 16 November 1999, the Court promulgated its Decision in G.R. No. 131235, affirming the BLR
Resolution dated 15 August 1997 which ruled that the purported election of USTFU officers held on 4
October 1996 was void for violating the Constitution and By-Laws of the union.17

(5) Case No. NCR-OD-M-9611-009

18
On 15 November 1996, respondents18 filed before the Med-Arbiter, DOLE-NCR, a fourth
Complaint/Petition against the Mariño Group, as well as the Philippine Foundation for the Advancement
of the Teaching Profession, Inc., Security Bank Corporation, and Bank of the Philippine Islands, which
was docketed as Case No. NCR-OD-M-9611-009.19 Respondents claimed in their latest
Complaint/Petition that they were the legitimate USTFU officers, having been elected on 4 October 1996.
They prayed for an order directing the Mariño Group to cease and desist from using the name of USTFU
and from performing acts for and on behalf of the USTFU and the rest of the members of the collective
bargaining unit.

DOLE Department Order No. 9 took effect on 21 June 1997, amending the Rules Implementing Book V
of the Labor Code, as amended. Thereunder, jurisdiction over the complaints for any violation of the
union constitution and by-laws and the conditions of union membership was vested in the Regional
Director of the DOLE.20 Pursuant to said Department Order, all four Petitions/Complaints filed by
respondents against the Mariño Group, particularly, Case No. NCR-OD-M-9412-022, Case No. NCR-
OD-M-9510-028, Case No. NCR-OD-M-9610-001, and Case No. NCR-OD-M-9611-009 were
consolidated and indorsed to the Office of the Regional Director of the DOLE-NCR.

On 27 May 1999, the DOLE-NCR Regional Director rendered a Decision21 in the consolidated cases in
respondents’ favor.

In Case No. NCR-OD-M-9412-022 and Case No. NCR-OD-M-9510-028, the DOLE-NCR Regional
Director adjudged the Mariño Group, as the executive officers of USTFU, guilty of violating the
provisions of the USTFU Constitution and By-laws by failing to collect union dues and to conduct a
general assembly every three months. The DOLE-NCR Regional Director also ruled that the Mariño
Group violated Article 241(c)22 and (l)23 of the Labor Code when they did not submit a list of union
officers to the DOLE; when they did not submit/provide DOLE and the USTFU members with copies of
the audited financial statements of the union; and when they invested in a bank, without prior consent of
USTFU members, the sum of ₱9,766,570.01, which formed part of the ₱42 million economic benefits
package.

Additionally, the DOLE-NCR Regional Director declared that the check-off of ₱4.2 million collected by
the Mariño Group, as negotiation fees, was invalid. According to the MOA executed on 10 September
1992 by UST and USTFU, the ₱42 million economic benefits package was chargeable against the share
of the faculty members in the incremental proceeds of tuition fees collected and still to be collected.
Under Republic Act No. 6728,24 70% of the tuition fee increases should be allotted to academic and non-
academic personnel. Given that the records were silent as to how much of the ₱42 million economic
benefits package was obtained through negotiations and how much was from the statutory allotment of
70% of the tuition fee increases, the DOLE-NCR Regional Director held that the entire amount was
within the statutory allotment, which could not be the subject of negotiation and, thus, could not be
burdened by negotiation fees.

The DOLE-NCR Regional Director further found that the principal subject of Case No. NCR-OD-M-
9610-001 (i.e., violation by the Mariño Group of the provisions on election of officers in the Labor Code
and the USTFU Constitution and By-Laws) had been superseded by the central event in Case No. NCR-
OD-M-9611-009 (i.e., the subsequent election of another set of USTFU officers consisting of the Gamilla
Group). While there were two sets of USTFU officers vying for legitimacy, the eventual ruling of the
DOLE-NCR Regional Director, for the expulsion of the Mariño Group from their positions as USTFU
officers, practically extinguished Case No. NCR-OD-M-9611-009.

The decretal portion of the 27 May 1999 Decision of the DOLE-NCR Regional Director reads:
WHEREFORE, premises considered, judgment is hereby rendered:

a) Expelling [the Mariño Group] from their positions as officers of USTFU, and hereby order
them under pain of contempt, to cease and desist from performing acts as such officers;

b) Ordering [the Mariño Group] to jointly and severally refund to USTFU the amount of P4.2 M
checked-off as attorney’s fees from the P42 M economic package;

c) Ordering [the Mariño Group] to account for:

19
c.1. P2.0 M paid to USTFU in satisfaction of the remaining obligation of the University
under the 1986 CBA;

c.2. P7.0 M as consideration of the Compromise Agreement entered into by USTFU

involving certain labor cases;

c.3. Interest/earnings of the P9,766,570.01 balance of the P42 M invested/deposited by

[the Mariño Group] with the PCI Capital Corporation.

d) Ordering conduct of election of Union officers under the supervision of this Department. 25

Petitioners interposed an appeal26 before the BLR, which was docketed as BLR-A-TR-52-25-10-99.

In the meantime, the election of USTFU officers was held as scheduled on 14 January 2000, 27 in which
the Gamilla Group claimed victory.28 On 3 March 2000, the Gamilla group, as the new USTFU officers,
entered into a Memorandum of Agreement29 with the UST, which provided for the economic benefits to
be granted to the faculty members of the UST for the years 1999-2001. Said Agreement was ratified by
the USTFU members on 9 March 2000.

On the same day, 9 March 2000, the BLR promulgated its Decision30 in BLR-A-TR-52-25-10-99, the
fallo of which provides:

WHEREFORE, the appeal is GRANTED IN PART. Accordingly, the decision appealed from is hereby
MODIFIED to the effect that appellant USTFU officers are hereby ordered to return to the general
membership the amount of P4.2 million they have collected by way of attorney’s fees.

Let the entire records of this case be remanded to the Regional Office of origin for the immediate conduct
of election of officers of USTFU. The election shall be held under the control and supervision of the
Regional Office, in accordance with Section 1 (b), Rule XV of Department Order No. 9, unless the parties
mutually agree to a different procedure consistent with ensuring integrity and fairness in the electoral
exercise.

The BLR found no basis for the order of the DOLE-NCR Regional Director to the Mariño Group to
account for the amounts of ₱2 million and ₱7 million supposedly paid by UST to USTFU. The BLR
clarified that UST paid USTFU a lump sum of ₱7 million. The ₱2 million of this lump sum was the
payment by UST of its outstanding obligations to USTFU under the 1986 CBA. This amount was
subsequently donated by USTFU members to the Philippine Foundation for the Advancement of the
Teaching Profession, Inc. The remaining ₱5 million of the lump sum was the consideration for the
settlement of an illegal dismissal case between UST and the Mariño Group. Hence, the ₱5 million legally
belonged to the Mariño Group, and there was no need to make it account for the same. As to the interest
earnings of the sum of ₱9,766,570.01 that was invested by the Mariño Group in a bank, the BLR ruled
that the same was included in the amount of ₱6,389,145.04 that was distributed to the faculty members on
18 November 1994.

The BLR, however, agreed in the finding of the DOLE-NCR Regional Director that the ₱42 million
economic benefits package was sourced from the faculty members’ share in the tuition fee increases
under Republic Act No. 6728. Under said law, 70% of tuition fee increases shall go to the payment of
salaries, wages, allowances, and other benefits of teaching and non-teaching personnel. As was held in the
decision31 and subsequent resolution32 of the Supreme Court in Cebu Institute of Technology v. Ople, the
law has already provided for the minimum percentage of tuition fee increases to be allotted for teachers
and other school personnel. This allotment is mandatory and cannot be diminished, although it may be
increased by collective bargaining. It follows that only the amount beyond that mandated by law shall be
subject to negotiation fees and attorney's fees for the simple reason that it was only this amount that the
school employees had to bargain for.

The BLR further reasoned that the ₱4.2 million collected by the Mariño Group was in the nature of
attorney’s fees or negotiation fees and, therefore, fell under the general prohibition against such fees in
Article 222(b)33 of the Labor Code, as amended. Also, the exception to charging against union funds was
not applicable because the ₱42 million economic benefits package under the 10 September 1992 MOA
was not union fund, as the same was intended not for the union coffers, but for the members of the entire
bargaining unit. The fact that the ₱4.2 million check-off was approved by the majority of USTFU 20
members was immaterial in view of the clear command of Article 222(b) that any contract, agreement, or
arrangement of any sort, contrary to the prohibition contained therein, shall be null and void.

Lastly, as to the alleged failure of the Mariño Group to perform some of its duties, the BLR held that the
change of USTFU officers can best be decided, not by outright expulsion, but by the general membership
through the actual conduct of elections.

Petitioners’ Motion for Partial Reconsideration34 of the foregoing Decision was denied by the BLR in a
Resolution35dated 13 June 2000.

Aggrieved once again, petitioners filed with the Court of Appeals a Petition for Certiorari36 under Rule 65
of the Rules of Court, which was docketed as CA-G.R. SP No. 60657. In a Resolution dated 26
September 2000, the Court of Appeals directed respondents to file their Comment; and, in order not to
render moot and academic the issues in the Petition, enjoined respondents and all those acting for and on
their behalf from enforcing, implementing, and effecting the BLR Decision dated 9 March 2000.

On 16 March 2001, the Court of Appeals rendered its Decision in CA-G.R. SP No. 60657, favoring
respondents.

According to the Court of Appeals, the BLR did not commit grave abuse of discretion, amounting to lack
or excess of jurisdiction, in ruling that the ₱42 million economic benefits package was merely the share of
the faculty members in the tuition fee increases pursuant to Republic Act No. 6728. The appellate court
explained:

It is too plain to see that the 60% of the proceeds is to be allocated specifically for increase in salaries or
wages of the members of the faculty and all other employees of the school concerned. Under Section 5(2)
of Republic Act 6728, the amount had been increased to 70% of the tuition fee increases which was
specifically allocated to the payment of salaries, wages, allowances and other benefits of teaching and
non-teaching personnel of the school[,] except administrators who are principal stockholders of the school
and to cover increases as provided for in the collective bargaining agreements existing or in force at the
time the law became effective[.]

xxxx

It is too plain to see, too, that under the "Memorandum of Agreement" between UST and the Union, x x x,
the ₱42,000,000.00 economic package granted by the UST to the Union was in compliance with the
mandates of the law and pertinent Department of Education, Culture and Sports regulation (sic) required
to be allotted following the payment of salaries, wages, allowances and other benefits of teaching and
non-teaching personnel of the University[.]

xxxx

Whether or not UST implemented the mandate of Republic Act 6728 voluntarily or through the efforts
and prodding of the Union does not and cannot change or alter a whit the nature of the economic package
or the purpose or purposes of the allocation of the said amount. For, if we acquiesced to and sustained
Petitioners’ stance, we will thereby be leaving the compliance by the private educational institutions of
the mandate of Republic Act 6728 at the will, mercy, whims and caprices of the Union and the private
educational institution. This cannot and should not come to pass.

With our foregoing findings and disquisitions, We thus agree with the [BLR] that the aforesaid amount of
₱42,000,000.00 should not answer for any attorney’s fees claimed by the Petitioners. x x x.
xxxx

Moreover, [Section 5 of Rule X of] the CBL of the Union provides that:

Section 5. Special assessments or other extraordinary fees such as for payment of attorney’s fees shall be
made only upon such a resolution duly ratified by the general membership by secret balloting. x x x.

Also, Article 241(n)37 of the Labor Code, as amended, provides that no special assessment shall be levied
upon the members of the union unless authorized by a written resolution of a majority of all the members
at a general membership meeting duly called for the purpose[.] 21

xxxx

In "ABS-CBN Supervisors-Employees Union Members versus ABS-CBN Broadcasting Corporation, 304

SCRA 489", our Supreme Court declared that Article 241(n) of the Labor Code, as amended, speaks of
three (3) requisites, to wit: (1) authorization by a written resolution of the majority of all members at the
general membership meeting called for the purpose; (2) secretary’s record of the minutes of the meeting;
and (3) individual written authorization for check-off duly signed by the employee concerned.

Contrary to the provisions of Articles 222(b) and 241(n) of the Labor Code, as amended, and Section 5,
Rule X of [the] CBL of the Union, no resolution ratified by the general membership of [the] USTFU
through secret balloting which embodied the award of attorney’s fees was submitted. Instead, the
Petitioners submitted copies of the form for the ratification of the MOA and the check-off for attorney’s
fees.

xxxx

The aforementioned "ratification with check-off" form embodied the: (a) ratification of the MOA; (b)
check-off of union dues; and (c) check-off of a special assessment, i.e., attorney’s fees and labor
education fund. x x x. Patently, the CBL was not complied with.

Worse, the check-off for union dues and attorney’s fees were included in the ratification of the MOA. The
members were thus placed in a situation where, upon ratification of the MOA, not only the check-off of
union dues and special assessment for labor education fund but also the payment of attorney’s fees were
(sic) authorized.38

In like manner, the Court of Appeals found no grave abuse of discretion, amounting to lack or excess of
jurisdiction, on the part of the BLR in ordering the conduct of elections under the control and supervision
of the DOLE-NCR. Said the appellate court:

We agree with the Petitioners that the elections of officers of the Union, before the Decision of the [BLR],
had been unfettered by any intervention of the DOLE. However, We agree with the Decision of the
[BLR] for two (2) specific reasons, namely: (a) the parties are given an opportunity to first agree on a
different procedure to ensure the integrity and fairness of the electoral exercise, before the DOLE, may
supervise the election[.]

xxxx

Under Article IX of the CBL, the Board of Officers of the Union shall create a Committee on
Elections, Comelec for brevity, composed of a chairman and two (2) members appointed by the Board of
Officers[.]

xxxx

It, however, appears that the term of office of the Petitioners had already expired in September of 1996. In
fact, an election of officers was scheduled on October 6, 1996. However, on October 4, 1996,
[respondents] and the members of the faculty of UST, both union member and non-union member,
elected [respondents] as the new officers of the USTFU. The same was, however, (sic) nullified by the
Supreme Court, on November 16, 1999. However, as the term of office of the [respondents] had expired,
on October 4, 1999, there is nothing to nullify anymore. By virtue of an election, held on January 14,
2000, the [respondents] were elected as the new officers of the Union, which election was not contested
by the Petitioners or any other group in the union.

xxxx

We are thus faced with a situation where one set of officers claim to be the legitimate and incumbent
officers of the Union, pursuant to the CBL of the Union, and another set of officers who claim to have
been elected by the members of the faculty of the Union thru an election alleged to have been supervised
by the DOLE which situation partakes of and is akin to the nature of an intra-union dispute[.] x x x.
22
Undeniably, the CBL gives the Board of Officers the right to create and appoint members of the Comelec.
However, the CBL has no application to a situation where there are two (2) sets of officers, one set
claiming to be the legitimate incumbent officers holding over to their positions who have not exercised
their powers and functions therefor and another claiming to have been elected in an election supervised by
the DOLE and, at the same time, exercising the powers and functions appended to their positions. In such
a case, the BLR, which has jurisdiction over the intra-union dispute, can validly order the immediate
conduct of election of officers, otherwise, internecine disputes and blame-throwing will derail an orderly
and fair election. Indeed, Section 1(b), [Rule XV], Book V of the Implementing Rules and Regulations of
the Labor Code, as amended, by Department Order No. 09, Series of 1997,39 provides that, in the absence
of any agreement among the members or any provision in the constitution and by-laws of the labor
organization, in an election ordered by the Regional Director, the chairman of the committee shall be a
representative of the Labor Relations Division of the Regional Office[.]40

Ultimately, the Court of Appeals decreed:

IN THE LIGHT OF ALL THE FOREGOING, the Petition is denied due course and is
hereby DISMISSED.41

Petitioners moved for reconsideration42 of the Decision dated 16 March 2001 of the Court of Appeals, but
it was denied by the said court in its Resolution43 dated 30 August 2001.

Petitioners elevated the case to this Court via the instant Petition, invoking the following assignment of
errors:

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR

AND GRAVELY ABUSED ITS DISCRETION WHEN IT UPHELD THE APPLICATION BY THE
HONORABLE DIRECTOR OF THE BUREAU OF LABOR RELATIONS OF THE PROVISIONS OF
REPUBLIC ACT NO. 6728 TO THE P42 MILLION CBA PACKAGE OF ECONOMIC BENEFITS
OBTAINED BY THE UST FACULTY UNION FROM THE UNIVERSITY OF SANTO TOMAS.

II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR

AND GRAVELY ABUSED ITS DISCRETION WHEN IT DISALLOWED THE LUMP-SUM CHECK-
OFF AMOUNTING TO P4.2 MILLION BY RULING THAT THE P42 MILLION CBA ECONOMIC
PACKAGE OBTAINED BY THE UST FACULTY UNION WAS MERELY AN ALLOCATION OF
THE SEVENTY PER CENT (70%) OF THE TUITION INCREASES AUTHORIZED BY LAW AND
THE DEPARTMENT OF EDUCATION, CULTURE AND SPORTS.

III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ERROR

AND GRAVELY ABUSED ITS DISCRETION WHEN IT DISREGARDED THE PROVISIONS ON
ELECTION OF UNION OFFICERS IN THE CONSTITUTION AND BY-LAWS OF THE UST
FACULTY UNION AND INSTEAD UPHELD THE DIRECTIVE OF THE HONORABLE DIRECTOR
OF THE BUREAU OF LABOR RELATIONS TO CONDUCT THE ELECTION OF UNION
OFFICERS UNDER THE CONTROL AND SUPERVISION OF THE REGIONAL DIRECTOR FOR
THE NATIONAL CAPITAL REGION OF THE DEPARTMENT OF LABOR AND EMPLOYMENT.
Essentially, in order to arrive at a final disposition of the instant case, this Court is tasked to determine the
following: (1) the nature of the ₱42 million economic benefits package granted by UST to USTFU; (2)
the legality of the 10% check-off collected by the Mariño Group from the ₱42 million economic benefits
package; and (3) the validity of the BLR order for USTFU to conduct election of union officers under the
control and supervision of the DOLE-NCR Regional Director.

II
RULING

(1) The ₱42 million economic benefits package 23

Petitioners argue that the ₱42 million economic benefits package granted to the covered faculty members
were additional benefits, which resulted from a long and arduous process of negotiations between the
Mariño Group and UST. The BLR and the Court of Appeals were in error for considering the said amount
as purely sourced from the allocation by UST of 70% percent of the incremental proceeds of tuition fee
increases, in accordance with Republic Act No. 6728. Said law was improperly applied as a general law
that decrees the allocation by all private schools of 70% of their tuition fee increases to the payment of
salaries, wages, allowances and other benefits of their teaching & non-teaching personnel. It is clear from
the title of the law itself that it only covers government assistance to students and teachers in private
education. Section 5 of Republic Act No. 6728 unequivocally limits the scope of the law to tuition fee
supplements and subsidies extended by the Government to students in private high schools. Thus, the
petitioners maintain that Republic Act No. 6728 has no application to the MOA executed on 10
September 1992 between UST and USTFU, through the efforts of the Mariño Group.

The Court disagrees with petitioners’ stance.

The provisions of Republic Act No. 6728 were not arbitrarily applied by the DOLE-NCR Regional
Director, the BLR, or the Court of Appeals to the ₱42 million economic benefits package granted by UST
to USTFU, considering that the parties themselves stipulated in Section 7 of the MOA they signed on 10
September 1992 that:

7.0. It is clearly understood and agreed upon that the aggregate sum of ₱42 million is chargeable against
the share of the faculty members in the incremental proceeds of tuition fees collected and still to be
collected[;] Provided, however, that he (sic) commitment of the UNIVERSITY to pay the aggregate sum
of ₱42 million shall subsist even if the said amount exceeds the proportionate share that may accrue to the
faculty members in the tuition fee increases that the UNIVERSITY may be authorized to collect in
School–Year 1992-1993, and, Provided, finally, that the covered faculty members shall still be entitled to
their proportionate share in any undistributed portion of the incremental proceeds of the tuition fee
increases in School-Year 1992-1993, and which incremental proceeds are, by law and pertinent
Department of Education Culture and Sports (DECS) regulations, required to be allotted for the payment
of salaries, wages, allowances and other benefits of teaching and non-teaching personnel for the
UNIVERSITY.44 (Emphases supplied.)

The "law" in the aforequoted Section 7 of the MOA can only refer to Republic Act No. 6728, otherwise
known as the "Government Assistance to Students and Teachers in Private Education Act." Republic Act
No. 6728 was enacted in view of the declared policy of the State, in conformity with the mandate of the
Constitution, to promote and make quality education accessible to all Filipino citizens, as well as the
recognition of the State of the complementary roles of public and private educational institutions in the
educational system and the invaluable contribution that the private schools have made and will make to
education.45 The said statute primarily grants various forms of financial aid to private educational
institutions such as tuition fee supplements, assistance funds, and scholarship grants.46

One such form of financial aid is provided under Section 5 of Republic Act No. 6728, which states:

SEC. 5. Tuition Fee Supplement for Student in Private High School. –

(1) Financial assistance for tuition for students in private high schools shall be provided by the
government through a voucher system in the following manner:

(a) For students enrolled in schools charging less than one thousand five hundred pesos
(₱1,500) per year in tuition and other fees during school year 1988-89 or such amount in
 subsequent years as may be determined from time to time by the State Assistance
Council: The Government shall provide them with a voucher equal to two hundred ninety
pesos ₱290.00: Provided, That the student pays in the 1989-1990 school year, tuition and
other fees equal to the tuition and other fees paid during the preceding academic
year: Provided, further, That the Government shall reimburse the vouchers from the
schools concerned within sixty (60) days from the close of the registration
period: Provided, furthermore, That the student's family resides in the same city or
province in which the high school is located unless the student has been enrolled in that
school during the previous academic year.
24
(b) For students enrolled in schools charging above one thousand five hundred pesos
(₱1,500) per year in tuition and other fees during the school year 1988-1989 or such
amount in subsequent years as may be determined from time to time by the State
Assistance Council, no assistance for tuition fees shall be granted by the
Government: Provided, however, That the schools concerned may raise their tuition fee
subject to Section 10 hereof.

(2) Assistance under paragraph (1), subparagraphs (a) and (b) shall be granted and tuition fees
under subparagraph (c) may be increased, on the condition that seventy percent (70%) of the
amount subsidized, allotted for tuition fee or of the tuition fee increases shall go to the payment of
salaries, wages, allowances and other benefits of teaching and non-teaching personnel except
administrators who are principal stockholders of the school, and may be used to cover increases
as provided for in the collective bargaining agreements existing or in force at the time when this
Act is approved and made effective: Provided, That government subsidies are not used directly
for salaries of teachers of nonsecular subjects. At least twenty percent (20%) shall go to the
improvement or modernization of buildings, equipment, libraries, laboratories, gymnasia and
similar facilities and to the payment of other costs of operation. For this purpose, schools shall
maintain a separate record of accounts for all assistance received from the government, any
tuition fee increase, and the detailed disposition and use thereof, which record shall be made
available for periodic inspection as may be determined by the State Assistance Council, during
business hours, by the faculty, the non-teaching personnel, students of the school concerned, and
Department of Education, Culture and Sports and other concerned government agencies.
(Emphases ours.)

Although Section 5 of Republic Act No. 6728 does speak of government assistance to students in private
high schools, it is not limited to the same. Contrary to petitioners’ puerile claim, Section 5 likewise grants
an unmistakable authority to private high schools to increase their tuition fees, subject to the condition
that seventy (70%) percent of the tuition fee increases shall go to the payment of the salaries, wages,
allowances, and other benefits of their teaching and non-teaching personnel. The said allocation may also
be used to cover increases in the salaries, wages, allowances, and other benefits of school employees as
provided for in the CBAs existing or in force at the time when Republic Act No. 6728 was approved and
made effective.

Contrary to petitioners’ argument, the right of private schools to increase their tuition fee -- with their
corresponding obligation to allocate 70% of said increase to the payment of the salaries, wages,
allowances, and other benefits of their employees -- is not limited to private high schools. Section 947 of
Republic Act No. 6728, on "Further Assistance to Students in Private Colleges and Universities," is
crystal clear in providing that:

d) Government assistance and tuition increases as described in this Section shall be governed by the same
conditions as provided under Section 5 (2).

Indeed, a private educational institution under Republic Act No. 6728 still has the discretion on the
disposition of 70% of the tuition fee increase. It enjoys the privilege of determining how much increase in
salaries to grant and the kind and amount of allowances and other benefits to give. The only precondition
is that 70% percent of the incremental tuition fee increase goes to the payment of salaries, wages,
allowances and other benefits of teaching and non-teaching personnel.48

In this case, UST and USTFU stipulated in their 10 September 1992 MOA that the ₱42 million economic
benefits package granted by UST to the members of the collective bargaining unit represented by USTFU,
was chargeable against the 70% allotment from the proceeds of the tuition fee increases collected and still
to be collected by UST. As observed by the DOLE-NCR Regional Director, and affirmed by both the
BLR and the Court of Appeals, there is no showing that any portion of the ₱42 million economic benefits
package was derived from sources other than the 70% allotment from tuition fee increases of UST.

Given the lack of evidence to the contrary, it can be conclusively presumed that the entire ₱42 million
economic benefits package extended to USTFU came from the 70% allotment from tuition fee increases
of UST. Preceding from this presumption, any deduction from the ₱42 million economic benefits
package, such as the ₱4.2 million claimed by the Mariño Group as attorney’s/agency fees, should not be
allowed, because it would ultimately result in the reduction of the statutorily mandated 70% allotment
from the tuition fee increases of UST. 25

The other reasons for disallowing the ₱4.2 million attorney’s/agency fees collected by the Mariño Group
from the ₱42 million economic benefits package are discussed in the immediately succeeding paragraphs.

(2) The ₱4.2 Million Check-off

Petitioners contend that the ₱4.2 million check-off, from the ₱42 million economic benefits package, was
lawfully made since the requirements of Article 222(b) of the Labor Code, as amended, were complied
with by the Mariño Group. The individual paychecks of the covered faculty employees were not reduced
and the ₱4.2 million deducted from the ₱42 million economic benefits package became union funds,
which were then used to pay attorney’s fees, negotiation fees, and similar charges arising from the CBA.
In addition, the ₱4.2 million constituted a special assessment upon the USTFU members, the
requirements for which were properly observed. The special assessment was authorized in writing by the
general membership of USTFU during a meeting in which it was included as an item in the agenda.
Petitioners fault the Court of Appeals for disregarding the authorization of the special assessment by
USTFU members. There is no law that prohibits the insertion of a written authorization for the special
assessment in the same instrument for the ratification of the 10 September 1992 MOA. Neither is there a
law prescribing a particular form that needs to be accomplished for the authorization of the special
assessment. The faculty members who signed the ratification of the MOA, which included the
authorization for the special assessment, have high educational attainment, and there is ample reason to
believe that they affixed their signatures thereto with full comprehension of what they were doing.

Again, the Court is not persuaded.

The pertinent legal provisions on a check-off are found in Articles 222(b) and 241(n) and (o) of the Labor
Code, as amended.

Article 222(b) states:

(b) No attorney's fees, negotiation fees or similar charges of any kind arising from any collective
bargaining negotiations or conclusion of the collective agreement shall be imposed on any individual
member of the contracting union: Provided, however, that attorney's fees may be charged against unions
funds in an amount to be agreed upon by the parties. Any contract, agreement or arrangement of any sort
to the contrary shall be null and void.

Article 241(n) reads:

(n) No special assessment or other extraordinary fees may be levied upon the members of a labor
organization unless authorized by a written resolution of a majority of all the members at a general
membership meeting duly called for the purpose. The secretary of the organization shall record the
minutes of the meeting including the list of all members present, the votes cast, the purpose of the special
assessment or fees and the recipient of such assessment or fees. The record shall be attested to by the
president.

And Article 241(o) provides:

(o) Other than for mandatory activities under the Code, no special assessments, attorney's fees,
negotiation fees or any other extraordinary fees may be checked off from any amount due to an employee
without an individual written authorization duly signed by the employee. The authorization should
specifically state the amount, purpose and beneficiary of the deduction.
Article 222(b) of the Labor Code, as amended, prohibits the payment of attorney's fees only when it is
effected through forced contributions from the employees from their own funds as distinguished from
union funds.49 Hence, the general rule is that attorney’s fees, negotiation fees, and other similar charges
may only be collected from union funds, not from the amounts that pertain to individual union members.
As an exception to the general rule, special assessments or other extraordinary fees may be levied upon or
checked off from any amount due an employee for as long as there is proper authorization by the
employee.

A check-off is a process or device whereby the employer, on agreement with the Union, recognized as the
proper bargaining representative, or on prior authorization from the employees, deducts union dues or 26
agency fees from the latter's wages and remits them directly to the Union. Its desirability in a labor
organization is quite evident. The Union is assured thereby of continuous funding. As this Court has
acknowledged, the system of check-off is primarily for the benefit of the Union and, only indirectly, for
the individual employees.50

The Court finds that, in the instant case, the ₱42 million economic benefits package granted by UST did
not constitute union funds from whence the ₱4.2 million could have been validly deducted as attorney’s
fees. The ₱42 million economic benefits package was not intended for the USTFU coffers, but for all the
members of the bargaining unit USTFU represented, whether members or non-members of the union. A
close reading of the terms of the MOA reveals that after the satisfaction of the outstanding obligations of
UST under the 1986 CBA, the balance of the ₱42 million was to be distributed to the covered faculty
members of the collective bargaining unit in the form of salary increases, returns on paycheck deductions;
and increases in hospitalization, educational, and retirement benefits, and other economic benefits. The
deduction of the ₱4.2 million, as alleged attorney’s/agency fees, from the ₱42 million economic benefits
package effectively decreased the share from said package accruing to each member of the collective
bargaining unit.

Petitioners’ line of argument – that the amount of ₱4.2 million became union funds after its deduction
from the ₱42 million economic benefits package and, thus, could already be used to pay attorney’s fees,
negotiation fees, or similar charges from the CBA – is absurd. Petitioners’ reasoning is evidently flawed
since the attorney’s fees may only be paid from union funds; yet the amount to be used in paying for the
same does not become union funds until it is actually deducted as attorney’s fees from the benefits
awarded to the employees. It is just a roundabout argument. What the law requires is that the funds be
already deemed union funds even before the attorney’s fees are deducted or paid therefrom; it does not
become union funds after the deduction or payment. To rule otherwise will also render the general
prohibition stated in Article 222(b) nugatory, because all that the union needs to do is to deduct from the
total benefits awarded to the employees the amount intended for attorney’s fees and, thus, "convert" the
latter to union funds, which could then be used to pay for the said attorney’s fees.

The Court further determines that the requisites for a valid levy and check-off of special assessments, laid
down by Article 241(n) and (o), respectively, of the Labor Code, as amended, have not been complied
with in the case at bar. To recall, these requisites are: (1) an authorization by a written resolution of the
majority of all the union members at the general membership meeting duly called for the purpose; (2)
secretary's record of the minutes of the meeting; and (3) individual written authorization for check-off
duly signed by the employee concerned.51

Additionally, Section 5, Rule X of the USTFU Constitution and By-Laws mandates that:

Section 5. Special assessments or other extraordinary fees such as for payment of attorney’s fees shall be
made only upon a resolution duly ratified by the general membership by secret balloting.

In an attempt to comply with the foregoing requirements, the Mariño Group caused the majority of the
general membership of USTFU to individually sign a document, which embodied the ratification of the
MOA between UST and USTFU, dated 10 September 1992, as well as the authorization for the check-off
of ₱4.2 million, from the ₱42 million economic benefits package, as payment for attorney’s fees. As held
by the Court of Appeals, however, the said documents constitute unsatisfactory compliance with the
requisites set forth in the Labor Code, as amended, and in the USTFU Constitution and By-Laws, even
though individually signed by a majority of USTFU members.1avvphi1

The inclusion of the authorization for a check-off of union dues and special assessments for the Labor
Education Fund and attorney’s fees, in the same document for the ratification of the 10 September 1992
MOA granting the ₱42 million economic benefits package, necessarily vitiated the consent of USTFU
members. For sure, it is fairly reasonable to assume that no individual member of USTFU would casually
turn down the substantial and lucrative award of ₱42 million in economic benefits under the MOA.
However, there was no way for any individual union member to separate his or her consent to the
ratification of the MOA from his or her authorization of the check-off of union dues and special
assessments. As it were, the ratification of the MOA carried with it the automatic authorization of the
check-off of union dues and special assessments in favor of the union. Such a situation militated against
the legitimacy of the authorization for the ₱4.2 million check-off by a majority of USTFU membership.
Although the law does not prescribe a particular form for the written authorization for the levy or check-
off of special assessments, the authorization must, at the very least, embody the genuine consent of the 27
union member.

The failure of the Mariño Group to strictly comply with the requirements set forth by the Labor Code, as
amended, and the USTFU Constitution and By-Laws, invalidates the questioned special assessment.
Substantial compliance is not enough in view of the fact that the special assessment will diminish the
compensation of the union members. Their express consent is required, and this consent must be obtained
in accordance with the steps outlined by law, which must be followed to the letter. No shortcuts are
allowed.52

Viewed in this light, the Court does not hesitate to declare as illegal the check-off of ₱4.2 million, from
the ₱42 million economic benefits package, for union dues and special assessments for the Labor
Education Fund and attorney’s fees. Said amount rightfully belongs to and should be returned by
petitioners to the intended beneficiaries thereof, i.e., members of the collective bargaining unit, whether
or not members of USTFU. This directive is without prejudice to the right of petitioners to seek
reimbursement from the other USTFU officers and directors, who were part of the Mariño Group, and
who were equally responsible for the illegal check-off of the aforesaid amount.

(3) Election of new officers

Having been overtaken by subsequent events, the Court need no longer pass upon the issue of the validity
of the order of BLR for USTFU to conduct its long overdue election of union officers, under the control
and supervision of the DOLE-NCR Regional Director.

The BLR issued such an order since USTFU then had two groups, namely, the Mariño Group and the
Gamilla Group, each claiming to be the legitimate officers of USTFU.

The DOLE-NCR Regional Director, in his Decision dated 27 May 1999, decreed that the Mariño Group
be expelled from their positions as USTFU officers. But then, the BLR, in its Decision promulgated on 9
March 2000, declared that the change of officers could best be decided, not by expulsion, but by the
general membership of the union through the conduct of election, under the control and supervision of the
DOLE-NCR Regional Director. In its assailed Decision dated 16 March 2001, the Court of Appeals
agreed with the BLR judgment in its ruling that the conduct of an election, under the control and
supervision of the DOLE-NCR Regional Director, is necessary to settle the question of who, as between
the officers of the Mariño Group and of the Gamilla Group, are the legitimate officers of the USTFU.

The Court points out, however, that neither the Decision of the BLR nor of the Court of Appeals took into
account the fact that an election of USTFU officers was already conducted on 14 January 2000, which
was won by the Gamilla Group. There is nothing in the records to show that the said election was
contested or made the subject of litigation. The Gamilla Group had exercised their powers as USTFU
officers during their elected term. Since the term of union officers under the USTFU Constitution and By-
Laws was only for three years, then the term of the Gamilla Group already expired in 2003. It is already
beyond the jurisdiction of this Court, in the present Petition, to still look into the subsequent elections of
union officers held after 2003.

The election of the Gamilla Group as union officers in 2000 should have already been recognized by the
BLR and the Court of Appeals. The order for USTFU to conduct another election was only a superfluity.
The issue of who between the officers of the Mariño Group and of the Gamilla Group are the legitimate
USTFU officers has been rendered moot by the succeeding events in the case.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is
hereby DENIED. The Decision dated 16 March 2001 and the Resolution dated 30 August 2001 of the
Court of Appeals in CA-G.R. SP No. 60657, are hereby AFFIRMED WITH MODIFICATIONS.
Petitioners are hereby ORDERED to reimburse, jointly and severally, to the faculty members of the
University of Sto. Tomas, belonging to the collective bargaining unit, the amount of ₱4.2 million
checked-off as union dues and special assessments for the Labor Education Fund and attorney’s fees, with
legal interest of 6% per annum from 15 December 1994, until the finality of this decision. The order for
the conduct of election for the officers of the University of Sto. Tomas Faculty Union, under the control
and supervision of the Regional Director of the Department of Labor and Employment-National Capital
Region, is hereby DELETED. No costs.

SO ORDERED. 28

22.

FIRST DIVISION
[G.R. No. 129175. November 19, 2001]
RUBEN N. BARRAMEDA, ELVIS L. ESPIRITU, MERARDO G. ENERO, JR., MARCELITO B.
ABBAS and REYNALDO V. ABUNDO, petitioners, vs. ROMEO ATIENZA, EDGARDO
DASCO, BERNARDO DIEZMO, JESUS FERNANDEZ, MILAGROS ESTRELLADO,
ARTEMIO INDIAS, RAUL CARRANCEJA, MARY ANN ASOR and ANTONIO
OBIAS, respondents.

DECISION
PARDO, J.:

The key issue is whether or not petitioners are the rightful directors of Camarines Norte Electric
Cooperative (CANORECO) as against respondents, who were elected in a general assembly of members
called by a presidential ad hoc committee.
CANORECO is an electric cooperative organized under the provisions of P. D. No. 269, otherwise
known as the National Electrification Administration Decree, as amended by P. D. No. 1645. On July 10,
1996, the Cooperative Development Authority (CDA) certified that CANORECO is registered as a full-
fledged cooperative under R. A. No. 6938.
On March 1, 1988, the National Electrification Administration (NEA) and CANORECO entered into
a Contract of Loan[1] and First Mortgage[2] of CANORECO properties for the improvement of the
cooperatives electrification program. One provision in the loan agreement is embodied in Article VI,
Section 2, which provides:

Section 2. In the event of default, the NEA may, in addition to the rights, privileges, powers and remedies
granted to it under Presidential Decree No. 269 and other pertinent laws, exercise any or all of the
following remedies.

a. xxx

b. xxx

c. Assign or appoint a Project Supervisor and/or General Manager

d. Take over the construction, operation, management and control of the SYSTEM

e. Take any other lawful remedial measure

On March 10, 1990, Congress enacted into law Republic Act No. 6938 (the Cooperative Code of the
Philippines) and Republic Act No. 6939 (creating the Cooperative Development Authority [CDA]). The
latter act vested the power to register cooperatives solely on CDA.
One of the signatories to the loan contract was petitioner Reynaldo V. Abundo, the general manager
of CANORECO at that time.
 During Abundos incumbency, he failed to pay the loan obligations as they fell due. Thus, as of
March 31, 1995, CANORECOs outstanding loan with NEA amounted to seventy four (74) million
pesos.[3]
In 1995, NEA enforced the provisions of the mortgage contract by designating an acting general
manager of CANORECO to protect state funds invested therein.
On May 28, 1995, during the annual general membership assembly of CANORECO, the members
elected a new set of members of the board of directors.[4] Thereafter, NEA appointed a new general
manager, Felix Rolando G. Zaldua, and declared former manager Reynaldo V. Abundo as pesona non
grata. 29

Shortly, the group of Reynaldo V. Abundo contested the authority of NEA to supervise and control
CANORECO, filing with CDA several cases, including CDA-CO Case No. 95-910.
On February 15, 1996, CDA declared the board meeting of May 28, 1995, void ab initio because
there was no quorum considering that there were only three (3) incumbent board members who were
present. Thus, the resolutions issued during the meeting were all declared null and void. The CDA ruled:

WHEREFORE, premises considered, the Board Meeting of May 28, 1995, participated by respondents,
and all the Resolutions issued on such occasions, are hereby declared NULL AND VOID AB INITIO.

Likewise, the election of respondents Norberto Ochoa, Antonio Obias, Felicito Ilan, and Luis Pascua, as
President, Vice-President, Secretary, and Treasurer, respectively, of CANORECO is hereby declared
NULL AND VOID AB INITIO.

Hence, respondents Norberto Ochoa, Antonio Obias, Felicito Ilan, and Luis Pascua are hereby ordered to
refrain from representing themselves as President, Vice-President, Secretary, and Treasurer, respectively,
of CANORECO. The same respondents are further ordered to refrain from acting as authorized
signatories to the bank accounts of CANORECO.

Further respondent Felicito Ilan is hereby ordered to refrain from exercising the duties and functions of a
member of the Board of CANORECO until the election protest is resolved in a proper forum. In the
meantime, the incumbency of petitioner Merardo Enero, Jr. as Director of CANORECO Board is hereby
recognized.

A status quo is hereby ordered as regards the position of General Manager, being held by Mr. Reynaldo
Abundo, considering that the recall of his appointment was done under a void Resolution, and that the
designation of Mr. Oscar Acodera as Officer-In-Charge, under the same void Resolution, has no force and
effect.

Finally, respondents Antonio Obias, Norberto Ochoa, Luisito Pascua, and petitioners Ruben Barrameda,
Elvis Espiritu, Marcelito Abas and Merardo Enero, Jr. are hereby ordered to work together as Board of
Directors, for the common good of CANORECO and its consumer-members, and to maintain an
atmosphere of sincere cooperation among the officers and members of CANORECO.[5]

On February 27, 1996, petitioner Abundo resigned as general manager of CANORECO.[6]

In turn, NEA recognized the appointment of acting general manager Felix Rolando G. Zaldua. On
September 23, 1996, Juanito M. Irabon replaced Rolando G. Zaldua. [7]
On September 26, 1996, CDA issued a writ of execution and order to vacate thereby enabling
petitioners to resume control of CANORECO.
On December 3, 1996, President Fidel V. Ramos issued Memorandum Order No. 409,[8] in response
to letters from the Governor of Camarines Norte and the Office of the Sangguniang Panlalawigan
regarding the conflict between the NEA group and the CDA group.[9]
The order constituted an ad hoc committee to temporarily take over and manage the affairs of
CANORECO. NEA and CDA are both under the supervision and control of the Office of the President.

The ad hoc committee was composed of:

Rex Tantiongco Chairman Presidential Assistant on Energy Affairs

(Member)
Honesto de Jesus Cooperative Development Authority Nominee
(Member)
Andres Ibasco Cooperative Development Authority Nominee
(Member)
Teodulo M. Mea National Electrification Administration Nominee
(Member)
Vicente Lukban National Electrification Administration Nominee
(Member)

On February 16, 1997, the ad hoc committee presided over by Chairman Rex Tantiongco called for a 30
special general membership meeting of CANORECO. The purpose of the meeting was to determine
whether there was a need to change the composition of CANORECOs board of directors. An
overwhelming majority voted in favor of replacing the board of directors of CANORECO.[10]
Accordingly, CANORECO conducted a general election for directors.
On March 23, 1997, CANORECO elected as new board members the following:

1. Milagros Estrellado

2. Jesus Thomas Fernandez

3. Bernardo Diezmo

4. Raul Carranceja

5. Romeo Atienza

6. Edgar Dasco

7. Artemio Indias[11]

On April 19, 1997, the board passed Resolution No. 01, series of 1997, declaring the position of
general manager vacant,[12] and Resolution No. 02, series of 1997, appointing Mary Ann C. Asor general
manager.[13]
Hence, this petition for quo warranto.[14]
On February 27, 1998, we declared invalid Memorandum Order No. 409 of the President.[15]
We said:

Having registered itself with the CDA pursuant to Section 128 of R.A. No. 6938 and Section 17 of R.A.
No. 6939, CANORECO was brought under the coverage of said laws. Article 38 of R.A. No. 6938 vests
upon the board of directors the conduct and management of the affairs of cooperatives, and Article 39
provides for the powers of the board of directors. These sections read:

Article 38. Composition of the Board of Directors. -- The conduct and management of the affairs of a
cooperative shall be vested in a board of directors which shall be composed of not less than five (5) nor
more than fifteen (15) members elected by the general assembly for a term fixed in the by-laws but not
exceeding a term of two (2) years and shall hold office until their successors are duly elected and
qualified, or until duly removed. However, no director shall serve for more than three (3) consecutive
terms.

Article 39. Powers of the Board of Directors. -- The board of directors shall direct and supervise the
business, manage the property of the cooperative and may, by resolution, exercise all such powers of the
cooperative as are not reserved for the general assembly under this Code and the by-laws.

As to the officers of cooperatives, Article 43 of the Code provides:

ART. 43. Officers of the Cooperatives. The board of directors shall elect from among themselves only the
chairman and vice-chairman, and elect or appoint other officers of the cooperative from outside of the
board in accordance with their by-laws. All officers shall serve during good behavior and shall not be
removed except for cause and after due hearing. Loss of confidence shall not be a valid ground for
removal unless evidenced by acts or omissions causing loss of confidence in the honesty and integrity of
such officer. No two (2) or more persons with relationship up to the third degree of consanguinity or
affinity shall serve as elective or appointive officers in the same board.

Under Article 34 of the Code, the general assembly of cooperatives has the exclusive power, which
cannot be delegated, to elect or appoint the members of the board of directors and to remove them for
cause.Article 51 thereof provides for removal of directors and officers as follows:

ART. 51. Removal. -- An elective officer, director, or committee member may be removed by a vote of 31
two-thirds (2/3) of the voting members present and constituting a quorum, in a regular or special general
assembly meeting called for the purpose. The person involved shall be given an opportunity to be heard at
said assembly.

Memorandum Order No. 409 clearly removed from the Board of Directors of CANORECO the power to
manage the affairs of CANORECO and transferred such power to the Ad Hoc Committee, albeit
temporarily. Considering that (1) the take-over will be until such time that a general membership meeting
can be called to decide the serious issues affecting the said cooperative and normalcy in operations is
restored, and (2) the date such meeting shall be called and the determination of whether there is a need to
change the composition of the membership of CANORECOs Board of Directors are exclusively left to the
Ad Hoc Committee, it necessarily follows that the incumbent directors were, for all intents and purposes,
suspended at the least, and removed, at the most, from their office. The said Memorandum did no less to
the lawfully appointed General Manager by directing that upon the settlement of the issue concerning the
composition of the board of directors the Committee shall decide on the appointment of a general
manager. In the meantime, it authorized the Committee to designate upon the recommendation of the
Chairman an Acting Manager, with the lawfully appointed Manager considered on leave, but who is,
however, entitled to the payment of his salaries.

Nothing in law supported the take-over of the management of the affairs of CANORECO, and the
suspension, if not removal, of the Board of Directors and the officers thereof.

It must be pointed out that the controversy which resulted in the issuance of the Memorandum Order
stemmed from a struggle between two groups vying for control of the management of CANORECO. One
faction was led by the group of Norberto Ochoa, while the other was petitioners group whose members
were, at that time, the incumbent directors and officers. It was the action of Ochoa and his cohorts in
holding a special meeting on 28 May 1995 and then declaring vacant the positions of cooperative officers
and thereafter electing themselves to the positions of president, vice-president, treasurer, and secretary of
CANORECO which compelled the petitioners to file a petition with the CDA. The CDA thereafter came
out with a decision favorable to the petitioners.

Obviously there was a clear case of intra-cooperative dispute. Article 121 of the Cooperative Code is
explicit on how the dispute should be resolved; thus:

ART. 121. Settlement of Disputes. -- Disputes among members, officers, directors, and committee
members, and intra-cooperative disputes shall, as far as practicable, be settled amicably in accordance
with the conciliation or mediation mechanisms embodied in the by-laws of the cooperative, and in
applicable laws.

Should such a conciliation/mediation proceeding fail, the matter shall be settled in a court of competent
jurisdiction.

Complementing this Article is Section 8 of R. A. No. 6939, which provides:

SEC. 8. Mediation and Conciliation. Upon request of either or both or both parties, the [CDA] shall
mediate and conciliate disputes with the cooperative or between cooperatives: Provided, That if no
mediation or conciliation succeeds within three (3) months from request thereof, a certificate of non-
resolution shall be issued by the commission prior to the filing of appropriate action before the proper
courts.

Even granting for the sake of argument that the party aggrieved by a decision of the CDA could pursue an
administrative appeal to the Office of the President on the theory that the CDA is an agency under its
direct supervision and control, still the Office of the President could not in this case, motu proprio or upon
request of a party, supplant or overturn the decision of the CDA. The record does not disclose that the
group of Norberto Ochoa appealed from the decision of the CDA in CDA-CO Case No. 95-010 to the
Office of the President as the head of the Executive Department exercising supervision and control over
said agency. In fact the CDA had already issued a Cease and Desist Order dated 14 August 1996
ordering Antonio Obias, Norberto Ochoa, Luis Pascua, Felicito Ilan and their followers to cease and
desist from acting as the Board of Directors and Officers of Camarines Norte Electric Cooperative
(CANORECO) and to refrain from implementing their Resolution calling for the District V Election on
August 17 and 24, 1996. Consequently, the said decision of the CDA had long become final and executory
when Memorandum Order No. 409 was issued on 3 December 1996. That Memorandum cannot then be 32
considered as one reversing the decision of the CDA which had attained finality.

Under Section 15, Chapter III of Book VII of the Administrative Code of 1987 (Executive Order No.
292), decisions of administrative agencies become final and executory fifteen days after receipt of a copy
thereof by the party adversely affected unless within that period an administrative appeal or judicial
review, if proper, has been perfected. One motion for reconsideration is allowed. A final resolution or
decision of an administrative agency also binds the Office of the President even if such agency is under
the administrative supervision and control of the latter.

xxx xxx xxx

Neither can police power be invoked to clothe with validity the assailed Memorandum Order No.
409. Police power is the power inherent in a government to enact laws, within constitutional limits, to
promote the order, safety, health, morals, and general welfare of society. It is lodged primarily in the
legislature. By virtue of a valid delegation of legislative power, it may also be exercised by the President
and administrative boards, as well as the lawmaking bodies on all municipal levels, including the
barangay. Delegation of legislative powers to the President is permitted in Sections 23(2) and 28(2) of
Article VI of the Constitution. The pertinent laws on cooperatives, namely, R. A. No. 6938, R. A. No.
6939, and P. D. No. 269 as amended by P. D. No. 1645 do not provide for the President or any other
administrative body to take over the internal management of a cooperative. Article 98 of R. A. No. 6938
instead provides:

ART. 98. Regulation of Public Service Cooperatives. -- (1) The internal affairs of public service
cooperatives such as the rights and privileges of members, the rules and procedures for meetings of the
general assembly, board of directors and committees; for the election and qualification of officers,
directors, and committee members; allocation and distribution of surpluses, and all other matters relating
to their internal affairs shall be governed by this Code.

We do not then hesitate to rule that Memorandum Order No. 409 has no constitutional and statutory
basis. It violates the basic underlying principle enshrined in Article 4(2) of R.A. No. 6938 that
cooperatives are democratic organizations and that their affairs shall be administered by persons elected
or appointed in a manner agreed upon by the members. Likewise, it runs counter to the policy set forth in
Section 1 of R.A. No. 6939 that the State shall, except as provided in said Act, maintain a policy of non-
interference in the management and operation of cooperatives. (Italics ours)

In our resolution dated November 16, 1998, we said that the decision in G. R. No. 127249 declared
invalid Memorandum Order No. 409, but did not delve on the issue of who are the rightful directors of the
cooperative.[16]
Until the merits of the quo warranto proceedings have been decided, petitioners cannot unilaterally
assume their former positions in the cooperative.[17]
On November 16, 1998, we issued a temporary restraining order[18] enjoining the Cooperative
Development Authority, its agents and representatives from executing the alias writ of execution dated
July 27, 1998, issued in CDA-CO Case No. 95-010.
As said at the outset, the question is whether petitioners are entitled to their positions in the
cooperative.
Memorandum Order No. 409

M. O. No. 409 caused the interruption of petitioners functions.

In Akbayan v. Philippine National Bank, citing a US Supreme Court decision, we said:

"The actual existence of a statute, prior to such a determination [of unconstitutionality], is an operative
fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a
new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in
various aspects, with respect to particular relations, individual and corporate, and particular conduct 33
private and official."[19]

This has been quoted with approval in a resolution in Araneta v. Hill, 93 Phil. 1002 (1953), in Manila
Motor Co., Inc. v. Flores, 99 Phil. 738 (1956), and in Fernandez v. Cuerva and Co., 129 Phil. 332
(1967).[20]
In the case of Municipality of Malabang v. Benito,[21] we said:

"An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it
creates no office; it is, in legal contemplation, as inoperative as though it had never been passed."[22]

In that case, Executive Order No. 386, creating the Municipality of Balabagan was declared
unconstitutional.
In the same wise, M. O. No. 409 "created no office." The existence of M. O. No. 409 is "an operative
fact which cannot justly be ignored."[23] Therefore, M. O. No. 409 conferred no rights. The board of
directors, elected through the ad hoc committees exercise of its functions while the law was in force, did
not exist, as if no election was held.
In Malabag, the court declared Executive Order 386 void, and permanently restrained the
respondents from performing the duties and functions of their respective offices.
In this case, however, the situation was complicated by certain events. While we declared M. O. No.
409 unconstitutional, the election of respondents before such event is presumed valid until nullified.
The law expressly confers on the board of directors the power to manage the affairs of the
cooperative, according to the Cooperative Code.
However, CANORECO entered into a contract of loan with NEA.

The National Electrification Administration

As far as NEA is concerned, Article VI, Section 2 of the loan agreement was clear that in the event
of default in the payment of the loan, NEA may assign or appoint a project supervisor or a general
manager. This provision finds support in Section 10, Chapter II, P. D. No. 269, as amended by P. D. No.
1645.
A contract is the law between the parties.[24] Obligations arising from contracts have the force of law
between the contracting parties and shall be complied with in good faith.[25]
At the time NEA took over the management of CANORECO, it exercised its rights under the law
and the loan agreement entered into by CANORECO and NEA.

The Cooperative Development Authority

However, as we said,[26] having registered itself with the CDA, pursuant to Section 128 of R. A. No.
6938 and Section 17 of R. A. No. 6939, CANORECO was under the coverage of said laws. Article 38 of
R. A. No. 6938 vests upon the board of directors the conduct and management of the affairs of
cooperatives, and Article 39 prescribes the powers of the board of directors.
Article 38. Composition of the Board of Directors. -- The conduct and management of the affairs of a
cooperative shall be vested in a board of directors which shall be composed of not less than five (5) nor
more than fifteen (15) members elected by the general assembly for a term fixed in the by-laws but not
exceeding a term of two (2) years and shall hold office until their successors are duly elected and
qualified, or until duly removed. However, no director shall serve for more than three (3) consecutive
terms.

Article 39. Powers of the Board of Directors. -- The board of directors shall direct and supervise the
business, manage the property of the cooperative and may, by resolution, exercise all such powers of the
cooperative as are not reserved for the general assembly under this Code and the by-laws. 34

As to the officers of cooperatives, Article 43 of the Code provides:

ART. 43. Officers of the Cooperatives. The board of directors shall elect from among themselves only the
chairman and vice-chairman, and elect or appoint other officers of the cooperative from outside of the
board in accordance with their by-laws. All officers shall serve during good behavior and shall not be
removed except for cause and after due hearing. Loss of confidence shall not be a valid ground for
removal unless evidenced by acts or omissions causing loss of confidence in the honesty and integrity of
such officer. No two (2) or more persons with relationship up to the third degree of consanguinity or
affinity shall serve as elective or appointive officers in the same board.

Under Article 34 of the Code, the general assembly of cooperatives has the exclusive power, which
cannot be delegated, to elect or appoint the members of the board of directors and to remove them for
cause. Article 51 provides for removal of directors and officers as follows:

ART. 51. Removal. -- An elective officer, director, or committee member may be removed by a vote of
two-thirds (2/3) of the voting members present and constituting a quorum, in a regular or special general
assembly meeting called for the purpose. The person involved shall be given an opportunity to be heard at
said assembly.

Nevertheless, this is without prejudice to the holding of a general assembly for the purpose of
conducting another election of directors since the term of office of the directors expired sometime in
1996. In the meantime, respondents shall hold office until their successors shall have been elected and
qualified.
WHEREFORE, the petition is hereby DENIED. Respondents are allowed to continue occupying
their positions pending the holding of a general assembly for the purpose of electing directors.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

21.

THIRD DIVISION

G.R. No. 110434 December 13, 1993

HI-PRECISION STEEL CENTER, INC., petitioner,

vs.
LIM KIM STEEL BUILDERS, INC., and CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION, respondents.

Felix Q. Vinluan and Siguion Reyna, Montecillo & Ongsiako for petitioner.

De Castro & Cagampang Law Offices for Lim Kim teel Builders, Inc.
 RESOLUTION

FELICIANO, J.:

On 18 June 1993, a "Petition for Extension to File Petition for Review" 1 was filed before the Court,
petitioner Hi-Precision Steel Center, Inc. ("Hi-Precision") stating that it intended to file a Petition for
Review on Certiorari in respect of the 13 November 1992 Award 2 and 13 May 1993 Order 3 of public
respondent Construction Industry Arbitration Commission ("CIAC") in Arbitration Case No. 13-90.
35
The Petition (really a Motion) prayed for an extension of thirty (30) days or until 21 July 1993 within
which to file a Petition for Review.

An opposition 4 to the Motion was filed by private respondent Lim Kim Steel Builders, Inc. ("Steel
Builders") on 5 July 1993. On the same day, however, the Court issued a Resolution 5 granting the
Motion with a warning that no further extension would be given.

The Opposition, the subsequent Reply 6 of petitioner filed on 20 July 1993 and the Petition for
Review 7 dated 21 July 1993, were noted by the Court in its Resolution 8 of 28 July 1993. The Court
also required private respondent Steel Builders to file a Comment on the Petition for Review and
Steel Builders complied.

The Petition prays for issuance of a temporary restraining order 9 to stay the execution of the
assailed Order and Award in favor of Steel Builders, which application the Court merely noted, as it
did subsequent Urgent Motions for a temporary restraining order. 10

Petitioner Hi-Precision entered into a contract with private respondent Steel Builders under which the
latter as Contractor was to complete a P21 Million construction project owned by the former within a
period of 153 days, i.e. from 8 May 1990 to 8 October 1990. The project completion date was first
moved to 4 November 1990. On that date, however, only 75.8674% of the project was actually
completed. Petitioner attributed this non-completion to Steel Builders which allegedly had frequently
incurred delays during the
original contract period and the extension period. Upon the other hand, Steel Builders insisted that
the delays in the project were either excusable or due to Hi-Precision's own fault and issuance of
change orders. The project was taken over on 7 November 1990, and eventually completed on
February 1991, by Hi-Precision.

Steel Builders filed a "Request for Adjudication" with public respondent CIAC. In its Complaint filed
with the CIAC, Steel Builders sought payment of its unpaid progress buildings, alleged unearned
profits and other receivables. Hi-Precision, upon the other hand, in its Answer and Amended
Answer, claimed actual and liquidated damages, reimbursement of alleged additional costs it had
incurred in order to complete the project and attorney's fees.

The CIAC formed an Arbitral Tribunal with three (3) members, two (2) being appointed upon
nomination of Hi-Precision and Steel Builders, respectively; the third member (the Chairman) was
appointed by the CIAC as a common nominee of the two (2) parties. On the Chairman was a lawyer.
After the arbitration proceeding, the Arbitral Tribunal rendered a unanimous Award dated 13
November 1992, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Owner [petitioner Hi-Precision] is ordered

to pay the Contractor [private respondent Steel Builders] the amount of
P6,400,717.83 and all other claims of the parties against each other are deemed
compensated and offset. No pronouncement as to costs.

The Parties are enjoined to abide by the award. 11

Upon motions for reconsideration filed, respectively, by Hi-Precision and Steel Builders, the
Arbitral Tribunal issued an Order dated 13 May 1993 which reduced the net amount due to
contractor Steel Builders to P6,115,285.83. 12

In its Award, the Arbitral Tribunal stated that it was guided by Articles 1169, 1192 and 2215 of the
Civil Code. With such guidance, the arbitrators concluded that (a) both parties were at fault, though
the Tribunal could not point out which of the parties was the first infractor; and (b) the breaches by
one party affected the discharge of the reciprocal obligations of the other party. With mutual fault as
a principal premise, the Arbitral Tribunal denied (a) petitioner's claims for the additional costs
allegedly incurred to complete the project; and (b) private respondent's claim for profit it had failed to
earn because of petitioner's take over of the project.

The Tribunal then proceeded to resolve the remaining specific claims of the parties. In disposing of
these multiple, detailed claims the Arbitral Tribunal, in respect of one or more of the respective
claims of the parties: (a) averaged out the conflicting amounts and percentages claimed by the
parties; 13 (b) found neither basis nor justification for a particular claim; 14 (c) found the evidence
submitted in support of particular claims either weak or non-existent; 15 (d) took account of the
36
admissions of liability in respect of particular claims; 16 (e) relied on its own expertise in resolving
particular claims; 17 and (f) applied a "principle of equity" in requiring each party to bear its own loss
resulting or arising from mutual fault or delay (compensation morae). 18

Petitioner Hi-Precision now asks this Court to set aside the Award, contending basically that it was
the contractor Steel Builders who had defaulted on its contractual undertakings and so could not be
the injured party and should not be allowed to recover any losses it may have incurred in the project.
Petitioner Hi-Precision insists it is still entitled to damages, and claims that the Arbitral Tribunal
committed grave abuse of discretion when it allowed certain claims by Steel Builders and offset them
against claims of Hi-Precision.

A preliminary point needs to be made. We note that the Arbitral Tribunal has not been impleaded as
a respondent in the Petition at bar. The CIAC has indeed been impleaded; however, the Arbitral
Award was not rendered by the CIAC, but rather by the Arbitral Tribunal. Moreover, under Section
20 of Executive Order No. 1008, dated 4 February 1985, as amended, it is the Arbitral Tribunal, or
the single Arbitrator, with the concurrence of the CIAC, which issues the writ of execution requiring
any sheriff or other proper officer to execute the award. We consider that the Arbitral Tribunal which
rendered the Award sought to be reviewed and set aside, should be impleaded even though the
defense of its Award would presumably have to be carried by the prevailing party.

Petitioner Hi-Precision apparently seeks review of both under Rule 45 and Rule 65 of the Rules of
Court. 19 We do not find it necessary to rule which of the two: a petition for review under Rule 45 or a
petition for certiorari under Rule 65 — is necessary under Executive Order No. 1008, as amended;
this issue was, in any case, not squarely raised by either party and has not been properly and
adequately litigated.

In its Petition, Hi-Precision purports to raise "legal issues," and in presenting these issues, prefaced
each with a creative formula:

(1)

The public respondent [should be the "Arbitral Tribunal'] committed serious error in
law, if not grave abuse of discretion, when it failed to strictly apply Article 1191, New
Civil Code, against the
contractor . . .;

(2)

The public respondent committee serious error in law, if not grave abuse of
discretion, when it failed to rule in favor of the owner, now petitioner herein, all the
awards it claimed on arbitration, and when it nonetheless persisted in its awards of
damages in favor of the
respondent. . . .;

(3)

The public respondent committed serious error in law, if not grave abuse of
discretion, for its abject failure to apply the doctrine of waiver, estoppel against the
contractor, the private respondent herein, when it agreed on November 16, 1990 to
award termination of the contract and the owner's takeover of the project . . .;

(4)
 The public respondent committed serious error in law, if not grave abuse of
discretion, when it did not enforce the law between the parties, the "technical
specification[s]" which is one of the contract documents, particularly to par. (a), sub-
part 3.01, part 3, Sec. 2b, which expressly requires that major site work activities like
stripping, removal and stockpiling of top soil shall be done "prior to the start of regular
excavation or backfiling work", the principal issue in arbitration being non-compliance
with the contract documents;

(5)
37
The public respondent committed serious error in law, if not grave abuse of
discretion, when it found, in the May 13, 1993 Order, the petitioner "guilty of
estoppel" although it is claimed that the legal doctrine of estoppel does not apply with
respect to the required written formalities in the issuance of change order . . .;

(6)

The exceptional circumstances in Remalante vs. Tibe, 158 SCRA 138, where the
Honorable Supreme Court may review findings of facts, are present in the instant
case, namely; (a) when the inference made is manifestly absurd, mistaken or
impossible (Luna vs. Linatoc, 74 Phil. 15); (2) when there is grave abuse of discretion
in the appreciation of facts (Buyco vs. People, 95 Phil. 253); (3) when the judgment is
premised on a misapprehension of facts (De la Cruz v. Sosing, 94 Phil. 26 and
Castillo vs. CA, 124 SCRA 808); (4) when the findings of fact are conflicting (Casica
v. Villaseca, 101 Phil. 1205); (5) when the findings are contrary to the admissions of
the parties (Evangelista v. Alto Surety, 103 Phil. 401), and therefore, the findings of
facts of the public respondent in the instant case may be reviewed by the Honorable
Supreme Court. 20 (Emphasis partly applied and partly in the original)

From the foregoing, petitioner Hi-Precision may be seen to be making two (2) basic arguments:

(a) Petitioner asks this Court to correct legal errors committed by the Arbitral
Tribunal, which at the same time constitute grave abuse of discretion amounting to
lack of jurisdiction on the part of the Arbitral Tribunal; and

(b) Should the supposed errors petitioner asks us to correct be characterized as

errors of fact, such factual errors should nonetheless be reviewed because there was
"grave abuse of discretion" in the misapprehension of facts on the part of the Arbitral
Tribunal.

Executive Order No. 1008, as amended, provides, in its Section 19, as follows:

Sec. 19. Finality of Awards. — The arbitral award shall be binding upon the parties. It
shall be final and inappealable except on questions of law which shall be appealable
to the Supreme Court.

Section 19 makes it crystal clear that questions of fact cannot be raised in proceedings
before the Supreme Court — which is not a trier of facts — in respect of an arbitral award
rendered under the aegis of the CIAC. Consideration of the animating purpose of voluntary
arbitration in general, and arbitration under the aegis of the CIAC in particular, requires us to
apply rigorously the above principle embodied in Section 19 that the Arbitral Tribunal's
findings of fact shall be final and inappealable.

Voluntary arbitration involves the reference of a dispute to an impartial body, the members of which
are chosen by the parties themselves, which parties freely consent in advance to abide by the
arbitral award issued after proceedings where both parties had the opportunity to be heard. The
basic objective is to provide a speedy and inexpensive method of settling disputes by allowing the
parties to avoid the formalities, delay, expense and aggravation which commonly accompany
ordinary litigation, especially litigation which goes through the entire hierarchy of courts. Executive
Order No. 1008 created an arbitration facility to which the construction industry in the Philippines can
have recourse. The Executive Order was enacted to encourage the early and expeditious settlement
of disputes in the construction industry, a public policy the implementation of which is necessary and
important for the realization of national development goals. 21
Aware of the objective of voluntary arbitration in the labor field, in the construction industry, and in
any other area for that matter, the Court will not assist one or the other or even both parties in any
effort to subvert or defeat that objective for their private purposes. The Court will not review the
factual findings of an arbitral tribunal upon the artful allegation that such body had "misapprehended
the facts" and will not pass upon issues which are, at bottom, issues of fact, no matter how cleverly
disguised they might be as "legal questions." The parties here had recourse to arbitration and chose
the arbitrators themselves; they must have had confidence in such arbitrators. The Court will not,
therefore, permit the parties to relitigate before it the issues of facts previously presented and argued
before the Arbitral Tribunal, save only where a very clear showing is made that, in reaching its
factual conclusions, the Arbitral Tribunal committed an error so egregious and hurtful to one party as
to constitute a grave abuse of discretion resulting in lack or loss of jurisdiction. 22 Prototypical 38
examples would be factual conclusions of the Tribunal which resulted in deprivation of one or the
other party of a fair opportunity to present its position before the Arbitral Tribunal, and an award
obtained through fraud or the corruption of arbitrators. 23 Any other, more relaxed, rule would result in
setting at naught the basic objective of a voluntary arbitration and would reduce arbitration to a
largely inutile institution.

Examination of the Petition at bar reveals that it is essentially an attempt to re-assert and re-litigate
before this Court the detailed or itemized factual claims made before the Arbitral Tribunal under a
general averment that the Arbitral Tribunal had "misapprehended the facts" submitted to it. In the
present Petition, too, Hi-Precision claims that the Arbitral Tribunal had committed grave abuse of
discretion amounting to lack of jurisdiction in reaching its factual and legal conclusions.

The first "legal issue" submitted by the Petition is the claimed misapplication by the Arbitral Tribunal
of the first and second paragraphs of Article 1911 of the Civil Code. 24 Article 1191 reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Hi-Precision contends energetically that it is the injured party and that Steel Builders was the obligor
who did not comply with what was incumbent upon it, such that Steel Builders was the party in
default and the entity guilty of negligence and delay. As the injured party, Hi-Precision maintains that
it may choose between the fulfillment or rescission of the obligation in accordance with Article 1191,
and is entitled to damages in either case. Thus, Hi-Precision continues, when the contractor Steel
Builders defaulted on the 153rd day of the original contract period, Hi-Precision opted for specific
performance and gave Steel Builders a 30-day extension period with which to complete the project.

What petitioner Hi-Precision, in its above argument, disregards is that the determination of whether
Hi-Precision or Steel Builders was the "injured party" is not to be resolved by an application of Article
1191. That determination is eminently a question of fact, for it requires ascertainment and
identification of which the two (2) contending parties had first failed to comply with what is incumbent
upon it. In other words, the supposed misapplication of Article 1191, while ostensibly a "legal issue,"
is ultimately a question of fact, i.e., the determination of the existence or non-existence of a fact or
set of facts in respect of which Article 1191 may be properly applied. Thus, to ask this Court to
correct a claimed misapplication or non-application of Article 1191 is to compel this Court to
determine which of the two (2) contending parties was the "injured party" or the "first infractor." As
noted earlier, the Arbitral Tribunal after the prolonged arbitration proceeding, was unable to make
that factual determination and instead concluded that both parties had committed breaches of their
respective obligations. We will not review, and much less reverse, that basic factual finding of the
Arbitral Tribunal.

A second "legal issue" sought to be raised by petitioner Hi-Precision relates to the supposed failure
of the Arbitral Tribunal to apply the doctrines of estoppel and waiver as against Steel Builders. 25 The
Arbitral Tribunal, after declaring that the parties were mutually at fault, proceeded to enumerate the
faults of each of the parties. One of the faults attributed to petitioner Hi-Precision is that it had failed
to give the contractor Steel Builders the required 15-day notice for termination of the contract. 26 This
was clearly a finding of fact on the part of the Tribunal, supported by the circumstance that per the
record, petitioner had offered no proof that it had complied with such 15-day notice required under
Article 28.01 of the General Conditions of Contract forming part of the Contract Documents.
Petitioner Hi-Precision's argument is that a written Agreement dated 16 November 1990 with Steel
Builders concerning the take over of the project by Hi-Precision, constituted waiver on the part of the
latter of its right to a 15-day notice of contract termination. Whether or not that Agreement dated 16
November 1990 (a document not submitted to this Court) is properly characterized as constituting
waiver on the part of Steel Builders, may be conceded to be prima facie a question of law; but, if it is,
and assuming arguendo that the Arbitral Tribunal had erred in resolving it, that error clearly 39
did not constitute a grave abuse of discretion resulting in lack or loss of jurisdiction on the part of the
Tribunal.

A third "legal issue" posed by Hi-Precision relates to the supposed failure on the part of the Arbitral
Tribunal "to uphold the supremacy of 'the
law between the parties' and enforce it against private respondent [Steel Builders]." 27 The "law
between that parties" here involved is the "Technical Specifications" forming part of the Contract
Documents. Hi-Precision asserts that the Arbitral Tribunal did not uphold the "law between the
parties," but instead substituted the same with "its [own] absurd inference and 'opinion' on mud."
Here again, petitioner is merely disguising a factual question as a "legal issue," since petitioner is in
reality asking this Court to review the physical operations relating, e.g., to site preparation carried out
by the contractor Steel Builders and to determine whether such operations were in accordance with
the Technical Specifications of the project. The Arbitral Tribunal resolved Hi-Precision's claim by
finding that Steel Builders had complied substantially with the Technical Specifications. This Court
will not pretend that it has the technical and engineering capability to review the resolution of that
factual issue by the Arbitral Tribunal.

Finally, the Petition asks this Court to "review serious errors in the findings of fact of the [Arbitral
Tribunal]." 28 In this section of its Petition,
Hi-Precision asks us to examine each item of its own claims which the Arbitral Tribunal had rejected
in its Award, and each claim of the contractor Steel Builders which the Tribunal had granted. In
respect of each item of the owner's claims and each item of the contractor's claims, Hi-Precision sets
out its arguments, to all appearances the same arguments it had raised before the Tribunal. As
summarized in the Arbitral Award, Contractor's Claims were as follows:

12.1. Unpaid Progress Billing 1,812,706.95

12.2. Change Order 1 0.00

12.3. -do- 2 10,014.00
12.4. -do- 3 320,000.00
12.5. -do- 4 112,300.70
12.6. -do- 5 398,398.00
12.7. -do- 6 353,050.38
12.8. -do- 7 503,836.53
12.9. -do- 8 216,138.75
12.10. -do- 9 101,621.40
12.11. -do- 10 7,200.00
12.12. -do- 11 0.00
12.13. -do- 12 7,800.00
12.14. -do- 13 49,250.00
12.15. -do- 14 167,952.00
12.16. -do- 15 445,600.00
12.17. -do- 16 92,457.30
12.18. -do- 17 1,500.00
12.19. 20,240.00
12.20. 63,518.00
12.21. 0.00
12.22. 0.00
12.23. 0.00
12.24. 0.00
12.25. 0.00
12.26. 730,201.57
12.27. 1,130,722.70
 12.28. 0.00
12.29. 273,991.00
12.30. 0.00

———————

12.31. 7,318,499.28 29

=============
40
Upon the other hand, the petitioner's claims we are asked to review and grant are summarized as
follows:

1. Actual Damages

Advance Downpayment
[at] signing of Contract
which is subject to 40%
deduction every progress
billing (40% of Contract Price) P8,406,000.00

Progress Billings 5,582,585.55

Advances made to Lim Kim

a) prior to take-over 392,781.45

b) after the take-over

Civil Works 1,158,513.88

Materials 4,213,318.72
Labor 2,155,774.79
Equipment Rental 1,448,208.90

———————

P8,974,816.45

Total Amount Paid for Construction 23,650,183.00

Less: Contract Price (21,000,000.00)

IA Excess of amount paid

over contract price 2,650,163.29

IB Other items due from Lim

Kim Steel Builders

a. Amount not yet deducted

from Downpayment due
to non-completion of Project
(P24.1326%) 2,027,138.40

b. Due to Huey Commercial

used for HSCI Project 51,110.40

IC Additional construction expenses

a. Increases in prices since Oct. 5,272,096.81

b. Cost of money of (a) 873,535.49

ID Installation of machinery
 a. Foreign exchange loss 11,565,048.37

b. Cost of money (a) 2,871,987.01

I[E] Raw Materials

a. Foreign exchange loss 4,155,982.18

b. Cost of money (a) 821,242.72
c. Additional import levy of 5% 886,513.33
d. Cost of money (c) 170,284.44 41
e. Cost of money on marginal
deposit on Letter of Credit 561,195.25

IF Cost of money on holding to CRC INTY 3,319,609.63

Total Actual Damages 35,295,927.32

2. Liquidated Damages 2,436,000.00

3. Attorney's Fees 500,000.00

———————

P38,231,927.3230

=============

We consider that in asking this Court to go over each individual claim submitted by it and each
individual countering claim submitted by Steel Builders to the Arbitral Tribunal, petitioner Hi-
Precision is asking this Court to pass upon claims which are either clearly and directly factual in
nature or require previous determination of factual issues. This upon the one hand. Upon the other
hand, the Court considers that petitioner Hi-Precision has failed to show any serious errors of law
amounting to grave abuse of discretion resulting in lack of jurisdiction on the part of the Arbitral
Tribunal, in either the methods employed or the results reached by the Arbitral Tribunal, in disposing
of the detailed claims of the respective parties.

WHEREFORE, for all the foregoing, the Petition is hereby DISMISSED for lack of merit. Costs
against petitioner.

SO ORDERED.

20.

THIRD DIVISION

HUTAMA-RSEA JOINT OPERATIONS, G.R. No. 180640

INC.,

Petitioner,
Present:

YNARES-SANTIAGO, J.,
- versus - Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and

PERALTA, JJ.
42
CITRA METRO MANILA TOLLWAYS
CORPORATION,

Respondent.
Promulgated:

April 24, 2009

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

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision[2] dated 23 May 2007 and Resolution[3] dated 16 November 2007 of the Court of
Appeals in CA-G.R. SP No. 92504.

The facts, culled from the records, are as follows:

Petitioner HUTAMA-RSEA Joint Operations Incorporation and respondent Citra Metro Manila Tollways
Corporation are corporations organized and existing under Philippine laws. Petitioner is a sub-contractor
engaged in engineering and construction works. Respondent, on the other hand, is the general contractor
and operator of the South Metro Manila Skyway Project (Skyway Project).

On 25 September 1996, petitioner and respondent entered into an Engineering Procurement Construction
Contract (EPCC) whereby petitioner would undertake the construction of Stage 1 of the Skyway Project,
which stretched from the junction of Buendia Avenue, Makati City, up to Bicutan
Interchange, Taguig City. As consideration for petitioners undertaking, respondent obliged itself under
the EPCC to pay the former a total amount of US$369,510,304.00.[4]
During the construction of the Skyway Project, petitioner wrote respondent on several occasions
requesting payment of the formers interim billings, pursuant to the provisions of the EPCC. Respondent
only partially paid the said interim billings, thus, prompting petitioner to demand that respondent pay the
outstanding balance thereon, but respondent still failed to do so.[5]

The Skyway Project was opened on 15 December 1999 for public use, and toll fees were accordingly
collected. After informing respondent that the construction of the Skyway Project was already complete,
petitioner reiterated its demand that respondent pay the outstanding balance on the interim billings, as 43

well as the Early Completion Bonus agreed upon in the EPCC. Respondent refused to comply with
petitioners demands.[6]

On 24 May 2004, petitioner, through counsel, sent a letter to respondent demanding payment of the
following: (1) the outstanding balance on the interim billings; (2) the amount of petitioners final billing;
(3) early completion bonus; and (4) interest charges on the delayed payment. Thereafter, petitioner and
respondent, through their respective officers and representatives, held several meetings to discuss the
possibility of amicably settling the dispute. Despite several meetings and continuous negotiations, lasting
for a period of almost one year, petitioner and respondent failed to reach an amicable settlement.[7]

Petitioner finally filed with the Construction Industry Arbitration Commission (CIAC) a Request for
Arbitration, seeking to enforce its money claims against respondent.[8]Petitioners Request was docketed as
CIAC Case No. 17-2005.

In its Answer ad cautelam with Motion to Dismiss, respondent averred that the CIAC had no jurisdiction
over CIAC Case No. 17-2005. Respondent argued that the filing by petitioner of said case was premature
because a condition precedent, i.e., prior referral by the parties of their dispute to the Dispute
Adjudication Board (DAB), required by Clause 20.4 of the EPCC, had not been satisfied or complied
with. Respondent asked the CIAC to dismiss petitioners Request for Arbitration in CIAC Case No. 17-
2005 and to direct the parties to comply first with Clause 20.4 of the EPCC.[9]

After submission by the parties of the necessary pleadings on the matter of jurisdiction, the CIAC issued
on 30 August 2005, an Order in CIAC Case No. 17-2005, favoring petitioner. The CIAC ruled that it had
jurisdiction over CIAC Case No. 17-2005, and that the determination of whether petitioner had complied
with Clause 20.4 of the EPCC was a factual issue that may be resolved during the trial. It then ordered
respondent to file an Answer to petitioners Request for Arbitration.[10]

After respondent and petitioner filed an Answer and a Reply, respectively, in CIAC Case No. 17-2005,
the CIAC conducted a preliminary conference, wherein petitioner and respondent signed the Terms of
Reference outlining the issues to be resolved, viz:

(1) Is prior resort to the DAB a precondition to submission of the dispute to arbitration considering that
the DAB was not constituted?;

(2) Is [herein petitioner] entitled to the balance of the principal amount of the contract? If so, how much?;
(3) Is [petitioner] entitled to the early compensation bonus net of VAT due thereon? If so, how much?;

(4) Was there delay in the completion of the project? If so, is [herein respondent] entitled to its
counterclaim for liquidated damages?;

44

(5) Is [petitioner] entitled to payment of interest on the amounts of its claims for unpaid billings and early
completion bonus? If so, at what rate and for what period?;

(6) Which of the parties is entitled to reimbursement of the arbitration costs incurred? [11]

Respondent, however, subsequently filed an Urgent Motion requesting that CIAC refrain from proceeding
with the trial proper of CIAC Case No. 17-2005 until it had resolved the issue of whether prior resort by
the parties to DAB was a condition precedent to the submission of the dispute to CIAC. [12] Respondents
Urgent Motion was denied by the CIAC in its Order dated 6 December 2005.[13]

Respondent filed a Motion for Reconsideration of the CIAC Order dated 6 December 2005.[14] The CIAC
issued, on 12 December 2005, an Order denying respondents Motion for Reconsideration.[15] It held that
prior resort by the parties to DAB was not a condition precedent for it to assume jurisdiction over CIAC
Case No. 17-2005. Aggrieved, respondent assailed the CIAC Order dated 12 December 2005 by filing a
special civil action for certiorari and prohibition with the Court of Appeals,[16] docketed as CA-G.R. SP
No. 92504.

On 23 May 2007, the Court of Appeals rendered its Decision in CA-G.R. SP No. 92504, annulling the 12
December 2005 Order of the CIAC, and enjoining the said Commission from proceeding with CIAC Case
No. 17-2005 until the dispute between petitioner and respondent had been referred to and decided by the
DAB, to be constituted by the parties pursuant to Clause 20.4 of the EPCC. The appellate court, thus,
found that the CIAC exceeded its jurisdiction in taking cognizance of petitioners Request for Arbitration
in CIAC Case No. 17-2005 despite the latters failure to initially refer its dispute with respondent to the
DAB, as directed by Clause 20.4 of the EPCC.

The dispositive portion of the 23 May 2007 Decision of the Court of Appeals reads:

WHEREFORE, the instant petition is GRANTED and the order of the Arbitration Tribunal of the
Construction Industry Arbitration Commission dated December 12, 2005 is hereby ANNULED and SET
ASIDE and, instead, [CIAC, members of the Arbitral Tribunal,[17] and herein petitioner], their agents or
anybody acting in their behalf, are enjoined from further proceeding with CIAC Case No. 17-2005,
promulgating a decision therein, executing the same if one has already been promulgated or otherwise
enforcing said order of December 12, 2005 until the dispute has been referred to and decided by the
Dispute Adjudication Board to be constituted by the parties in accordance with Sub-Clause 20.4 of the
Engineering Procurement Construction Contract dated September 25, 1996.
Petitioner filed a Motion for Reconsideration of the afore-mentioned Decision but this was denied by the
Court of Appeals in a Resolution dated 16 November 2007.

Hence, petitioner filed the instant Petition for Review before us raising the sole issue of whether CIAC 45
has jurisdiction over CIAC Case No. 17-2005.

Section 4 of Executive Order No. 1008[18] defines the jurisdiction of CIAC, thus:

SECTION 4. Jurisdiction. - The CIAC shall have original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in construction in the Philippines,
whether the disputes arises before or after the completion of the contract, or after the abandonment or
breach thereof. These disputes may involve government or private contracts. For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.

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

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

Further, Section 1, Article III of the CIAC Rules of Procedure Governing Construction
Arbitration[19] (CIAC Rules), provides:

SECTION 1. Submission to CIAC Jurisdiction. An arbitration clause in a construction contract or a

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

An arbitration agreement or a submission to arbitration shall be in writing, but it need not be signed by
the parties, as long as the intent is clear that the parties agree to submit a present or future controversy
arising from a construction contract to arbitration.
It may be in the form of exchange of letters sent by post or by telefax, telexes, telegrams or any other
modes of communication. (Emphasis ours.)

Based on the foregoing provisions, the CIAC shall have jurisdiction over a dispute involving a
construction contract if said contract contains an arbitration clause (nothwithstanding any reference by the
same contract to another arbitration institution or arbitral body); or, even in the absence of such a clause 46
in the construction contract, the parties still agree to submit their dispute to arbitration.

It is undisputed that in the case at bar, the EPCC contains an arbitration clause in which the petitioner and
respondent explicitly agree to submit to arbitration any dispute between them arising from or connected
with the EPCC, under the following terms and conditions[20]:

CLAIMS, DISPUTES and ARBITRATION

xxxx

20.3 Unless the member or members of the Dispute Adjudication Board have been previously mutually
agreed upon by the parties and named in the Contract, the parties shall, within 28 days of the Effective
Date, jointly ensure the appointment of a Dispute Adjudication Board. Such Dispute Adjudication Board
shall comprise suitably qualified persons as members, the number of members being either one or three,
as stated in the Appendix to Tender. If the Dispute Adjudication Board is to comprise three members,
each party shall nominate one member for the approval of the other party, and the parties shall mutually
agree upon and appoint the third member (who shall act as chairman).

The terms of appointment of the Dispute Adjudication Board shall:

(a) incorporate the model terms published by the Fdration Internationale des Ingnieurs-Conseils (FIDIC),

(b) require each member of the Dispute Adjudication Board to be, and to remain throughout the
appointment, independent of the parties,

(c) require the Dispute Adjudication Board to act impartially and in accordance with the Contract, and

(d) include undertakings by the parties (to each other and to the Dispute Adjudication Board) that the
members of the Dispute Adjudication Board shall in no circumstances be liable for breach of duty or of
contract arising out of their appointment; the parties shall indemnify the members against such claims.

The terms of the remuneration of the Dispute Adjudication Board, including the remuneration of each
member and of any specialist from whom the Dispute Adjudication Board may require to seek advice,
shall be mutually agreed upon by the Employer, the Contractor and each member of the Dispute
Adjudication Board when agreeing such terms of appointment. In the event of disagreement, the
remuneration of each member shall include reimbursement for reasonable expenses, a daily fee in
accordance with the daily fee established from time to time for arbitrators under the administrative and
financial regulations of the International Centre for Settlement of Investment Disputes, and a retainer fee
per calendar month equivalent to three times such daily fee.

The Employer and the Contractor shall each pay one-half of the Dispute Adjudication Boards 47

remuneration in accordance with its terms of remuneration. If, at any time, either party shall fail to pay its
due proportion of such remuneration, the other party shall be entitled to make payment on his behalf and
recover if from the party in default.

The Dispute Adjudication Boards appointment may be terminated only by mutual agreement of the
Employer and the Contractor. The Dispute Adjudication Boards appointment shall expire when the
discharge referred to in Sub-Clause 13.12 shall have become effective, or at such other time as the parties
may mutually agree.

It, at any time, the parties so agree, they may appoint a suitably qualified person to replace (or to be
available to replace) any or all members of the Dispute Adjudication Board. The appointment will come
into effect if a member of the Dispute Adjudication Board declines to act or is unable to act as a result of
death, disability, resignation or termination of appointment. If a member so declines or is unable to act,
and no such replacement is available to act, the member shall be replaced in the same manner as such
member was to have been nominated.

If any of the following conditions apply, namely:

(a) the parties fail to agree upon the appointment of the sole member of a one-person Dispute
Adjudication Board within 28 days of the Effective Date,

(b) either party fails to nominate an acceptable member, for the Dispute Adjudication Board of three
members, within 28 days of the Effective Date,

(c) the parties fail to agree upon the appointment of the third member (to act as chairman) within 28 days
of the Effective Date, or

(d) the parties fail to agree upon the appointment of a replacement member of the Dispute Adjudication
Board within 28 days of the date on which a member of the Dispute Adjudication Board declines to act or
is unable to act as a result of death, disability, resignation or termination of appointment,

then the person or administration named in the Appendix to the Tender shall, after due consultation with
the parties, nominate such member of the Dispute Adjudication Board, and such nomination shall be final
and conclusive.
20.4 If a dispute arises between the Employer and the Contractor in connection with, or arising out of, the
Contract or the execution of the Works, including any dispute as to any opinion, instruction,
determination, certification or valuation of the Employers Representative, the dispute shall initially be
referred in writing to the Dispute Adjudication Board for its decision, with a copy to the other party. Such
reference shall state that it is made under this Sub-Clause. The parties shall promptly make available to
the Dispute Adjudication Board all such information, access to the Site, and appropriate facilities, as the
Dispute Adjudication Board may require for the purposes of rendering its decision. No later than the fifty-
48
sixth day after the day on which it received such reference, the Dispute Adjudication Board, acting as a
panel of expert(s) and not as arbitrator(s), shall give notice of its decision to the parties. Such notice shall
include reasons and shall state that it is given under this Sub-Clause.

Unless the Contract has already been repudiated or terminated, the Contractor shall, in every case,
continue to proceed with the Works with all due diligence, and the Contractor and the Employer shall
give effect forthwith to every decision of the Dispute Adjudication Board, unless and until the same shall
be revised, as hereinafter provided, in an amicable settlement or an arbitral award.

If either party is dissatisfied with the Dispute Adjudication Boards decision, then either party, on or
before the twenty-eighth day after the day on which it received notice of such decision, may notify the
other party of its dissatisfaction. If the Dispute Adjudication Board fails to give notice of its decision on
or before the fifty-sixth day after the day on which it received the reference, then either party, on or
before the twenty-eighth day after the day on which the said period of fifty-six days has expired, may
notify the other party of its dissatisfaction. In either event, such notice of dissatisfaction shall state that it
is given under this Sub-Clause, such notice shall set out the matters in dispute and the reason(s) for
dissatisfaction and, subject to Sub-Clauses 20.7 and 20.8, no arbitration in respect of such dispute may be
commenced unless such notice is given.

If the Dispute Adjudication Board has given notice of its decision as to a matter in dispute to the
Employer and the Contractor and no notice of dissatisfaction has been given by either party on or before
the twenty-eighth day after the day on which the parties received the Dispute Adjudication Boards
decision, then the Dispute Adjudication Boards decision shall become final and binding upon the
Employer and the Contractor.

20.5 Where notice of dissatisfaction has been given under Sub-Clause 20.4, the parties shall attempt
to settle such dispute amicably before the commencement of arbitration. Provided that unless the
parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day
on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been
made.

20.6 Any dispute in respect of which:

(a) the decision, if any, of the Dispute Adjudication Board has not become final and binding
pursuant to
Sub-Clause 20.4, and
(b) amicable settlement has not been reached,

shall be finally decided by international arbitration. The arbitration rules under which the
arbitration is conducted, the institution to nominate the arbitrator(s) or to administer the
arbitration rules (unless named therein), the number of arbitrators, and the language and place of
such arbitration shall be as set out in the Appendix to Tender. The arbitrator(s) shall have full 49
power to open up, review and revise any decision of the Dispute Adjudication Board.

Neither party shall be limited, in the proceedings before such arbitrator(s), to the evidence or
arguments previously put before the Dispute Adjudication Board to obtain its decision.

Arbitration may be commenced prior to or after completion of the Works. The obligations of the
parties and the Dispute Adjudication Board shall not be altered by reason of the arbitration being
conducted during the progress of the Works.

20.7 Where neither party has given notice of dissatisfaction within the period stated in Sub-Clause
20.4 and the Dispute Adjudication Boards related decision, if any, has become final and binding,
either party may, if the other party fails to comply with such decision, and without prejudice to any
other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6. The
provisions of Sub-Clauses 20.4 and 20.5 shall not apply to any such reference.

20.8 When the appointment of the Dispute Adjudication Board and of any replacement has expired,
any such dispute referred to in Sub-Clause 20.4 shall be finally settled by arbitration pursuant to
Sub-Clause 20.6. The provisions of Sub-Clauses 20.4 and 20.5 shall not apply to any such
reference. (Emphasis ours.)

Despite the presence of the afore-quoted arbitration clause in the EPCC, it is respondents position, upheld
by the Court of Appeals, that the CIAC still cannot assume jurisdiction over CIAC Case No. 17-2005
(petitioners Request for Arbitration) because petitioner has not yet referred its dispute with respondent to
the DAB, as directed by Clause 20.4 of the EPCC. Prior resort of the dispute to DAB is a condition
precedent and an indispensable requirement for the CIAC to acquire jurisdiction over CIAC Case No. 17-
2005.[21]

It is true that Clause 20.4 of the EPCC states that a dispute between petitioner and respondent as regards
the EPCC shall be initially referred to the DAB for decision, and only when the parties are dissatisfied
with the decision of the DAB should arbitration commence. This does not mean, however, that the CIAC
is barred from assuming jurisdiction over the dispute if such clause was not complied with.

Under Section 1, Article III of the CIAC Rules, an arbitration clause in a construction contract shall be
deemed as 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 x x x. Elementary is the rule that when laws or rules are clear, it is incumbent on the court to
apply them. When the law (or rule) is unambiguous and unequivocal, application, not interpretation
thereof, is imperative.[22]

Hence, the bare fact that the parties herein incorporated an arbitration clause in the EPCC is sufficient to
vest the CIAC with jurisdiction over any construction controversy or claim between the parties. [23] The
arbitration clause in the construction contract ipso facto vested the CIAC with jurisdiction.[24] This rule 50

applies, regardless of whether the parties specifically choose another forum or make reference to another
arbitral body.[25] Since the jurisdiction of CIAC is conferred by law, it cannot be subjected to any
condition; nor can it be waived or diminished by the stipulation, act or omission of the parties, as long as
the parties agreed to submit their construction contract dispute to arbitration, or if there is an arbitration
clause in the construction contract.[26] The parties will not be precluded from electing to submit their
dispute to CIAC, because this right has been vested in each party by law.[27]

In China Chang Jiang Energy Corporation (Philippines) v. Rosal Infrastructure Builders,[28] we

elucidated thus:

What the law merely requires for a particular construction contract to fall within the jurisdiction of
CIAC is for the parties to agree to submit the same to voluntary arbitration.Unlike in the original
version of Section 1, as applied in the Tesco case, the law does not mention that the parties should agree
to submit disputes arising from their agreement specifically to the CIAC for the latter to acquire
jurisdiction over such disputes. 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 specially 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.

xxxx

Now that Section 1, Article III [CIAC Rules of Procedure Governing Construction Arbitration], as
amended, is submitted to test in the present petition, we rule to uphold its validity with full
certainty. However, this should not be understood to mean that the parties may no longer stipulate to
submit their disputes to a different forum or arbitral body. Parties may continue to stipulate as regards
their preferred forum in case of voluntary arbitration, but in so doing, they may not divest the
CIAC of jurisdiction as provided by law. Under the elementary principle on the law on contracts
that laws obtaining in a jurisdiction form part of all agreements, when the law provides that the
Board acquires jurisdiction when the parties to the contract agree to submit the same to voluntary
arbitration, the law in effect, automatically gives the parties an alternative forum before whom they
may submit their disputes. That alternative forum is the CIAC. This, to the mind of the Court, is
the real spirit of E.O. No. 1008, as implemented by Section 1, Article III of the CIAC
Rules. (Emphases ours.)

Likewise, in National Irrigation Administration v. Court of Appeals,[29] we pronounced that:

Under the present Rules of Procedure [CIAC Rules of Procedure Governing Construction Arbitration], 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,
51
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.

We note that this is not a case wherein the arbitration clause in the construction contract named another
forum, not the CIAC, which shall have jurisdiction over the dispute between the parties; rather, the said
clause requires prior referral of the dispute to the DAB. Nonetheless, we still hold that this condition
precedent, or more appropriately, non-compliance therewith, should not deprive CIAC of its jurisdiction
over the dispute between the parties.

It bears to emphasize that the mere existence of an arbitration clause in the construction contract is
considered by law as an agreement by the parties to submit existing or future controversies between them
to CIAC jurisdiction, without any qualification or condition precedent. To affirm a condition precedent in
the construction contract, which would effectively suspend the jurisdiction of the CIAC until compliance
therewith, would be in conflict with the recognized intention of the law and rules to automatically
vest CIAC with jurisdiction over a dispute should the construction contract contain an arbitration clause.

Moreover, the CIAC was created in recognition of the contribution of the construction industry to national
development goals. Realizing that delays in the resolution of construction industry disputes would also
hold up the development of the country, Executive Order No. 1008 expressly mandates the CIAC
to expeditiously settle construction industry disputes and, for this purpose, vests in the CIAC original and
exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by the parties
involved in construction in the Philippines.[30]

The dispute between petitioner and respondent has been lingering for almost five years now. Despite
numerous meetings and negotiations between the parties, which took place prior to petitioners filing with
the CIAC of its Request for Arbitration, no amicable settlement was reached. A ruling requiring the
parties to still appoint a DAB, to which they should first refer their dispute before the same could be
submitted to the CIAC, would merely be circuitous and dilatory at this point. It would entail unnecessary
delays and expenses on both parties, which Executive Order No. 1008 precisely seeks to prevent. It
would, indeed, defeat the purpose for which the CIAC was created.

WHEREFORE, the Petition is hereby GRANTED. The Decision, dated 23 May 2007, and Resolution,
dated 16 November 2007, of the Court of Appeals in CA-G.R. SP No. 92504 are
hereby REVERSED and SET ASIDE. The instant case is hereby REMANDED for further proceedings
to the CIAC which is DIRECTED to resolve the same with dispatch.

SO ORDERED.
19.

SECOND DIVISION

[G.R. No. 146717. November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,

AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
52
DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device
in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.

Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901
entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001.[2]

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey
basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of
Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the
design, construction, commissioning, testing and completion of the Project.[4]

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000,
or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined
in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT)
for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays
caused by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.[6]

To secure performance of petitioners obligation on or before the target completion date, or such time for
completion as may be determined by the parties agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to as the Securities), to wit:
Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New
Zealand Banking Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]

In the course of the construction of the project, petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations.
LHC denied the requests, however. This gave rise to a series of legal actions between the parties which
culminated in the instant petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request for
Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC) [11] on 3
November 2000. In both arbitration proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time
sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of
petitioner to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,[12] petitionerin two separate letters[13] both dated 10 August 2000advised respondent
banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its
alleged default in the performance of its obligations. Asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks
that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under
LHC would constrain it to hold respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and
when LHC calls on them.[15]
53

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner
in default/delay in the performance of its obligations under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC
served notice that it would call on the securities for the payment of liquidated damages for the delay.[16]

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on
the Securities and respondent banks from transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary
restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to
Branch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18]

The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to
justify the issuance of the writ. Employing the principle of independent contract in letters of credit, the
trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It
debunked petitioners contention that the principle of independent contract could be invoked only by
respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The
trial court further ruled that the banks were mere custodians of the funds and as such they were obligated
to transfer the same to the beneficiary for as long as the latter could submit the required certification of its
claims.

Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction.[20] Petitioner submitted to the
appellate court that LHCs call on the Securities was premature considering that the issue of its default had
not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay
could be established, LHC had no right to draw on the Securities for liquidated damages.

Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call on and use of
the Securities as payment for liquidated damages. It averred that the Securities are independent of the
main contract between them as shown on the face of the two Standby Letters of Credit which both
provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates
or the declarants capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering
respondent banks to cease and desist from transferring, paying or in any manner disposing of the
Securities.

However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to
ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ
Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial courts decision that LHC could call on the Securities pursuant to the
first principle in credit law that the credit itself is independent of the underlying transaction and that as
long as the beneficiary complied with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even assuming that the trial courts denial of
petitioners application for a writ of preliminary injunction was erroneous, it constituted only an error of
54
judgment which is not correctible by certiorari, unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY

A BENEFICIARY THEREOF WHERE THE BENEFICIARYS CALL THEREON IS WRONGFUL OR
FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE
RESOLUTION OF PETITIONERS AND LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHCS CALL
THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN

THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.[21]

Petitioner contends that the courts below improperly relied on the independence principle on letters of
credit when this case falls squarely within the fraud exception rule. Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental

Memorandum,[23] alleging that in the course of the proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through the use of different modes of discovery available
in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were
discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays
notwithstanding its knowledge and admission that delays were excused under the Turnkey Contractto be
able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave
irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to
return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioners theory on
appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioners Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It
adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW,
55
entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims and
counterclaims arising from petitioners performance/misperformance of its obligations as contractor for
LHC; and (2) Civil Case No. 04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro
Corporation before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution
of the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004.

In its Comment to petitioners Motion for Leave to File Addendum to Petitioners Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be returned is
outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs partial award is
now fully within the Makati RTCs jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement
of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it
was under no obligation to look into the validity or accuracy of the certification submitted by respondent
LHC or into the latters capacity or entitlement to so certify. It adds that the act sought to be enjoined by
petitioner was already fait accompli and the present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under which
it had no obligation to ascertain the truth of LHCs allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioners prayer for preliminary injunction had been rendered moot and academic.

At the core of the present controversy is the applicability of the independence principle and fraud
exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred
to simply as credits, would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter
of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the banks customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable.[29]

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient

and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of
a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying.[30] The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used
in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-
sale settings have come to be known as standby credits.[31]
There are three significant differences between commercial and standby credits. First, commercial credits
involve the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show
that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of the standby credit must certify that his
obligor has not performed the contract.[32]
56
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.[33] A letter of credit, however, changes its nature as different transactions occur
and if carried through to completion ends up as a binding contract between the issuing and honoring
banks without any regard or relation to the underlying contract or disputes between the parties thereto.[34]

Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary
Credits to standardize practices in the letter of credit area. The vast majority of letters of credit
incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits has undergone several
revisions, the latest of which was in 1993.[36]

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the
absence of any particular provision in the Code of Commerce, commercial transactions shall be governed
by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of
Appeals,[38] this Court ruled that there being no specific provisions which govern the legal complexities
arising from transactions involving letters of credit, not only between or among banks themselves but also
between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently,
the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the applicant resulting from his relationships with
the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever.[39]

The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like
for instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse of the credit.[40]

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it
is a defense available only to respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with.[41] Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties
57
in the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of
credit is independent of the related and originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.

Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke
the independence principle on letters of creditdoes not impress this Court. To say that the independence
principle may only be invoked by the issuing banks would render nugatory the purpose for which the
letters of credit are used in commercial transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the
letter of credit from the issuing bank, the party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter
of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately
called beneficiary.

Petitioners argument that any dispute must first be resolved by the parties, whether through negotiations
or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the
letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of
credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the
release of funds under a letter of credit. In other words, the argument is incompatible with the very nature
of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract
entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters
of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial
credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are usually triggered by a factual
determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one
hand and the standby credit on the other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both ensure against the obligors
nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance,
usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of
determining whether the obligor defaulted (a matter over which the surety and the beneficiary often
litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong financial institution that will perform if the
obligor does not. The beneficiary also should understand that such performance must await the sometimes
lengthy and costly determination that the obligor has defaulted. In addition, the suretys performance takes
time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event
of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with
the obligor (the applicant) over the nature of the applicants performance takes place. The standby credit
has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligors performance. The beneficiary may have to establish that fact in 58

litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of
delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed
and that the beneficiarys presentation of those documents is not rightful. In that case, the applicant may
sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant,
holds the money. Parties that use a standby credit and courts construing such a credit should understand
this allocation of burdens. There is a tendency in some quarters to overlook this distinction between
surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.[42]

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioners
posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the amounts
due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules
that the respondent banks were left with little or no alternative but to honor the credit and both of them in
fact submitted that it was ministerial for them to honor the call for payment.[43]

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of
the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the Securities), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually renewable basis.[44]

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way
of liquidated damages (Liquidated Damages for Delay) the amount of US$75,000 for each and every day
or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided
that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of
the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on
the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of
such damages from any monies due, or to become due to the Contractor and/or by drawing on the
Security.[45]

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with good
faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the intention of the parties to
make the Securities answerable for the liquidated damages occasioned by any delay on the part of
petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which the Securities have
been proffered. Thus, even without the use of the independence principle, the Turnkey Contract itself
bestows upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is
wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in
the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It
asserts that the fraud exception exists when the beneficiary, for the purpose of drawing on the credit,
59
fraudulently presents to the confirming bank, documents that contain, expressly or by implication,
material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it.

Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not without
limits and it is important to fashion those limits in light of the principles purpose, which is to serve the
commercial function of the credit. If it does not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should apply.

It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare
the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether
petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of defaultsuch issue having been submitted by the parties
to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. [47]

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse is
an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the
fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud
under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.[49]

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension
of two hundred fifty-three (253) days which would move the target completion date. It argued that if its
claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any
liquidated damages.[50]

Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is
not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of
the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking cognizance of the case, the only
limitation being that this discretion should be exercised based upon the grounds and in the manner
provided by law.[51]

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are
violative of the said right.[52] It must be shown that the invasion of the right sought to be protected is
material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent
and paramount necessity for the writ to prevent serious damage.[53] Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation.[54]

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call
on the Securities which would justify the issuance of preliminary injunction. By petitioners own
admission, the right of LHC to call on the Securities was contractually rooted and subject to the express
stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5,
in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities,
stating the nature of the default for which the claim on any of the Securities is to be made, provided that
no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of
60
their expiration in accordance with Clause 4.2.2.[56]

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.[57]

The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties
intended that all disputes regarding delay should first be settled through arbitration before LHC would be
allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on
the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.[58] What
petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be
premature and without basis in view of the pending disputes between them. Petitioner should not be
allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of
an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for the first time on
appeal.[59] The lower courts could thus not be faulted for not applying the fraud exception rule not only
because the existence of fraud was fundamentally interwoven with the issue of default still pending before
the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the
courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to
prevent LHCs call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey
Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with
the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.[60] More importantly, pursuant to the principle of autonomy of
contracts embodied in Article 1306 of the Civil Code,[61] petitioner could have incorporated in its Contract
with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it
would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due
under the Securities, this Court reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHCs certification that default has occurred. Neither
were they bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent
banks undertaking was simply to pay once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon
the Securities were wrongful due to the non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be foreclosed pursuant to general principles
of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters of
credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant
petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post Manila,
Inc.[64] this Court ruled that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former employerthe very purpose of the
preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely
61
useless as there would be no actual case or controversy between the parties insofar as the preliminary
injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition
mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive
relief could have no practical effect on the existing controversy.[65] The other issues raised by petitioner
particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according
to it, could properly be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions.
First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this
Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioners acts
constitutes forum-shopping which should be punished by the dismissal of the claim in both forums.
Second, in its Comment to Petitioners Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same
time pursuing Civil Case No. 04-332wherein petitioner pressed for judgment on the issue of whether the
funds LHC drew on the Securities should be returnedpetitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially the same issues
either pending in, or already resolved adversely, by some other court.[67] It may also consist in the act of a
party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal or special civil action of certiorari, or the
institution of two or more actions or proceedings grounded on the same cause on the supposition that one
or the other court might look with favor upon the other party.[68] To determine whether a party violated
the rule against forum-shopping, the test applied is whether the elements of litis pendentia are present or
whether a final judgment in one case will amount to res judicata in another.[69] Forum-shopping
constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and
direct contempt of court.[70]

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has
been given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

18.

SECOND DIVISION

[G.R. No. 129916. March 26, 2001]

MAGELLAN CAPITAL MANAGEMENT CORPORATION and MAGELLAN CAPITAL

HOLDINGS CORPORATION, petitioners, vs. ROLANDO M. ZOSA and HON. JOSE P.
SOBERANO, JR., in his capacity as Presiding Judge of Branch 58 of the Regional Trial Court Of
Cebu, 7th Judicial Region, respondents. 62

DECISION

BUENA, J.:

Under a management agreement entered into on March 18, 1994, Magellan Capital Holdings Corporation
[MCHC] appointed Magellan Capital Management Corporation [MCMC] as manager for the operation of
its business and affairs.[1] Pursuant thereto, on the same month, MCHC, MCMC, and private respondent
Rolando M. Zosa entered into an "Employment Agreement" designating Zosa as President and Chief
Executive Officer of MCHC.

Under the "Employment Agreement", the term of respondent Zosa's employment shall be co-terminous
with the management agreement, or until March 1996,[2] unless sooner terminated pursuant to the
provisions of the Employment Agreement.[3] The grounds for termination of employment are also
provided in the Employment Agreement.

On May 10, 1995, the majority of MCHCs Board of Directors decided not to re-elect respondent Zosa as
President and Chief Executive Officer of MCHC on account of loss of trust and confidence [4]arising from
alleged violation of the resolution issued by MCHC's board of directors and of the non-competition clause
of the Employment Agreement.[5] Nevertheless, respondent Zosa was elected to a new position as
MCHC's Vice-Chairman/Chairman for New Ventures Development.[6]

On September 26, 1995, respondent Zosa communicated his resignation for good reason from the position
of Vice-Chairman under paragraph 7 of the Employment Agreement on the ground that said position had
less responsibility and scope than President and Chief Executive Officer. He demanded that he be given
termination benefits as provided for in Section 8 (c) (i) (ii) and (iii) of the Employment Agreement.[7]

In a letter dated October 20, 1995, MCHC communicated its non-acceptance of respondent Zosa's
resignation for good reason, but instead informed him that the Employment Agreement is terminated for
cause, effective November 19, 1995, in accordance with Section 7 (a) (v) of the said agreement, on
account of his breach of Section 12 thereof. Respondent Zosa was further advised that he shall have no
further rights under the said Agreement or any claims against the Manager or the Corporation except the
right to receive within thirty (30) days from November 19, 1995, the amounts stated in Section 8 (a) (i)
(ii) of the Agreement.[8]

Disagreeing with the position taken by petitioners, respondent Zosa invoked the Arbitration Clause of
the Employment Agreement, to wit:

23. Arbitration. In the event that any dispute, controversy or claim arises out of or under any provisions of
this Agreement, then the parties hereto agree to submit such dispute, controversy or claim to arbitration as
set forth in this Section and the determination to be made in such arbitration shall be final and
binding. Arbitration shall be effected by a panel of three arbitrators. The Manager, Employee and
Corporation shall designate one (1) arbitrator who shall, in turn, nominate and elect who among them
shall be the chairman of the committee. Any such arbitration, including the rendering of an arbitration
award, shall take place in Metro Manila. The arbitrators shall interpret this Agreement in accordance with
the substantive laws of the Republic of the Philippines. The arbitrators shall have no power to add to,
subtract from or otherwise modify the terms of Agreement or to grant injunctive relief of any nature. Any
judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof, with
costs of the arbitration to be borne equally by the parties, except that each party shall pay the fees and
expenses of its own counsel in the arbitration.

On November 10, 1995, respondent Zosa designated his brother, Atty. Francis Zosa, as his representative
in the arbitration panel[9] while MCHC designated Atty. Inigo S. Fojas[10] and MCMC nominated Atty.
Enrique I. Quiason[11] as their respective representatives in the arbitration panel. However, instead of
submitting the dispute to arbitration, respondent Zosa, on April 17, 1996, filed an action for damages
against petitioners before the Regional Trial Court of Cebu[12] to enforce his benefits under
the Employment Agreement.
63
[13]
On July 3, 1996, petitioners filed a motion to dismiss arguing that (1) the trial court has no jurisdiction
over the instant case since respondent Zosa's claims should be resolved through arbitration pursuant to
Section 23 of the Employment Agreement with petitioners; and (2) the venue is improperly laid since
respondent Zosa, like the petitioners, is a resident of Pasig City and thus, the venue of this case, granting
without admitting that the respondent has a cause of action against the petitioners cognizable by the RTC,
should be limited only to RTC-Pasig City.[14]

Meanwhile, respondent Zosa filed an amended complaint dated July 5, 1996.

On August 1, 1996, the RTC Branch 58 of Cebu City issued an Order denying petitioners motion to
dismiss upon the findings that (1) the validity and legality of the arbitration provision can only be
determined after trial on the merits; and (2) the amount of damages claimed, which is over P100,000.00,
falls within the jurisdiction of the RTC.[15] Petitioners filed a motion for reconsideration which was denied
by the RTC in an order dated September 5, 1996.[16]

In the interim, on August 22, 1996, in compliance with the earlier order of the court directing petitioners
to file responsive pleading to the amended complaint, petitioners filed their Answer Ad Cautelamwith
counterclaim reiterating their position that the dispute should be settled through arbitration and the court
had no jurisdiction over the nature of the action.[17]

On October 21, 1996, the trial court issued its pre-trial order declaring the pre-trial stage terminated and
setting the case for hearing. The order states:

ISSUES:

The Court will only resolve one issue in so far as this case is concerned, to wit:

Whether or not the Arbitration Clause contained in Sec.23 of the Employment Agreement is void and of
no effect: and, if it is void and of no effect, whether or not the plaintiff is entitled to damages in
accordance with his complaint and the defendants in accordance with their counterclaim.

It is understood, that in the event the arbitration clause is valid and binding between the parties, the parties
shall submit their respective claim to the Arbitration Committee in accordance with the said arbitration
clause, in which event, this case shall be deemed dismissed.[18]

On November 18, 1996, petitioners filed their Motion Ad Cautelam for the Correction, Addition and
Clarification of the Pre-trial Order dated November 15 1996,[19] which was denied by the court in an order
dated November 28, 1996.[20]

Thereafter, petitioners MCMC and MCHC filed a Motion Ad Cautelam for the parties to file their
Memoranda to support their respective stand on the issue of the validity of the arbitration clause contained
in the Employment Agreement. In an order dated December 13, 1996, the trial court denied the motion of
petitioners MCMC and MCHC.

On January 17, 1997, petitioners MCMC and MCHC filed a petition for certiorari and prohibition under
Rule 65 of the Rules of Court with the Court of Appeals, questioning the trial court orders dated August
1, 1996, September 5, 1996, and December 13, 1996.[21]
On March 21, 1997, the Court of Appeals rendered a decision, giving due course to the petition, the
decretal portion of which reads:

WHEREFORE, the petition is GIVEN DUE COURSE. The respondent court is directed to resolve the
issue on the validity or effectivity of the arbitration clause in the Employment Agreement, and to suspend
further proceedings in the trial on the merits until the said issue is resolved. The questioned orders are set
aside insofar as they contravene this Courts resolution of the issues raised as herein pronounced.

The petitioner is required to remit to this Court the sum of P81.80 for cost within five (5) days from
notice. 64

SO ORDERED.[22]

Petitioners filed a motion for partial reconsideration of the CA decision praying (1) for the dismissal of
the case in the trial court, on the ground of lack of jurisdiction, and (2) that the parties be directed to
submit their dispute to arbitration in accordance with the Employment Agreement dated March 1994. The
CA, in a resolution promulgated on June 20, 1997, denied the motion for partial reconsideration for lack
of merit.

In compliance with the CA decision, the trial court, on July 18, 1997, rendered a decision declaring the
arbitration clause in the Employment Agreement partially void and of no effect. The dispositive portion of
the decision reads:

WHEREFORE, premises considered, judgment is hereby rendered partially declaring the arbitration
clause of the Employment Agreement void and of no effect, only insofar as it concerns the composition of
the panel of arbitrators, and directing the parties to proceed to arbitration in accordance with the
Employment Agreement under the panel of three (3) arbitrators, one for the plaintiff, one for the
defendants, and the third to be chosen by both the plaintiff and defendants. The other terms, conditions
and stipulations in the arbitration clause remain in force and effect."[23]

In view of the trial courts decision, petitioners filed this petition for review on certiorari, under Rule 45 of
the Rules of Court, assigning the following errors for the Courts resolution:

I. The trial court gravely erred when it ruled that the arbitration clause under the employment agreement
is partially void and of no effect, considering that:

A. The arbitration clause in the employment agreement dated March 1994 between respondent Zosa and
defendants MCHC and MCMC is valid and binding upon the parties thereto.

B. In view of the fact that there are three parties to the employment agreement, it is but proper that each
party be represented in the arbitration panel.

C. The trial court grievously erred in its conclusion that petitioners MCMC and MCHC represent the
same interest.

D. Respondent Zosa is estopped from questioning the validity of the arbitration clause, including the right
of petitioner MCMC to nominate its own arbitrator, which he himself has invoked.

II. In any event, the trial court acted without jurisdiction in hearing the case below, considering that it has
no jurisdiction over the nature of the action or suit since controversies in the election or appointment of
officers or managers of a corporation, such as the action brought by respondent Zosa, fall within the
original and exclusive jurisdiction of the Securities and Exchange Commission.

III. Contrary to respondent Zosas allegation, the issue of the trial courts jurisdiction over the case below
has not yet been resolved with finality considering that petitioners have expressly reserved their right to
raise said issue in the instant petition. Moreover, the principle of the law of the case is not applicable in
the instant case.
IV. Contrary to respondent Zosas allegation, petitioners MCMC and MCHC are not guilty of forum
shopping.

V. Contrary to respondent Zosas allegation, the instant petition for review involves only questions of law
and not of fact.[24]

We rule against the petitioners.

It is error for the petitioners to claim that the case should fall under the jurisdiction of the Securities and
Exchange Commission [SEC, for brevity]. The controversy does not in anyway involve the 65
election/appointment of officers of petitioner MCHC, as claimed by petitioners in their assignment of
errors. Respondent Zosas amended complaint focuses heavily on the illegality of the Employment
Agreements Arbitration Clause initially invoked by him in seeking his termination benefits under Section
8 of the employment contract. And under Republic Act No. 876, otherwise known as the Arbitration Law,
it is the regional trial court which exercises jurisdiction over questions relating to arbitration. We thus
advert to the following discussions made by the Court of Appeals, speaking thru Justice Minerva P.
Gonzaga-Reyes,[25] in C.A.-G.R. S.P. No. 43059, viz:

As regards the fourth assigned error, asserting that jurisdiction lies with the SEC, which is raised for the
first time in this petition, suffice it to state that the Amended Complaint squarely put in issue the question
whether the Arbitration Clause is valid and effective between the parties. Although the controversy which
spawned the action concerns the validity of the termination of the service of a corporate officer, the issue
on the validity and effectivity of the arbitration clause is determinable by the regular courts, and do not
fall within the exclusive and original jurisdiction of the SEC.

The determination and validity of the agreement is not a matter intrinsically connected with the regulation
and internal affairs of corporations (see Pereyra vs. IAC, 181 SCRA 244; Sales vs. SEC, 169 SCRA 121);
it is rather an ordinary case to be decided in accordance with the general laws, and do not require any
particular expertise or training to interpret and apply (Viray vs. CA, 191 SCRA 308).[26]

Furthermore, the decision of the Court of Appeals in CA-G.R. SP No. 43059 affirming the trial courts
assumption of jurisdiction over the case has become the law of the case which now binds the
petitioners. The law of the case doctrine has been defined as a term applied to an established rule that
when an appellate court passes on a question and remands the cause to the lower court for further
proceedings, the question there settled becomes the law of the case upon subsequent appeal.[27] To note,
the CAs decision in CA-G.R. SP No. 43059 has already attained finality as evidenced by a Resolution of
this Court ordering entry of judgment of said case, to wit:

ENTRY OF JUDGMENT

This is to certify that on September 8, 1997 a decision/resolution rendered in the above-entitled case was
filed in this Office, the dispositive part of which reads as follows:

G.R. No. 129615 (Magellan Capital Management Corporation, et al. vs. Court of Appeals, Rolando Zosa,
et al.).- Considering the petitioners manifestation dated August 11, 1997 and withdrawal of intention to
file petition for review on certiorari, the Court Resolved to DECLARE THIS CASE TERMINATED and
DIRECT the Clerk of Court to INFORM the parties that the judgment sought to be reviewed has become
final and executory, no appeal therefore having been timely perfected.

and that the same has, on September 17, 1997, become final and executory and is hereby recorded in the
Book of Entries of Judgments. [28]

Petitioners, therefore, are barred from challenging anew, through another remedial measure and in any
other forum, the authority of the regional trial court to resolve the validity of the arbitration clause, lest
they be truly guilty of forum-shopping which the courts consistently consider as a contumacious practice
that derails the orderly administration of justice.
Equally unavailing for the petitioners is the review by this Court, via the instant petition, of the factual
findings made by the trial court that the composition of the panel of arbitrators would, in all probability,
work injustice to respondent Zosa. We have repeatedly stressed that the jurisdiction of this Court in a
petition for review on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only
errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence
on record, or the assailed judgment is based on misapprehension of facts.[29]

Even if procedural rules are disregarded, and a scrutiny of the merits of the case is undertaken, this Court
finds the trial courts observations on why the composition of the panel of arbitrators should be voided,
66
incisively correct so as to merit our approval. Thus,

From the memoranda of both sides, the Court is of the view that the defendants [petitioner] MCMC and
MCHC represent the same interest. There is no quarrel that both defendants are entirely two different
corporations with personalities distinct and separate from each other and that a corporation has a
personality distinct and separate from those persons composing the corporation as well as from that of any
other legal entity to which it may be related.

But as the defendants [herein petitioner] represent the same interest, it could never be expected, in the
arbitration proceedings, that they would not protect and preserve their own interest, much less, would
both or either favor the interest of the plaintiff. The arbitration law, as all other laws, is intended for the
good and welfare of everybody. In fact, what is being challenged by the plaintiff herein is not the law
itself but the provision of the Employment Agreement based on the said law, which is the arbitration
clause but only as regards the composition of the panel of arbitrators. The arbitration clause in question
provides, thus:

In the event that any dispute, controversy or claim arise out of or under any provisions of this Agreement,
then the parties hereto agree to submit such dispute, controversy or claim to arbitration as set forth in this
Section and the determination to be made in such arbitration shall be final and binding. Arbitration shall
be effected by a panel of three arbitrators. The Manager, Employee, and Corporation shall designate one
(1) arbitrator who shall, in turn, nominate and elect as who among them shall be the chairman of the
committee. Any such arbitration, including the rendering of an arbitration award, shall take place in Metro
Manila. The arbitrators shall interpret this Agreement in accordance with the substantive laws of the
Republic of the Philippines. The arbitrators shall have no power to add to, subtract from or otherwise
modify the terms of this Agreement or to grant injunctive relief of any nature. Any judgment upon the
award of the arbitrators may be entered in any court having jurisdiction thereof, with costs of the
arbitration to be borne equally by the parties, except that each party shall pay the fees and expenses of its
own counsel in the arbitration. (Emphasis supplied).

From the foregoing arbitration clause, it appears that the two (2) defendants [petitioners] (MCMC and
MCHC) have one (1) arbitrator each to compose the panel of three (3) arbitrators. As the defendant
MCMC is the Manager of defendant MCHC, its decision or vote in the arbitration proceeding would
naturally and certainly be in favor of its employer and the defendant MCHC would have to protect and
preserve its own interest; hence, the two (2) votes of both defendants (MCMC and MCHC) would
certainly be against the lone arbitrator for the plaintiff [herein defendant]. Hence, apparently, plaintiff
[defendant] would never get or receive justice and fairness in the arbitration proceedings from the panel
of arbitrators as provided in the aforequoted arbitration clause. In fairness and justice to the plaintiff
[defendant], the two defendants (MCMC and MCHC)[herein petitioners] which represent the same
interest should be considered as one and should be entitled to only one arbitrator to represent them in the
arbitration proceedings.Accordingly, the arbitration clause, insofar as the composition of the panel of
arbitrators is concerned should be declared void and of no effect, because the law says, Any clause giving
one of the parties power to choose more arbitrators than the other is void and of no effect (Article 2045,
Civil Code).

The dispute or controversy between the defendants (MCMC and MCHC) [herein petitioners] and the
plaintiff [herein defendant] should be settled in the arbitration proceeding in accordance with the
Employment Agreement, but under the panel of three (3) arbitrators, one (1) arbitrator to represent the
plaintiff, one (1) arbitrator to represent both defendants (MCMC and MCHC)[herein petitioners] and the
third arbitrator to be chosen by the plaintiff [defendant Zosa] and defendants [petitioners].

x x x x x x x x x[30]

In this connection, petitioners attempt to put respondent in estoppel in assailing the arbitration clause
must be struck down. For one, this issue of estoppel, as likewise noted by the Court of Appeals, found its
way for the first time only on appeal. Well-settled is the rule that issues not raised below cannot be
resolved on review in higher courts.[31] Secondly, employment agreements such as the one at bar are
usually contracts of adhesion. Any ambiguity in its provisions is generally resolved against the party who 67

drafted the document. Thus, in the relatively recent case of Phil. Federation of Credit Cooperatives, Inc.
(PFCCI) and Fr. Benedicto Jayoma vs. NLRC and Victoria Abril,[32] we had the occasion to stress that
where a contract of employment, being a contract of adhesion, is ambiguous, any ambiguity therein
should be construed strictly against the party who prepared it. And, finally, respondent Zosa never
submitted himself to arbitration proceedings (as there was none yet) before bewailing the composition of
the panel of arbitrators. He in fact, lost no time in assailing the arbitration clause upon realizing the
inequities that may mar the arbitration proceedings if the existing line-up of arbitrators remained
unchecked.

We need only to emphasize in closing that arbitration proceedings are designed to level the playing field
among the parties in pursuit of a mutually acceptable solution to their conflicting claims. Any
arrangement or scheme that would give undue advantage to a party in the negotiating table is anathema to
the very purpose of arbitration and should, therefore, be resisted.

WHEREFORE, premises considered, the petition is hereby DISMISSED and the decision of the trial
court dated July 18, 1997 is AFFIRMED.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, and De Leon, Jr., JJ., concur. Quisumbing, J., on leave.

17.

THIRD DIVISION

G.R. No. 170633 October 17, 2007

MCC INDUSTRIAL SALES CORPORATION, petitioner,

vs.
SSANGYONG CORPORATION, respondents.

DECISION

NACHURA, J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-
G.R. CV No. 82983 and its Resolution2 denying the motion for reconsideration thereof.

Petitioner MCC Industrial Sales (MCC), a domestic corporation with office at Binondo, Manila, is
engaged in the business of importing and wholesaling stainless steel products. 3 One of its suppliers is the
Ssangyong Corporation (Ssangyong),4 an international trading company5 with head office in Seoul, South
Korea and regional headquarters in Makati City, Philippines.6 The two corporations conducted business
through telephone calls and facsimile or telecopy transmissions.7 Ssangyong would send the pro
forma invoices containing the details of the steel product order to MCC; if the latter conforms thereto, its
representative affixes his signature on the faxed copy and sends it back to Ssangyong, again by fax.8
On April 13, 2000, Ssangyong Manila Office sent, by fax, a letter 9 addressed to Gregory Chan, MCC
Manager [also the President10 of Sanyo Seiki Stainless Steel Corporation], to confirm MCC's and Sanyo
Seiki's order of 220 metric tons (MT) of hot rolled stainless steel under a preferential rate
of US$1,860.00 per MT. Chan, on behalf of the corporations, assented and affixed his signature on
the conforme portion of the letter.11

On April 17, 2000, Ssangyong forwarded to MCC Pro Forma Invoice No. ST2-
POSTSO40112 containing the terms and conditions of the transaction. MCC sent back by fax to
Ssangyong the invoice bearing the conformity signature13 of Chan. As stated in the pro forma invoice,
68
payment for the ordered steel products would be made through an irrevocable letter of credit (L/C) at
sight in favor of Ssangyong.14 Following their usual practice, delivery of the goods was to be made after
the L/C had been opened.

In the meantime, because of its confirmed transaction with MCC, Ssangyong placed the order with its
steel manufacturer, Pohang Iron and Steel Corporation (POSCO), in South Korea 15 and paid the same in
full.

Because MCC could open only a partial letter of credit, the order for 220MT of steel was split into
two,16 one for 110MT covered by Pro Forma Invoice No. ST2-POSTS0401-117 and another for 110MT
covered by ST2-POSTS0401-2,18 both dated April 17, 2000.

On June 20, 2000, Ssangyong, through its Manila Office, informed Sanyo Seiki and Chan, by way of a
fax transmittal, that it was ready to ship 193.597MT of stainless steel from Korea to the Philippines. It
requested that the opening of the L/C be facilitated.19 Chan affixed his signature on the fax transmittal and
returned the same, by fax, to Ssangyong.20

Two days later, on June 22, 2000, Ssangyong Manila Office informed Sanyo Seiki, thru Chan, that it was
able to secure a US$30/MT price adjustment on the contracted price of US$1,860.00/MT for the 200MT
stainless steel, and that the goods were to be shipped in two tranches, the first 100MT on that day and the
second 100MT not later than June 27, 2000. Ssangyong reiterated its request for the facilitation of the
L/C's opening.21

Ssangyong later, through its Manila Office, sent a letter, on June 26, 2000, to the Treasury Group of
Sanyo Seiki that it was looking forward to receiving the L/C details and a cable copy thereof that
day.22 Ssangyong sent a separate letter of the same date to Sanyo Seiki requesting for the opening of the
L/C covering payment of the first 100MT not later than June 28, 2000.23 Similar letters were transmitted
by Ssangyong Manila Office on June 27, 2000.24 On June 28, 2000, Ssangyong sent another facsimile
letter to MCC stating that its principal in Korea was already in a difficult situation 25 because of the failure
of Sanyo Seiki and MCC to open the L/C's.

The following day, June 29, 2000, Ssangyong received, by fax, a letter signed by Chan, requesting an
extension of time to open the L/C because MCC's credit line with the bank had been fully availed of in
connection with another transaction, and MCC was waiting for an additional credit line.26 On the same
date, Ssangyong replied, requesting that it be informed of the date when the L/C would be opened,
preferably at the earliest possible time, since its Steel Team 2 in Korea was having problems and
Ssangyong was incurring warehousing costs.27 To maintain their good business relationship and to
support MCC in its financial predicament, Ssangyong offered to negotiate with its steel manufacturer,
POSCO, another US$20/MT discount on the price of the stainless steel ordered. This was intimated in
Ssangyong's June 30, 2000 letter to MCC.28 On July 6, 2000, another follow-up letter29 for the opening of
the L/C was sent by Ssangyong to MCC.

However, despite Ssangyong's letters, MCC failed to open a letter of credit. 30 Consequently, on August
15, 2000, Ssangyong, through counsel, wrote Sanyo Seiki that if the L/C's were not opened, Ssangyong
would be compelled to cancel the contract and hold MCC liable for damages for breach thereof
amounting to US$96,132.18, inclusive of warehouse expenses, related interests and charges.31
Later, Pro Forma Invoice Nos. ST2-POSTS080-132 and ST2-POSTS080-233 dated August 16, 2000 were
issued by Ssangyong and sent via fax to MCC. The invoices slightly varied the terms of the earlier pro
forma invoices (ST2-POSTSO401, ST2-POSTS0401-1 and ST2-POSTS0401-2), in that the quantity
was now officially 100MT per invoice and the price was reduced to US$1,700.00 per MT. As can be
gleaned from the photocopies of the said August 16, 2000 invoices submitted to the court, they both bear
the conformity signature of MCC Manager Chan.

On August 17, 2000, MCC finally opened an L/C with PCIBank for US$170,000.00 covering payment
for 100MT of stainless steel coil under Pro Forma Invoice No. ST2-POSTS080-2.34 The goods covered
69
by the said invoice were then shipped to and received by MCC.35

MCC then faxed to Ssangyong a letter dated August 22, 2000 signed by Chan, requesting for a price
adjustment of the order stated in Pro Forma Invoice No. ST2-POSTS080-1, considering that the
prevailing price of steel at that time was US$1,500.00/MT, and that MCC lost a lot of money due to a
recent strike.36

Ssangyong rejected the request, and, on August 23, 2000, sent a demand letter 37 to Chan for the opening
of the second and last L/C of US$170,000.00 with a warning that, if the said L/C was not opened by MCC
on August 26, 2000, Ssangyong would be constrained to cancel the contract and hold MCC liable for
US$64,066.99 (representing cost difference, warehousing expenses, interests and charges as of August
15, 2000) and other damages for breach. Chan failed to reply.

Exasperated, Ssangyong through counsel wrote a letter to MCC, on September 11, 2000, canceling the
sales contract under ST2-POSTS0401-1 /ST2-POSTS0401-2, and demanding payment of US$97,317.37
representing losses, warehousing expenses, interests and charges.38

Ssangyong then filed, on November 16, 2001, a civil action for damages due to breach of contract against
defendants MCC, Sanyo Seiki and Gregory Chan before the Regional Trial Court of Makati City. In its
complaint,39Ssangyong alleged that defendants breached their contract when they refused to open the L/C
in the amount of US$170,000.00 for the remaining 100MT of steel under Pro Forma Invoice Nos. ST2-
POSTS0401-1 and ST2-POSTS0401-2.

After Ssangyong rested its case, defendants filed a Demurrer to Evidence40 alleging that Ssangyong failed
to present the original copies of the pro forma invoices on which the civil action was based. In an Order
dated April 24, 2003, the court denied the demurrer, ruling that the documentary evidence presented had
already been admitted in the December 16, 2002 Order41 and their admissibility finds support in Republic
Act (R.A.) No. 8792, otherwise known as the Electronic Commerce Act of 2000. Considering that both
testimonial and documentary evidence tended to substantiate the material allegations in the complaint,
Ssangyong's evidence sufficed for purposes of a prima facie case.42

After trial on the merits, the RTC rendered its Decision43 on March 24, 2004, in favor of Ssangyong. The
trial court ruled that when plaintiff agreed to sell and defendants agreed to buy the 220MT of steel
products for the price of US$1,860 per MT, the contract was perfected. The subject transaction was
evidenced by Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2, which were later
amended only in terms of reduction of volume as well as the price per MT, following Pro Forma Invoice
Nos. ST2-POSTS080-1 and ST2-POSTS080-2. The RTC, however, excluded Sanyo Seiki from liability
for lack of competent evidence. The fallo of the decision reads:

WHEREFORE, premises considered, Judgment is hereby rendered ordering defendants MCC Industrial
Sales Corporation and Gregory Chan, to pay plaintiff, jointly and severally the following:

1) Actual damages of US$93,493.87 representing the outstanding principal claim plus interest at the rate
of 6% per annum from March 30, 2001.

2) Attorney's fees in the sum of P50,000.00 plus P2,000.00 per counsel's appearance in court, the same
being deemed just and equitable considering that by reason of defendants' breach of their obligation under
the subject contract, plaintiff was constrained to litigate to enforce its rights and recover for the damages
it sustained, and therefore had to engage the services of a lawyer.

3) Costs of suit.

No award of exemplary damages for lack of sufficient basis.

SO ORDERED.44

On April 22, 2004, MCC and Chan, through their counsel of record, Atty. Eladio B. Samson, filed their 70
Notice of Appeal.45 On June 8, 2004, the law office of Castillo Zamora & Poblador entered its appearance
as their collaborating counsel.

In their Appeal Brief filed on March 9, 2005,46 MCC and Chan raised before the CA the following errors
of the RTC:

I. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING THAT APPELLANTS

VIOLATED THEIR CONTRACT WITH APPELLEE

A. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING THAT APPELLANTS

AGREED TO PURCHASE 200 METRIC TONS OF STEEL PRODUCTS FROM APPELLEE,
INSTEAD OF ONLY 100 METRIC TONS.

1. THE HONORABLE COURT A QUO PLAINLY ERRED IN ADMITTING IN EVIDENCE THE PRO
FORMA INVOICES WITH REFERENCE NOS. ST2- POSTS0401-1 AND ST2-POSTS0401-2.

II. THE HONORABLE COURT A QUO PLAINLY ERRED IN AWARDING ACTUAL DAMAGES
TO APPELLEE.

III. THE HONORABLE COURT A QUO PLAINLY ERRED IN AWARDING ATTORNEY'S FEES TO
APPELLEE.

IV. THE HONORABLE COURT A QUO PLAINLY ERRED IN FINDING APPELLANT GREGORY
CHAN JOINTLY AND SEVERALLY LIABLE WITH APPELLANT MCC.47

On August 31, 2005, the CA rendered its Decision48 affirming the ruling of the trial court, but absolving
Chan of any liability. The appellate court ruled, among others, that Pro Forma Invoice Nos. ST2-
POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E", "E-1" and "F") were admissible in evidence,
although they were mere facsimile printouts of MCC's steel orders.49 The dispositive portion of the
appellate court's decision reads:

WHEREFORE, premises considered, the Court holds:

(1) The award of actual damages, with interest, attorney's fees and costs ordered by the lower court is
hereby AFFIRMED.

(2) Appellant Gregory Chan is hereby ABSOLVED from any liability.

SO ORDERED.50

A copy of the said Decision was received by MCC's and Chan's principal counsel, Atty. Eladio B.
Samson, on September 14, 2005.51 Their collaborating counsel, Castillo Zamora & Poblador,52 likewise,
received a copy of the CA decision on September 19, 2005.53

On October 4, 2005, Castillo Zamora & Poblador, on behalf of MCC, filed a motion for reconsideration
of the said decision.54 Ssangyong opposed the motion contending that the decision of the CA had become
final and executory on account of the failure of MCC to file the said motion within the reglementary
period. The appellate court resolved, on November 22, 2005, to deny the motion on its merits, 55 without,
however, ruling on the procedural issue raised.
Aggrieved, MCC filed a petition for review on certiorari56 before this Court, imputing the following
errors to the Court of Appeals:

THE COURT OF APPEALS DECIDED A LEGAL QUESTION NOT IN ACCORDANCE WITH

JURISPRUDENCE AND SANCTIONED A DEPARTURE FROM THE USUAL AND ACCEPTED
COURSE OF JUDICIAL PROCEEDINGS BY REVERSING THE COURT A QUO'S DISMISSAL OF
THE COMPLAINT IN CIVIL CASE NO. 02-124 CONSIDERING THAT:

I. THE COURT OF APPEALS ERRED IN SUSTAINING THE ADMISSIBILITY IN EVIDENCE OF

THE PRO-FORMA INVOICES WITH REFERENCE NOS. ST2-POSTSO401-1 AND ST2- 71

POSTSO401-2, DESPITE THE FACT THAT THE SAME WERE MERE PHOTOCOPIES OF
FACSIMILE PRINTOUTS.

II. THE COURT OF APPEALS FAILED TO APPRECIATE THE OBVIOUS FACT THAT, EVEN
ASSUMING PETITIONER BREACHED THE SUPPOSED CONTRACT, THE FACT IS THAT
PETITIONER FAILED TO PROVE THAT IT SUFFERED ANY DAMAGES AND THE AMOUNT
THEREOF.

III. THE AWARD OF ACTUAL DAMAGES IN THE AMOUNT OF US$93,493.87 IS SIMPLY

UNCONSCIONABLE AND SHOULD HAVE BEEN AT LEAST REDUCED, IF NOT DELETED BY
THE COURT OF APPEALS.57

In its Comment, Ssangyong sought the dismissal of the petition, raising the following arguments: that the
CA decision dated 15 August 2005 is already final and executory, because MCC's motion for
reconsideration was filed beyond the reglementary period of 15 days from receipt of a copy thereof, and
that, in any case, it was a pro formamotion; that MCC breached the contract for the purchase of the steel
products when it failed to open the required letter of credit; that the printout copies and/or photocopies of
facsimile or telecopy transmissions were properly admitted by the trial court because they are considered
original documents under R.A. No. 8792; and that MCC is liable for actual damages and attorney's fees
because of its breach, thus, compelling Ssangyong to litigate.

The principal issues that this Court is called upon to resolve are the following:

I – Whether the CA decision dated 15 August 2005 is already final and executory;

II – Whether the print-out and/or photocopies of facsimile transmissions are electronic evidence and
admissible as such;

III – Whether there was a perfected contract of sale between MCC and Ssangyong, and, if in the
affirmative, whether MCC breached the said contract; and

IV – Whether the award of actual damages and attorney's fees in favor of Ssangyong is proper and
justified.

-I-

It cannot be gainsaid that in Albano v. Court of Appeals,58 we held that receipt of a copy of the decision
by one of several counsels on record is notice to all, and the period to appeal commences on such date
even if the other counsel has not yet received a copy of the decision. In this case, when Atty. Samson
received a copy of the CA decision on September 14, 2005, MCC had only fifteen (15) days within which
to file a motion for reconsideration conformably with Section 1, Rule 52 of the Rules of Court, or to file a
petition for review on certiorari in accordance with Section 2, Rule 45. The period should not be reckoned
from September 29, 2005 (when Castillo Zamora & Poblador received their copy of the decision) because
notice to Atty. Samson is deemed notice to collaborating counsel.

We note, however, from the records of the CA, that it was Castillo Zamora & Poblador, not Atty.
Samson, which filed both MCC's and Chan's Brief and Reply Brief. Apparently, the arrangement between
the two counsels was for the collaborating, not the principal, counsel to file the appeal brief and
subsequent pleadings in the CA. This explains why it was Castillo Zamora & Poblador which filed the
motion for the reconsideration of the CA decision, and they did so on October 5, 2005, well within the
15-day period from September 29, 2005, when they received their copy of the CA decision. This could
also be the reason why the CA did not find it necessary to resolve the question of the timeliness of
petitioner's motion for reconsideration, even as the CA denied the same.

Independent of this consideration though, this Court assiduously reviewed the records and found that
strong concerns of substantial justice warrant the relaxation of this rule.

In Philippine Ports Authority v. Sargasso Construction and Development Corporation,59 we ruled that: 72

In Orata v. Intermediate Appellate Court, we held that where strong considerations of substantive justice
are manifest in the petition, this Court may relax the strict application of the rules of procedure in the
exercise of its legal jurisdiction. In addition to the basic merits of the main case, such a petition usually
embodies justifying circumstance which warrants our heeding to the petitioner's cry for justice in spite of
the earlier negligence of counsel. As we held in Obut v. Court of Appeals:

[W]e cannot look with favor on a course of action which would place the administration of justice in a
straight jacket for then the result would be a poor kind of justice if there would be justice at all. Verily,
judicial orders, such as the one subject of this petition, are issued to be obeyed, nonetheless a non-
compliance is to be dealt with as the circumstances attending the case may warrant. What should guide
judicial action is the principle that a party-litigant is to be given the fullest opportunity to establish the
merits of his complaint or defense rather than for him to lose life, liberty, honor or property on
technicalities.

The rules of procedure are used only to secure and not override or frustrate justice. A six-day delay in the
perfection of the appeal, as in this case, does not warrant the outright dismissal of the appeal.
In Development Bank of the Philippines vs. Court of Appeals, we gave due course to the petitioner's
appeal despite the late filing of its brief in the appellate court because such appeal involved public
interest. We stated in the said case that the Court may exempt a particular case from a strict application of
the rules of procedure where the appellant failed to perfect its appeal within the reglementary period,
resulting in the appellate court's failure to obtain jurisdiction over the case. In Republic vs. Imperial, Jr.,
we also held that there is more leeway to exempt a case from the strictness of procedural rules when the
appellate court has already obtained jurisdiction over the appealed case. We emphasize that:

[T]he rules of procedure are mere tools intended to facilitate the attainment of justice, rather than frustrate
it. A strict and rigid application of the rules must always be eschewed when it would subvert the rule's
primary objective of enhancing fair trials and expediting justice. Technicalities should never be used to
defeat the substantive rights of the other party. Every party-litigant must be afforded the amplest
opportunity for the proper and just determination of his cause, free from the constraints of technicalities.60

Moreover, it should be remembered that the Rules were promulgated to set guidelines in the orderly
administration of justice, not to shackle the hand that dispenses it. Otherwise, the courts would be
consigned to being mere slaves to technical rules, deprived of their judicial discretion. Technicalities must
take a backseat to substantive rights. After all, it is circumspect leniency in this respect that will give the
parties the fullest opportunity to ventilate the merits of their respective causes, rather than have them lose
life, liberty, honor or property on sheer technicalities.61

The other technical issue posed by respondent is the alleged pro forma nature of MCC's motion for
reconsideration, ostensibly because it merely restated the arguments previously raised and passed upon by
the CA.

In this connection, suffice it to say that the mere restatement of arguments in a motion for reconsideration
does not per se result in a pro forma motion. In Security Bank and Trust Company, Inc. v. Cuenca,62 we
held that a motion for reconsideration may not be necessarily pro forma even if it reiterates the arguments
earlier passed upon and rejected by the appellate court. A movant may raise the same arguments precisely
to convince the court that its ruling was erroneous. Furthermore, the pro forma rule will not apply if the
arguments were not sufficiently passed upon and answered in the decision sought to be reconsidered.

- II -

The second issue poses a novel question that the Court welcomes. It provides the occasion for this Court
to pronounce a definitive interpretation of the equally innovative provisions of the Electronic Commerce
Act of 2000 (R.A. No. 8792) vis-à-vis the Rules on Electronic Evidence.

Although the parties did not raise the question whether the original facsimile transmissions are "electronic 73
data messages" or "electronic documents" within the context of the Electronic Commerce Act (the
petitioner merely assails as inadmissible evidence the photocopies of the said facsimile transmissions), we
deem it appropriate to determine first whether the said fax transmissions are indeed within the coverage of
R.A. No. 8792 before ruling on whether the photocopies thereof are covered by the law. In any case, this
Court has ample authority to go beyond the pleadings when, in the interest of justice or for the promotion
of public policy, there is a need to make its own findings in order to support its conclusions.63

Petitioner contends that the photocopies of the pro forma invoices presented by respondent Ssangyong to
prove the perfection of their supposed contract of sale are inadmissible in evidence and do not fall within
the ambit of R.A. No. 8792, because the law merely admits as the best evidence the original fax
transmittal. On the other hand, respondent posits that, from a reading of the law and the Rules on
Electronic Evidence, the original facsimile transmittal of the pro forma invoice is admissible in evidence
since it is an electronic document and, therefore, the best evidence under the law and the Rules.
Respondent further claims that the photocopies of these fax transmittals (specifically ST2-POSTS0401-
1 and ST2-POSTS0401-2) are admissible under the Rules on Evidence because the respondent
sufficiently explained the non-production of the original fax transmittals.

In resolving this issue, the appellate court ruled as follows:

Admissibility of Pro Forma

Invoices; Breach of Contract
by Appellants

Turning first to the appellants' argument against the admissibility of the Pro Forma Invoices with
Reference Nos. ST2-POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E", "E-1" and "F", pp. 215-218,
Records), appellants argue that the said documents are inadmissible (sic) being violative of the best
evidence rule.

The argument is untenable.

The copies of the said pro-forma invoices submitted by the appellee are admissible in evidence, although
they are mere electronic facsimile printouts of appellant's orders. Such facsimile printouts are considered
Electronic Documents under the New Rules on Electronic Evidence, which came into effect on August 1,
2001. (Rule 2, Section 1 [h], A.M. No. 01-7-01-SC).

"(h) 'Electronic document' refers to information or the representation of information, data, figures,
symbols or other modes of written expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored, processed, retrieved or produced electronically. It includes
digitally signed documents and any printout or output, readable by sight or other means, which accurately
reflects the electronic data message or electronic document. For purposes of these Rules, the term
'electronic document' may be used interchangeably with 'electronic data message'.

An electronic document shall be regarded as the equivalent of an original document under the Best
Evidence Rule, as long as it is a printout or output readable by sight or other means, showing to reflect the
data accurately. (Rule 4, Section 1, A.M. No. 01-7-01-SC)
The ruling of the Appellate Court is incorrect. R.A. No. 8792,64 otherwise known as the Electronic
Commerce Act of 2000, considers an electronic data message or an electronic document as the functional
equivalent of a written document for evidentiary purposes.65 The Rules on Electronic Evidence66 regards
an electronic document as admissible in evidence if it complies with the rules on admissibility prescribed
by the Rules of Court and related laws, and is authenticated in the manner prescribed by the said
Rules.67 An electronic document is also the equivalent of an original document under the Best Evidence
Rule, if it is a printout or output readable by sight or other means, shown to reflect the data accurately.68

Thus, to be admissible in evidence as an electronic data message or to be considered as the functional

74
equivalent of an original document under the Best Evidence Rule, the writing must foremost be an
"electronic data message" or an "electronic document."

The Electronic Commerce Act of 2000 defines electronic data message and electronic document as
follows:

Sec. 5. Definition of Terms. For the purposes of this Act, the following terms are defined, as follows:

xxx

c. "Electronic Data Message" refers to information generated, sent, received or stored by electronic,
optical or similar means.

xxx

f. "Electronic Document" refers to information or the representation of information, data, figures, symbols
or other modes of written expression, described or however represented, by which a right is established or
an obligation extinguished, or by which a fact may be proved and affirmed, which is received, recorded,
transmitted, stored, processed, retrieved or produced electronically.

The Implementing Rules and Regulations (IRR) of R.A. No. 8792,69 which was signed on July 13, 2000
by the then Secretaries of the Department of Trade and Industry, the Department of Budget and
Management, and then Governor of the Bangko Sentral ng Pilipinas, defines the terms as:

Sec. 6. Definition of Terms. For the purposes of this Act and these Rules, the following terms are
defined, as follows:

xxx

(e) "Electronic Data Message" refers to information generated, sent, received or stored by electronic,
optical or similar means, but not limited to, electronic data interchange (EDI), electronic mail, telegram,
telex or telecopy. Throughout these Rules, the term "electronic data message" shall be equivalent to and
be used interchangeably with "electronic document."

xxxx

(h) "Electronic Document" refers to information or the representation of information, data, figures,
symbols or other modes of written expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored, processed, retrieved or produced electronically. Throughout these
Rules, the term "electronic document" shall be equivalent to and be used interchangeably with "electronic
data message."

The phrase "but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or
telecopy" in the IRR's definition of "electronic data message" is copied from the Model Law on Electronic
Commerce adopted by the United Nations Commission on International Trade Law (UNCITRAL), 70 from
which majority of the provisions of R.A. No. 8792 were taken.71 While Congress deleted this phrase in
the Electronic Commerce Act of 2000, the drafters of the IRR reinstated it. The deletion by Congress of
the said phrase is significant and pivotal, as discussed hereunder.
The clause on the interchangeability of the terms "electronic data message" and "electronic document"
was the result of the Senate of the Philippines' adoption, in Senate Bill 1902, of the phrase "electronic
data message" and the House of Representative's employment, in House Bill 9971, of the term "electronic
document."72 In order to expedite the reconciliation of the two versions, the technical working group of
the Bicameral Conference Committee adopted both terms and intended them to be the equivalent of each
one.73 Be that as it may, there is a slight difference between the two terms. While "data message" has
reference to information electronically sent, stored or transmitted, it does not necessarily mean that it will
give rise to a right or extinguish an obligation,74 unlike an electronic document. Evident from the law,
however, is the legislative intent to give the two terms the same construction. 75

The Rules on Electronic Evidence promulgated by this Court defines the said terms in the following
manner:

SECTION 1. Definition of Terms. – For purposes of these Rules, the following terms are defined, as
follows:

xxxx

(g) "Electronic data message" refers to information generated, sent, received or stored by electronic,
optical or similar means.

(h) "Electronic document" refers to information or the representation of information, data, figures,
symbols or other modes of written expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored, processed, retrieved or produced electronically. It includes
digitally signed documents and print-out or output, readable by sight or other means, which accurately
reflects the electronic data message or electronic document. For purposes of these Rules, the term
"electronic document" may be used interchangeably with "electronic data message."

Given these definitions, we go back to the original question: Is an original printout of a facsimile
transmission an electronic data message or electronic document?

The definitions under the Electronic Commerce Act of 2000, its IRR and the Rules on Electronic
Evidence, at first glance, convey the impression that facsimile transmissions are electronic data messages
or electronic documents because they are sent by electronic means. The expanded definition of an
"electronic data message" under the IRR, consistent with the UNCITRAL Model Law, further supports
this theory considering that the enumeration "xxx [is] not limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy." And to telecopy is to send a document from one place to
another via a fax machine.75

As further guide for the Court in its task of statutory construction, Section 37 of the Electronic Commerce
Act of 2000 provides that

Unless otherwise expressly provided for, the interpretation of this Act shall give due regard to its
international origin and the need to promote uniformity in its application and the observance of good
faith in international trade relations. The generally accepted principles of international law and convention
on electronic commerce shall likewise be considered.

Obviously, the "international origin" mentioned in this section can only refer to the UNCITRAL Model
Law, and the UNCITRAL's definition of "data message":

"Data message" means information generated, sent, received or stored by electronic, optical or similar
means including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or
telecopy.76

is substantially the same as the IRR's characterization of an "electronic data message."

However, Congress deleted the phrase, "but not limited to, electronic data interchange (EDI), electronic
mail, telegram, telex or telecopy," and replaced the term "data message" (as found in the UNCITRAL
Model Law ) with "electronic data message." This legislative divergence from what is assumed as the
term's "international origin" has bred uncertainty and now impels the Court to make an inquiry into the
true intent of the framers of the law. Indeed, in the construction or interpretation of a legislative measure,
the primary rule is to search for and determine the intent and spirit of the law. 77 A construction should be
rejected that gives to the language used in a statute a meaning that does not accomplish the purpose for
which the statute was enacted, and that tends to defeat the ends which are sought to be attained by the
enactment.78 76

Interestingly, when Senator Ramon B. Magsaysay, Jr., the principal author of Senate Bill 1902 (the
predecessor of R.A. No. 8792), sponsored the bill on second reading, he proposed to adopt the term "data
message" as formulated and defined in the UNCITRAL Model Law.79 During the period of amendments,
however, the term evolved into "electronic data message," and the phrase "but not limited to, electronic
data interchange (EDI), electronic mail, telegram, telex or telecopy" in the UNCITRAL Model Law was
deleted. Furthermore, the term "electronic data message," though maintaining its description under the
UNCITRAL Model Law, except for the aforesaid deleted phrase, conveyed a different meaning, as
revealed in the following proceedings:

xxxx

Senator Santiago. Yes, Mr. President. I will furnish a copy together with the explanation of this proposed
amendment.

And then finally, before I leave the Floor, may I please be allowed to go back to Section 5; the Definition
of Terms. In light of the acceptance by the good Senator of my proposed amendments, it will then become
necessary to add certain terms in our list of terms to be defined. I would like to add a definition on what is
"data," what is "electronic record" and what is an "electronic record system."

If the gentleman will give me permission, I will proceed with the proposed amendment on Definition of
Terms, Section 5.

Senator Magsaysay. Please go ahead, Senator Santiago.

Senator Santiago. We are in Part 1, short title on the Declaration of Policy, Section 5, Definition of
Terms.

At the appropriate places in the listing of these terms that have to be defined since these are arranged
alphabetically, Mr. President, I would like to insert the term DATA and its definition. So, the amendment
will read: "DATA" MEANS REPRESENTATION, IN ANY FORM, OF INFORMATION OR
CONCEPTS.

The explanation is this: This definition of "data" or "data" as it is now fashionably pronounced in America
- - the definition of "data" ensures that our bill applies to any form of information in an electronic record,
whether these are figures, facts or ideas.

So again, the proposed amendment is this: "DATA" MEANS REPRESENTATIONS, IN ANY FORM,
OF INFORMATION OR CONCEPTS.

Senator Magsaysay. May I know how will this affect the definition of "Data Message" which
encompasses electronic records, electronic writings and electronic documents?

Senator Santiago. These are completely congruent with each other. These are compatible. When we
define "data," we are simply reinforcing the definition of what is a data message.

Senator Magsaysay. It is accepted, Mr. President.

Senator Santiago. Thank you. The next term is "ELECTRONIC RECORD." The proposed amendment is
as follows:

"ELECTRONIC RECORD" MEANS DATA THAT IS RECORDED OR STORED ON ANY MEDIUM

IN OR BY A COMPUTER SYSTEM OR OTHER SIMILAR DEVICE, THAT CAN BE READ OR
PERCEIVED BY A PERSON OR A COMPUTER SYSTEM OR OTHER SIMILAR DEVICE. IT
INCLUDES A DISPLAY, PRINTOUT OR OTHER OUTPUT OF THAT DATA.

The explanation for this term and its definition is as follows: The term "ELECTRONIC RECORD" fixes
the scope of our bill. The record is the data. The record may be on any medium. It is electronic because it 77

is recorded or stored in or by a computer system or a similar device.

The amendment is intended to apply, for example, to data on magnetic strips on cards or in Smart
cards. As drafted, it would not apply to telexes or faxes, except computer-generated faxes, unlike the
United Nations model law on electronic commerce. It would also not apply to regular digital telephone
conversations since the information is not recorded. It would apply to voice mail since the information
has been recorded in or by a device similar to a computer. Likewise, video records are not covered.
Though when the video is transferred to a website, it would be covered because of the involvement of the
computer. Music recorded by a computer system on a compact disc would be covered.

In short, not all data recorded or stored in digital form is covered. A computer or a similar device has to
be involved in its creation or storage. The term "similar device" does not extend to all devices that create
or store data in digital form. Although things that are not recorded or preserved by or in a computer
system are omitted from this bill, these may well be admissible under other rules of law. This provision
focuses on replacing the search for originality proving the reliability of systems instead of that of
individual records and using standards to show systems reliability.

Paper records that are produced directly by a computer system such as printouts are themselves
electronic records being just the means of intelligible display of the contents of the record. Photocopies of
the printout would be paper record subject to the usual rules about copies, but the original printout
would be subject to the rules of admissibility of this bill.

However, printouts that are used only as paper records and whose computer origin is never again called
on are treated as paper records. In that case, the reliability of the computer system that produces the
record is irrelevant to its reliability.

Senator Magsaysay. Mr. President, if my memory does not fail me, earlier, the lady Senator accepted that
we use the term "Data Message" rather than "ELECTRONIC RECORD" in being consistent with the
UNCITRAL term of "Data Message." So with the new amendment of defining "ELECTRONIC
RECORD," will this affect her accepting of the use of "Data Message" instead of "ELECTRONIC
RECORD"?

Senator Santiago. No, it will not. Thank you for reminding me. The term I would like to insert is
ELECTRONIC DATA MESSAGE in lieu of "ELECTRONIC RECORD."

Senator Magsaysay. Then we are, in effect, amending the term of the definition of "Data Message" on
page 2A, line 31, to which we have no objection.

Senator Santiago. Thank you, Mr. President.

xxxx

Senator Santiago. Mr. President, I have proposed all the amendments that I desire to, including the
amendment on the effect of error or change. I will provide the language of the amendment together with
the explanation supporting that amendment to the distinguished sponsor and then he can feel free to take
it up in any session without any further intervention.
Senator Magsaysay. Before we end, Mr. President, I understand from the proponent of these amendments
that these are based on the Canadian E-commerce Law of 1998. Is that not right?

Senator Santiago. That is correct.80

Thus, when the Senate consequently voted to adopt the term "electronic data message," it was consonant
with the explanation of Senator Miriam Defensor-Santiago that it would not apply "to telexes or faxes,
except computer-generated faxes, unlike the United Nations model law on electronic commerce." In
explaining the term "electronic record" patterned after the E-Commerce Law of Canada, Senator
Defensor-Santiago had in mind the term "electronic data message." This term then, while maintaining part 78

of the UNCITRAL Model Law's terminology of "data message," has assumed a different context, this
time, consonant with the term "electronic record" in the law of Canada. It accounts for the addition of the
word "electronic" and the deletion of the phrase "but not limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy." Noteworthy is that the Uniform Law Conference of Canada,
explains the term "electronic record," as drafted in the Uniform Electronic Evidence Act, in a manner
strikingly similar to Sen. Santiago's explanation during the Senate deliberations:

"Electronic record" fixes the scope of the Act. The record is the data. The record may be any medium. It
is "electronic" because it is recorded or stored in or by a computer system or similar device. The Act is
intended to apply, for example, to data on magnetic strips on cards, or in smart cards. As drafted, it would
not apply to telexes or faxes (except computer-generated faxes), unlike the United Nations Model Law on
Electronic Commerce. It would also not apply to regular digital telephone conversations, since the
information is not recorded. It would apply to voice mail, since the information has been recorded in or by
a device similar to a computer. Likewise video records are not covered, though when the video is
transferred to a Web site it would be, because of the involvement of the computer. Music recorded by a
computer system on a compact disk would be covered.

In short, not all data recorded or stored in "digital" form is covered. A computer or similar device has to
be involved in its creation or storage. The term "similar device" does not extend to all devices that create
or store data in digital form. Although things that are not recorded or preserved by or in a computer
system are omitted from this Act, they may well be admissible under other rules of law. This Act focuses
on replacing the search for originality, proving the reliability of systems instead of that of individual
records, and using standards to show systems reliability.

Paper records that are produced directly by a computer system, such as printouts, are themselves
electronic records, being just the means of intelligible display of the contents of the record. Photocopies
of the printout would be paper records subject to the usual rules about copies, but the "original" printout
would be subject to the rules of admissibility of this Act.

However, printouts that are used only as paper records, and whose computer origin is never again called
on, are treated as paper records. See subsection 4(2). In this case the reliability of the computer system
that produced the record is relevant to its reliability.81

There is no question then that when Congress formulated the term "electronic data message," it intended
the same meaning as the term "electronic record" in the Canada law. This construction of the term
"electronic data message," which excludes telexes or faxes, except computer-generated faxes, is in
harmony with the Electronic Commerce Law's focus on "paperless" communications and the "functional
equivalent approach"82 that it espouses. In fact, the deliberations of the Legislature are replete with
discussions on paperless and digital transactions.

Facsimile transmissions are not, in this sense, "paperless," but verily are paper-based.

A facsimile machine, which was first patented in 1843 by Alexander Bain, 83 is a device that can send or
receive pictures and text over a telephone line. It works by digitizing an image—dividing it into a grid of
dots. Each dot is either on or off, depending on whether it is black or white. Electronically, each dot is
represented by a bit that has a value of either 0 (off) or 1 (on). In this way, the fax machine translates a
picture into a series of zeros and ones (called a bit map) that can be transmitted like normal computer
data. On the receiving side, a fax machine reads the incoming data, translates the zeros and ones back into
dots, and reprints the picture.84 A fax machine is essentially an image scanner, a modem and a computer
printer combined into a highly specialized package. The scanner converts the content of a physical
document into a digital image, the modem sends the image data over a phone line, and the printer at the
other end makes a duplicate of the original document.85 Thus, in Garvida v. Sales, Jr.,86where we
explained the unacceptability of filing pleadings through fax machines, we ruled that:

A facsimile or fax transmission is a process involving the transmission and reproduction of printed and
graphic matter by scanning an original copy, one elemental area at a time, and representing the shade or
79
tone of each area by a specified amount of electric current. The current is transmitted as a signal over
regular telephone lines or via microwave relay and is used by the receiver to reproduce an image of the
elemental area in the proper position and the correct shade. The receiver is equipped with a stylus or other
device that produces a printed record on paper referred to as a facsimile.

x x x A facsimile is not a genuine and authentic pleading. It is, at best, an exact copy preserving all the
marks of an original. Without the original, there is no way of determining on its face whether the
facsimile pleading is genuine and authentic and was originally signed by the party and his counsel. It
may, in fact, be a sham pleading.87

Accordingly, in an ordinary facsimile transmission, there exists an original paper-based information or

data that is scanned, sent through a phone line, and re-printed at the receiving end. Be it noted that in
enacting the Electronic Commerce Act of 2000, Congress intended virtual or paperless writings to be
the functional equivalent and to have the same legal function as paper-based documents.88 Further, in a
virtual or paperless environment, technically, there is no original copy to speak of, as all direct printouts
of the virtual reality are the same, in all respects, and are considered as originals.89 Ineluctably, the law's
definition of "electronic data message," which, as aforesaid, is interchangeable with "electronic
document," could not have included facsimile transmissions, which have an original paper-based copy as
sent and a paper-based facsimile copy as received. These two copies are distinct from each other, and
have different legal effects. While Congress anticipated future developments in communications and
computer technology90 when it drafted the law, it excluded the early forms of technology, like telegraph,
telex and telecopy (except computer-generated faxes, which is a newer development as compared to the
ordinary fax machine to fax machine transmission), when it defined the term "electronic data message."

Clearly then, the IRR went beyond the parameters of the law when it adopted verbatim the UNCITRAL
Model Law's definition of "data message," without considering the intention of Congress when the latter
deleted the phrase "but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex
or telecopy." The inclusion of this phrase in the IRR offends a basic tenet in the exercise of the rule-
making power of administrative agencies. After all, the power of administrative officials to promulgate
rules in the implementation of a statute is necessarily limited to what is found in the legislative enactment
itself. The implementing rules and regulations of a law cannot extend the law or expand its coverage, as
the power to amend or repeal a statute is vested in the Legislature.91 Thus, if a discrepancy occurs
between the basic law and an implementing rule or regulation, it is the former that prevails, because the
law cannot be broadened by a mere administrative issuance—an administrative agency certainly cannot
amend an act of Congress.92 Had the Legislature really wanted ordinary fax transmissions to be covered
by the mantle of the Electronic Commerce Act of 2000, it could have easily lifted without a bit of tatter
the entire wordings of the UNCITRAL Model Law.

Incidentally, the National Statistical Coordination Board Task Force on the Measurement of E-
Commerce,93 on November 22, 2006, recommended a working definition of "electronic commerce," as
"[a]ny commercial transaction conducted through electronic, optical and similar medium, mode,
instrumentality and technology. The transaction includes the sale or purchase of goods and services,
between individuals, households, businesses and governments conducted over computer-mediated
networks through the Internet, mobile phones, electronic data interchange (EDI) and other channels
through open and closed networks." The Task Force's proposed definition is similar to the Organization of
Economic Cooperation and Development's (OECD's) broad definition as it covers transactions made over
any network, and, in addition, it adopted the following provisions of the OECD definition: (1) for
transactions, it covers sale or purchase of goods and services; (2) for channel/network, it considers any
computer-mediated network and NOT limited to Internet alone; (3) it excludes transactions
received/placed using fax, telephone or non-interactive mail; (4) it considers payments done online or
offline; and (5) it considers delivery made online (like downloading of purchased books, music or
software programs) or offline (deliveries of goods).94

We, therefore, conclude that the terms "electronic data message" and "electronic document," as defined
under the Electronic Commerce Act of 2000, do not include a facsimile transmission. Accordingly,
a facsimile transmissioncannot be considered as electronic evidence. It is not the functional equivalent of
80
an original under the Best Evidence Rule and is not admissible as electronic evidence.

Since a facsimile transmission is not an "electronic data message" or an "electronic document," and
cannot be considered as electronic evidence by the Court, with greater reason is a photocopy of such a fax
transmission not electronic evidence. In the present case, therefore, Pro Forma Invoice Nos. ST2-
POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E" and "F"), which are mere photocopies of the
original fax transmittals, are not electronic evidence, contrary to the position of both the trial and the
appellate courts.

- III -

Nevertheless, despite the pro forma invoices not being electronic evidence, this Court finds that
respondent has proven by preponderance of evidence the existence of a perfected contract of sale.

In an action for damages due to a breach of a contract, it is essential that the claimant proves (1) the
existence of a perfected contract, (2) the breach thereof by the other contracting party and (3) the damages
which he/she sustained due to such breach. Actori incumbit onus probandi. The burden of proof rests on
the party who advances a proposition affirmatively.95 In other words, a plaintiff in a civil action must
establish his case by a preponderance of evidence, that is, evidence that has greater weight, or is more
convincing than that which is offered in opposition to it.96

In general, contracts are perfected by mere consent,97 which is manifested by the meeting of the offer and
the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain
and the acceptance absolute.98 They are, moreover, obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present. 99 Sale, being a consensual
contract, follows the general rule that it is perfected at the moment there is a meeting of the minds upon
the thing which is the object of the contract and upon the price. From that moment, the parties may
reciprocally demand performance, subject to the provisions of the law governing the form of contracts.100

The essential elements of a contract of sale are (1) consent or meeting of the minds, that is, to transfer
ownership in exchange for the price, (2) object certain which is the subject matter of the contract, and (3)
cause of the obligation which is established.101

In this case, to establish the existence of a perfected contract of sale between the parties, respondent
Ssangyong formally offered in evidence the testimonies of its witnesses and the following exhibits:

Exhibit Description Purpose

E Pro forma Invoice dated 17 April To show that defendants contracted with
2000 with Contract No. ST2- plaintiff for the delivery of 110 MT of
POSTS0401-1, photocopy stainless steel from Korea payable by way
of an irrevocable letter of credit in favor
of plaintiff, among other conditions.

E-1 Pro forma Invoice dated 17 April To show that defendants sent their
2000 with Contract No. ST2- confirmation of the (i) delivery to it of the
POSTS0401, contained in specified stainless steel products, (ii)
facsimile/thermal paper faxed by defendants' payment thereof by way of an
 defendants to plaintiff showing irrevocable letter of credit in favor of
the printed transmission details plaintiff, among other conditions.
on the upper portion of said
paper as coming from defendant
MCC on 26 Apr 00 08:41AM

E-2 Conforme signature of Mr. To show that defendants sent their

Gregory Chan, contained in confirmation of the (i) delivery to it of the
facsimile/thermal paper faxed by total of 220MT specified stainless steel 81
defendants to plaintiff showing products, (ii) defendants' payment thereof
the printed transmission details by way of an irrevocable letter of credit in
on the upper portion of said favor of plaintiff, among other conditions.
paper as coming from defendant
MCC on 26 Apr 00 08:41AM

F Pro forma Invoice dated 17 April To show that defendants contracted with
2000 with Contract No. ST2- plaintiff for delivery of another 110 MT of
POSTSO401-2, photocopy stainless steel from Korea payable by way
of an irrevocable letter of credit in favor
of plaintiff, among other conditions.

G Letter to defendant SANYO To prove that defendants were informed

SEIKE dated 20 June of the date of L/C opening and
2000, contained in defendant's conforme/approval thereof.
facsimile/thermal paper

G-1 Signature of defendant Gregory

Chan, contained in
facsimile/thermal paper.

H Letter to defendants dated 22 To prove that defendants were informed

June 2000, original of the successful price adjustments
secured by plaintiff in favor of former and
were advised of the schedules of its L/C
opening.

I Letter to defendants dated 26 To prove that plaintiff repeatedly

June 2000, original requested defendants for the agreed
opening of the Letters of Credit,
J Letter to defendants dated 26 defendants' failure and refusal to comply
June 2000, original with their obligations and the problems of
plaintiff is incurring by reason of
K Letter to defendants dated 27 defendants' failure and refusal to open the
June 2000, original L/Cs.

L Facsimile message to defendants

dated 28 June 2000, photocopy

M Letter from defendants dated 29 To prove that defendants admit of their

June 2000, contained in liabilities to plaintiff, that they requested
facsimile/thermal paper faxed by for "more extension" of time for the
defendants to plaintiff showing opening of the Letter of Credit, and
the printed transmission details begging for favorable understanding and
on the upper portion of said consideration.
paper as coming from defendant
 MCC on 29 June 00 11:12 AM

M-1 Signature of defendant Gregory

Chan, contained in
facsimile/thermal paper faxed by
defendants to plaintiff showing
the printed transmission details
on the upper portion of said
paper as coming from defendant 82
MCC on June 00 11:12 AM

N Letter to defendants dated 29

June 2000, original

O Letter to defendants dated 30 To prove that plaintiff reiterated its

June 2000, photocopy
request for defendants to L/C opening
after the latter's request for extension of
time was granted, defendants' failure and
refusal to comply therewith extension of
time notwithstanding.

P Letter to defendants dated 06 July

2000, original

Q Demand letter to defendants To prove that plaintiff was constrained to

dated 15 Aug 2000, original engaged services of a lawyer for
collection efforts.

R Demand letter to defendants To prove that defendants opened the first

dated 23 Aug 2000, original L/C in favor of plaintiff, requested for
further postponement of the final L/C and
for minimal amounts, were urged to open
the final L/C on time, and were informed
that failure to comply will cancel the
contract.

S Demand letter to defendants To show defendants' refusal and failure to

dated 11 Sept 2000, original open the final L/C on time, the
cancellation of the contract as a
consequence thereof, and final demand
upon defendants to remit its obligations.

W Letter from plaintiff To prove that there was a perfected sale

SSANGYONG to defendant and purchase agreement between the
SANYO SEIKI dated 13 April parties for 220 metric tons of steel
2000, with fax back from products at the price of US$1,860/ton.
defendants SANYO SEIKI/MCC
to plaintiff
SSANGYONG, contained in
facsimile/thermal paper with
back-up photocopy

W-1 Conforme signature of defendant To prove that defendants, acting through

Gregory Chan, contained in Gregory Chan, agreed to the sale and
facsimile/thermal paper with purchase of 220 metric tons of steel
 back-up photocopy products at the price of US$1,860/ton.

W-2 Name of sender MCC Industrial To prove that defendants sent their
Sales Corporation conformity to the sale and purchase
agreement by facsimile transmission.

X Pro forma Invoice dated 16 To prove that defendant MCC agreed to

August 2000, photocopy adjust and split the confirmed purchase
order into 2 shipments at 100 metric tons 83
each at the discounted price of
US$1,700/ton.

X-1 Notation "1/2", photocopy To prove that the present Pro forma
Invoice was the first of 2 pro forma
invoices.

X-2 Ref. No. ST2-POSTS080- To prove that the present Pro

1, photocopy formaInvoice was the first of 2 pro
formainvoices.

X-3 Conforme signature of defendant To prove that defendant MCC, acting

Gregory Chan, photocopy
through Gregory Chan, agreed to the sale
and purchase of the balance of 100 metric
tons at the discounted price of
US$1,700/ton, apart from the other order
and shipment of 100 metric tons which
was delivered by plaintiff SSANGYONG
and paid for by defendant MCC.

DD Letter from defendant MCC to To prove that there was a perfected sale
plaintiff SSANGYONG dated 22 and purchase agreement between plaintiff
August 2000, contained in SSANGYONG and defendant MCC for
facsimile/thermal paper with the balance of 100 metric tons, apart from
back-up photocopy the other order and shipment of 100
metric tons which was delivered by
plaintiff SSANGYONG and paid for by
defendant MCC.

DD-1 Ref. No. ST2-POSTS080- To prove that there was a perfected sale
1, contained in facsimile/thermal and purchase agreement between plaintiff
paper with back-up photocopy SSANGYONG and defendant MCC for
the balance of 100 metric tons, apart from
the other order and shipment of 100
metric tons which was delivered by
plaintiff SSANGYONG and paid for by
defendant MCC.

DD-2 Signature of defendant Gregory To prove that defendant MCC, acting

Chan, contained in through Gregory Chan, agreed to the sale
facsimile/thermal paper with and purchase of the balance of 100 metric
back-up photocopy tons, apart from the other order and
shipment of 100 metric tons which was
delivered by plaintiff Ssangyong and paid
for by defendant MCC.102
Significantly, among these documentary evidence presented by respondent, MCC, in its petition before
this Court, assails the admissibility only of Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2-
POSTS0401-2 (Exhibits "E" and "F"). After sifting through the records, the Court found that these
invoices are mere photocopies of their original fax transmittals. Ssangyong avers that these documents
were prepared after MCC asked for the splitting of the original order into two, so that the latter can apply
for an L/C with greater facility. It, however, failed to explain why the originals of these documents were
not presented.

To determine whether these documents are admissible in evidence, we apply the ordinary Rules on
84
Evidence, for as discussed above we cannot apply the Electronic Commerce Act of 2000 and the Rules on
Electronic Evidence.

Because these documents are mere photocopies, they are simply secondary evidence, admissible only
upon compliance with Rule 130, Section 5, which states, "[w]hen the original document has been lost or
destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and the
cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by a recital
of its contents in some authentic document, or by the testimony of witnesses in the order stated."
Furthermore, the offeror of secondary evidence must prove the predicates thereof, namely: (a) the loss or
destruction of the original without bad faith on the part of the proponent/offeror which can be shown by
circumstantial evidence of routine practices of destruction of documents; (b) the proponent must prove by
a fair preponderance of evidence as to raise a reasonable inference of the loss or destruction of the
original copy; and (c) it must be shown that a diligent and bona fide but unsuccessful search has been
made for the document in the proper place or places. It has been held that where the missing document is
the foundation of the action, more strictness in proof is required than where the document is only
collaterally involved.103

Given these norms, we find that respondent failed to prove the existence of the original fax transmissions
of Exhibits E and F, and likewise did not sufficiently prove the loss or destruction of the originals. Thus,
Exhibits E and F cannot be admitted in evidence and accorded probative weight.

It is observed, however, that respondent Ssangyong did not rely merely on Exhibits E and F to prove the
perfected contract. It also introduced in evidence a variety of other documents, as enumerated above,
together with the testimonies of its witnesses. Notable among them are Pro Forma Invoice Nos. ST2-
POSTS080-1 and ST2-POSTS080-2 which were issued by Ssangyong and sent via fax to MCC. As
already mentioned, these invoices slightly varied the terms of the earlier invoices such that the quantity
was now officially 100MT per invoice and the price reduced to US$1,700.00 per MT. The copies of the
said August 16, 2000 invoices submitted to the court bear the conformity signature of MCC Manager
Chan.

Pro Forma Invoice No. ST2-POSTS080-1 (Exhibit "X"), however, is a mere photocopy of its original.
But then again, petitioner MCC does not assail the admissibility of this document in the instant petition.
Verily, evidence not objected to is deemed admitted and may be validly considered by the court in
arriving at its judgment.104 Issues not raised on appeal are deemed abandoned.

As to Pro Forma Invoice No. ST2-POSTS080-2 (Exhibits "1-A" and "2-C"), which was certified by
PCIBank as a true copy of its original,105 it was, in fact, petitioner MCC which introduced this document
in evidence. Petitioner MCC paid for the order stated in this invoice. Its admissibility, therefore, is not
open to question.

These invoices (ST2-POSTS0401, ST2-POSTS080-1 and ST2-POSTS080-2), along with the other
unchallenged documentary evidence of respondent Ssangyong, preponderate in favor of the claim that a
contract of sale was perfected by the parties.

This Court also finds merit in the following observations of the trial court:

Defendants presented Letter of Credit (Exhibits "1", "1-A" to "1-R") referring to Pro Forma Invoice for
Contract No. ST2POSTS080-2, in the amount of US$170,000.00, and which bears the signature of
Gregory Chan, General Manager of MCC. Plaintiff, on the other hand, presented Pro Forma Invoice
referring to Contract No. ST2-POSTS080-1, in the amount of US$170,000.00, which likewise bears the
signature of Gregory Chan, MCC. Plaintiff accounted for the notation "1/2" on the right upper portion of
the Invoice, that is, that it was the first of two (2) pro forma invoices covering the subject contract
between plaintiff and the defendants. Defendants, on the other hand, failed to account for the notation
"2/2" in its Pro Forma Invoice (Exhibit "1-A"). Observably further, both Pro Forma Invoices bear the
same date and details, which logically mean that they both apply to one and the same transaction.106

Indeed, why would petitioner open an L/C for the second half of the transaction if there was no first half
85
to speak of?

The logical chain of events, as gleaned from the evidence of both parties, started with the petitioner and
the respondent agreeing on the sale and purchase of 220MT of stainless steel at US$1,860.00 per MT.
This initial contract was perfected. Later, as petitioner asked for several extensions to pay, adjustments in
the delivery dates, and discounts in the price as originally agreed, the parties slightly varied the terms of
their contract, without necessarily novating it, to the effect that the original order was reduced to 200MT,
split into two deliveries, and the price discounted to US$1,700 per MT. Petitioner, however, paid only
half of its obligation and failed to open an L/C for the other 100MT. Notably, the conduct of both parties
sufficiently established the existence of a contract of sale, even if the writings of the parties, because of
their contested admissibility, were not as explicit in establishing a contract.107 Appropriate conduct by the
parties may be sufficient to establish an agreement, and while there may be instances where the exchange
of correspondence does not disclose the exact point at which the deal was closed, the actions of the parties
may indicate that a binding obligation has been undertaken.108

With our finding that there is a valid contract, it is crystal-clear that when petitioner did not open the L/C
for the first half of the transaction (100MT), despite numerous demands from respondent Ssangyong,
petitioner breached its contractual obligation. It is a well-entrenched rule that the failure of a buyer to
furnish an agreed letter of credit is a breach of the contract between buyer and seller. Indeed, where the
buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for
such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss
of profit which the seller would reasonably have made had the transaction been carried out.109

- IV -

This Court, however, finds that the award of actual damages is not in accord with the evidence on record.
It is axiomatic that actual or compensatory damages cannot be presumed, but must be proven with a
reasonable degree of certainty.110 In Villafuerte v. Court of Appeals,111 we explained that:

Actual or compensatory damages are those awarded in order to compensate a party for an injury or loss he
suffered. They arise out of a sense of natural justice and are aimed at repairing the wrong done. Except as
provided by law or by stipulation, a party is entitled to an adequate compensation only for such pecuniary
loss as he has duly proven. It is hornbook doctrine that to be able to recover actual damages, the claimant
bears the onus of presenting before the court actual proof of the damages alleged to have been suffered,
thus:

A party is entitled to an adequate compensation for such pecuniary loss actually suffered by him as he has
duly proved. Such damages, to be recoverable, must not only be capable of proof, but must actually be
proved with a reasonable degree of certainty. We have emphasized that these damages cannot be
presumed and courts, in making an award must point out specific facts which could afford a basis for
measuring whatever compensatory or actual damages are borne.112

In the instant case, the trial court awarded to respondent Ssangyong US$93,493.87 as actual damages. On
appeal, the same was affirmed by the appellate court. Noticeably, however, the trial and the appellate
courts, in making the said award, relied on the following documents submitted in evidence by the
respondent: (1) Exhibit "U," the Statement of Account dated March 30, 2001; (2) Exhibit "U-1," the
details of the said Statement of Account); (3) Exhibit "V," the contract of the alleged resale of the goods
to a Korean corporation; and (4) Exhibit "V-1," the authentication of the resale contract from the Korean
Embassy and certification from the Philippine Consular Office.

The statement of account and the details of the losses sustained by respondent due to the said breach are,
at best, self-serving. It was respondent Ssangyong itself which prepared the said documents. The items
therein are not even substantiated by official receipts. In the absence of corroborative evidence, the said
statement of account is not sufficient basis to award actual damages. The court cannot simply rely on
speculation, conjecture or guesswork as to the fact and amount of damages, but must depend
on competent proof that the claimant had suffered, and on evidence of, the actual amount thereof.113
86

Furthermore, the sales contract and its authentication certificates, Exhibits "V" and "V-1," allegedly
evidencing the resale at a loss of the stainless steel subject of the parties' breached contract, fail to
convince this Court of the veracity of its contents. The steel items indicated in the sales contract114 with a
Korean corporation are different in all respects from the items ordered by petitioner MCC, even in size
and quantity. We observed the following discrepancies:

List of commodities as stated in Exhibit "V":

COMMODITY: Stainless Steel HR Sheet in Coil, Slit Edge

SPEC: SUS304 NO. 1

SIZE/Q'TY:

2.8MM X 1,219MM X C 8.193MT

3.0MM X 1,219MM X C 7.736MT

3.0MM X 1,219MM X C 7.885MT

3.0MM X 1,219MM X C 8.629MT

4.0MM X 1,219MM X C 7.307MT

4.0MM X 1,219MM X C 7.247MT

4.5MM X 1,219MM X C 8.450MT

4.5MM X 1,219MM X C 8.870MT

5.0MM X 1,219MM X C 8.391MT

6.0MM X 1,219MM X C 6.589MT

6.0MM X 1,219MM X C 7.878MT

6.0MM X 1,219MM X C 8.397MT

TOTAL: 95.562MT115

List of commodities as stated in Exhibit "X" (the invoice that was not paid):

DESCRIPTION: Hot Rolled Stainless Steel Coil SUS 304

SIZE AND QUANTITY:

2.6 MM X 4' X C 10.0MT

 3.0 MM X 4' X C 25.0MT

4.0 MM X 4' X C 15.0MT

4.5 MM X 4' X C 15.0MT

5.0 MM X 4' X C 10.0MT

6.0 MM X 4' X C 25.0MT

87

TOTAL: 100MT116

From the foregoing, we find merit in the contention of MCC that Ssangyong did not adequately prove that
the items resold at a loss were the same items ordered by the petitioner. Therefore, as the claim for actual
damages was not proven, the Court cannot sanction the award.

Nonetheless, the Court finds that petitioner knowingly breached its contractual obligation and obstinately
refused to pay despite repeated demands from respondent. Petitioner even asked for several extensions of
time for it to make good its obligation. But in spite of respondent's continuous accommodation, petitioner
completely reneged on its contractual duty. For such inattention and insensitivity, MCC must be held
liable for nominal damages. "Nominal damages are 'recoverable where a legal right is technically violated
and must be vindicated against an invasion that has produced no actual present loss of any kind or where
there has been a breach of contract and no substantial injury or actual damages whatsoever have been or
can be shown.'"117 Accordingly, the Court awards nominal damages of P200,000.00 to respondent
Ssangyong.

As to the award of attorney's fees, it is well settled that no premium should be placed on the right to
litigate and not every winning party is entitled to an automatic grant of attorney's fees. The party must
show that he falls under one of the instances enumerated in Article 2208 of the Civil Code. 118 In the
instant case, however, the Court finds the award of attorney's fees proper, considering that petitioner
MCC's unjustified refusal to pay has compelled respondent Ssangyong to litigate and to incur expenses to
protect its rights.

WHEREFORE, PREMISES CONSIDERED, the appeal is PARTIALLY GRANTED. The Decision

of the Court of Appeals in CA-G.R. CV No. 82983 is MODIFIED in that the award of actual damages
is DELETED. However, petitioner is ORDERED to pay respondent NOMINAL DAMAGES in the
amount of P200,000.00, and the ATTORNEY'S FEES as awarded by the trial court.

SO ORDERED.

16.

SECOND DIVISION

KOREA TECHNOLOGIES CO., G.R. No. 143581

LTD.,

Petitioner,

Present:

- versus - QUISUMBING, J., Chairperson,

CARPIO,

CARPIO MORALES,

HON. ALBERTO A. LERMA, in TINGA, and

his capacity as Presiding Judge of VELASCO, JR., JJ.

Branch 256 of Regional Trial

88
Court of Muntinlupa City, and

PACIFIC GENERAL STEEL Promulgated:

MANUFACTURING

CORPORATION,

Respondents. January 7, 2008

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

DECISION

VELASCO, JR., J.:

In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in civil
and commercial disputes. Arbitration along with mediation, conciliation, and negotiation, being
inexpensive, speedy and less hostile methods have long been favored by this Court. The petition before us
puts at issue an arbitration clause in a contract mutually agreed upon by the parties stipulating that they
would submit themselves to arbitration in a foreign country. Regrettably, instead of hastening the
resolution of their dispute, the parties wittingly or unwittingly prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in the
supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants, while private
respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby KOGIES would set up an LPG
Cylinder Manufacturing Plant in Carmona, Cavite. The contract was executed in the Philippines. On April
7, 1997, the parties executed, in Korea, an Amendment for Contract No. KLP-970301 dated March 5,
1997[2] amending the terms of payment. The contract and its amendment stipulated that KOGIES will ship
the machinery and facilities necessary for manufacturing LPG cylinders for which PGSMC would pay
USD 1,224,000. KOGIES would install and initiate the operation of the plant for which PGSMC bound
itself to pay USD 306,000 upon the plants production of the 11-kg. LPG cylinder samples. Thus, the total
contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease[3] with Worth Properties, Inc. (Worth) for
use of Worths 5,079-square meter property with a 4,032-square meter warehouse building to house the
LPG manufacturing plant. The monthly rental was PhP 322,560 commencing on January 1, 1998 with a
10% annual increment clause.Subsequently, the machineries, equipment, and facilities for the
manufacture of LPG cylinders were shipped, delivered, and installed in the Carmona plant. PGSMC paid
KOGIES USD 1,224,000.

However, gleaned from the Certificate[4] executed by the parties on January 22, 1998, after the installation 89

of the plant, the initial operation could not be conducted as PGSMC encountered financial difficulties
affecting the supply of materials, thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997 contract.

For the remaining balance of USD306,000 for the installation and initial operation of the plant, PGSMC
issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998 for PhP 4,500,000; and
(2) BPI Check No. 0316413 dated March 30, 1998 for PhP 4,500,000.[5]

When KOGIES deposited the checks, these were dishonored for the reason PAYMENT STOPPED. Thus,
on May 8, 1998, KOGIES sent a demand letter[6] to PGSMC threatening criminal action for violation
of Batas Pambansa Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President
faxed a letter dated May 7, 1998 to KOGIES President who was then staying at a Makati City hotel. She
complained that not only did KOGIES deliver a different brand of hydraulic press from that agreed upon
but it had not delivered several equipment parts already paid for.

On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded but the
payments were stopped for reasons previously made known to KOGIES.[7]

On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract dated March 5,
1997 on the ground that KOGIES had altered the quantity and lowered the quality of the machineries and
equipment it delivered to PGSMC, and that PGSMC would dismantle and transfer the machineries,
equipment, and facilities installed in the Carmona plant. Five days later, PGSMC filed before the Office
of the Public Prosecutor an Affidavit-Complaint for Estafa docketed as I.S. No. 98-03813 against Mr.
Dae Hyun Kang, President of KOGIES.

On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not unilaterally
rescind their contract nor dismantle and transfer the machineries and equipment on mere imagined
violations by KOGIES. It also insisted that their disputes should be settled by arbitration as agreed upon
in Article 15, the arbitration clause of their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1, 1998 letter
threatening that the machineries, equipment, and facilities installed in the plant would be dismantled and
transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an Application for Arbitration
before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15 of the
Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case No. 98-
117[8] against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted a
temporary restraining order (TRO) on July 4, 1998, which was subsequently extended until July 22,
1998. In its complaint, KOGIES alleged that PGSMC had initially admitted that the checks that were
stopped were not funded but later on claimed that it stopped payment of the checks for the reason that
their value was not received as the former allegedly breached their contract by altering the quantity and
lowering the quality of the machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22, 1998
Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as amended, by 90
unilaterally rescinding the contract without resorting to arbitration. KOGIES also asked that PGSMC be
restrained from dismantling and transferring the machinery and equipment installed in the plant which the
latter threatened to do on July 4, 1998.

On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not entitled to the
TRO since Art. 15, the arbitration clause, was null and void for being against public policy as it ousts the
local courts of jurisdiction over the instant controversy.

On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim[9] asserting that it had the full
right to dismantle and transfer the machineries and equipment because it had paid for them in full as
stipulated in the contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the checks for
failing to completely install and make the plant operational; and that KOGIES was liable for damages
amounting to PhP 4,500,000 for altering the quantity and lowering the quality of the machineries and
equipment.Moreover, PGSMC averred that it has already paid PhP 2,257,920 in rent (covering January to
July 1998) to Worth and it was not willing to further shoulder the cost of renting the premises of the plant
considering that the LPG cylinder manufacturing plant never became operational.

After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order denying the
application for a writ of preliminary injunction, reasoning that PGSMC had paid KOGIES USD
1,224,000, the value of the machineries and equipment as shown in the contract such that KOGIES no
longer had proprietary rights over them. And finally, the RTC held that Art. 15 of the Contract as
amended was invalid as it tended to oust the trial court or any other court jurisdiction over any dispute
that may arise between the parties. KOGIES prayer for an injunctive writ was denied.[10] The dispositive
portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court believes and so holds that no cogent
reason exists for this Court to grant the writ of preliminary injunction to restrain and refrain defendant
from dismantling the machineries and facilities at the lot and building of Worth Properties, Incorporated
at Carmona, Cavite and transfer the same to another site: and therefore denies plaintiffs application for a
writ of preliminary injunction.

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to Counterclaim.[11] KOGIES denied it
had altered the quantity and lowered the quality of the machinery, equipment, and facilities it delivered to
the plant. It claimed that it had performed all the undertakings under the contract and had already
produced certified samples of LPG cylinders. It averred that whatever was unfinished was PGSMCs fault
since it failed to procure raw materials due to lack of funds. KOGIES, relying on Chung Fu Industries
(Phils.), Inc. v. Court of Appeals,[12] insisted that the arbitration clause was without question valid.

After KOGIES filed a Supplemental Memorandum with Motion to Dismiss[13] answering PGSMCs
memorandum of July 22, 1998 and seeking dismissal of PGSMCs counterclaims, KOGIES, on August 4,
1998, filed its Motion for Reconsideration[14] of the July 23, 1998 Order denying its application for 91

an injunctive writ claiming that the contract was not merely for machinery and facilities worth USD
1,224,000 but was for the sale of an LPG manufacturing plant consisting of supply of all the machinery
and facilities and transfer of technology for a total contract price of USD 1,530,000 such that the
dismantling and transfer of the machinery and facilities would result in the dismantling and transfer of the
very plant itself to the great prejudice of KOGIES as the still unpaid owner/seller of the plant. Moreover,
KOGIES points out that the arbitration clause under Art. 15 of the Contract as amended was a valid
arbitration stipulation under Art. 2044 of the Civil Code and as held by this Court in Chung Fu Industries
(Phils.), Inc.[15]

In the meantime, PGSMC filed a Motion for Inspection of Things[16] to determine whether there was
indeed alteration of the quantity and lowering of quality of the machineries and equipment, and whether
these were properly installed. KOGIES opposed the motion positing that the queries and issues raised in
the motion for inspection fell under the coverage of the arbitration clause in their contract.

On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion for inspection; (2)
denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order; and (3) denying KOGIES
motion to dismiss PGSMCs compulsory counterclaims as these counterclaims fell within the requisites of
compulsory counterclaims.

On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration [17] of the September 21, 1998
RTC Order granting inspection of the plant and denying dismissal of PGSMCs compulsory
counterclaims.

Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998 urgent
motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for
certiorari[18] docketed as CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and September
21, 1998 RTC Orders and praying for the issuance of writs of prohibition, mandamus, and preliminary
injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and transferring the machineries
and equipment in the Carmona plant, and to direct the RTC to enforce the specific agreement on
arbitration to resolve the dispute.

In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for reconsideration and
directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant
on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249 informing the CA
about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the writs of
prohibition, mandamus and preliminary injunction which was not acted upon by the CA. KOGIES
asserted that the Branch Sheriff did not have the technical expertise to ascertain whether or not the
machineries and equipment conformed to the specifications in the contract and were properly installed.

On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding that the enumerated
machineries and equipment were not fully and properly installed. 92

The Court of Appeals affirmed the trial court and declared

the arbitration clause against public policy

On May 30, 2000, the CA rendered the assailed Decision[22] affirming the RTC Orders and dismissing the
petition for certiorari filed by KOGIES. The CA found that the RTC did not gravely abuse its discretion
in issuing the assailed July 23, 1998 and September 21, 1998 Orders. Moreover, the CA reasoned that
KOGIES contention that the total contract price for USD 1,530,000 was for the whole plant and had not
been fully paid was contrary to the finding of the RTC that PGSMC fully paid the price of USD
1,224,000, which was for all the machineries and equipment. According to the CA, this determination by
the RTC was a factual finding beyond the ambit of a petition for certiorari.

On the issue of the validity of the arbitration clause, the CA agreed with the lower court that an arbitration
clause which provided for a final determination of the legal rights of the parties to the contract by
arbitration was against public policy.

On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum shopping by
PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones and payment of docket
fees was not required since the Answer with counterclaim was not an initiatory pleading. For the same
reason, the CA said a certificate of non-forum shopping was also not required.

Furthermore, the CA held that the petition for certiorari had been filed prematurely since KOGIES did not
wait for the resolution of its urgent motion for reconsideration of the September 21, 1998 RTC Order
which was the plain, speedy, and adequate remedy available. According to the CA, the RTC must be
given the opportunity to correct any alleged error it has committed, and that since the assailed orders were
interlocutory, these cannot be the subject of a petition for certiorari.

Hence, we have this Petition for Review on Certiorari under Rule 45.

The Issues
Petitioner posits that the appellate court committed the following errors:

a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY AND

FACILITIES AS A QUESTION OF FACT BEYOND THE AMBIT OF A PETITION FOR
CERTIORARI INTENDED ONLY FOR CORRECTION OF ERRORS OF JURISDICTION OR
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION,
AND CONCLUDING THAT THE TRIAL COURTS FINDING ON THE SAME QUESTION WAS
IMPROPERLY RAISED IN THE PETITION BELOW;
93

b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE 15 OF THE

CONTRACT BETWEEN THE PARTIES FOR BEING CONTRARY TO PUBLIC POLICY AND FOR
OUSTING THE COURTS OF JURISDICTION;

c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO BE ALL

COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET FEES AND CERTIFICATION OF
NON-FORUM SHOPPING;

d. RULING THAT THE PETITION WAS FILED PREMATURELY WITHOUT WAITING

FOR THE RESOLUTION OF THE MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT AN OPPORTUNITY TO
CORRECT ITSELF;

e. PROCLAIMING THE TWO ORDERS DATED JULY 23 AND SEPTEMBER 21,

1998 NOT TO BE PROPER SUBJECTS OF CERTIORARI AND PROHIBITION FOR BEING
INTERLOCUTORY IN NATURE;

f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN HE (SIC)

PETITION AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling

The petition is partly meritorious.

Before we delve into the substantive issues, we shall first tackle the procedural issues.

The rules on the payment of docket fees for counterclaims

and cross claims were amended effective August 16, 2004

KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid docket fees and
filed a certificate of non-forum shopping, and that its failure to do so was a fatal defect.

We disagree with KOGIES.

As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer with 94
Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997 Revised
Rules of Civil Procedure, the rule that was effective at the time the Answer with Counterclaim was
filed. Sec. 8 on existing counterclaim or cross-claimstates, A compulsory counterclaim or a cross-claim
that a defending party has at the time he files his answer shall be contained therein.

On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims against KOGIES,
it was not liable to pay filing fees for said counterclaims being compulsory in nature. We stress, however,
that effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC, docket fees
are now required to be paid in compulsory counterclaim or cross-claims.

As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an initiatory pleading
which requires a certification against forum shopping under Sec. 5[24] of Rule 7, 1997 Revised Rules of
Civil Procedure. It is a responsive pleading, hence, the courts a quo did not commit reversible error in
denying KOGIES motion to dismiss PGSMCs compulsory counterclaims.

Interlocutory orders proper subject of certiorari

Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition are neither the remedies
to question the propriety of an interlocutory order of the trial court.[26] The CA erred on its reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case which was not
assailable in an action for certiorari since the denial of a motion to quash required the accused to plead
and to continue with the trial, and whatever objections the accused had in his motion to quash can then be
used as part of his defense and subsequently can be raised as errors on his appeal if the judgment of the
trial court is adverse to him. The general rule is that interlocutory orders cannot be challenged by an
appeal.[27] Thus, in Yamaoka v. Pescarich Manufacturing Corporation, we held:

The proper remedy in such cases is an ordinary appeal from an adverse judgment on the merits,
incorporating in said appeal the grounds for assailing the interlocutory orders. Allowing appeals from
interlocutory orders would result in the sorry spectacle of a case being subject of a
counterproductive ping-pong to and from the appellate court as often as a trial court is perceived to have
made an error in any of its interlocutory rulings. However, where the assailed interlocutory order was
issued with grave abuse of discretion or patently erroneous and the remedy of appeal would not afford
adequate and expeditious relief, the Court allows certiorari as a mode of redress.[28]
Also, appeals from interlocutory orders would open the floodgates to endless occasions for dilatory
motions. Thus, where the interlocutory order was issued without or in excess of jurisdiction or with grave
abuse of discretion, the remedy is certiorari.[29]

The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction in the
issuance of the two assailed orders coupled with the fact that there is no plain, speedy, and adequate
remedy in the ordinary course of law amply provides the basis for allowing the resort to a petition for
certiorari under Rule 65. 95

Prematurity of the petition before the CA

Neither do we think that KOGIES was guilty of forum shopping in filing the petition for certiorari. Note
that KOGIES motion for reconsideration of the July 23, 1998 RTC Order which denied the issuance of
the injunctive writ had already been denied. Thus, KOGIES only remedy was to assail the RTCs
interlocutory order via a petition for certiorari under Rule 65.

While the October 2, 1998 motion for reconsideration of KOGIES of the September 21, 1998 RTC Order
relating to the inspection of things, and the allowance of the compulsory counterclaims has not yet been
resolved, the circumstances in this case would allow an exception to the rule that before certiorari may be
availed of, the petitioner must have filed a motion for reconsideration and said motion should have been
first resolved by the court a quo. The reason behind the rule is to enable the lower court, in the first
instance, to pass upon and correct its mistakes without the intervention of the higher court.[30]

The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant, equipment, and
facilities when he is not competent and knowledgeable on said matters is evidently flawed and devoid of
any legal support. Moreover, there is an urgent necessity to resolve the issue on the dismantling of the
facilities and any further delay would prejudice the interests of KOGIES. Indeed, there is real and
imminent threat of irreparable destruction or substantial damage to KOGIES equipment and
machineries. We find the resort to certiorari based on the gravely abusive orders of the trial court sans the
ruling on the October 2, 1998 motion for reconsideration to be proper.

The Core Issue: Article 15 of the Contract

We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It provides:

Article 15. Arbitration.All disputes, controversies, or differences which may arise between the parties, out
of or in relation to or in connection with this Contract or for the breach thereof, shall finally be settled by
arbitration in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean
Commercial Arbitration Board. The award rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null and void.

Petitioner is correct.

Established in this jurisdiction is the rule that the law of the place where the contract is made governs. Lex
loci contractus. The contract in this case was perfected here in the Philippines. Therefore, our laws ought 96
to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually agreed arbitral
clause or the finality and binding effect of an arbitral award. Art. 2044 provides, Any stipulation that the
arbitrators award or decision shall be final, is valid, without prejudice to Articles 2038, 2039 and
2040. (Emphasis supplied.)

Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a compromise or an arbitral
award, as applied to Art. 2044 pursuant to Art. 2043,[34] may be voided, rescinded, or annulled, but these
would not denigrate the finality of the arbitral award.

The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been shown to
be contrary to any law, or against morals, good customs, public order, or public policy. There has been no
showing that the parties have not dealt with each other on equal footing. We find no reason why the
arbitration clause should not be respected and complied with by both parties. In Gonzales v. Climax
Mining Ltd.,[35] we held that submission to arbitration is a contract and that a clause in a contract
providing that all matters in dispute between the parties shall be referred to arbitration is a
contract.[36] Again in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he
provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part
of that contract and is itself a contract.[37]

Arbitration clause not contrary to public policy

The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in accordance
with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and binding, is
not contrary to public policy. This Court has sanctioned the validity of arbitration clauses in a catena of
cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court had
occasion to rule that an arbitration clause to resolve differences and breaches of mutually agreed
contractual terms is valid. In BF Corporation v. Court of Appeals, we held that [i]n this jurisdiction,
arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of Republic
Act No. 876, this Court has countenanced the settlement of disputes through arbitration. Republic Act No.
876 was adopted to supplement the New Civil Codes provisions on arbitration.[39] And in LM Power
Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:

Being an inexpensive, speedy and amicable method of settling disputes, arbitrationalong with mediation,
conciliation and negotiationis encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as
the wave of the future in international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts
should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that
covers the asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in favor
of arbitration.[40]

Having said that the instant arbitration clause is not against public policy, we come to the question on 97
what governs an arbitration clause specifying that in case of any dispute arising from the contract, an
arbitral panel will be constituted in a foreign country and the arbitration rules of the foreign country
would govern and its award shall be final and binding.

RA 9285 incorporated the UNCITRAL Model law

to which we are a signatory

For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising from
contractual relations. In case a foreign arbitral body is chosen by the parties, the arbitration rules of our
domestic arbitration bodies would not be applied. As signatory to the Arbitration Rules of the
UNCITRAL Model Law on International Commercial Arbitration[41] of the United Nations Commission
on International Trade Law (UNCITRAL) in the New York Convention on June 21, 1985,
the Philippinescommitted itself to be bound by the Model Law. We have even incorporated the Model
Law in Republic Act No. (RA) 9285, otherwise known as the Alternative Dispute Resolution Act of
2004 entitled 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, promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent
provisions:

CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION

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 (United
Nations Document A/40/17) and recommended for enactment by the General Assembly in Resolution No.
40/72 approved on December 11, 1985, copy of which is hereto attached as Appendix A.

SEC. 20. Interpretation of Model Law.In interpreting the Model Law, regard shall be had to its
international origin and to the need for uniformity in its interpretation and resort may be made to
the travaux preparatories and the report of the Secretary General of the United Nations Commission on
International Trade Law dated March 25, 1985 entitled, International Commercial Arbitration: Analytical
Commentary on Draft Trade identified by reference number A/CN. 9/264.
While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since it is a procedural
law which has a retroactive effect. Likewise, KOGIES filed its application for arbitration before the
KCAB on July 1, 1998 and it is still pending because no arbitral award has yet been rendered. Thus, RA
9285 is applicable to the instant case.Well-settled is the rule that procedural laws are construed to be
applicable to actions pending and undetermined at the time of their passage, and are deemed retroactive in
that sense and to that extent. As a general rule, the retroactive application of procedural laws does not
violate any personal rights because no vested right has yet attached nor arisen from them.[42]
98

Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model Law are the
following:

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of
arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:

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 than 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.

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final and
binding are not immediately enforceable or cannot be implemented immediately. Sec. 35[43] of the
UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a competent
court for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition
or enforcement on the grounds provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and 44
relative to Secs. 47 and 48, thus:

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

The recognition and enforcement of such arbitral awards shall be filed with the Regional Trial Court in
accordance with the rules of procedure to be promulgated by the Supreme Court. Said procedural rules
shall provide that the party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly certified translation thereof into
any of such languages.

The applicant shall establish that the country in which foreign arbitration award was made in party to the
New York Convention.

99

xxxx

SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not Covered by the New York
Convention.The recognition and enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be promulgated by the Supreme
Court. The Court may, on grounds of comity and reciprocity, recognize and enforce a non-convention
award as a convention award.

SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral award when confirmed by a
court of a foreign country, shall be recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.

A foreign arbitral award, when confirmed by the Regional Trial Court, shall be enforced in the same
manner as final and executory decisions of courts of law of the Philippines

xxxx

SEC. 47. Venue and Jurisdiction.Proceedings for recognition and enforcement of an arbitration agreement
or for vacations, setting aside, correction or modification of an arbitral award, and any application with a
court for arbitration assistance and supervision shall be deemed as special proceedings and shall be filed
with the Regional Trial Court (i) where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where any of the parties to the dispute
resides or has his place of business; or (iv) in the National Judicial Capital Region, at the option of the
applicant.

SEC. 48. Notice of Proceeding to Parties.In a special proceeding for recognition and enforcement of an
arbitral award, the Court shall send notice to the parties at their address of record in the arbitration, or if
any part cannot be served notice at such address, at such partys last known address. The notice shall be
sent al least fifteen (15) days before the date set for the initial hearing of the application.

It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a judgment of a
foreign court but as a foreign arbitral award, and when confirmed, are enforced as final and executory
decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is similar to judgments or
awards given by some of our quasi-judicial bodies, like the National Labor Relations Commission and
Mines Adjudication Board, whose final judgments are stipulated to be final and binding, but not
immediately executory in the sense that they may still be judicially reviewed, upon the instance of any
party. Therefore, the final foreign arbitral awards are similarly situated in that they need first to be
confirmed by the RTC.
100

(3) The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific authority and
jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided under Art. 34(2) of
the UNCITRAL Model Law. Secs. 42 and 45 provide:

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

The recognition and enforcement of such arbitral awards shall be filed with the Regional Trial Court in
accordance with the rules of procedure to be promulgated by the Supreme Court. Said procedural rules
shall provide that the party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the award or agreement is
not made in any of the official languages, the party shall supply a duly certified translation thereof into
any of such languages.

The applicant shall establish that the country in which foreign arbitration award was made is party to the
New York Convention.

If the application for rejection or suspension of enforcement of an award has been made, the Regional
Trial Court may, if it considers it proper, vacate its decision and may also, on the application of the party
claiming recognition or enforcement of the award, order the party to provide appropriate security.

xxxx

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 procedures
and 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.
Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually agreed
upon by the parties, still the foreign arbitral award is subject to judicial review by the RTC which can set
aside, reject, or vacate it. In this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied
upon by KOGIES is applicable insofar as the foreign arbitral awards, while final and binding, do not oust
courts of jurisdiction since these arbitral awards are not absolute and without exceptions as they are still
judicially reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether domestic
or foreign, are subject to judicial review on specific grounds provided for.

(4) Grounds for judicial review different in domestic and foreign arbitral awards
101

The differences between a final arbitral award from an international or foreign arbitral tribunal and an
award given by a local arbitral tribunal are the specific grounds or conditions that vest jurisdiction over
our courts to review the awards.

For foreign or international arbitral awards which must first be confirmed by the RTC, the grounds for
setting aside, rejecting or vacating the award by the RTC are provided under Art. 34(2) of the
UNCITRAL Model Law.

For final domestic arbitral awards, which also need confirmation by the RTC pursuant to Sec. 23 of RA
876[44] and shall be recognized as final and executory decisions of the RTC,[45] they may only be assailed
before the RTC and vacated on the grounds provided under Sec. 25 of RA 876.[46]

(5) RTC decision of assailed foreign arbitral award appealable

Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party in cases
where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the Regional Trial Court
confirming, vacating, setting aside, modifying or correcting an arbitral award may be appealed to the
Court of Appeals in accordance with the rules and procedure to be promulgated by the Supreme Court.

The losing party who appeals from the judgment of the court confirming an arbitral award shall be
required by the appellate court to post a counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this Court through a petition for
review under Rule 45 of the Rules of Court.

PGSMC has remedies to protect its interests

Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign arbitration as it
bound itself through the subject contract. While it may have misgivings on the foreign arbitration done
in Korea by the KCAB, it has available remedies under RA 9285. Its interests are duly protected by the
law which requires that the arbitral award that may be rendered by KCAB must be confirmed here by the
RTC before it can be enforced.

With our disquisition above, petitioner is correct in its contention that an arbitration clause, stipulating
that the arbitral award is final and binding, does not oust our courts of jurisdiction as the international 102

arbitral award, the award of which is not absolute and without exceptions, is still judicially reviewable
under certain conditions provided for by the UNCITRAL Model Law on ICA as applied and incorporated
in RA 9285.

Finally, it must be noted that there is nothing in the subject Contract which provides that the parties may
dispense with the arbitration clause.

Unilateral rescission improper and illegal

Having ruled that the arbitration clause of the subject contract is valid and binding on the parties, and not
contrary to public policy; consequently, being bound to the contract of arbitration, a party may not
unilaterally rescind or terminate the contract for whatever cause without first resorting to arbitration.

What this Court held in University of the Philippines v. De Los Angeles[47] and reiterated in succeeding
cases,[48] that the act of treating a contract as rescinded on account of infractions by the other contracting
party is valid albeit provisional as it can be judicially assailed, is not applicable to the instant case on
account of a valid stipulation on arbitration. Where an arbitration clause in a contract is availing, neither
of the parties can unilaterally treat the contract as rescinded since whatever infractions or breaches by a
party or differences arising from the contract must be brought first and resolved by arbitration, and not
through an extrajudicial rescission or judicial action.

The issues arising from the contract between PGSMC and KOGIES on whether the equipment and
machineries delivered and installed were properly installed and operational in the plant in Carmona,
Cavite; the ownership of equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact that PGSMC could not
supply the raw materials required to produce the sample LPG cylinders, are matters proper for
arbitration.Indeed, we note that on July 1, 1998, KOGIES instituted an Application for Arbitration before
the KCAB in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is incumbent upon
PGSMC to abide by its commitment to arbitrate.

Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion for Inspection of
Things on September 21, 1998, as the subject matter of the motion is under the primary jurisdiction of the
mutually agreed arbitral body, the KCAB in Korea.

In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the inspection
made on October 28, 1998, as ordered by the trial court on October 19, 1998, is of no worth as said
Sheriff is not technically competent to ascertain the actual status of the equipment and machineries as
installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the grant of
the inspection of the equipment and machineries have to be recalled and nullified.

Issue on ownership of plant proper for arbitration

103

Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price of USD
1,530,000 was for the whole plant and its installation is beyond the ambit of a Petition for Certiorari.

Petitioners position is untenable.

It is settled that questions of fact cannot be raised in an original action for certiorari. [49] Whether or not
there was full payment for the machineries and equipment and installation is indeed a factual issue
prohibited by Rule 65.

However, what appears to constitute a grave abuse of discretion is the order of the RTC in resolving the
issue on the ownership of the plant when it is the arbitral body (KCAB) and not the RTC which has
jurisdiction and authority over the said issue. The RTCs determination of such factual issue constitutes
grave abuse of discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for PGSMC to
dismantle and transfer the equipment and machineries, we find it to be in order considering the factual
milieu of the instant case.

Firstly, while the issue of the proper installation of the equipment and machineries might well be under
the primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of RA 9285 has
jurisdiction to hear and grant interim measures to protect vested rights of the parties. Sec. 28 pertinently
provides:

SEC. 28. Grant of interim Measure of Protection.(a) It is not incompatible with an arbitration
agreement for a party to request, before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral proceedings, a request for an
interim measure of protection, or modification thereof, may be made with the arbitral or to the extent
that the arbitral tribunal has no power to act or is unable to act effectivity, the request may be
made with the Court. The arbitral tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and written communication of said
nomination and acceptance has been received by the party making the request.

(b) The following rules on interim or provisional relief shall be observed:

Any party may request that provisional relief be granted against the adverse party. 104

Such relief may be granted:

(i) to prevent irreparable loss or injury;

(ii) to provide security for the performance of any obligation;

(iii) to produce or preserve any evidence; or

(iv) to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned upon the provision of security or any act or
omission specified in the order.

(d) Interim or provisional relief is requested by written application transmitted by reasonable means to the
Court or arbitral tribunal as the case may be and the party against whom the relief is sought, describing in
appropriate detail the precise relief, the party against whom the relief is requested, the grounds for the
relief, and the evidence supporting the request.

(e) The order shall be binding upon the parties.

(f) Either party may apply with the Court for assistance in implementing or enforcing an interim measure
ordered by an arbitral tribunal.

(g) A party who does not comply with the order shall be liable for all damages resulting from
noncompliance, including all expenses, and reasonable attorney's fees, paid in obtaining the orders
judicial enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of protection as:

Article 17. Power of arbitral tribunal to order interim measures

xxx xxx xxx

(2) An interim measure is any temporary measure, whether in the form of an award or in another form,
by which, at any time prior to the issuance of the award by which the dispute is finally decided, the
arbitral tribunal orders a party to:

105
(a) Maintain or restore the status quo pending determination of the dispute;

(b) Take action that would prevent, or refrain from taking action that is likely to cause, current or
imminent harm or prejudice to the arbitral process itself;

(c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or

(d) Preserve evidence that may be relevant and material to the resolution of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim
measures:

Article 17 J. Court-ordered interim measures

A court shall have the same power of issuing an interim measure in relation to arbitration proceedings,
irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in
courts. The court shall exercise such power in accordance with its own procedures in consideration of the
specific features of international arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were explicit that
even the pendency of an arbitral proceeding does not foreclose resort to the courts for provisional reliefs.
We explicated this way:

As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for
provisional reliefs. The Rules of the ICC, which governs the parties arbitral dispute, allows the
application of a party to a judicial authority for interim or conservatory measures. Likewise, Section 14 of
Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter which is the subject of the dispute in arbitration.
In addition, R.A. 9285, otherwise known as the Alternative Dispute Resolution Act of 2004, allows the
filing of provisional or interim measures with the regular courts whenever the arbitral tribunal has no
power to act or to act effectively.[50]
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of protection.

Secondly, considering that the equipment and machineries are in the possession of PGSMC, it has the
right to protect and preserve the equipment and machineries in the best way it can. Considering that the 106
LPG plant was non-operational, PGSMC has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the better way to make good use of them
which is ineluctably within the management discretion of PGSMC.

Thirdly, and of greater import is the reason that maintaining the equipment and machineries in Worths
property is not to the best interest of PGSMC due to the prohibitive rent while the LPG plant as set-up is
not operational. PGSMC was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without
considering the 10% annual rent increment in maintaining the plant.

Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the preservation or
transfer of the equipment and machineries as an interim measure, yet on hindsight, the July 23, 1998
Order of the RTC allowing the transfer of the equipment and machineries given the non-recognition by
the lower courts of the arbitral clause, has accorded an interim measure of protection to PGSMC which
would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount based on the
contract. Moreover, KOGIES is amply protected by the arbitral action it has instituted before the KCAB,
the award of which can be enforced in our jurisdiction through the RTC. Besides, by our decision,
PGSMC is compelled to submit to arbitration pursuant to the valid arbitration clause of its contract with
KOGIES.

PGSMC to preserve the subject equipment and machineries

Finally, while PGSMC may have been granted the right to dismantle and transfer the subject equipment
and machineries, it does not have the right to convey or dispose of the same considering the pending
arbitral proceedings to settle the differences of the parties. PGSMC therefore must preserve and maintain
the subject equipment and machineries with the diligence of a good father of a family[51] until final
resolution of the arbitral proceedings and enforcement of the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117
are REVERSED and SET ASIDE;

(3) The parties are hereby ORDERED to submit themselves to the arbitration of their dispute and
differences arising from the subject Contract before the KCAB; and
107

(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and machineries, if it had not
done so, and ORDERED to preserve and maintain them until the finality of whatever arbitral award is
given in the arbitration proceedings.

No pronouncement as to costs. SO ORDERED.

15.

Republic of the Philippines

Supreme Court

Manila

FIRST DIVISION

DEPARTMENT OF FOREIGN AFFAIRS G.R. No. 176657

and BANGKO SENTRAL NG PILIPINAS,

Petitioners,

Present:

- versus -
CORONA, C.J.,

Chairperson,

VELASCO, JR.,
HON. FRANCO T. FALCON, IN HIS
CAPACITY AS THE PRESIDING JUDGE LEONARDO-DE CASTRO,
OF BRANCH 71 OF THE REGIONAL DEL CASTILLO, and
TRIAL COURT IN PASIG CITY and BCA
INTERNATIONAL CORPORATION, PEREZ, JJ.

Respondents.
 Promulgated:

September 1, 2010
108
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Certiorari and prohibition under Rule 65 of the Rules of Court with a
prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction filed by
petitioners Department of Foreign Affairs (DFA) and Bangko Sentral ng Pilipinas (BSP). Petitioners pray
that the Court declare as null and void the Order[1] dated February 14, 2007 of respondent Judge Franco T.
Falcon (Judge Falcon) in Civil Case No. 71079, which granted the application for preliminary injunction
filed by respondent BCA International Corporation (BCA). Likewise, petitioners seek to prevent
respondent Judge Falcon from implementing the corresponding Writ of Preliminary Injunction dated
February 23, 2007[2] issued pursuant to the aforesaid Order.

The facts of this case, as culled from the records, are as follows:

Being a member state of the International Civil Aviation Organization (ICAO),[3] the Philippines has to
comply with the commitments and standards set forth in ICAO Document No. 9303 [4] which requires the
ICAO member states to issue machine readable travel documents (MRTDs)[5] by April 2010.

Thus, in line with the DFAs mandate to improve the passport and visa issuance system, as well as the
storage and retrieval of its related application records, and pursuant to our governments ICAO
commitments, the DFA secured the approval of the President of the Philippines, as Chairman of the
Board of the National Economic and Development Authority (NEDA), for the implementation of the
Machine Readable Passport and Visa Project (the MRP/V Project) under the Build-Operate-and-Transfer
(BOT) scheme, provided for by Republic Act No. 6957, as amended by Republic Act No. 7718 (the BOT
Law), and its Implementing Rules and Regulations (IRR). Thus, a Pre-qualification, Bids and Awards
Committee (PBAC) published an invitation to pre-qualify and bid for the supply of the needed machine
readable passports and visas, and conducted the public bidding for the MRP/V Project on January 10,
2000. Several bidders responded and BCA was among those that pre-qualified and submitted its technical
and financial proposals.On June 29, 2000, the PBAC found BCAs bid to be the sole complying bid;
hence, it permitted the DFA to engage in direct negotiations with BCA. On even date, the PBAC
recommended to the DFA Secretary the award of the MRP/V Project to BCA on a BOT arrangement.

In compliance with the Notice of Award dated September 29, 2000 and Section 11.3, Rule 11 of the IRR
of the BOT Law,[6] BCA incorporated a project company, the Philippine Passport Corporation (PPC) to
undertake and implement the MRP/V Project.

109

On February 8, 2001, a Build-Operate-Transfer Agreement[7] (BOT Agreement) between the DFA and
PPC was signed by DFA Acting Secretary Lauro L. Baja, Jr. and PPC President Bonifacio
Sumbilla. Under the BOT Agreement, the MRP/V Project was defined as follows:

Section 1.02 MRP/V Project refers to all the activities and services undertaken in the fulfillment of the
Machine Readable Passport and Visa Project as defined in the Request for Proposals (RFP), a copy of
which is hereto attached as Annex A, including but not limited to project financing, systems development,
installation and maintenance in the Philippines and Foreign Service Posts (FSPs), training of DFA
personnel, provision of all project consumables (related to the production of passports and visas, such as
printer supplies, etc.), scanning of application and citizenship documents, creation of data bases, issuance
of machine readable passports and visas, and site preparation in the Central Facility and Regional
Consular Offices (RCOs) nationwide.[8]

On April 5, 2002, former DFA Secretary Teofisto T. Guingona and Bonifacio Sumbilla, this time as BCA
President, signed an Amended BOT Agreement[9] in order to reflect the change in the designation of the
parties and to harmonize Section 11.3 with Section 11.8[10] of the IRR of the BOT Law. The Amended
BOT Agreement was entered into by the DFA and BCA with the conformity of PPC.

The two BOT Agreements (the original version signed on February 8, 2001 and the amended version
signed April 5, 2002) contain substantially the same provisions except for seven additional paragraphs in
the whereas clauses and two new provisions Section 9.05 on Performance and Warranty Securities and
Section 20.15 on Miscellaneous Provisions. The two additional provisions are quoted below:

Section 9.05. The PPC has posted in favor of the DFA the performance security required for Phase 1 of
the MRP/V Project and shall be deemed, for all intents and purposes, to be full compliance by BCA with
the provisions of this Article 9.

xxxx

Section 20.15 It is clearly and expressly understood that BCA may assign, cede and transfer all of its
rights and obligations under this Amended BOT Agreement to PPC, as fully as if PPC is the original
signatory to this Amended BOT Agreement, provided however that BCA shall nonetheless be jointly and
severally liable with PPC for the performance of all the obligations and liabilities under this Amended
BOT Agreement.[11]
Also modified in the Amended BOT Agreement was the Project Completion date of the MRP/V Project
which set the completion of the implementation phase of the project within 18 to 23 months from the date
of effectivity of the Amended BOT Agreement as opposed to the previous period found in the original
BOT Agreement which set the completion within 18 to 23 months from receipt of the NTP (Notice to
Proceed) in accordance with the Project Master Plan.
110

On April 12, 2002, an Assignment Agreement[12] was executed by BCA and PPC, whereby BCA assigned
and ceded its rights, title, interest and benefits arising from the Amended BOT Agreement to PPC.

As set out in Article 8 of the original and the Amended BOT Agreement, the MRP/V Project was divided
into six phases:

Phase 1. Project Planning Phase The Project Proponent [BCA] shall prepare detailed plans and
specifications in accordance with Annex A of this [Amended] BOT Agreement within three (3) months
from issuance of the NTP (Notice to Proceed) [from the date of effectivity of this Amended BOT
Agreement]. This phase shall be considered complete upon the review, acceptance and approval by the
DFA of these plans and the resulting Master Plan, including the Master Schedule, the business process
specifications, the acceptance criteria, among other plans.

xxxx

The DFA must approve all detailed plans as a condition precedent to the issuance of the CA [Certificate
of Acceptance] for Phase 1.

Phase 2. Implementation of the MRP/V Project at the Central Facility Within six (6) months from
issuance of the CA for Phase 1, the PROJECT PROPONENT [BCA] shall complete the implementation
of the MRP/V Project in the DFA Central Facility, and establish the network design between the DFA
Central Facility, the ten (10) RCOs [Regional Consular Offices] and the eighty (80) FSPs [Foreign
Service Posts].

xxxx

Phase 3. Implementation of the MRP/V Project at the Regional Consular Offices This phase
represents the replication of the systems as approved from the Central Facility to the RCOs throughout
the country, as identified in the RFP [Request for Proposal]. The approved systems are those
implemented, evaluated, and finally approved by DFA as described in Phase 1.The Project Proponent
[BCA] will be permitted to begin site preparation and the scanning and database building operations in all
offices as soon as the plans are agreed upon and accepted. This includes site preparation and database
building operations in these Phase-3 offices.
Within six (6) months from issuance of CA for Phase 2, the Project Proponent [BCA] shall complete site
preparation and implementation of the approved systems in the ten (10) RCOs, including a fully
functional network connection between all equipment at the Central Facility and the RCOs.

Phase 4. Full Implementation, including all Foreign Service Posts Within three (3) to eight (8) months
from issuance of the CA for Phase-3, the Project Proponent [BCA] shall complete all preparations and 111
fully implement the approved systems in the eighty (80) FSPs, including a fully functional network
connection between all equipment at the Central Facility and the FSPs. Upon satisfactory completion of
Phase 4, a CA shall be issued by the DFA.

Phase 5. In Service Phase Operation and maintenance of the complete MRP/V Facility to provide
machine readable passports and visas in all designated locations around the world.

Phase 6. Transition/Turnover Transition/Turnover to the DFA of all operations and equipment, to

include an orderly transfer of ownership of all hardware, application system software and its source code
and/or licenses (subject to Section 5.02 [H]), peripherals, leasehold improvements, physical and computer
security improvements, Automated Fingerprint Identification Systems, and all other MRP/V facilities
shall commence at least six (6) months prior to the end of the [Amended] BOT Agreement. The transition
will include the training of DFA personnel who will be taking over the responsibilities of system
operation and maintenance from the Project Proponent [BCA]. The Project Proponent [BCA] shall bear
all costs related to this transfer.[13] (Words in brackets appear in the Amended BOT Agreement)

To place matters in the proper perspective, it should be pointed out that both the DFA and BCA impute
breach of the Amended BOT Agreement against each other.

According to the DFA, delays in the completion of the phases permeated the MRP/V Project due to the
submission of deficient documents as well as intervening issues regarding BCA/PPCs supposed financial
incapacity to fully implement the project.

On the other hand, BCA contends that the DFA failed to perform its reciprocal obligation to issue to BCA
a Certificate of Acceptance of Phase 1 within 14 working days of operation purportedly required by
Section 14.04 of the Amended BOT Agreement. BCA bewailed that it took almost three years for the
DFA to issue the said Certificate allegedly because every appointee to the position of DFA Secretary
wanted to review the award of the project to BCA. BCA further alleged that it was the DFAs refusal to
approve the location of the DFA Central Facility which prevented BCA from proceeding with Phase 2 of
the MRP/V Project.

Later, the DFA sought the opinion of the Department of Finance (DOF) and the Department of Justice
(DOJ) regarding the appropriate legal actions in connection with BCAs alleged delays in the completion
of the MRP/V Project. In a Letter dated February 21, 2005,[14] the DOJ opined that the DFA should issue
a final demand upon BCA to make good on its obligations, specifically on the warranties and
responsibilities regarding the necessary capitalization and the required financing to carry out the MRP/V
Project.The DOJ used as basis for said recommendation, the Letter dated April 19, 2004[15] of DOF
Secretary Juanita Amatong to then DFA Secretary Delia Albert stating, among others, that BCA may not
be able to infuse more capital into PPC to use for the completion of the MRP/V Project.

Thus, on February 22, 2005, DFA sent a letter[16] to BCA, through its project company PPC, invoking
BCAs financial warranty under Section 5.02(A) of the Amended BOT Agreement. [17] The DFA required
BCA to submit (a) proof of adequate capitalization (i.e., full or substantial payment of stock 112

subscriptions); (b) a bank guarantee indicating the availability of a credit facility of P700 million; and (c)
audited financial statements for the years 2001 to 2004.

In reply to DFAs letter, BCA, through PPC, informed the former of its position that its financial capacity
was already passed upon during the prequalification process and that the Amended BOT Agreement did
not call for any additional financial requirements for the implementation of the MRP/V
Project. Nonetheless, BCA submitted its financial statements for the years 2001 and 2002 and requested
for additional time within which to comply with the other financial requirements which the DFA insisted
on.[18]

According to the DFA, BCAs financial warranty is a continuing warranty which requires that it shall have
the necessary capitalization to finance the MRP/V Project in its entirety and not on a per phase basis as
BCA contends. Only upon sufficient proof of its financial capability to complete and implement the
whole project will the DFAs obligation to choose and approve the location of its Central Facility
arise. The DFA asserted that its approval of a Central Facility site was not ministerial and upon its review,
BCAs proposed site for the Central Facility was purportedly unacceptable in terms of security and
facilities. Moreover, the DFA allegedly received conflicting official letters and notices[19] from BCA and
PPC regarding the true ownership and control of PPC. The DFA implied that the disputes among the
shareholders of PPC and between PPC and BCA appeared to be part of the reason for the hampered
implementation of the MRP/V Project.

BCA, in turn, submitted various letters and documents to prove its financial capability to complete the
MRP/V Project.[20] However, the DFA claimed these documents were unsatisfactory or of dubious
authenticity. Then on August 1, 2005, BCA terminated its Assignment Agreement with PPC and notified
the DFA that it would directly implement the MRP/V Project.[21] BCA further claims that the termination
of the Assignment Agreement was upon the instance, or with the conformity, of the DFA, a claim which
the DFA disputed.

On December 9, 2005, the DFA sent a Notice of Termination[22] to BCA and PPC due to their alleged
failure to submit proof of financial capability to complete the entire MRP/V Project in accordance with
the financial warranty under Section 5.02(A) of the Amended BOT Agreement. The Notice states:

After a careful evaluation and consideration of the matter, including the reasons cited in your letters dated
March 3, May 3, and June 20, 2005, and upon the recommendation of the Office of the Solicitor General
(OSG), the Department is of the view that your continuing default in complying with the requisite bank
guarantee and/or credit facility, despite repeated notice and demand, is legally unjustified.
In light of the foregoing considerations and upon the instruction of the Secretary of Foreign Affairs, the
Department hereby formally TERMINATE (sic) the Subject Amended BOT Agreement dated 5 April
2005 (sic)[23] effective 09 December 2005. Further, and as a consequence of this termination, the
Department formally DEMAND (sic) that you pay within ten (10) days from receipt hereof, liquidated
damages equivalent to the corresponding performance security bond that you had posted for the MRP/V
Project.

Please be guided accordingly. 113

On December 14, 2005, BCA sent a letter[24] to the DFA demanding that it immediately reconsider and
revoke its previous notice of termination, otherwise, BCA would be compelled to declare the DFA in
default pursuant to the Amended BOT Agreement. When the DFA failed to respond to said letter, BCA
issued its own Notice of Default dated December 22, 2005[25] against the DFA, stating that if the default is
not remedied within 90 days, BCA will be constrained to terminate the MRP/V Project and hold the DFA
liable for damages.

BCAs request for mutual discussion under Section 19.01 of the Amended BOT Agreement[26] was
purportedly ignored by the DFA and left the dispute unresolved through amicable means within 90 days.
Consequently, BCA filed its Request for Arbitration dated April 7, 2006[27] with the Philippine Dispute
Resolution Center, Inc. (PDRCI), pursuant to Section 19.02 of the Amended BOT Agreement which
provides:

Section 19.02 Failure to Settle Amicably If the Dispute cannot be settled amicably within ninety (90)
days by mutual discussion as contemplated under Section 19.01 herein, the Dispute shall be settled with
finality by an arbitrage tribunal operating under International Law, hereinafter referred to as the Tribunal,
under the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the United Nations
General Assembly on December 15, 1976, and entitled Arbitration Rules on the United Nations
Commission on the International Trade Law.The DFA and the BCA undertake to abide by and implement
the arbitration award. The place of arbitration shall be Pasay City, Philippines, or such other place as may
mutually be agreed upon by both parties. The arbitration proceeding shall be conducted in the English
language.[28]

As alleged in BCAs Request for Arbitration, PDRCI is a non-stock, non-profit organization composed of
independent arbitrators who operate under its own Administrative Guidelines and Rules of Arbitration as
well as under the United Nations Commission on the International Trade Law (UNCITRAL) Model Law
on International Commercial Arbitration and other applicable laws and rules. According to BCA, PDRCI
can act as an arbitration center from whose pool of accredited arbitrators both the DFA and BCA may
select their own nominee to become a member of the arbitral tribunal which will render the arbitration
award.

BCAs Request for Arbitration filed with the PDRCI sought the following reliefs:
1. A judgment nullifying and setting aside the Notice of Termination dated December 9, 2005 of
Respondent [DFA], including its demand to Claimant [BCA] to pay liquidated damages equivalent to the
corresponding performance security bond posted by Claimant [BCA];

2. A judgment (a) confirming the Notice of Default dated December 22, 2005 issued by Claimant [BCA]
to Respondent [DFA]; and (b) ordering Respondent [DFA] to perform its obligation under the Amended
BOT Agreement dated April 5, 2002 by approving the site of the Central Facility at the Star Mall
Complex on Shaw Boulevard, Mandaluyong City, within five days from receipt of the Arbitral Award; 114

and

3. A judgment ordering respondent [DFA] to pay damages to Claimant [BCA], reasonably estimated
at P50,000,000.00 as of this date, representing lost business opportunities; financing fees, costs and
commissions; travel expenses; legal fees and expenses; and costs of arbitration, including the fees of the
arbitrator/s.[29]

PDRCI, through a letter dated April 26, 2006,[30] invited the DFA to submit its Answer to the Request for
Arbitration within 30 days from receipt of said letter and also requested both the DFA and BCA to
nominate their chosen arbitrator within the same period of time.

Initially, the DFA, through a letter dated May 22, 2006,[31] requested for an extension of time to file its
answer, without prejudice to jurisdictional and other defenses and objections available to it under the
law. Subsequently, however, in a letter dated May 29, 2006,[32] the DFA declined the request for
arbitration before the PDRCI. While it expressed its willingness to resort to arbitration, the DFA pointed
out that under Section 19.02 of the Amended BOT Agreement, there is no mention of a specific body or
institution that was previously authorized by the parties to settle their dispute. The DFA further claimed
that the arbitration of the dispute should be had before an ad hocarbitration body, and not before the
PDRCI which has as its accredited arbitrators, two of BCAs counsels of record. Likewise, the DFA
insisted that PPC, allegedly an indispensable party in the instant case, should also participate in the
arbitration.

The DFA then sought the opinion of the DOJ on the Notice of Termination dated December 9, 2005 that
it sent to BCA with regard to the MRP/V Project.

In DOJ Opinion No. 35 (2006) dated May 31, 2006,[33] the DOJ concurred with the steps taken by the
DFA, stating that there was basis in law and in fact for the termination of the MRP/V Project. Moreover,
the DOJ recommended the immediate implementation of the project (presumably by a different
contractor) at the soonest possible time.

Thereafter, the DFA and the BSP entered into a Memorandum of Agreement for the latter to provide the
former passports compliant with international standards. The BSP then solicited bids for the supply,
delivery, installation and commissioning of a system for the production of Electronic Passport Booklets or
e-Passports.[34]
For BCA, the BSPs invitation to bid for the supply and purchase of e-Passports (the e-Passport Project)
would only further delay the arbitration it requested from the DFA.Moreover, this new e-Passport Project
by the BSP and the DFA would render BCAs remedies moot inasmuch as the e-Passport Project would
then be replacing the MRP/V Project which BCA was carrying out for the DFA.

Thus, BCA filed a Petition for Interim Relief[35] under Section 28 of the Alternative Dispute Resolution 115
Act of 2004 (R.A. No. 9285),[36] with the Regional Trial Court (RTC) of Pasig City, Branch 71, presided
over by respondent Judge Falcon. In that RTC petition, BCA prayed for the following:

WHEREFORE, BCA respectfully prays that this Honorable Court, before the constitution of the arbitral
tribunal in PDRCI Case No. 30-2006/BGF, grant petitioner interim relief in the following manner:

(a) upon filing of this Petition, immediately issue an order temporarily restraining Respondents [DFA and
BSP], their agents, representatives, awardees, suppliers and assigns (i) from awarding a new contract to
implement the Project, or any similar electronic passport or visa project; or (ii) if such contract has been
awarded, from implementing such Project or similar projects until further orders from this Honorable
Court;

(b) after notice and hearing, issue a writ of preliminary injunction ordering Respondents [DFA and BSP],
their agents, representatives, awardees, suppliers and assigns to desist (i) from awarding a new contract to
implement the Project or any similar electronic passport or visa project; or (ii) if such contract has been
awarded, from implementing such Project or similar projects, and to maintain the status quo ante pending
the resolution on the merits of BCAs Request for Arbitration; and

(c) render judgment affirming the interim relief granted to BCA until the dispute between the parties shall
have been resolved with finality.

BCA also prays for such other relief, just and equitable under the premises.[37]

BCA alleged, in support for its application for a Temporary Restraining Order (TRO), that unless the
DFA and the BSP were immediately restrained, they would proceed to undertake the project together with
a third party to defeat the reliefs BCA sought in its Request for Arbitration, thus causing BCA to suffer
grave and irreparable injury from the loss of substantial investments in connection with the
implementation of the MRP/V Project.

Thereafter, the DFA filed an Opposition (to the Application for Temporary Restraining Order and/or Writ
of Preliminary Injunction) dated January 18, 2007,[38] alleging that BCA has no cause of action against it
as the contract between them is for machine readable passports and visas which is not the same as the
contract it has with the BSP for the supply of electronic passports. The DFA also pointed out that the
Filipino people and the governments international standing would suffer great damage if a TRO would be
issued to stop the e-Passport Project. The DFA mainly anchored its opposition on Republic Act No. 8975,
which prohibits trial courts from issuing a TRO, preliminary injunction or mandatory injunction against
the bidding or awarding of a contract or project of the national government.

On January 23, 2007, after summarily hearing the parties oral arguments on BCAs application for the
issuance of a TRO, the trial court ordered the issuance of a TRO restraining the DFA and the BSP, their
agents, representatives, awardees, suppliers and assigns from awarding a new contract to implement the
Project or any similar electronic passport or visa project, or if such contract has been awarded, from 116

implementing such or similar projects.[39] The trial court also set for hearing BCAs application for
preliminary injunction.

Consequently, the DFA filed a Motion for Reconsideration[40] of the January 23, 2007 Order. The BSP, in
turn, also sought to lift the TRO and to dismiss the petition. In its Urgent Omnibus Motion dated February
1, 2007,[41] the BSP asserted that BCA is not entitled to an injunction, as it does not have a clear right
which ought to be protected, and that the trial court has no jurisdiction to enjoin the implementation of the
e-Passport Project which, the BSP alleged, is a national government project under Republic Act No. 8975.

In the hearings set for BCAs application for preliminary injunction, BCA presented as witnesses, Mr.
Bonifacio Sumbilla, its President, Mr. Celestino Mercader, Jr. from the Independent Verification and
Validation Contractor commissioned by the DFA under the Amended BOT Agreement, and DFA
Assistant Secretary Domingo Lucenario, Jr. as adverse party witness.

The DFA and the BSP did not present any witness during the hearings for BCAs application for
preliminary injunction. According to the DFA and the BSP, the trial court did not have any jurisdiction
over the case considering that BCA did not pay the correct docket fees and that only the Supreme Court
could issue a TRO on the bidding for a national government project like the e-Passport Project pursuant to
the provisions of Republic Act No. 8975. Under Section 3 of Republic Act No. 8975, the RTC could only
issue a TRO against a national government project if it involves a matter of extreme urgency involving a
constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise.

Thereafter, BCA filed an Omnibus Comment [on Opposition and Supplemental Opposition (To the
Application for Temporary Restraining Order and/or Writ of Preliminary Injunction)] and Opposition [to
Motion for Reconsideration (To the Temporary Restraining Order dated January 23, 2007)] and Urgent
Omnibus Motion [(i) To Lift Temporary Restraining Order; and (ii) To Dismiss the Petition] dated
January 31, 2007.[42] The DFA and the BSP filed their separate Replies (to BCAs Omnibus Comment)
dated February 9, 2007[43] and February 13, 2007,[44] respectively.

On February 14, 2007, the trial court issued an Order granting BCAs application for preliminary
injunction, to wit:

WHEREFORE, in view of the above, the court resolves that it has jurisdiction over the instant petition
and to issue the provisional remedy prayed for, and therefore, hereby GRANTS petitioners [BCAs]
application for preliminary injunction. Accordingly, upon posting a bond in the amount of Ten Million
Pesos (P10,000,000.00), let a writ of preliminary injunction issue ordering respondents [DFA and BSP],
their agents, representatives, awardees, suppliers and assigns to desist (i) from awarding a new contract to
implement the project or any similar electronic passport or visa project or (ii) if such contract has been
awarded from implementing such project or similar projects.

The motion to dismiss is denied for lack of merit. The motions for reconsideration and to lift temporary
restraining Order are now moot and academic by reason of the expiration of the TRO.[45]

117

On February 16, 2007, BCA filed an Amended Petition,[46] wherein paragraphs 3.3(b) and 4.3 were
modified to add language to the effect that unless petitioners were enjoined from awarding the e-Passport
Project, BCA would be deprived of its constitutionally-protected right to perform its contractual
obligations under the original and amended BOT Agreements without due process of law. Subsequently,
on February 26, 2007, the DFA and the BSP received the Writ of Preliminary Injunction dated February
23, 2007.

Hence, on March 2, 2007, the DFA and the BSP filed the instant Petition for Certiorari[47] and prohibition
under Rule 65 of the Rules of Court with a prayer for the issuance of a temporary restraining order and/or
a writ of preliminary injunction, imputing grave abuse of discretion on the trial court when it granted
interim relief to BCA and issued the assailed Order dated February 14, 2007 and the writ of preliminary
injunction dated February 23, 2007.

The DFA and the BSP later filed an Urgent Motion for Issuance of a Temporary Restraining Order and/or
Writ of Preliminary Injunction dated March 5, 2007.[48]

On March 12, 2007, the Court required BCA to file its comment on the said petition within ten days from
notice and granted the Office of the Solicitor Generals urgent motion for issuance of a TRO and/or writ of
preliminary injunction,[49] thus:

After deliberating on the petition for certiorari and prohibition with temporary restraining order and/or
writ of preliminary injunction assailing the Order dated 14 February 2007 of the Regional Trial Court,
Branch 71, Pasig City, in Civil Case No. 71079, the Court, without necessarily giving due course thereto,
resolves to require respondents to COMMENT thereon (not to file a motion to dismiss) within ten (10)
days from notice.

The Court further resolves to GRANT the Office of the Solicitor Generals urgent motion for issuance of a
temporary restraining order and/or writ of preliminary injunction dated 05 March 2007
and ISSUE a TEMPORARY RESTRAINING ORDER, as prayed for, enjoining respondents from
implementing the assailed Order dated 14 February 2007 and the Writ of Preliminary Injunction dated 23
February 2007, issued by respondent Judge Franco T. Falcon in Civil Case No. 71079 entitled BCA
International Corporation vs. Department of Foreign Affairs and Bangko Sentral ng Pilipinas, and from
conducting further proceedings in said case until further orders from this Court.
BCA filed on April 2, 2007 its Comment with Urgent Motion to Lift TRO, [50] to which the DFA and the
BSP filed their Reply dated August 14, 2007.[51]

In a Resolution dated June 4, 2007,[52] the Court denied BCAs motion to lift TRO. BCA filed another
Urgent Omnibus Motion dated August 17, 2007, for the reconsideration of the Resolution dated June 4,
2007, praying that the TRO issued on March 12, 2007 be lifted and that the petition be denied. 118

In a Resolution dated September 10, 2007,[53] the Court denied BCAs Urgent Omnibus Motion and gave
due course to the instant petition. The parties were directed to file their respective memoranda within 30
days from notice of the Courts September 10, 2007 Resolution.

Petitioners DFA and BSP submit the following issues for our consideration:

ISSUES

WHETHER OR NOT THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION

AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN HE ISSUED THE ASSAILED
ORDER, WHICH EFFECTIVELY ENJOINED THE IMPLEMENTATION OF THE E-PASSPORT
PROJECT -- A NATIONAL GOVERNMENT PROJECT UNDER REPUBLIC ACT NO. 8975.

II

WHETHER OR NOT THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN GRANTING
RESPONDENT BCAS INTERIM RELIEF INASMUCH AS:

(I) RESPONDENT BCA HAS NOT ESTABLISHED A CLEAR RIGHT THAT CAN BE
PROTECTED BY AN INJUNCTION; AND

(II) RESPONDENT BCA HAS NOT SHOWN THAT IT WILL SUSTAIN GRAVE AND
IRREPARABLE INJURY THAT MUST BE PROTECTED BY AN INJUNCTION. ON THE
CONTRARY, IT IS THE FILIPINO PEOPLE, WHO PETITIONERS PROTECT, THAT WILL
SUSTAIN SERIOUS AND SEVERE INJURY BY THE INJUNCTION.[54]
At the outset, we dispose of the procedural objections of BCA to the petition, to wit: (a) petitioners did
not follow the hierarchy of courts by filing their petition directly with this Court, without filing a motion
for reconsideration with the RTC and without filing a petition first with the Court of Appeals; (b) the
person who verified the petition for the DFA did not have personal knowledge of the facts of the case and
whose appointment to his position was highly irregular; and (c) the verification by the Assistant Governor
and General Counsel of the BSP of only selected paragraphs of the petition was with the purported intent
to mislead this Court.

119

Although the direct filing of petitions for certiorari with the Supreme Court is discouraged when litigants
may still resort to remedies with the lower courts, we have in the past overlooked the failure of a party to
strictly adhere to the hierarchy of courts on highly meritorious grounds. Most recently, we relaxed the rule
on court hierarchy in the case of Roque, Jr. v. Commission on Elections,[55] wherein we held:

The policy on the hierarchy of courts, which petitioners indeed failed to observe, is not an iron-
clad rule. For indeed the Court has full discretionary power to take cognizance and assume jurisdiction of
special civil actions for certiorari and mandamus filed directly with it for exceptionally compelling
reasons or if warranted by the nature of the issues clearly and specifically raised in the
petition.[56] (Emphases ours.)

The Court deems it proper to adopt a similarly liberal attitude in the present case in consideration of the
transcendental importance of an issue raised herein. This is the first time that the Court is confronted with
the question of whether an information and communication technology project, which does not conform
to our traditional notion of the term infrastructure, is covered by the prohibition on the issuance of court
injunctions found in Republic Act No. 8975, which is entitled An Act to Ensure the Expeditious
Implementation and Completion of Government Infrastructure Projects by Prohibiting Lower Courts from
Issuing Temporary Restraining Orders, Preliminary Injunctions or Preliminary Mandatory Injunctions,
Providing Penalties for Violations Thereof, and for Other Purposes. Taking into account the current trend
of computerization and modernization of administrative and service systems of government offices,
departments and agencies, the resolution of this issue for the guidance of the bench and bar, as well as the
general public, is both timely and imperative.

Anent BCAs claim that Mr. Edsel T. Custodio (who verified the Petition on behalf of the DFA) did not
have personal knowledge of the facts of the case and was appointed to his position as Acting Secretary
under purportedly irregular circumstances, we find that BCA failed to sufficiently prove such
allegations. In any event, we have previously held that [d]epending on the nature of the allegations in the
petition, the verification may be based either purely on personal knowledge, or entirely on authentic
records, or on both sources.[57] The alleged lack of personal knowledge of Mr. Custodio (which, as we
already stated, BCA failed to prove) would not necessarily render the verification defective for he could
have verified the petition purely on the basis of authentic records.

As for the assertion that the partial verification of Assistant Governor and General Counsel Juan de
Zuniga, Jr. was for the purpose of misleading this Court, BCA likewise failed to adduce evidence on this
point. Good faith is always presumed. Paragraph 3 of Mr. Zunigas verification indicates that his partial
verification is due to the fact that he is verifying only the allegations in the petition peculiar to the
BSP. We see no reason to doubt that this is the true reason for his partial or selective verification.
In sum, BCA failed to successfully rebut the presumption that the official acts (of Mr. Custodio and Mr.
Zuniga) were done in good faith and in the regular performance of official duty. [58] Even assuming the
verifications of the petition suffered from some defect, we have time and again ruled that [t]he ends of
justice are better served when cases are determined on the merits after all parties are given full
opportunity to ventilate their causes and defenses rather than on technicality or some procedural
imperfections.[59] In other words, the Court may suspend or even disregard rules when the demands of
justice so require.[60]
120

We now come to the substantive issues involved in this case.

On whether the trial court had jurisdiction to issue a writ of preliminary injunction in the present case

In their petition, the DFA and the BSP argue that respondent Judge Falcon gravely abused his discretion
amounting to lack or excess of jurisdiction when he issued the assailed orders, which effectively enjoined
the bidding and/or implementation of the e-Passport Project. According to petitioners, this violated the
clear prohibition under Republic Act No. 8975 regarding the issuance of TROs and preliminary
injunctions against national government projects, such as the e-Passport Project.

The prohibition invoked by petitioners is found in Section 3 of Republic Act No. 8975, which reads:

Section 3. Prohibition on the Issuance of Temporary Restraining Orders, Preliminary Injunctions and
Preliminary Mandatory Injunctions. No court, except the Supreme Court, shall issue any temporary
restraining order, preliminary injunction or preliminary mandatory injunction against the government, or
any of its subdivisions, officials or any person or entity, whether public or private, acting under the
governments direction, to restrain, prohibit or compel the following acts:

(a) Acquisition, clearance and development of the right-of-way and/or site or location of any national
government project;

(b) Bidding or awarding of contract/project of the national government as defined under Section 2
hereof;

(c) Commencement, prosecution, execution, implementation, operation of any such contract or project;

(d) Termination or rescission of any such contract/project; and

(e) The undertaking or authorization of any other lawful activity necessary for such contract/project.
This prohibition shall apply in all cases, disputes or controversies instituted by a private party, including
but not limited to cases filed by bidders or those claiming to have rights through such bidders involving
such contract/project. This prohibition shall not apply when the matter is of extreme urgency involving a
constitutional issue, such that unless a temporary restraining order is issued, grave injustice and
irreparable injury will arise. The applicant shall file a bond, in an amount to be fixed by the court, which
bond shall accrue in favor of the government if the court should finally decide that the applicant was not
entitled to the relief sought.

121

If after due hearing the court finds that the award of the contract is null and void, the court may, if
appropriate under the circumstances, award the contract to the qualified and winning bidder or order a
rebidding of the same, without prejudice to any liability that the guilty party may incur under existing
laws.

From the foregoing, it is indubitable that no court, aside from the Supreme Court, may enjoin a national
government project unless the matter is one of extreme urgency involving a constitutional issue such that
unless the act complained of is enjoined, grave injustice or irreparable injury would arise.

What then are the national government projects over which the lower courts are without jurisdiction to
issue the injunctive relief as mandated by Republic Act No. 8975?

Section 2(a) of Republic Act No. 8975 provides:

Section 2. Definition of Terms.

(a) National government projects shall refer to all current and future national government infrastructure,
engineering works and service contracts, including projects undertaken by government-owned and -
controlled corporations, all projects covered by Republic Act No. 6975, as amended by Republic Act No.
7718, otherwise known as the Build-Operate-and-Transfer Law, and other related and necessary
activities, such as site acquisition, supply and/or installation of equipment and materials, implementation,
construction, completion, operation, maintenance, improvement, repair and rehabilitation, regardless of
the source of funding.

As petitioners themselves pointed out, there are three types of national government projects enumerated
in Section 2(a), to wit:

(a) current and future national government infrastructure projects, engineering works and
service contracts, including projects undertaken by government-owned and controlled corporations;
(b) all projects covered by R.A. No. 6975, as amended by R.A. No. 7718, or the Build-
Operate-and-Transfer ( BOT) Law; and

(c) other related and necessary activities, such as site acquisition, supply and/or installation of
equipment and materials, implementation, construction, completion, operation, maintenance,
improvement repair and rehabilitation, regardless of the source of funding.

122

Under Section 2(a) of the BOT Law as amended by Republic Act No. 7718,[61] private sector
infrastructure or development projects are those normally financed and operated by the public
sector but which will now be wholly or partly implemented by the private sector, including but not
limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply,
irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects,
industrial estates or townships, housing, government buildings, tourism projects, markets,
slaughterhouses, warehouses, solid waste management, information technology networks and database
infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and
development projects as may be authorized by the appropriate agency.

In contrast, Republic Act No. 9184,[62] also known as the Government Procurement Reform Act, defines
infrastructure projects in Section 5(k) thereof in this manner:

(k) Infrastructure Projects - include the construction, improvement, rehabilitation, demolition, repair,
restoration or maintenance of roads and bridges, railways, airports, seaports, communication
facilities, civil works components of information technology projects, irrigation, flood control and
drainage, water supply, sanitation, sewerage and solid waste management systems, shore protection,
energy/power and electrification facilities, national buildings, school buildings, hospital buildings and
other related construction projects of the government. (Emphasis supplied.)

In the present petition, the DFA and the BSP contend that the bidding for the supply, delivery, installation
and commissioning of a system for the production of Electronic Passport Booklets, is a national
government project within the definition of Section 2 of Republic Act No. 8975. Petitioners also point to
the Senate deliberations on Senate Bill No. 2038[63] (later Republic Act No. 8975) which allegedly show
the legislatives intent to expand the scope and definition of national government projects to cover not only
the infrastructure projects enumerated in Presidential Decree No. 1818, but also future projects that may
likewise be considered national government infrastructure projects, like the e-Passport Project, to wit:

Senator Cayetano. x x x Mr. President, the present bill, the Senate Bill No. 2038, is actually an
improvement of P.D. No. 1818 and definitely not a repudiation of what I have earlier said, as my good
friend clearly stated. But this is really an effort to improve both the scope and definition of the term
government projects and to ensure that lower court judges obey and observe this prohibition on the
issuance of TROs on infrastructure projects of the government.
xxxx

Senator Cayetano. That is why, Mr. President, I did try to explain why I would accept the proposed
amendment, meaning the totality of the repeal of P.D. 1818 which is not found in the original version of
the bill, because of my earlier explanation that the definition of the term government infrastructure project
covers all of those enumerated in Section 1 of P.D. No. 1818. And the reason for that, as we know, is we
do not know what else could be considered government infrastructure project in the next 10 or 20 years.
123

x x x So, using the Latin maxim of expression unius est exclusion alterius, which means what is expressly
mentioned is tantamount to an express exclusion of the others, that is the reason we did not include
particularly an enumeration of certain activities of the government found in Section 1 of P.D. No.
1818. Because to do that, it may be a good excuse for a brilliant lawyer to say Well, you know, since it
does not cover this particular activity, ergo, the Regional Trial Court may issue TRO.

Using the foregoing discussions to establish that the intent of the framers of the law was to broaden the
scope and definition of national government projects and national infrastructure projects, the DFA and the
BSP submit that the said scope and definition had since evolved to include the e-Passport Project. They
assert that the concept of infrastructure must now refer to any and all elements that provide support,
framework, or structure for a given system or organization, including information technology, such as the
e-Passport Project.

Interestingly, petitioners represented to the trial court that the e-Passport Project is a BOT project but in
their petition with this Court, petitioners simply claim that the e-Passport Project is a national government
project under Section 2 of Republic Act No. 8975. This circumstance is significant, since relying on the
claim that the e-Passport Project is a BOT project, the trial court ruled in this wise:

The prohibition against issuance of TRO and/or writ of preliminary injunction under RA 8975 applies
only to national government infrastructure project covered by the BOT Law, (RA 8975, Sec 3[b] in
relation to Sec. 2).

The national government projects covered under the BOT are enumerated under Sec. 2 of RA6957, as
amended, otherwise known as the BOT Law. Notably, it includes information technology networks
and database infrastructure.

In relation to information technology projects, infrastructure projects refer to the civil works
components thereof. (R.A. No. 9184 [2003], Sec. 5[c]{sic}).[64]

Respondent BSPs request for bid, for the supply, delivery, installation and commissioning of a system for
the production of Electronic Passport Booklets appears to be beyond the scope of the term civil works.
Respondents did not present evidence to prove otherwise.[65] (Emphases ours.)
From the foregoing, it can be gleaned that the trial court accepted BCAs reasoning that, assuming the e-
Passport Project is a project under the BOT Law, Section 2 of the BOT Law must be read in conjunction
with Section 5(c) of Republic Act No. 9184 or the Government Procurement Reform Act to the effect that
only the civil works component of information technology projects are to be considered
infrastructure. Thus, only said civil works component of an information technology project cannot be the
subject of a TRO or writ of injunction issued by a lower court.
124

Although the Court finds that the trial court had jurisdiction to issue the writ of preliminary injunction, we
cannot uphold the theory of BCA and the trial court that the definition of the term infrastructure project in
Republic Act No. 9184 should be applied to the BOT Law.

Section 5 of Republic Act No. 9184 prefaces the definition of the terms therein, including the term
infrastructure project, with the following phrase: For purposes of this Act, the following terms or words
and phrases shall mean or be understood as follows x x x.

This Court has stated that the definition of a term in a statute is not conclusive as to the meaning of the
same term as used elsewhere.[66] This is evident when the legislative definition is expressly made for the
purposes of the statute containing such definition.[67]

There is no legal or rational basis to apply the definition of the term infrastructure project in one statute to
another statute enacted years before and which already defined the types of projects it covers. Rather, a
reading of the two statutes involved will readily show that there is a legislative intent to treat information
technology projects differently under the BOT Law and the Government Procurement Reform Act.

In the BOT Law as amended by Republic Act No. 7718, the national infrastructure and development
projects covered by said law are enumerated in Section 2(a) as follows:

SEC. 2. Definition of Terms. - The following terms used in this Act shall have the meanings stated below:

(a) Private sector infrastructure or development projects - The general description of

infrastructure or development projects normally financed and operated by the public sector but which will
now be wholly or partly implemented by the private sector, including but not limited to, power plants,
highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation,
telecommunications, railroads and railways, transport systems, land reclamation projects, industrial
estates of townships, housing, government buildings, tourism projects, markets, slaughterhouses,
warehouses, solid waste management, information technology networks and database infrastructure,
education and health facilities, sewerage, drainage, dredging, and other infrastructure and development
projects as may be authorized by the appropriate agency pursuant to this Act. Such projects shall be
undertaken through contractual arrangements as defined hereunder and such other variations as may be
approved by the President of the Philippines.
For the construction stage of these infrastructure projects, the project proponent may obtain financing
from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino
contractor: Provided, That, in case an infrastructure or a development facility's operation requires a public
utility franchise, the facility operator must be a Filipino or if a corporation, it must be duly registered with
the Securities and Exchange Commission and owned up to at least sixty percent (60%) by
Filipinos: Provided, further, That in the case of foreign contractors, Filipino labor shall be employed or
hired in the different phases of construction where Filipino skills are available: Provided, finally, That
projects which would have difficulty in sourcing funds may be financed partly from direct government
appropriations and/or from Official Development Assistance (ODA) of foreign governments or 125
institutions not exceeding fifty percent (50%) of the project cost, and the balance to be provided by the
project proponent. (Emphasis supplied.)

A similar provision appears in the Revised IRR of the BOT Law as amended, to wit:

SECTION 1.3 - DEFINITION OF TERMS

For purposes of these Implementing Rules and Regulations, the terms and phrases hereunder shall be
understood as follows:

xxxx

v. Private Sector Infrastructure or Development Projects - The general description of infrastructure or

Development Projects normally financed, and operated by the public sector but which will now be wholly
or partly financed, constructed and operated by the private sector, including but not limited to, power
plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation,
telecommunications, railroad and railways, transport systems, land reclamation projects, industrial estates
or townships, housing, government buildings, tourism projects, public markets, slaughterhouses,
warehouses, solid waste management, information technology networks and database
infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and
development projects as may otherwise be authorized by the appropriate Agency/LGU pursuant to the Act
or these Revised IRR. Such projects shall be undertaken through Contractual Arrangements as defined
herein, including such other variations as may be approved by the President of the Philippines.

xxxx

SECTION 2.2 - ELIGIBLE TYPES OF PROJECTS

The Construction, rehabilitation, improvement, betterment, expansion, modernization, operation,

financing and maintenance of the following types of projects which are normally financed and operated
by the public sector which will now be wholly or partly financed, constructed and operated by the private
sector, including other infrastructure and development projects as may be authorized by the appropriate
agencies, may be proposed under the provisions of the Act and these Revised IRR, provided however that
such projects have a cost recovery component which covers at least 50% of the Project Cost, or as
determined by the Approving Body:

xxxx

126
h. Information technology (IT) and data base infrastructure, including modernization of IT, geo-spatial
resource mapping and cadastral survey for resource accounting and planning. (Underscoring supplied.)

Undeniably, under the BOT Law, wherein the projects are to be privately funded, the entire information
technology project, including the civil works component and the technological aspect thereof, is
considered an infrastructure or development project and treated similarly as traditional infrastructure
projects. All the rules applicable to traditional infrastructure projects are also applicable to information
technology projects. In fact, the MRP/V Project awarded to BCA under the BOT Law appears to include
both civil works (i.e., site preparation of the Central Facility, regional DFA offices and foreign service
posts) and non-civil works aspects (i.e., development, installation and maintenance in the Philippines and
foreign service posts of a computerized passport and visa issuance system, including creation of
databases, storage and retrieval systems, training of personnel and provision of consumables).

In contrast, under Republic Act No. 9184 or the Government Procurement Reform Act, which
contemplates projects to be funded by public funds, the term infrastructure project was limited to only the
civil works component of information technology projects. The non-civil works component of
information technology projects would be treated as an acquisition of goods or consulting services as the
case may be.

This limited definition of infrastructure project in relation to information technology projects under
Republic Act No. 9184 is significant since the IRR of Republic Act No. 9184 has some provisions that
are particular to infrastructure projects and other provisions that are applicable only to procurement of
goods or consulting services.[68]

Implicitly, the civil works component of information technology projects are subject to the provisions on
infrastructure projects while the technological and other components would be covered by the provisions
on procurement of goods or consulting services as the circumstances may warrant.

When Congress adopted a limited definition of what is to be considered infrastructure in relation to

information technology projects under the Government Procurement Reform Act, legislators are
presumed to have taken into account previous laws concerning infrastructure projects (the BOT Law and
Republic Act No. 8975) and deliberately adopted the limited definition. We can further presume that
Congress had written into law a different treatment for information technology projects financed by
public funds vis-a-visprivately funded projects for a valid legislative purpose.
The idea that the definitions of terms found in the Government Procurement Reform Act were not meant
to be applied to projects under the BOT Law is further reinforced by the following provision in the IRR of
the Government Procurement Reform Act:

Section 1. Purpose and General Coverage

127
This Implementing Rules and Regulations (IRR) Part A, hereinafter called IRR-A, is promulgated
pursuant to Section 75 of Republic Act No. 9184 (R.A. 9184), otherwise known as the Government
Procurement Reform Act (GPRA), for the purpose of prescribing the necessary rules and regulations for
the modernization, standardization, and regulation of the procurement activities of the government. This
IRR-A shall cover all fully domestically-funded procurement activities from procurement planning up
to contract implementation and termination, exceptfor the following:

a) Acquisition of real property which shall be governed by Republic Act No. 8974 (R.A. 8974), entitled
An Act to Facilitate the Acquisition of Right-of-Way Site or Location for National Government
Infrastructure Projects and for Other Purposes, and other applicable laws; and

b) Private sector infrastructure or development projects and other procurement covered by

Republic Act No. 7718 (R.A. 7718), entitled An Act Authorizing the Financing, Construction,
Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other
Purposes, as amended: Provided, however, That for the portions financed by the Government, the
provisions of this IRR-A shall apply.

The IRR-B for foreign-funded procurement activities shall be the subject of a subsequent issuance.
(Emphases supplied.)

The foregoing provision in the IRR can be taken as an administrative interpretation that the provisions of
Republic Act No. 9184 are inapplicable to a BOT project except only insofar as such portions of the BOT
project that are financed by the government.

Taking into account the different treatment of information technology projects under the BOT Law and
the Government Procurement Reform Act, petitioners contention the trial court had no jurisdiction to
issue a writ of preliminary injunction in the instant case would have been correct if the e-Passport Project
was a project under the BOT Law as they represented to the trial court.

However, petitioners presented no proof that the e-Passport Project was a BOT project. On the contrary,
evidence adduced by both sides tended to show that the e-Passport Project was a procurement contract
under Republic Act No. 9184.
The BSPs on-line request for expression of interest and to bid for the e-Passport Project[69] from the BSP
website and the newspaper clipping[70] of the same request expressly stated that [t]he two stage bidding
procedure under Section 30.4 of the Implementing Rules and Regulation (sic) Part-A of Republic Act No.
9184 relative to the bidding and award of the contract shall apply. During the testimony of DFA Assistant
Secretary Domingo Lucenario, Jr. before the trial court, he admitted that the e-Passport Project is a BSP
procurement project and that it is the BSP that will pay the suppliers.[71] In petitioners Manifestation dated
July 29, 2008[72] and the Erratum[73] thereto, petitioners informed the Court that a contract for the supply
of a complete package of systems design, technology, hardware, software, and peripherals, maintenance
and technical support, ecovers and datapage security laminates for the centralized production and 128
personalization of Machine Readable Electronic Passport was awarded to Francois Charles Oberthur
Fiduciaire. In the Notice of Award dated July 2, 2008[74] attached to petitioners pleading, it was stated that
the failure of the contractor/supplier to submit the required performance bond would be sufficient ground
for the imposition of administrative penalty under Section 69 of the IRR-A of Republic Act No. 9184.

Being a government procurement contract under Republic Act No. 9184, only the civil works component
of the e-Passport Project would be considered an infrastructure project that may not be the subject of a
lower court-issued writ of injunction under Republic Act No. 8975.

Could the e-Passport Project be considered as engineering works or a service contract or as related and
necessary activities under Republic Act No. 8975 which may not be enjoined?

We hold in the negative. Under Republic Act No. 8975, a service contract refers
to infrastructure contracts entered into by any department, office or agency of the national government
with private entities and nongovernment organizations for services related or incidental to the functions
and operations of the department, office or agency concerned.On the other hand, the phrase other related
and necessary activities obviously refers to activities related to a government infrastructure, engineering
works, service contract or project under the BOT Law. In other words, to be considered a service contract
or related activity, petitioners must show that the e-Passport Project is an infrastructure project or
necessarily related to an infrastructure project. This, petitioners failed to do for they saw fit not to present
any evidence on the details of the e-Passport Project before the trial court and this Court. There is nothing
on record to indicate that the e-Passport Project has a civil works component or is necessarily related to an
infrastructure project.

Indeed, the reference to Section 30.4[75] of the IRR of Republic Act No. 9184 (a provision specific to the
procurement of goods) in the BSPs request for interest and to bid confirms that the e-Passport Project is a
procurement of goods and not an infrastructure project. Thus, within the context of Republic Act No.
9184 which is the governing law for the e-Passport Project the said Project is not an infrastructure project
that is protected from lower court issued injunctions under Republic Act No. 8975, which, to reiterate, has
for its purpose the expeditious and efficient implementation and completion of government infrastructure
projects.

We note that under Section 28, Republic Act No. 9285 or the Alternative Dispute Resolution Act of
2004,[76] the grant of an interim measure of protection by the proper court before the constitution of an
arbitral tribunal is allowed:
Sec. 28. Grant of Interim Measure of Protection. (a) It is not incompatible with an arbitration agreement
for a party to request, before constitution of the tribunal, from a Court an interim measure of protection
and for the Court to grant such measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or modification thereof, may be made with
the arbitral tribunal or to the extent that the arbitral tribunal has no power to act or is unable to act
effectively, the request may be made with the Court.The arbitral tribunal is deemed constituted when the
sole arbitrator or the third arbitrator, who has been nominated, has accepted the nomination and written
communication of said nomination and acceptance has been received by the party making the request.
129

(a) The following rules on interim or provisional relief shall be observed:

(1) Any party may request that provisional relief be granted against the adverse party.

(2) Such relief may be granted:

(i) to prevent irreparable loss or injury;

(ii) to provide security for the performance of any obligation;

(iii) to produce or preserve any evidence; or

(iv) to compel any other appropriate act or omission.

(3) The order granting provisional relief may be conditioned upon the provision of security or
any act or omission specified in the order.

(4) Interim or provisional relief is requested by written application transmitted by reasonable

means to the Court or arbitral tribunal as the case may be and the party against whom the relief is sought,
describing in appropriate detail the precise relief, the party against whom the relief is requested, the
grounds for the relief, and the evidence supporting the request.

(5) The order shall be binding upon the parties.

(6) Either party may apply with the Court for assistance in implementing or enforcing an interim
measure ordered by an arbitral tribunal.

(7) A party who does not comply with the order shall be liable for all damages resulting from
noncompliance, including all expenses and reasonable attorneys fees, paid in obtaining the orders judicial
enforcement.
Section 3(h) of the same statute provides that the "Court" as referred to in Article 6 of the Model Law
shall mean a Regional Trial Court.

Republic Act No. 9285 is a general law applicable to all matters and controversies to be resolved through 130
alternative dispute resolution methods. This law allows a Regional Trial Court to grant interim or
provisional relief, including preliminary injunction, to parties in an arbitration case prior to the
constitution of the arbitral tribunal. This general statute, however, must give way to a special law
governing national government projects, Republic Act No. 8975 which prohibits courts, except the
Supreme Court, from issuing TROs and writs of preliminary injunction in cases involving national
government projects.

However, as discussed above, the prohibition in Republic Act No. 8975 is inoperative in this case, since
petitioners failed to prove that the e-Passport Project is national government project as defined
therein. Thus, the trial court had jurisdiction to issue a writ of preliminary injunction against the e-
Passport Project.

On whether the trial courts issuance of a writ of injunction was proper

Given the above ruling that the trial court had jurisdiction to issue a writ of injunction and going to the
second issue raised by petitioners, we answer the question: Was the trial courts issuance of a writ of
injunction warranted under the circumstances of this case?

Petitioners attack on the propriety of the trial courts issuance of a writ of injunction is two-pronged: (a)
BCA purportedly has no clear right to the injunctive relief sought; and (b) BCA will suffer no grave and
irreparable injury even if the injunctive relief were not granted.

To support their claim that BCA has no clear right to injunctive relief, petitioners mainly allege that the
MRP/V Project and the e-Passport Project are not the same project.Moreover, the MRP/V Project
purportedly involves a technology (the 2D optical bar code) that has been rendered obsolete by the latest
ICAO developments while the e-Passport Project will comply with the latest ICAO standards (the
contactless integrated circuit). Parenthetically, and not as a main argument, petitioners imply that BCA
has no clear contractual right under the Amended BOT Agreement since BCA had previously assigned all
its rights and obligations under the said Agreement to PPC.

BCA, on the other hand, claims that the Amended BOT Agreement also contemplated the supply and/or
delivery of e-Passports with the integrated circuit technology in the future and not only the machine
readable passport with the 2D optical bar code technology. Also, it is BCAs assertion that the integrated
circuit technology is only optional under the ICAO issuances. On the matter of its assignment of its rights
to PPC, BCA counters that it had already terminated (purportedly at DFAs request) the assignment
agreement in favor of PPC and that even assuming the termination was not valid, the Amended BOT
Agreement expressly stated that BCA shall remain solidarily liable with its assignee, PPC.

Most of these factual allegations and counter-allegations already touch upon the merits of the main
controversy between the DFA and BCA, i.e., the validity and propriety of the termination of the Amended
BOT Agreement (the MRP/V Project) between the DFA and BCA. The Court deems it best to refrain
from ruling on these matters since they should be litigated in the appropriate arbitration or court
proceedings between or among the concerned parties. 131

One preliminary point, however, that must be settled here is whether BCA retains a right to seek relief
against the DFA under the Amended BOT Agreement in view of BCAs previous assignment of its rights
to PPC. Without preempting any factual finding that the appropriate court or arbitral tribunal on the
matter of the validity of the assignment agreement with PPC or its termination, we agree with BCA that it
remained a party to the Amended BOT Agreement, notwithstanding the execution of the assignment
agreement in favor of PPC, for it was stipulated in the Amended BOT Agreement that BCA would be
solidarily liable with its assignee. For convenient reference, we reproduce the relevant provision of the
Amended BOT Agreement here:

Section 20.15. It is clearly and expressly understood that BCA may assign, cede and transfer all of its
rights and obligations under this Amended BOT Agreement to PPC [Philippine Passport Corporation], as
fully as if PPC is the original signatory to this Amended BOT Agreement, provided however that BCA
shall nonetheless be jointly and severally liable with PPC for the performance of all the obligations
and liabilities under this Amended BOT Agreement. (Emphasis supplied.)

Furthermore, a review of the records shows that the DFA continued to address its correspondence
regarding the MRP/V Project to both BCA and PPC, even after the execution of the assignment
agreement. Indeed, the DFAs Notice of Termination dated December 9, 2005 was addressed to Mr.
Bonifacio Sumbilla as President of both BCA and PPC and referred to the Amended BOT Agreement
executed between the Department of Foreign Affairs (DFA), on one hand, and the BCA International
Corporation and/or the Philippine Passport Corporation (BCA/PPC). At the very least, the DFA is
estopped from questioning the personality of BCA to bring suit in relation to the Amended BOT
Agreement since the DFA continued to deal with both BCA and PPC even after the signing of the
assignment agreement. In any event, if the DFA truly believes that PPC is an indispensable party to the
action, the DFA may take necessary steps to implead PPC but this should not prejudice the right of BCA
to file suit or to seek relief for causes of action it may have against the DFA or the BSP, for undertaking
the e-Passport Project on behalf of the DFA.

With respect to petitioners contention that BCA will suffer no grave and irreparable injury so as to justify
the grant of injunctive relief, the Court finds that this particular argument merits consideration.

The BOT Law as amended by Republic Act No. 7718, provides:

SEC. 7. Contract Termination. - In the event that a project is revoked, cancelled or terminated by the
Government through no fault of the project proponent or by mutual agreement, the Government
shall compensate the said project proponent for its actual expenses incurred in the project plus a
reasonable rate of return thereon not exceeding that stated in the contract as of the date of such
revocation, cancellation or termination: Provided, That the interest of the Government in this instances
shall be duly insured with the Government Service Insurance System [GSIS] or any other insurance entity
duly accredited by the Office of the Insurance Commissioner: Provided, finally, That the cost of the
insurance coverage shall be included in the terms and conditions of the bidding referred to above.
132

In the event that the government defaults on certain major obligations in the contract and such failure
is not remediable or if remediable shall remain unremedied for an unreasonable length of time, the
project proponent/contractor may, by prior notice to the concerned national government agency or
local government unit specifying the turn-over date, terminate the contract. The project
proponent/contractor shall be reasonably compensated by the Government for equivalent or
proportionate contract cost as defined in the contract. (Emphases supplied.)

In addition, the Amended BOT Agreement, which is the law between and among the parties to it,
pertinently provides:

Section 17.01 Default In case a party commits an act constituting an event of default, the non-
defaulting party may terminate this Amended BOT Agreement by serving a written notice to the
defaulting party specifying the grounds for termination and giving the defaulting party a period of ninety
(90) days within which to rectify the default. If the default is not remedied within this period to the
satisfaction of the non-defaulting party, then the latter will serve upon the former a written notice of
termination indicating the effective date of termination.

Section 17.02 Proponents Default If this Amended BOT Agreement is terminated by reason of the
BCAs default, the DFA shall have the following options:

A. Allow the BCAs unpaid creditors who hold a lien on the MRP/V Facility to foreclose on
the MRP/V Facility. The right of the BCAs unpaid creditors to foreclose on the MRP/V Facility shall be
valid for the duration of the effectivity of this Amended BOT Agreement; or,

B. Allow the BCAs unpaid creditors who hold a lien on the MRP/V Facility to designate a
substitute BCA for the MRP/V Project, provided the designated substitute BCA is qualified under
existing laws and acceptable to the DFA. This substitute BCA shall hereinafter be referred to as the
Substitute BCA. The Substitute BCA shall assume all the BCAs rights and privileges, as well as the
obligations, duties and responsibilities hereunder; provided, however, that the DFA shall at all times and
its sole option, have the right to invoke and exercise any other remedy which may be available to the DFA
under any applicable laws, rules and/or regulations which may be in effect at any time and from time to
time. The DFA shall cooperate with the creditors with a view to facilitating the choice of a Substitute
BCA, who shall take-over the operation, maintenance and management of the MRP/V Project, within
three (3) months from the BCAs receipt of the notice of termination from the DFA. The Substituted BCA
shall have all the rights and obligations of the previous BCA as contained in this Amended BOT
Agreement; or
C. Take-over the MRP/V Facility and assume all attendant liabilities thereof.

D. In all cases of termination due to the default of the BCA, it shall pay DFA liquidated
damages equivalent to the applicable the (sic) Performance Security.

133

Section 17.03 DFAs Default If this Amended BOT Agreement is terminated by the BCA by reason of the
DFAs Default, the DFA shall:

A. Be obligated to take over the MRP/V Facility on an as is, where is basis, and shall
forthwith assume attendant liabilities thereof; and

B. Pay liquidated damages to the BCA equivalent to the following amounts, which may be
charged to the insurance proceeds referred to in Article 12:

(1) In the event of termination prior to completion of the implementation of the MRP/V
Project, damages shall be paid equivalent to the value of completed implementation, minus the
aggregate amount of the attendant liabilities assumed by the DFA, plus ten percent (10%)
thereof. The amount of such compensation shall be determined as of the date of the notice of termination
and shall become due and demandable ninety (90) days after the date of this notice of termination. Under
this Amended BOT Agreement, the term Value of the Completed Implementation shall mean the
aggregate of all reasonable costs and expenses incurred by the BCA in connection with, in relation to
and/or by reason of the MRP/V Project, excluding all interest and capitalized interest, as certified by a
reputable and independent accounting firm to be appointed by the BCA and subject to the approval by the
DFA, such approval shall not be unreasonably withheld.

(2) In the event of termination after completion of design, development, and installation of
the MRP/V Project, just compensation shall be paid equivalent to the present value of the net
income which the BCA expects to earn or realize during the unexpired or remaining term of this
Amended BOT Agreement using the internal rate of return on equity (IRRe) defined in the financial
projections of the BCA and agreed upon by the parties, which is attached hereto and made as an integral
part of this Amended BOT Agreement as Schedule 1. (Emphases supplied.)

The validity of the DFAs termination of the Amended BOT Agreement and the determination of the party
or parties in default are issues properly threshed out in arbitration proceedings as provided for by the
agreement itself. However, even if we hypothetically accept BCAs contention that the DFA terminated
the Amended BOT Agreement without any default or wrongdoing on BCAs part, it is not indubitable that
BCA is entitled to injunctive relief.

The BOT Law expressly allows the government to terminate a BOT agreement, even without fault on the
part of the project proponent, subject to the payment of the actual expenses incurred by the proponent plus
a reasonable rate of return.
Under the BOT Law and the Amended BOT Agreement, in the event of default on the part of the
government (in this case, the DFA) or on the part of the proponent, the non-defaulting party is allowed to
terminate the agreement, again subject to proper compensation in the manner set forth in the agreement.

Time and again, this Court has held that to be entitled to injunctive relief the party seeking such relief
must be able to show grave, irreparable injury that is not capable of compensation.

134

In Lopez v. Court of Appeals, [77] we held:

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest. It is
not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. It is resorted
to only when there is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation. The application of the injunctive writ rests upon the
existence of an emergency or of a special reason before the main case can be regularly heard. The
essential conditions for granting such temporary injunctive relief are that the complaint alleges facts
which appear to be sufficient to constitute a proper basis for injunction and that on the entire showing
from the contending parties, the injunction is reasonably necessary to protect the legal rights of the
plaintiff pending the litigation. Two requisites are necessary if a preliminary injunction is to issue,
namely, the existence of a right to be protected and the facts against which the injunction is to be directed
are violative of said right. In particular, for a writ of preliminary injunction to issue, the existence of the
right and the violation must appear in the allegation of the complaint and a preliminary injunction is
proper only when the plaintiff (private respondent herein) appears to be entitled to the relief
demanded in his complaint. (Emphases supplied.)

We reiterated this point in Transfield Philippines, Inc. v. Luzon Hydro Corporation,[78] where we likewise
opined:

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are
violative of the said right. It must be shown that the invasion of the right sought to be protected is material
and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only
be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation. (Emphasis supplied.)

As the Court explained previously in Philippine Airlines, Inc. v. National Labor Relations
Commission[79]:

An injury is considered irreparable if it is of such constant and frequent recurrence that no fair and
reasonable redress can be had therefor in a court of law, or where there is no standard by which their
amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical
computation. It is considered irreparable injury when it cannot be adequately compensated in
damages due to the nature of the injury itself or the nature of the right or property injured or when
there exists no certain pecuniary standard for the measurement of damages. (Emphases supplied.)

It is still contentious whether this is a case of termination by the DFA alone or both the DFA and
BCA. The DFA contends that BCA, by sending its own Notice of Default, likewise terminated or 135
abandoned the Amended BOT Agreement. Still, whether this is a termination by the DFA alone without
fault on the part of BCA or a termination due to default on the part of either party, the BOT Law and the
Amended BOT Agreement lay down the measure of compensation to be paid under the appropriate
circumstances.

Significantly, in BCAs Request for Arbitration with the PDRCI, it prayed for, among others, a judgment
ordering respondent [DFA] to pay damages to Claimant [BCA], reasonably estimated at P50,000,000.00
as of [the date of the Request for Arbitration], representing lost business opportunities; financing fees,
costs and commissions; travel expenses; legal fees and expenses; and costs of arbitration, including the
fees of the arbitrator/s.[80] All the purported damages that BCA claims to have suffered by virtue of the
DFAs termination of the Amended BOT Agreement are plainly determinable in pecuniary terms and can
be reasonably estimated according to BCAs own words.

Indeed, the right of BCA, a party which may or may not have been in default on its BOT contract, to have
the termination of its BOT contract reversed is not guaranteed by the BOT Law. Even assuming BCAs
innocence of any breach of contract, all the law provides is that BCA should be adequately compensated
for its losses in case of contract termination by the government.

There is one point that none of the parties has highlighted but is worthy of discussion. In seeking to enjoin
the government from awarding or implementing a machine readable passport project or any similar
electronic passport or visa project and praying for the maintenance of the status quo ante pending the
resolution on the merits of BCAs Request for Arbitration, BCA effectively seeks to enjoin the termination
of the Amended BOT Agreement for the MRP/V Project.

There is no doubt that the MRP/V Project is a project covered by the BOT Law and, in turn, considered a
national government project under Republic Act No. 8795. Under Section 3(d) of that statute, trial courts
are prohibited from issuing a TRO or writ of preliminary injunction against the government to restrain or
prohibit the termination or rescission of any such national government project/contract.

The rationale for this provision is easy to understand. For if a project proponent that the government
believes to be in default is allowed to enjoin the termination of its contract on the ground that it is
contesting the validity of said termination, then the government will be unable to enter into a new contract
with any other party while the controversy is pending litigation. Obviously, a courts grant of injunctive
relief in such an instance is prejudicial to public interest since government would be indefinitely
hampered in its duty to provide vital public goods and services in order to preserve the private proprietary
rights of the project proponent. On the other hand, should it turn out that the project proponent was not at
fault, the BOT Law itself presupposes that the project proponent can be adequately compensated for the
termination of the contract. Although BCA did not specifically pray for the trial court to enjoin the
termination of the Amended BOT Agreement and thus, there is no direct violation of Republic Act No.
8795, a grant of injunctive relief as prayed for by BCA will indirectly contravene the same statute.
Verily, there is valid reason for the law to deny preliminary injunctive relief to those who seek to contest
the governments termination of a national government contract. The only circumstance under which a
court may grant injunctive relief is the existence of a matter of extreme urgency involving a constitutional
issue, such that unless a TRO or injunctive writ is issued, grave injustice and irreparable injury will result.

Now, BCA likewise claims that unless it is granted injunctive relief, it would suffer grave and irreparable
injury since the bidding out and award of the e-Passport Project would be tantamount to a violation of its
right against deprivation of property without due process of law under Article III, Section 1 of the 136

Constitution. We are unconvinced.

Article III, Section 1 of the Constitution provides [n]o person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal protection of the laws. Ordinarily,
this constitutional provision has been applied to the exercise by the State of its sovereign powers such as,
its legislative power,[81] police power,[82] or its power of eminent domain.[83]

In the instant case, the State action being assailed is the DFAs termination of the Amended BOT
Agreement with BCA. Although the said agreement involves a public service that the DFA is mandated to
provide and, therefore, is imbued with public interest, the relationship of DFA to BCA is primarily
contractual and their dispute involves the adjudication of contractual rights. The propriety of the DFAs
acts, in relation to the termination of the Amended BOT Agreement, should be gauged against the
provisions of the contract itself and the applicable statutes to such contract. These contractual and
statutory provisions outline what constitutes due process in the present case. In all, BCA failed to
demonstrate that there is a constitutional issue involved in this case, much less a constitutional issue of
extreme urgency.

As for the DFAs purported failure to appropriate sufficient amounts in its budget to pay for liquidated
damages to BCA, this argument does not support BCAs position that it will suffer grave and irreparable
injury if it is denied injunctive relief. The DFAs liability to BCA for damages is contingent on BCA
proving that it is entitled to such damages in the proper proceedings. The DFA has no obligation to set
aside funds to pay for liquidated damages, or any other kind of damages, to BCA until there is a final and
executory judgment in favor of BCA. It is illogical and impractical for the DFA to set aside a significant
portion of its budget for an event that may never happen when such idle funds should be spent on
providing necessary services to the populace. For if it turns out at the end of the arbitration proceedings
that it is BCA alone that is in default, it would be the one liable for liquidated damages to the DFA under
the terms of the Amended BOT Agreement.

With respect to BCAs allegation that the e-Passport Project is grossly disadvantageous to the Filipino
people since it is the government that will be spending for the project unlike the MRP/V Project which
would have been privately funded, the same is immaterial to the issue at hand. If it is true that the award
of the e-Passport Project is inimical to the public good or tainted with some anomaly, it is indeed a cause
for grave concern but it is a matter that must be investigated and litigated in the proper forum. It has no
bearing on the issue of whether BCA would suffer grave and irreparable injury such that it is entitled to
injunctive relief from the courts.

In all, we agree with petitioners DFA and BSP that the trial courts issuance of a writ of preliminary
injunction, despite the lack of sufficient legal justification for the same, is tantamount to grave abuse of
discretion.
To be very clear, the present decision touches only on the twin issues of (a) the jurisdiction of the trial
court to issue a writ of preliminary injunction as an interim relief under the factual milieu of this case; and
(b) the entitlement of BCA to injunctive relief. The merits of the DFA and BCAs dispute regarding the
termination of the Amended BOT Agreement must be threshed out in the proper arbitration
proceedings. The civil case pending before the trial court is purely for the grant of interim relief since the
main case is to be the subject of arbitration proceedings.
137

BCAs petition for interim relief before the trial court is essentially a petition for a provisional remedy
(i.e., preliminary injunction) ancillary to its Request for Arbitration in PDRCI Case No. 30-
2006/BGF. BCA specifically prayed that the trial court grant it interim relief pending the constitution of
the arbitral tribunal in the said PDRCI case.Unfortunately, during the pendency of this case, PDRCI Case
No. 30-2006/BGF was dismissed by the PDRCI for lack of jurisdiction, in view of the lack of agreement
between the parties to arbitrate before the PDRCI.[84] In Philippine National Bank v. Ritratto Group,
Inc.,[85] we held:

A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the
principal action. The dismissal of the principal action thus results in the denial of the prayer for the
issuance of the writ. x x x. (Emphasis supplied.)

In view of intervening circumstances, BCA can no longer be granted injunctive relief and the civil case
before the trial court should be accordingly dismissed. However, this is without prejudice to the parties
litigating the main controversy in arbitration proceedings, in accordance with the provisions of the
Amended BOT Agreement, which should proceed with dispatch.

It does not escape the attention of the Court that the delay in the submission of this controversy to
arbitration was caused by the ambiguity in Section 19.02 of the Amended BOT Agreement regarding the
proper body to which a dispute between the parties may be submitted and the failure of the parties to
agree on such an arbitral tribunal. However, this Court cannot allow this impasse to continue
indefinitely. The parties involved must sit down together in good faith and finally come to an
understanding regarding the constitution of an arbitral tribunal mutually acceptable to them.

WHEREFORE, the instant petition is hereby GRANTED. The assailed Order dated February 14, 2007
of the Regional Trial Court of Pasig in Civil Case No. 71079 and the Writ of Preliminary Injunction dated
February 23, 2007 are REVERSED and SET ASIDE. Furthermore, Civil Case No. 71079 is
hereby DISMISSED.

No pronouncement as to costs. SO ORDERED.

14.

SECOND DIVISION

[G.R. No. 114323. July 23, 1998]

OIL AND NATURAL GAS COMMISSION, petitioner, vs. COURT OF APPEALS and PACIFIC
CEMENT COMPANY, INC. respondents.

DECISION 138

MARTINEZ, J.:

This proceeding involves the enforcement of a foreign judgment rendered by the Civil Judge of Dehra
Dun, India in favor of the petitioner, OIL AND NATURAL GAS COMMISSION and against the private
respondent, PACIFIC CEMENT COMPANY, INCORPORATED.

The petitioner is a foreign corporation owned and controlled by the Government of India while the private
respondent is a private corporation duly organized and existing under the laws of the Philippines. The
present conflict between the petitioner and the private respondent has its roots in a contract entered into
by and between both parties on February 26, 1983 whereby the private respondent undertook to supply
the petitioner FOUR THOUSAND THREE HUNDRED (4,300) metric tons of oil well cement. In
consideration therefor, the petitioner bound itself to pay the private respondent the amount of FOUR
HUNDRED SEVENTY-SEVEN THOUSAND THREE HUNDRED U.S. DOLLARS ($477,300.00) by
opening an irrevocable, divisible, and confirmed letter of credit in favor of the latter. The oil well cement
was loaded on board the ship MV SURUTANA NAVA at the port of Surigao City, Philippines for
delivery at Bombay and Calcutta, India. However, due to a dispute between the shipowner and the private
respondent, the cargo was held up in Bangkok and did not reach its point of destination. Notwithstanding
the fact that the private respondent had already received payment and despite several demands made by
the petitioner, the private respondent failed to deliver the oil well cement. Thereafter, negotiations ensued
between the parties and they agreed that the private respondent will replace the entire 4,300 metric tons of
oil well cement with Class G cement cost free at the petitioners designated port. However, upon
inspection, the Class G cement did not conform to the petitioners specifications. The petitioner then
informed the private respondent that it was referring its claim to an arbitrator pursuant to Clause 16 of
their contract which stipulates:

Except where otherwise provided in the supply order/contract all questions and disputes, relating to the
meaning of the specification designs, drawings and instructions herein before mentioned and as to quality
of workmanship of the items ordered or as to any other question, claim, right or thing whatsoever, in any
way arising out of or relating to the supply order/contract design, drawing, specification, instruction or
these conditions or otherwise concerning the materials or the execution or failure to execute the same
during stipulated/extended period or after the completion/abandonment thereof shall be referred to the
sole arbitration of the persons appointed by Member of the Commission at the time of dispute. It will be
no objection to any such appointment that the arbitrator so appointed is a Commission employer (sic) that
he had to deal with the matter to which the supply or contract relates and that in the course of his duties as
Commissions employee he had expressed views on all or any of the matter in dispute or difference.

The arbitrator to whom the matter is originally referred being transferred or vacating his office or being
unable to act for any reason the Member of the Commission shall appoint another person to act as
arbitrator in acordance with the terms of the contract/supply order. Such person shall be entitled to
proceed with reference from the stage at which it was left by his predecessor. Subject as aforesaid the
provisions of the Arbitration Act, 1940, or any Statutary modification or re-enactment there of and the
rules made there under and for the time being in force shall apply to the arbitration proceedings under this
clause.

The arbitrator may with the consent of parties enlarge the time, from time to time, to make and publish
the award.
The venue for arbitration shall be at Dehra dun.[1]

On July 23, 1988, the chosen arbitrator, one Shri N.N. Malhotra, resolved the dispute in petitioners favor
setting forth the arbitral award as follows:

NOW THEREFORE after considering all facts of the case, the evidence, oral and documentarys adduced
by the claimant and carefully examining the various written statements, submissions, letters, telexes, etc.
sent by the respondent, and the oral arguments addressed by the counsel for the claimants, I, N.N.
Malhotra, Sole Arbitrator, appointed under clause 16 of the supply order dated 26.2.1983, according to
which the parties, i.e. M/S Oil and Natural Gas Commission and the Pacific Cement Co., Inc. can refer 139

the dispute to the sole arbitration under the provision of the Arbitration Act. 1940, do hereby award and
direct as follows:-

The Respondent will pay the following to the claimant :-

1. Amount received by the Respondent

against the letter of credit No. 11/19

dated 28.2.1983 - - - US $ 477,300.00

2. Re-imbursement of expenditure incurred

by the claimant on the inspection teams

visit to Philippines in August 1985 - - - US$ 3,881.00

3. L. C. Establishment charges incurred

by the claimant - - - US $ 1,252.82

4. Loss of interest suffered by claimant

from 21.6.83 to 23.7.88 - - - US $ 417,169.95

Total amount of award - - - US $ 899,603.77

In addition to the above, the respondent would also be liable to pay to the claimant the interest at the rate
of 6% on the above amount, with effect from 24.7.1988 upto the actual date of payment by the
Respondent in full settlement of the claim as awarded or the date of the decree, whichever is earlier.

I determine the cost at Rs. 70,000/- equivalent to US $5,000 towards the expenses on Arbitration, legal
expenses, stamps duly incurred by the claimant. The cost will be shared by the parties in equal proportion.

Pronounced at Dehra Dun to-day, the 23rd of July 1988.[2]

To enable the petitioner to execute the above award in its favor, it filed a Petition before the Court of the
Civil Judge in Dehra Dun, India (hereinafter referred to as the foreign court for brevity), praying that the
decision of the arbitrator be made the Rule of Court in India. The foreign court issued notices to the
private respondent for filing objections to the petition. The private respondent complied and sent its
objections dated January 16, 1989. Subsequently, the said court directed the private respondent to pay the
filing fees in order that the latters objections could be given consideration. Instead of paying the required
filing fees, the private respondent sent the following communication addressed to the Civil Judge of
Dehra Dun:

The Civil Judge

Dehra Dun (U.P.) India

Re: Misc. Case No. 5 of 1989

M/S Pacific Cement Co.,

Inc. vs. ONGC Case

Sir:

1. We received your letter dated 28 April 1989 only last 18 May 1989.

2. Please inform us how much is the court fee to be paid. Your letter did not mention the amount to be
paid. 140

3. Kindly give us 15 days from receipt of your letter advising us how much to pay to comply with the
same.

Thank you for your kind consideration.

Pacific Cement Co., Inc.

By:

Jose Cortes, Jr.

President"[3]

Without responding to the above communication, the foreign court refused to admit the private
respondents objections for failure to pay the required filing fees, and thereafter issued an Order on
February 7, 1990, to wit:

ORDER

Since objections filed by defendant have been rejected through Misc. Suit No. 5 on 7.2.90, therefore,
award should be made Rule of the Court.

ORDER

Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the basis of conditions of award
decree is passed. Award Paper No. 3/B-1 shall be a part of the decree. The plaintiff shall also be entitled
to get from defendant (US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand six hundred and three
point seventy seven only) alongwith 9% interest per annum till the last date of realisation.[4]

Despite notice sent to the private respondent of the foregoing order and several demands by the petitioner
for compliance therewith, the private respondent refused to pay the amount adjudged by the foreign court
as owing to the petitioner. Accordingly, the petitioner filed a complaint with Branch 30 of the Regional
Trial Court (RTC) of Surigao City for the enforcement of the aforementioned judgment of the foreign
court. The private respondent moved to dismiss the complaint on the following grounds: (1) plaintiffs
lack of legal capacity to sue; (2) lack of cause of action; and (3) plaintiffs claim or demand has been
waived, abandoned, or otherwise extinguished. The petitioner filed its opposition to the said motion to
dismiss, and the private respondent, its rejoinder thereto. On January 3, 1992, the RTC issued an order
upholding the petitioners legal capacity to sue, albeit dismissing the complaint for lack of a valid cause of
action. The RTC held that the rule prohibiting foreign corporations transacting business in the Philippines
without a license from maintaining a suit in Philippine courts admits of an exception, that is, when the
foreign corporation is suing on an isolated transaction as in this case.[5] Anent the issue of the sufficiency
of the petitioners cause of action, however, the RTC found the referral of the dispute between the parties
to the arbitrator under Clause 16 of their contract erroneous. According to the RTC,

[a] perusal of the above-quoted clause (Clause 16) readily shows that the matter covered by its terms is
limited to ALL QUESTIONS AND DISPUTES, RELATING TO THE MEANING OF THE
SPECIFICATION, DESIGNS, DRAWINGS AND INSTRUCTIONS HEREIN BEFORE MENTIONED
and as to the QUALITY OF WORKMANSHIP OF THE ITEMS ORDERED or as to any other questions,
claim, right or thing whatsoever, but qualified to IN ANY WAY ARISING OR RELATING TO THE
SUPPLY ORDER/CONTRACT, DESIGN, DRAWING, SPECIFICATION, etc., repeating the
enumeration in the opening sentence of the clause.

The court is inclined to go along with the observation of the defendant that the breach, consisting of the
non-delivery of the purchased materials, should have been properly litigated before a court of law,
pursuant to Clause No. 15 of the Contract/Supply Order, herein quoted, to wit:

JURISDICTION
141
All questions, disputes and differences, arising under out of or in connection with this supply order, shall
be subject to the EXCLUSIVE JURISDICTION OF THE COURT, within the local limits of whose
jurisdiction and the place from which this supply order is situated.[6]

The RTC characterized the erroneous submission of the dispute to the arbitrator as a mistake of law or
fact amounting to want of jurisdiction. Consequently, the proceedings had before the arbitrator were null
and void and the foreign court had therefore, adopted no legal award which could be the source of an
enforceable right.[7]

The petitioner then appealed to the respondent Court of Appeals which affirmed the dismissal of the
complaint. In its decision, the appellate court concurred with the RTCs ruling that the arbitrator did not
have jurisdiction over the dispute between the parties, thus, the foreign court could not validly adopt the
arbitrators award. In addition, the appellate court observed that the full text of the judgment of the foreign
court contains the dispositive portion only and indicates no findings of fact and law as basis for the award.
Hence, the said judgment cannot be enforced by any Philippine court as it would violate the constitutional
provision that no decision shall be rendered by any court without expressing therein clearly and distinctly
the facts and the law on which it is based.[8] The appellate court ruled further that the dismissal of the
private respondents objections for non-payment of the required legal fees, without the foreign court first
replying to the private respondents query as to the amount of legal fees to be paid, constituted want of
notice or violation of due process. Lastly, it pointed out that the arbitration proceeding was defective
because the arbitrator was appointed solely by the petitioner, and the fact that the arbitrator was a former
employee of the latter gives rise to a presumed bias on his part in favor of the petitioner.[9]

A subsequent motion for reconsideration by the petitioner of the appellate courts decision was denied,
thus, this petition for review on certiorari citing the following as grounds in support thereof:

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE LOWER COURTS

ORDER OF DISMISSAL SINCE:

A. THE NON-DELIVERY OF THE CARGO WAS A MATTER PROPERLY COGNIZABLE BY THE

PROVISIONS OF CLAUSE 16 OF THE CONTRACT;

B. THE JUDGMENT OF THE CIVIL COURT OF DEHRADUN, INDIA WAS AN AFFIRMATION OF

THE FACTUAL AND LEGAL FINDINGS OF THE ARBITRATOR AND THEREFORE
ENFORCEABLE IN THIS JURISDICTION;

C. EVIDENCE MUST BE RECEIVED TO REPEL THE EFFECT OF A PRESUMPTIVE RIGHT

UNDER A FOREIGN JUDGMENT.[10]

The threshold issue is whether or not the arbitrator had jurisdiction over the dispute between the petitioner
and the private respondent under Clause 16 of the contract. To reiterate, Clause 16 provides as follows:

Except where otherwise provided in the supply order/contract all questions and disputes, relating to the
meaning of the specification designs, drawings and instructions herein before mentioned and as to quality
of workmanship of the items ordered or as to any other question, claim, right or thing whatsoever, in any
way arising out of or relating to the supply order/contract design, drawing, specification, instruction or
these conditions or otherwise concerning the materials or the execution or failure to execute the same
during stipulated/extended period or after the completion/abandonment thereof shall be referred to the
sole arbitration of the persons appointed by Member of the Commission at the time of dispute. It will be
no objection to any such appointment that the arbitrator so appointed is a Commission employer (sic) that
he had to deal with the matter to which the supply or contract relates and that in the course of his duties as
Commissions employee he had expressed views on all or any of the matter in dispute or difference.[11]

The dispute between the parties had its origin in the non-delivery of the 4,300 metric tons of oil well
cement to the petitioner. The primary question that may be posed, therefore, is whether or not the non-
delivery of the said cargo is a proper subject for arbitration under the above-quoted Clause 16. The
petitioner contends that the same was a matter within the purview of Clause 16, particularly the phrase, x
142
x x or as to any other questions, claim, right or thing whatsoever, in any way arising or relating to the
supply order/contract, design, drawing, specification, instruction x x x.[12] It is argued that the foregoing
phrase allows considerable latitude so as to include non-delivery of the cargo which was a claim, right or
thing relating to the supply order/contract. The contention is bereft of merit. First of all, the petitioner has
misquoted the said phrase, shrewdly inserting a comma between the words supply order/contract and
design where none actually exists. An accurate reproduction of the phrase reads, x x x or as to any other
question, claim, right or thing whatsoever, in any way arising out of or relating to the supply
order/contract design, drawing, specification, instruction or these conditions x x x. The absence of a
comma between the words supply order/contract and design indicates that the former cannot be taken
separately but should be viewed in conjunction with the words design, drawing, specification, instruction
or these conditions. It is thus clear that to fall within the purview of this phrase, the claim, right or thing
whatsoever must arise out of or relate to the design, drawing, specification, or instruction of the supply
order/contract. The petitioner also insists that the non-delivery of the cargo is not only covered by the
foregoing phrase but also by the phrase, x x x or otherwise concerning the materials or the execution or
failure to execute the same during the stipulated/extended period or after completion/abandonment thereof
x x x.

The doctrine of noscitur a sociis, although a rule in the construction of statutes, is equally applicable in
the ascertainment of the meaning and scope of vague contractual stipulations, such as the aforementioned
phrase. According to the maxim noscitur a sociis, where a particular word or phrase is ambiguous in itself
or is equally susceptible of various meanings, its correct construction may be made clear and specific by
considering the company of the words in which it is found or with which it is associated, or stated
differently, its obscurity or doubt may be reviewed by reference to associated words. [13] A close
examination of Clause 16 reveals that it covers three matters which may be submitted to arbitration
namely,

(1) all questions and disputes, relating to the meaning of the specification designs, drawings and
instructions herein before mentioned and as to quality of workmanship of the items ordered; or

(2) any other question, claim, right or thing whatsoever, in any way arising out of or relating to the supply
order/contract design, drawing, specification, instruction or these conditions; or

(3) otherwise concerning the materials or the execution or failure to execute the same during
stipulated/extended period or after the completion/abandonment thereof.

The first and second categories unmistakably refer to questions and disputes relating to the design,
drawing, instructions, specifications or quality of the materials of the supply/order contract. In the third
category, the clause, execution or failure to execute the same, may be read as execution or failure to
execute the supply order/contract. But in accordance with the doctrine of noscitur a sociis, this reference
to the supply order/contract must be construed in the light of the preceding words with which it is
associated, meaning to say, as being limited only to the design, drawing, instructions, specifications or
quality of the materials of the supply order/contract. The non-delivery of the oil well cement is definitely
not in the nature of a dispute arising from the failure to execute the supply order/contract design, drawing,
instructions, specifications or quality of the materials. That Clause 16 should pertain only to matters
involving the technical aspects of the contract is but a logical inference considering that the underlying
purpose of a referral to arbitration is for such technical matters to be deliberated upon by a person
possessed with the required skill and expertise which may be otherwise absent in the regular courts.
This Court agrees with the appellate court in its ruling that the non-delivery of the oil well cement is a
matter properly cognizable by the regular courts as stipulated by the parties in Clause 15 of their contract:

All questions, disputes and differences, arising under out of or in connection with this supply order, shall
be subject to the exclusive jurisdiction of the court, within the local limits of whose jurisdiction and the
place from which this supply order is situated.[14]

The following fundamental principles in the interpretation of contracts and other instruments served as
our guide in arriving at the foregoing conclusion:
143
"ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood
as bearing that import which is most adequate to render it effectual."[15]

ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.[16]

Sec. 11. Instrument construed so as to give effect to all provisions. In the construction of an instrument,
where there are several provisions or particulars, such a construction is, if possible, to be adopted as will
give effect to all.[17]

Thus, this Court has held that as in statutes, the provisions of a contract should not be read in isolation
from the rest of the instrument but, on the contrary, interpreted in the light of the other related
provisions.[18] The whole and every part of a contract must be considered in fixing the meaning of any of
its parts and in order to produce a harmonious whole. Equally applicable is the canon of construction that
in interpreting a statute (or a contract as in this case), care should be taken that every part thereof be given
effect, on the theory that it was enacted as an integrated measure and not as a hodge-podge of conflicting
provisions. The rule is that a construction that would render a provision inoperative should be avoided;
instead, apparently inconsistent provisions should be reconciled whenever possible as parts of a
coordinated and harmonious whole.[19]

The petitioners interpretation that Clause 16 is of such latitude as to contemplate even the non-delivery of
the oil well cement would in effect render Clause 15 a mere superfluity. A perusal of Clause 16 shows
that the parties did not intend arbitration to be the sole means of settling disputes. This is manifest from
Clause 16 itself which is prefixed with the proviso, Except where otherwise provided in the supply
order/contract x x x, thus indicating that the jurisdiction of the arbitrator is not all encompassing, and
admits of exceptions as may be provided elsewhere in the supply order/contract. We believe that the
correct interpretation to give effect to both stipulations in the contract is for Clause 16 to be confined to
all claims or disputes arising from or relating to the design, drawing, instructions, specifications or quality
of the materials of the supply order/contract, and for Clause 15 to cover all other claims or disputes.

The petitioner then asseverates that granting, for the sake of argument, that the non-delivery of the oil
well cement is not a proper subject for arbitration, the failure of the replacement cement to conform to the
specifications of the contract is a matter clearly falling within the ambit of Clause 16. In this contention,
we find merit. When the 4,300 metric tons of oil well cement were not delivered to the petitioner, an
agreement was forged between the latter and the private respondent that Class G cement would be
delivered to the petitioner as replacement. Upon inspection, however, the replacement cement was
rejected as it did not conform to the specifications of the contract. Only after this latter circumstance was
the matter brought before the arbitrator. Undoubtedly, what was referred to arbitration was no longer the
mere non-delivery of the cargo at the first instance but also the failure of the replacement cargo to
conform to the specifications of the contract, a matter clearly within the coverage of Clause 16.

The private respondent posits that it was under no legal obligation to make replacement and that it
undertook the latter only in the spirit of liberality and to foster good business relationship. [20] Hence, the
undertaking to deliver the replacement cement and its subsequent failure to conform to specifications are
not anymore subject of the supply order/contract or any of the provisions thereof. We disagree.
As per Clause 7 of the supply order/contract, the private respondent undertook to deliver the 4,300 metric
tons of oil well cement at BOMBAY (INDIA) 2181 MT and CALCUTTA 2119 MT.[21] The failure of the
private respondent to deliver the cargo to the designated places remains undisputed. Likewise, the fact
that the petitioner had already paid for the cost of the cement is not contested by the private respondent.
The private respondent claims, however, that it never benefited from the transaction as it was not able to
recover the cargo that was unloaded at the port of Bangkok.[22] First of all, whether or not the private
respondent was able to recover the cargo is immaterial to its subsisting duty to make good its promise to
deliver the cargo at the stipulated place of delivery. Secondly, we find it difficult to believe this
representation. In its Memorandum filed before this Court, the private respondent asserted that the Civil 144
Court of Bangkok had already ruled that the non-delivery of the cargo was due solely to the fault of the
carrier.[23] It is, therefore, but logical to assume that the necessary consequence of this finding is the
eventual recovery by the private respondent of the cargo or the value thereof. What inspires credulity is
not that the replacement was done in the spirit of liberality but that it was undertaken precisely because of
the private respondents recognition of its duty to do so under the supply order/contract, Clause 16 of
which remains in force and effect until the full execution thereof.

We now go to the issue of whether or not the judgment of the foreign court is enforceable in this
jurisdiction in view of the private respondents allegation that it is bereft of any statement of facts and law
upon which the award in favor of the petitioner was based. The pertinent portion of the judgment of the
foreign court reads:

ORDER

Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the basis of conditions of award
decree is passed. Award Paper No. 3/B-1 shall be a part of the decree. The plaintiff shall also be entitled
to get from defendant ( US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand six hundred and three
point seventy seven only) alongwith 9% interest per annum till the last date of realisation.[24]

As specified in the order of the Civil Judge of Dehra Dun, Award Paper No. 3/B-1 shall be a part of the
decree. This is a categorical declaration that the foreign court adopted the findings of facts and law of the
arbitrator as contained in the latters Award Paper. Award Paper No. 3/B-1, contains an exhaustive
discussion of the respective claims and defenses of the parties, and the arbitrators evaluation of the same.
Inasmuch as the foregoing is deemed to have been incorporated into the foreign courts judgment the
appellate court was in error when it described the latter to be a simplistic decision containing literally,
only the dispositive portion.[25]

The constitutional mandate that no decision shall be rendered by any court without expressing therein
clearly and distinctly the facts and the law on which it is based does not preclude the validity of
memorandum decisions which adopt by reference the findings of fact and conclusions of law contained in
the decisions of inferior tribunals. In Francisco v. Permskul,[26] this Court held that the following
memorandum decision of the Regional Trial Court of Makati did not transgress the requirements of
Section 14, Article VIII of the Constitution:

MEMORANDUM DECISION

After a careful perusal, evaluation and study of the records of this case, this Court hereby adopts by
reference the findings of fact and conclusions of law contained in the decision of the Metropolitan Trial
Court of Makati, Metro Manila, Branch 63 and finds that there is no cogent reason to disturb the same.

WHEREFORE, judgment appealed from is hereby affirmed in toto.[27] (Underscoring supplied.)

This Court had occasion to make a similar pronouncement in the earlier case of Romero v. Court of
Appeals,[28] where the assailed decision of the Court of Appeals adopted the findings and disposition of
the Court of Agrarian Relations in this wise:

We have, therefore, carefully reviewed the evidence and made a re-assessment of the same, and We are
persuaded, nay compelled, to affirm the correctness of the trial courts factual findings and the soundness
of its conclusion. For judicial convenience and expediency, therefore, We hereby adopt by way of
reference, the findings of facts and conclusions of the court a quo spread in its decision, as integral part of
this Our decision.[29] (Underscoring supplied)

Hence, even in this jurisdiction, incorporation by reference is allowed if only to avoid the cumbersome
reproduction of the decision of the lower courts, or portions thereof, in the decision of the higher
court.[30] This is particularly true when the decision sought to be incorporated is a lengthy and thorough
discussion of the facts and conclusions arrived at, as in this case, where Award Paper No. 3/B-1 consists
of eighteen (18) single spaced pages.
145

Furthermore, the recognition to be accorded a foreign judgment is not necessarily affected by the fact that
the procedure in the courts of the country in which such judgment was rendered differs from that of the
courts of the country in which the judgment is relied on.[31] This Court has held that matters of remedy
and procedure are governed by the lex fori or the internal law of the forum.[32] Thus, if under the
procedural rules of the Civil Court of Dehra Dun, India, a valid judgment may be rendered by adopting
the arbitrators findings, then the same must be accorded respect. In the same vein, if the procedure in the
foreign court mandates that an Order of the Court becomes final and executory upon failure to pay the
necessary docket fees, then the courts in this jurisdiction cannot invalidate the order of the foreign court
simply because our rules provide otherwise.

The private respondent claims that its right to due process had been blatantly violated, first by reason of
the fact that the foreign court never answered its queries as to the amount of docket fees to be paid then
refused to admit its objections for failure to pay the same, and second, because of the presumed bias on
the part of the arbitrator who was a former employee of the petitioner.

Time and again this Court has held that the essence of due process is to be found in the reasonable
opportunity to be heard and submit any evidence one may have in support of ones defense [33] or stated
otherwise, what is repugnant to due process is the denial of opportunity to be heard. [34] Thus, there is no
violation of due process even if no hearing was conducted, where the party was given a chance to explain
his side of the controversy and he waived his right to do so.[35]

In the instant case, the private respondent does not deny the fact that it was notified by the foreign court to
file its objections to the petition, and subsequently, to pay legal fees in order for its objections to be given
consideration. Instead of paying the legal fees, however, the private respondent sent a communication to
the foreign court inquiring about the correct amount of fees to be paid. On the pretext that it was yet
awaiting the foreign courts reply, almost a year passed without the private respondent paying the legal
fees. Thus, on February 2, 1990, the foreign court rejected the objections of the private respondent and
proceeded to adjudicate upon the petitioners claims. We cannot subscribe to the private respondents claim
that the foreign court violated its right to due process when it failed to reply to its queries nor when the
latter rejected its objections for a clearly meritorious ground. The private respondent was afforded
sufficient opportunity to be heard. It was not incumbent upon the foreign court to reply to the private
respondents written communication. On the contrary, a genuine concern for its cause should have
prompted the private respondent to ascertain with all due diligence the correct amount of legal fees to be
paid. The private respondent did not act with prudence and diligence thus its plea that they were not
accorded the right to procedural due process cannot elicit either approval or sympathy from this Court. [36]

The private respondent bewails the presumed bias on the part of the arbitrator who was a former
employee of the petitioner. This point deserves scant consideration in view of the following stipulation in
the contract:

x x x. It will be no objection to any such appointment that the arbitrator so appointed is a Commission
employer (sic) that he had to deal with the matter to which the supply or contract relates and that in the
course of his duties as Commissions employee he had expressed views on all or any of the matter in
dispute or difference.[37] (Underscoring supplied.)

Finally, we reiterate hereunder our pronouncement in the case of Northwest Orient Airlines, Inc. v. Court
of Appeals[38] that:
A foreign judgment is presumed to be valid and binding in the country from which it comes, until the
contrary is shown. It is also proper to presume the regularity of the proceedings and the giving of due
notice therein.

Under Section 50, Rule 39 of the Rules of Court, a judgment in an action in personam of a tribunal of a
foreign country having jurisdiction to pronounce the same is presumptive evidence of a right as between
the parties and their successors-in-interest by a subsequent title. The judgment may, however, be assailed
by evidence of want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or
fact. Also, under Section 3 of Rule 131, a court, whether of the Philippines or elsewhere, enjoys the
146
presumption that it was acting in the lawful exercise of jurisdiction and has regularly performed its
official duty.[39]

Consequently, the party attacking a foreign judgment, the private respondent herein, had the burden of
overcoming the presumption of its validity which it failed to do in the instant case.

The foreign judgment being valid, there is nothing else left to be done than to order its enforcement,
despite the fact that the petitioner merely prays for the remand of the case to the RTC for further
proceedings. As this Court has ruled on the validity and enforceability of the said foreign judgment in this
jurisdiction, further proceedings in the RTC for the reception of evidence to prove otherwise are no longer
necessary.

WHEREFORE, the instant petition is GRANTED, and the assailed decision of the Court of Appeals
sustaining the trial courts dismissal of the OIL AND NATURAL GAS COMMISSIONs complaint in
Civil Case No. 4006 before Branch 30 of the RTC of Surigao City is REVERSED, and another in its
stead is hereby rendered ORDERING private respondent PACIFIC CEMENT COMPANY, INC. to pay
to petitioner the amounts adjudged in the foreign judgment subject of said case.

SO ORDERED.

Regalado, (Chairman), Melo, and Puno, JJ., concur.

Mendoza, J., no part, having taken part in the consideration of this case below.

13.

SECOND DIVISION

[G.R. No. 161957. February 28, 2005]

JORGE GONZALES and PANEL OF ARBITRATORS, petitioners, vs. CLIMAX MINING LTD.,
CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING
INC., respondents.

DECISION

TINGA, J.:

Petitioner Jorge Gonzales, as claimowner of mineral deposits located within the Addendum Area of
Influence in Didipio, in the provinces of Quirino and Nueva Vizcaya, entered into a co-production, joint
venture and/or production-sharing letter-agreement designated as the May 14, 1987 Letter of Intent with
Geophilippines, Inc, and Inmex Ltd. Under the agreement, petitioner, as claimowner, granted to
Geophilippines, Inc. and Inmex Ltd. collectively, the exclusive right to explore and survey the mining
claims for a period of thirty-six (36) months within which the latter could decide to take an operating
agreement on the mining claims and/or develop, operate, mine and otherwise exploit the mining claims
and market any and all minerals that may be derived therefrom.
On 28 February 1989, the parties to the May 14, 1987 Letter of Intent renegotiated the same into
the February 28, 1989 Agreement whereby the exploration of the mining claims was extended for another
period of three years.

On 9 March 1991, petitioner Gonzales, Arimco Mining Corporation, Geophilippines Inc., Inmex Ltd., and
Aumex Philippines, Inc. signed a document designated as the Addendum to the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement with Express Adhesion Thereto (hereafter, the Addendum
Contract).[1] Under the Addendum Contract, Arimco Mining Corporation would apply to the Government
of the Philippines for permission to mine the claims as the Governments contractor under a Financial and
147
Technical Assistance Agreement(FTAA). On 20 June 1994, Arimco Mining Corporation obtained the
FTAA[2] and carried out work under the FTAA.

Respondents executed the Operating and Financial Accommodation Contract[3] (between Climax-Arimco
Mining Corporation and Climax Mining Ltd., as first parties, and Australasian Philippines Mining Inc., as
second party) dated 23 December 1996 and Assignment, Accession Agreement[4] (between Climax-
Arimco Mining Corporation and Australasian Philippines Mining Inc.) dated 3 December 1996.
Respondent Climax Mining Corporation (Climax) and respondent Australasian Philippines Mining Inc.
(APMI) entered into a Memorandum of Agreement[5] dated 1 June 1991 whereby the former transferred its
FTAA to the latter.

On 8 November 1999, petitioner Gonzales filed before the Panel of Arbitrators, Region II, Mines and
Geosciences Bureau of the Department of Environment and Natural Resources, against respondents
Climax-Arimco Mining Corporation (Climax-Arimco), Climax, and APMI,[6] a Complaint[7] seeking the
declaration of nullity or termination of the Addendum Contract, the FTAA, the Operating and Financial
Accommodation Contract, the Assignment, Accession Agreement, and the Memorandum of
Agreement. Petitioner Gonzales prayed for an unspecified amount of actual and exemplary damages plus
attorneys fees and for the issuance of a temporary restraining order and/or writ of preliminary injunction
to restrain or enjoin respondents from further implementing the questioned agreements. He sought said
releifs on the grounds of FRAUD, OPPRESSION and/or VIOLATION of Section 2, Article XII of the
CONSTITUTION perpetrated by these foreign RESPONDENTS, conspiring and confederating with one
another and with each other.[8]

On 21 February 2001, the Panel of Arbitrators dismissed the Complaint for lack of jurisdiction. Petitioner
moved for reconsideration and this was granted on 18 October 2001, the Panel believing that the case
involved a dispute involving rights to mining areas and a dispute involving surface owners, occupants and
claim owners/concessionaires. According to the Panel, although the issue raised in
the Complaint appeared to be purely civil in nature and should be within the jurisdiction of the regular
courts, a ruling on the validity of the assailed contracts would result to the grant or denial of mining rights
over the properties; therefore, the question on the validity of the contract amounts to a mining conflict or
dispute. Hence, the Panel granted the Motion for Reconsideration with regard to the issues of nullity,
termination, withdrawal or damages, but with regard to the constitutionality of the Addendum
Agreement and FTAA, it held that it had no jurisdiction.[9]

Respondents filed their motion for reconsideration but this was denied on 25 June 2002. The Panel of
Arbitrators maintained that there was a mining dispute between the parties since the subject matter of
the Complaint arose from contracts between the parties which involve the exploration and exploitation of
minerals over the disputed area.[10]

Respondents assailed the orders of the Panel of Arbitrators via a petition for certiorari before the Court of
Appeals.

On 30 July 2003, the Court of Appeals granted the petition, declaring that the Panel of Arbitrators did not
have jurisdiction over the complaint filed by petitioner.[11] The jurisdiction of the Panel of Arbitrators,
said the Court of Appeals, is limited only to the resolution of mining disputes, defined as those which
raise a question of fact or matter requiring the technical knowledge and experience of mining authorities.
It was found that the complaint alleged fraud, oppression and violation of the Constitution, which called
for the interpretation and application of laws, and did not involve any mining dispute. The Court of
Appeals also observed that there were no averments relating to particular acts constituting fraud and
oppression. It added that since the Addendum Contract was executed in 1991, the action to annul it should
have been brought not later than 1995, as the prescriptive period for an action for annulment is four years
from the time of the discovery of the fraud.[12] When petitioner filed his complaint before the Panel in
1999, his action had already prescribed. Also, the Court of Appeals noted that fraud and duress only make
a contract voidable,[13] not inexistent, hence the contract remains valid until annulled. The Court of
Appeals was of the opinion that the petition should have been settled through arbitration under Republic
Act No. 876 (The Arbitration Law) as stated in Clause 19.1 of the Addendum Contract. The Court of 148
Appeals therefore declared as invalid the orders dated 18 October 2001 and 25 June 2002 issued by the
Panel of Arbitrators. On 28 January 2004, the Court of Appeals denied petitioners motion for
reconsideration for lack of merit.[14]

Petitioner filed on 22 March 2004 this Petition for Review on Certiorari Under Rule 45 assailing the
decision and resolution of the Court of Appeals. Petitioner raises the following issues:

A.

PROCEDURAL GROUND

THE HONORABLE COURT OF APPEALS SHOULD HAVE SUMMARILY DISMISSED

RESPONDENTS PETITION A QUO FOR FAILURE TO COMPLY WITH PROCEDURAL
REQUIREMENTS.

i.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO DESPITE
RESPONDENTS FAILURE TO COMPLY WITH THE RULES ON DISCLOSURE IN THE
VERIFICATION AND CERTIFICATION PORTION OF THEIR PETITION A QUO.

ii.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO FILED
BY RESPONDENT CLIMAX DESPITE THE LACK OF THE REQUISITE AUTHORITY TO FILE
THE PETITION A QUO.

B.

SUBSTANTIVE GROUND

THE HONORABLE COURT OF APPEALS ERRED IN GRANTING THE PETITION A QUO FILED
BY RESPONDENTS AND IN DENYING MOTION FOR RECONSIDERATION FILED BY
PETITIONER FOR UTTER LACK OF BASIS IN FACT AND IN LAW.

i.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER CEDED HIS CLAIMS
OVER THE MINERAL DEPOSITS LOCATED WITHIN THE ADDENDUM AREA OF INFLUENCE.

ii.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE PANEL OF ARBITRATORS IS
BEREFT OF JURISDICTION OVER THE SUBJECT MATTER OF CASE NO. 058.

iii.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE COMPLAINT FILED BY THE
PETITIONER FAILED TO ALLEGE ULTIMATE FACTS OR PARTICULARS OF FRAUD.

iv.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER AND RESPONDENTS
SHOULD SUBMIT TO ARBITRATION UNDER R.A. 876.
149
v.

WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE ACTION TO DECLARE THE
NULLITY OF THE ADDENDUM CONTRACT, FTAA, OFAC AND AAAA ON THE GROUND OF
FRAUD HAS PRESCRIBED.

The issues for resolution in this petition for review are:

(a) Whether there was forum-shopping on the part of respondents for their failure to disclose to this Court
their filing of a Petition to Compel for Arbitration before the Regional Trial Court of Makati City, Branch
148, which is currently pending.

(b) Whether counsel for respondent Climax had authority to file the petition for certiorari before the Court
of Appeals considering that the signor of the petition for certioraris Verification and Certification of Non-
forum Shopping was not authorized to sign the same in behalf of respondent Climax.

(c) Whether the complaint filed by petitioner raises a mining dispute over which the Panel of Arbitrators
has jurisdiction, or a judicial question which should properly be brought before the regular courts.

(d) Whether the dispute between the parties should be brought for arbitration under Rep. Act No. 876.

Let us deal first with procedural matters.

Petitioner claims that respondents are guilty of forum-shopping for failing to disclose before this Court
that they had filed a Petition to Compel for Arbitration before the RTC of Makati City. However, it
cannot be determined from petitioners mere allegations in the Petition that the Petition to Compel for
Arbitration instituted by respondent Climax-Arimco, involves related causes of action and the grant of the
same or substantially the same reliefs as those involved in the instant case. Petitioner did not attach copies
of the Petition to Compel for Arbitration or any order or resolution of the RTC of Makati City related to
that case.

Furthermore, it can be gleaned from the nature of the two actions that the issues in the case before the
RTC of Makati City and in the petition for certiorari before the Court of Appeals are different. A petition
for certiorari raises the issue of whether or not there was grave abuse of discretion, while the Petition to
Compel for Arbitration seeks the implementation of the arbitration clause in the agreement between the
parties.

Petitioner next alleges that there was no authority granted by respondent Climax to the law firm of Sycip
Salazar Hernandez & Gatmaitan to file the petition before the Court of Appeals. There is allegedly no
Secretarys Certificate from respondent Climax attached to the petition. The Verification and Certification
only contains a statement made by one Marianne M. Manzanas that she is also the authorized
representative of [respondent Climax] without presenting further proof of such authority. Hence, it is
argued that as to respondent Climax, the petition filed before the Court of Appeals is an unauthorized act
and the assailed orders of the Panel of Arbitrators have become final.

Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit, together with the
petition, a sworn certification of non-forum shopping, and failure to comply with this requirement is
sufficient ground for dismissal of the petition. The requirement that petitioner should sign the certificate
of non-forum shopping applies even to corporations, the Rules of Court making no distinction between
natural and juridical persons. The signatory in the case of the corporation should be a duly authorized
director or officer of the corporation who has knowledge of the matter being certified. [15] If, as in this
case, the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the
certification against forum-shopping is necessary. A certification not signed by a duly authorized person
renders the petition subject to dismissal.[16]

On this point, we have to agree with petitioner. There appears to be no subsequent compliance with the
150
requirement to attach a board resolution authorizing the signor Marianne M. Manzanas to file the petition
in behalf of respondent Climax. Respondent also failed to refute this in its Comment.[17] However, this
latter issue becomes irrelevant in the light of our decision to deny this petition for review for lack of
jurisdiction by the Panel of Arbitrators over the complaint filed by petitioner, as will be discussed below.

We now come to the meat of the case which revolves mainly around the question of jurisdiction by the
Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over the complaint for declaration of
nullity and/or termination of the subject contracts on the ground of fraud, oppression and violation of the
Constitution? This issue may be distilled into the more basic question of whether the Complaint raises a
mining dispute or a judicial question.

A judicial question is a question that is proper for determination by the courts, as opposed to a moot
question or one properly decided by the executive or legislative branch. [18] A judicial question is raised
when the determination of the question involves the exercise of a judicial function; that is, the question
involves the determination of what the law is and what the legal rights of the parties are with respect to
the matter in controversy.[19]

On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b) mineral
agreements, FTAAs, or permits, and (c) surface owners, occupants and
claimholders/concessionaires.[20] Under Republic Act No. 7942 (otherwise known as the Philippine
Mining Act of 1995), the Panel of Arbitrators has exclusive and original jurisdiction to hear and decide
these mining disputes.[21] The Court of Appeals, in its questioned decision, correctly stated that the Panels
jurisdiction is limited only to those mining disputes which raise questions of fact or matters requiring the
application of technological knowledge and experience.[22]

In Pearson v. Intermediate Appellate Court,[23] this Court observed that the trend has been to make the
adjudication of mining cases a purely administrative matter.[24] Decisions[25] of the Supreme Court on
mining disputes have recognized a distinction between (1) the primary powers granted by pertinent
provisions of law to the then Secretary of Agriculture and Natural Resources (and the bureau directors) of
an executive or administrative nature, such as granting of license, permits, lease and contracts, or
approving, rejecting, reinstating or canceling applications, or deciding conflicting applications, and (2)
controversies or disagreements of civil or contractual nature between litigants which are questions of a
judicial nature that may be adjudicated only by the courts of justice. This distinction is carried on even in
Rep. Act No. 7942.

The Complaint charged respondents with disregarding and ignoring the provisions of the Addendum
Contract, violating the purpose and spirit of the May 14, 1987 Letter of Intent and February 28, 1989
Agreement, and acting in a fraudulent and oppressive manner against petitioner and practicing fraud and
deception against the Government.[26] Petitioner alleged in his Complaint that under the original
agreements (the May 14, 1987 Letter of Intent and February 28, 1989 Agreement) respondent Climax-
Arimco had committed to complete the Bankable Feasibility Study by 28 February 1992, but the same
was not accomplished. Instead, respondent Climax-Arimco, through false and insidious representations
and machinations by alleging technical and financial capacity, induced petitioner to enter into
the Addendum Contract and the FTAA in order to repeatedly extend the option period within which to
conduct the feasibility study. In essence, petitioner alleges that respondents, conspiring and confederating
with one another, misrepresented under the Addendum Contract and FTAA that respondent Climax-
Arimco possessed financial and technical capacity to put the project into commercial production, when in
truth it had no such qualification whatsoever to do so. By so doing, respondents have allegedly caused
damage not only to petitioner but also to the Republic of the Philippines.[27]

It is apparent that the Panel of Arbitrators is bereft of jurisdiction over the Complaint filed by petitioner.
The basic issue in petitioners Complaint is the presence of fraud or misrepresentation allegedly attendant
to the execution of the Addendum Contract and the other contracts emanating from it, such that the
contracts are rendered invalid and not binding upon the parties. It avers that petitioner was misled by
respondents into agreeing to the Addendum Contract. This constitutes fraud which vitiated petitioners
consent, and under Article 1390 of the Civil Code, is one of the grounds for the annulment of a voidable
151
contract. Voidable or annullable contracts, before they are set aside, are existent, valid, and binding, and
are effective and obligatory between the parties.[28] They can be ratified.[29]

Petitioner insists that the Complaint is actually one for the declaration of nullity of void contracts. He
argues that respondents, by their lack of financial and technical competence to carry out the mining
project, do not qualify to enter into a co-production, joint venture or production sharing agreement with
the Government, in circumvention of and in patent violation of the spirit and purpose of the Constitution,
particularly Section 2, Article XII thereof. Petitioner relies on the Civil Code for support:[30]

Art. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;

....

(7) Those expressly prohibited or declared void by law.

....

Petitioner asserts that for circumventing and being in patent violation of the Constitution, the Addendum
Contract, the FTAA and the other contracts are void contracts. As such, they do not produce any effect
and cannot be ratified.

However, whether the case involves void or voidable contracts is still a judicial question. It may, in some
instances, involve questions of fact especially with regard to the determination of the circumstances of the
execution of the contracts. But the resolution of the validity or voidness of the contracts remains a legal or
judicial question as it requires the exercise of judicial function. It requires the ascertainment of what laws
are applicable to the dispute, the interpretation and application of those laws, and the rendering of a
judgment based thereon. Clearly, the dispute is not a mining conflict. It is essentially judicial. The
complaint was not merely for the determination of rights under the mining contracts since the very
validity of those contracts is put in issue.

The Complaint is not about a dispute involving rights to mining areas, nor is it a dispute involving
claimholders or concessionaires. The main question raised was the validity of the Addendum Contract, the
FTAA and the subsequent contracts. The question as to the rights of petitioner or respondents to the
mining area pursuant to these contracts, as well as the question of whether or not petitioner had ceded his
mining claims in favor of respondents by way of execution of the questioned contracts, is merely
corollary to the main issue, and may not be resolved without first determining the main issue.

The Complaint is also not what is contemplated by Rep. Act No. 7942 when it says the dispute should
involve FTAAs. The Complaint is not exclusively within the jurisdiction of the Panel of Arbitrators just
because, or for as long as, the dispute involves an FTAA. The Complaint raised the issue of the
constitutionality of the FTAA, which is definitely a judicial question. The question of constitutionality is
exclusively within the jurisdiction of the courts to resolve as this would clearly involve the exercise of
judicial power. The Panel of Arbitrators does not have jurisdiction over such an issue since it does not
involve the application of technical knowledge and expertise relating to mining. This the Panel of
Arbitrators has even conceded in its Orders dated 18 October 2001 and 25 June 2002. At this juncture, it
is worthy of note that in a case,[31] which was resolved only on 1 December 2004, this Court upheld the
validity of the FTAA entered into by the Republic of the Philippines and WMC (Philippines), Inc. and
constitutionality of Rep. Act No. 7942 and DENR Administrative Order 96-40.[32] In fact, the Court took
the case on an original petition, recognizing the exceptional character of the situation and the paramount
public interest involved, as well as the necessity for a ruling to put an end to the uncertainties plaguing the
mining industry and the affected communities as a result of doubts case upon the constitutionality and
validity of the Mining Act, the subject FTAA and future FTAAs, and the need to avert a multiplicity of
suits.[33]

Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the parties
152
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.

Petitioner also disagrees with the Court of Appeals ruling that the case should be brought for arbitration
under Rep. Act 876, pursuant to the arbitration clause in the Addendum Contractwhich states that [a]ll
disputes arising out of or in connection with the Contract, which cannot be settled amicably among the
Parties, shall finally be settled under R.A. 876. He points out that respondents Climax and APMI are not
parties to the Addendum Contract and are thus not bound by the arbitration clause in said contract.

We agree that the case should not be brought under the ambit of the Arbitration Law, but for a different
reason. The question of validity of the contract containing the agreement to submit to arbitration will
affect the applicability of the arbitration clause itself. A party cannot rely on the contract and claim rights
or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined
from taking inconsistent positions. As previously discussed, the complaint should have been filed before
the regular courts as it involved issues which are judicial in nature.

WHEREFORE, in view of the foregoing, the Petition for Review on Certiorari Under Rule 45 is
DENIED. The Orders dated 18 October 2001 and 25 June 2002 of the Panel of Arbitrators are SET
ASIDE. Costs against petitioner Jorge Gonzales.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

12.

SECOND DIVISION

[G.R. No. 136154. February 7, 2001]

DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS
HIDALGO, petitioners, vs. COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in his
capacity as Presiding Judge, RTC-Br. 74, Malabon, Metro Manila, MONTEBUENO
MARKETING, INC., LIONG LIONG C. SY and SABROSA FOODS, INC., respondents.

DECISION

BELLOSILLO, J.:

This Petition for Review on certiorari assails the 17 July 1998 Decision[1] of the Court of Appeals
affirming the 11 November 1997 Order[2] of the Regional Trial Court which denied petitioners Motion to
Suspend Proceedings in Civil Case No. 2637-MN. It also questions the appellate courts Resolution[3] of
30 October 1998 which denied petitioners Motion for Reconsideration.

On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)

appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive distributor of
its Del Monte products in the Philippines for a period of five (5) years, renewable for two (2) consecutive
five (5) year periods with the consent of the parties. The Agreement provided, among others, for an
arbitration clause which states -

12. GOVERNING LAW AND ARBITRATION[4] 153

This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United
States of America. All disputes arising out of or relating to this Agreement or the parties relationship,
including the termination thereof, shall be resolved by arbitration in the City of San Francisco, State of
California, under the Rules of the American Arbitration Association. The arbitration panel shall consist
of three members, one of whom shall be selected by DMC-USA, one of whom shall be selected by MMI,
and third of whom shall be selected by the other two members and shall have relevant experience in the
industry x x x x

In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country.Immediately after
its appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of
petitioner DMC-USA, as MMIs marketing arm to concentrate on its marketing and selling function as
well as to manage its critical relationship with the trade.

On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director Liong Liong C. Sy
(LILY SY) filed a Complaint[5] against petitioners DMC-USA, Paul E. Derby, Jr.,[6] Daniel Collins[7]and
Luis Hidalgo,[8] and Dewey Ltd.[9] before the Regional Trial Court of Malabon, Metro Manila. Private
respondents predicated their complaint on the alleged violations by petitioners of Arts. 20,[10] 21[11]and
23[12] of the Civil Code. According to private respondents, DMC-USA products continued to be brought
into the country by parallel importers despite the appointment of private respondent MMI as the sole and
exclusive distributor of Del Monte products thereby causing them great embarrassment and substantial
damage. They alleged that the products brought into the country by these importers were aged, damaged,
fake or counterfeit, so that in March 1995 they had to cause, after prior consultation with Antonio Ongpin,
Market Director for Special Markets of Del Monte Philippines, Inc., the publication of a "warning to the
trade" paid advertisement in leading newspapers. Petitioners DMC-USA and Paul E. Derby, Jr.,
apparently upset with the publication, instructed private respondent MMI to stop coordinating with
Antonio Ongpin and to communicate directly instead with petitioner DMC-USA through Paul E. Derby,
Jr.

Private respondents further averred that petitioners knowingly and surreptitiously continued to deal with
the former in bad faith by involving disinterested third parties and by proposing solutions which were
entirely out of their control. Private respondents claimed that they had exhausted all possible avenues for
an amicable resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice
and wanton attitude of petitioners, they should be held responsible for all the actual expenses incurred by
private respondents in the delayed shipment of orders which resulted in the extra handling thereof, the
actual expenses and cost of money for the unused Letters of Credit (LCs) and the substantial opportunity
losses due to created out-of-stock situations and unauthorized shipments of Del Monte-USA products to
the Philippine Duty Free Area and Economic Zone; that the bad faith, fraudulent acts and willful
negligence of petitioners, motivated by their determination to squeeze private respondents out of the
outstanding and ongoing Distributorship Agreement in favor of another party, had placed private
respondent LILY SY on tenterhooks since then; and, that the shrewd and subtle manner with which
petitioners concocted imaginary violations by private respondent MMI of the Distributorship Agreement
in order to justify the untimely termination thereof was a subterfuge. For the foregoing, private
respondents claimed, among other reliefs, the payment of actual damages, exemplary damages, attorneys
fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking the arbitration clause
in their Agreement with private respondents.

In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of petitioners Motion to
Suspend Proceedings as the grounds alleged therein did not constitute the suspension of the proceedings
considering that the action was for damages with prayer for the issuance of Writ of Preliminary
Attachment and not on the Distributorship Agreement.

On 15 January 1997 petitioners filed a Motion for Reconsideration to which private respondents filed
their Comment/Opposition. On 31 January 1997 petitioners filed their Reply. Subsequently, private 154

respondents filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This
Motion was admitted, over petitioners opposition, in an Order of the trial court dated 27 June 1997.

As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.

On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the ground
that it "will not serve the ends of justice and to allow said suspension will only delay the determination of
the issues, frustrate the quest of the parties for a judicious determination of their respective claims,
and/or deprive and delay their rights to seek redress."[15]

On appeal, the Court of Appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners causes of action, required the interpretation of Art.
21 of the Civil Code[16] and that in determining whether petitioners had violated it "would require a full
blown trial" making arbitration "out of the question."[17] Petitioners Motion for Reconsiderationof the
affirmation was denied. Hence, this Petition for Review.

The crux of the controversy boils down to whether the dispute between the parties warrants an order
compelling them to submit to arbitration.

Petitioners contend that the subject matter of private respondents causes of action arises out of or relates
to the Agreement between petitioners and private respondents. Thus, considering that the arbitration
clause of the Agreement provides that all disputes arising out of or relating to the Agreement or the
parties relationship, including the termination thereof, shall be resolved by arbitration, they insist on the
suspension of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876[18] -

Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an
agreement providing for 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.

Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and 23
of the Civil Code,[19] the determination of which demands a full blown trial, as correctly held by the Court
of Appeals. Moreover, they claim that the issues before the trial court were not joined so that the
Honorable Judge was not given the opportunity to satisfy himself that the issue involved in the case was
referable to arbitration. They submit that, apparently, petitioners filed a motion to suspend proceedings
instead of sending a written demand to private respondents to arbitrate because petitioners were not sure
whether the case could be a subject of arbitration. They maintain that had petitioners done so and private
respondents failed to answer the demand, petitioners could have filed with the trial court their demand for
arbitration that would warrant a determination by the judge whether to refer the case to
arbitration. Accordingly, private respondents assert that arbitration is out of the question.

Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition
on the same date[20] petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate
before the United States District Court in Northern California, docketed as Case No. C-98-4446. They
insist that the filing of the petition to compel arbitration in the United States made the petition filed before
this Court an alternative remedy and, in a way, an abandonment of the cause they are fighting for here in
the Philippines, thus warranting the dismissal of the present petition before this Court.

There is no doubt that arbitration is valid and constitutional in our jurisdiction. [21] Even before the
enactment of RA 876, this Court has countenanced the settlement of disputes through arbitration. Unless
the agreement is such as absolutely to close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable arrangement and will only interfere
155
with great reluctance to anticipate or nullify the action of the arbitrator.[22] Moreover, as RA 876 expressly
authorizes arbitration of domestic disputes, foreign arbitration as a system of settling commercial disputes
was likewise recognized when the Philippines adhered to the United Nations "Convention on the
Recognition and the Enforcement of Foreign Arbitral Awards of 1958" under the 10 May 1965
Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing enforcement of
international arbitration agreements between parties of different nationalities within a contracting state.[23]

A careful examination of the instant case shows that the arbitration clause in the Distributorship
Agreement between petitioner DMC-USA and private respondent MMI is valid and the dispute between
the parties is arbitrable. However, this Court must deny the petition.

The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision
to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that
contract and is itself a contract. As a rule, contracts are respected as the law between the contracting
parties and produce effect as between them, their assigns and heirs.[24] Clearly, only parties to the
Agreement, i.e., petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr.,
and private respondents MMI and its Managing Director LILY SY are bound by the Agreement and its
arbitration clause as they are the only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and
private respondent SFI, not parties to the Agreement and cannot even be considered assigns or heirs of the
parties, are not bound by the Agreement and the arbitration clause therein. Consequently, referral to
arbitration in the State of California pursuant to the arbitration clause and the suspension of the
proceedings in Civil Case No. 2637-MN pending the return of the arbitral award could be called for[25] but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and private respondents MMI and LILY SY, and
not as to the other parties in this case, in accordance with the recent case of Heirs of Augusto L. Salas, Jr.
v. Laperal Realty Corporation,[26] which superseded that of Toyota Motor Philippines Corp. v. Court of
Appeals.[27]

In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become dysfunctional
because of the presence of third parties is untenable ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"[28] and that "[a]s such, the parties are thereby expected to abide with good
faith in their contractual commitments."[29] However, in Salas, Jr., only parties to the Agreement, their
assigns or heirs have the right to arbitrate or could be compelled to arbitrate. The Court went further by
declaring that in recognizing the right of the contracting parties to arbitrate or to compel arbitration, the
splitting of the proceedings to arbitration as to some of the parties on one hand and trial for the others on
the other hand, or the suspension of trial pending arbitration between some of the parties, should not be
allowed as it would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary
delay.[30]

The object of arbitration is to allow the expeditious determination of a dispute.[31] Clearly, the issue before
us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration
proceedings and trial, or suspension of trial pending arbitration. Accordingly, the interest of justice would
only be served if the trial court hears and adjudicates the case in a single and complete proceeding.[32]

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the Order of
the Regional Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied
petitioners Motion to Suspend Proceedings, is AFFIRMED. The Regional Trial Court concerned is
directed to proceed with the hearing of Civil Case No. 2637-MN with dispatch. No costs. SO
ORDERED.

Mendoza, Buena, and De Leon, Jr., JJ., concur.

Quisumbing, J., no part, related to counsel of a party.

11. 156

THIRD DIVISION

[G.R. No. 127004. March 11, 1999]

NATIONAL STEEL CORPORATION, petitioner, vs. THE REGIONAL TRIAL COURT OF

LANAO DEL NORTE, BRANCH 2, ILIGAN CITY and E. WILLKOM ENTERPRISES,
INC., respondents.

DECISION

PURISIMA, J.:

Before the Court is a Petition for Certiorari with Prayer for Preliminary Injunction & Temporary
Restraining Order under Rule 65 of the Revised Rules of Court assailing the decision of the Regional
Trial Court of Lanao del Norte, Branch 2, Iligan City, on the following consolidated cases :

(a) Special Proceeding Case No. 2206 entitled National Steel Corporation vs E. Willkom Enterprise Inc to
Vacate Arbitrators Award; and;

(b) Civil Case No. 2198 entitled to E. Willkom Enterprises Inc. vs National Steel Corporation for Sum of
Money with application for Confirmation of Arbitrators Award.

The facts as found below are, as follows:

"xxx On Nov. 18, 1992, petitioner-defendant Edward Wilkom Enterprises Inc. (EWEI for brevity)
together with one Ramiro Construction and respondent-petitioner National Steel Corporation (NSC for
short) executed a contract whereby the former jointly undertook the Contract for Site Development (Exhs.
"3" & "D") for the latter's Integrated Iron and Steel Mills Complex to be established at Iligan City.

Sometime in the year 1983, the services of Ramiro Construction was terminated and on March 7, 1983,
petitioner-defendant EWEI took over Ramiro's contractual obligation. Due to this and to other causes
deemed sufficient by EWEI, extensions of time for the termination of the project, initially agreed to be
finished on July 17, 1983, were granted by NSC.

Differences later arose, Plaintiff-defendant EWEI filed Civil Case No. 1615 before the Regional Trial
Court of Lanao del Norte, Branch 06, (Exhs. "A" and "1") praying essentially for the payments
of P458,381.001 with interest from the time of delay; the price adjustment as provided by PD 1594; and
exemplary damages in the amount of P50,000.00 and attorney's fees.

Defendant-petitioner NSC filed an answer with counterclaim to plaintiff's complaints on May 18, 1990.

On August 21, 1990, the Honorable Court through Presiding Judge Valario M. Salazar upon joint motion
of both parties had issued an order (Exhs. "C" and "3") dismissing the said complaint and counterclaim x
x x in view of the desire of both parties to implement Sec. 19 of the contract, providing for a resolution of
any conflict by arbitration x x x . ( underscoring supplied).

In accordance with the aforesaid order, and pursuant to Sec. 19 of the Contract for Site Development (id)
the herein parties constituted an Arbitration Board composed of the following:
(a) Engr. Pafnucio M. Mejia as Chairman, who was nominated by the two arbitrators earlier nominated by
EWEI and NSC with an Oath of Office (Exh. "E");

(b) Engr. Eutaquio 0. Lagapa, Jr., member, who was nominated by EWEI with an oath office (Exh. "F")

(c) Engr. Gil A. Aberilia, a member who was nominated by NSC, with an Oath of Office (Exh. "G").

After series of hearings, the Arbitrators rendered the decision (Exh. "H" & "4") which is the subject
matter of these present causes of action, both initiated separately by the herein contending parties,
substantial portion of which directs NSC to pay EWEI, as follows: 157

(a) P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1-1/4% per
month from January 1, 1985 to actual date of payment;

(b) P1,335,514.20 representing price escalation adjustment under PD No. 1594, with interest thereon at
the rate of 1-1/4 % per month from January 1, 1985 to actual date of payment;

(c) P50,000 as and for exemplary damages;

(d) P350,000 as and for attorney's fees.; and

(e) P35,000.00 as and for cost of arbitration."[1]

The Regional Trial Court of Lanao del Norte Branch 2, Iligan City through Judge Maximo B. Ratunil,
rendered judgment as follows:

(1) In Civil Case No. 11-2198, declaring the award of the Board of Arbitrators, dated April 21, 1992 to be
duly AFFIRMED and CONFIRMED "en toto" ; that an entry of judgment be entered therewith pursuant
to Republic Act No. 876 (the Arbitration Law); and costs against respondent National Steel Corporation.

(2) In Special Proceeding No. 11-2206, ordering the petition to vacate the aforesaid award be
DISMISSED.

SO ORDERED.[2] "

With the denial on October 18, 1996 of its Motion for Reconsideration, the National Steel Corporation
(NSC) has come to this court via the present petition.

After deliberating on the petition as well as the comment and reply thereon, the court gave due course to
the petition and considered the case ripe for decision.

The pivot of inquiry here is whether or not the lower court acted with grave abuse of discretion in
not vacating the arbitrator's award.

A stipulation to refer all future disputes or to submit an ongoing dispute to an arbitrator is valid. Republic
Act 876, otherwise known as the Arbitration Law, was enacted by Congress since there was a growing
need for a law regulating arbitration in general.

The parties in the present case, upon entering into a Contract for Site Development, mutually agreed that
any dispute arising from the said contract shall be submitted for arbitration. Explicit is Paragraph 19 of
subject contract, which reads:

"Paragraph 19. ARBITRATION. All disputes questions or differences which may at any time arise
between the parties hereto in connection with or relating to this Agreement or the subject matter hereof,
including questions of interpretation or construction, shall be referred to an Arbitration Board composed
of three (3) arbitrators, one to be appointed by each party, and the third, to be appointed by the two (2)
arbitrators. The appointment of arbitrators and procedure for arbitration shall be governed by the
provisions of the Arbitration Law (Republic Act No. 876). The Board shall apply Philippine Law in
adjudicating the dispute. The decision of a majority of the members of the Arbitration Board shall be
valid, binding, final and conclusive upon the parties, and from which there will be no appeal, subject to
the provisions on vacating, modifying, or correcting an award under the said Republic Act No. 876.[3]

Thereunder, if a dispute should arise from the contract, the Arbitration Board shall assume jurisdiction
and conduct hearings. After the Board comes up with a decision, the parties may immediately implement
the same by treating it as an amicable settlement. However, if one of the parties refuses to comply or is
dissatisfied with the decision, he may file a Petition to Vacate the Arbitrator's decision before the trial
court. On the other hand, the winning party may ask the trial court's confirmation to have such decision
enforced.
158

It should be stressed that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity.[4] As a rule, findings of facts by quasi-judicial bodies, which have acquired expertise because
their jurisdiction is confined to specific matters, are accorded not only respect but even finality if they are
supported by substantial evidence,[5] even if not overwhelming or preponderant.[6] As the petitioner has
availed of Rule 65, the Court will not review the facts found nor even of the law as interpreted or applied
by the arbitrator unless the supposed errors of facts or of law are so patent and gross and prejudicial as to
amount to a grave abuse of discretion or an excess de pouvoir on the part of the arbitrators.[7]

Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in the performance of
official functions is presumed and the complaining party has the burden of proving the existence of any of
the grounds for vacating the award, as provided for by Sections 24 of the Arbitration Law, to wit:

"Sec. 24 GROUNDS FOR VACATING THE AWARD - In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the controversy when such party
proves affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud or other undue means;

(b) That there was evident partiality or corruption in the arbitrators of any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient
cause shown, or in refusing to hear evidence pertinent and material to the controversy; that one or more of
the arbitrators was disqualified to act as such under section nine hereof, and wilfully refrained from
disclosing such disqualification or of any other misbehavior by which the rights of any party have been
materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and
definite award upon the subject matter submitted to them was not made. xxx"

The grounds relied upon by the petitioner were the following (a) That there was evident partiality in the
assailed decision of the Arbitrators in favor of the respondent; and (b) That there was mistaken
appreciation of the facts and application of the law by the Arbitrators. These were the very same grounds
alleged by NSC before the trial court in their Petition to Vacate the Arbitration Award and which
petitioner is reiterating in this petition under scrutiny.

Petitioner's allegation that there was evident partiality is untenable. It is anemic of evidentiary support.

In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the decision of the Board of
Arbitrators, this Court ruled that the fact that a party was disadvantaged by the decision of the Arbitration
Committee does not prove evident partiality. Proofs other than mere inference are needed to establish
evident partiality. Here, petitioner merely averred evident partiality without any proof to back it
up. Petitioner was never deprived of the right to present evidence nor was there any showing that the
Board showed signs of any bias in favor of EWEI. As correctly found by the trial court:

"Thirdly, this Court cannot find its way to support NSC's contention that there was evident partiality in
the assailed Award of the Arbitrator in favor of the respondent because the conclusion of the Board,
which the Court found to be well-founded, is fully supported by substantial evidence, as follows:
"xxx The testimonies of witnesses from both parties were heard to clarify facts and to threash (sic) out the
dispute in the hearings. Upon motion by NSC counsel, the hearing of testimony from witnesses was
terminated on 22 January 1992. To end the testimonies in the hearing both litigant parties upon query by
Arbitrator-Chairman freely declared that there has been no partiality in the manner the Arbitrators
conducted the hearing, that there has been no instance, where Arbitrators refused to postpone requested or
to hear/accept evidence pertinent and material to the dispute. xxx (underscoring supplied)

Parentethically, and in the light of the record above-mentioned, this Court hereby holds that the Board of
Arbitrators did not commit any 'evident partiality' imputed by petitioner NSC. Above all, this Court must
159
sustain the said decision for it is a well settled rule that the actual findings of an administrative body
should be affirmed if there is substantial evidence to support them and the conclusions stated in the
decision are not clearly against the law and jurisprudence similar to the instant case. Henceforth, every
reasonable intendment will be indulged to give effect such proceedings and in favor of the regulatory and
integrity of the arbitrators act. (Corpus Juris, Vol. 5, p. 20)"[8]

Indeed, the allegation of evident partiality is not well-taken because the petitioner failed to substantiate
the same.

Anent the issue of mistaken appreciation of facts and law of the case, the petitioner theorizes that the
awards made by the Board were unsubstantiated and the same were a plain misapplication of the law and
even contrary to jurisprudence. To have a clearer understanding of the petition, this Court will try to
discuss individually the awards made by the Board, and determine if there was grave abuse of discretion
on the part of the trial court when it adopted such awards in toto.
I. P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1 1/4% per month from January 1, 1985 to actual date of payment;

Petitioner seeks to bar payment of the said amount to EWEI. Since the latter failed to complete the works
as agreed upon, NSC had the right to withhold such amount. The same will be used to cover the cost
differential paid to another contractor who finished the work allegedly left uncompleted by EWEI. Said
work cost NSC P1,225,000, and should be made chargeable to EWEI's receivables on Final Billing No.
16 issued to NSC.

The query here therefore is whether there was failure on the part of EWEI to complete the work agreed
upon. This will determine whether Final Billing No. 16 can be made chargeable to the cost differential
paid by NSC to another contractor.

After a series of hearings, the Board of Arbitrators concluded that the work was completed by EWEI. As
correctly stated:

"To authenticate the extent of unfinished work, quantity, unit cost differential and amount, NSC was
required to submit copies of payment vouchers and/or job awards extended to the other contractor
engaged to complete the works. The best efforts by NSC despite the multiplicity of
accounting/auditing/engineering records required in a corporate complex failed to produce documentary
proofs from their Iligan or Makati office despite repeated requests. NSC failed to substantiate such
allusion of completion by another contractor three unfinished items of works, actual quantities
accomplished and unit cost differential paid chargeable against EWEI.

xxx xxx xxx

The latest evaluation on record of the items of work completed by EWEI under the contract is drawn from
the NSC report (Exhibit "11-d") dated 12 November 1985 submitted with the EWEI Billing No. 16-Final
in the course of processing claim on items of work accomplished. There is no such report or mention of
unfinished work of 90,000 MT of dumped riprap, 100,000 cu. m. of site grading and 300,000 cu. m. of
spreading common excavated materials in the EWEI contract alluded to by the NSC as unfinished work
otherwise EWEI Billing No. 16-Final would not have passed processing for payment unless there is really
no such unfinished work NSC evaluation report with no adverse findings of unfinished work consider the
contract as completed.
To affirm the work items, quantity, unit cost differential and amount of unfinished work left behind by
EWEI, NSC in serving notice of contract termination to EWEI should have instead specifically cited these
obligations in detail for EWEI to perform/comply within 30 days, such failure to perform/comply should
have constituted as an event in default that would have justified termination of contract of NSC with
EWEI. If at all, this unfinished work may be additional/extra work awarded in 1984 to another contractor
at prices higher than the unit price tendered by EWEI in 1982 and/or the discrepancy between actual
quantities of work accomplished per plans versus estimated quantities of work covered by separate
contract as expansion of the original project."
160
xxx xxx xxx

IN VIEW OF THE FOREGOING, THE SO-CALLED UNFINISHED WORKS IN THE CONTRACT

BY EWEI ALLUDED TO BY NSC IS NOT CONSIDERED AN OBLIGATION TO
PERFORM/COMPLY THUS ABSOLVING EWEI OF ANY FAILURE TO PERFORM/COMPLY AND
THEREFORE CANNOT BE AVAILED OF AS A RIGHT OR REMEDY BY NSC TO RECOVER
UNIT DIFFERENTIAL COST FROM EWEI FOR THE SAME UNSUBSTANTIATED WORK DONE
BY ANOTHER CONTRACTOR." (ANNEX "C" ARBITRATION, page 86-88 of Rollo.)

Furthermore, under the contract sued upon, it is clear that should the Owner feel that the work agreed
upon was not completed by the contractor, it is incumbent upon the OWNER to send to CONTRACTOR
a letter within seven (7) days after completion of the inspection to specify the objections thereto [9] NSC
failed to comply with such requirement, and therefore it would be unfair to refuse payment to EWEI,
considering that the latter had faithfully submitted Final Billing No.16 believing that its work had been
completed because NSC did not call its attention to any objectionable aspect of their project.

But, what cannot be upheld is the Board's imposition of a 1-1/4% interest per month from January 1, 1985
to actual date of payment. There is nothing in the said contract to justify or authorize such an award. The
trial court should have therefore disregarded the same and instead, applied the legal rate of 6% per
annum, from Jan. 1, 1985 until this decision becomes final and executory. This is so because the legal rate
of interest on monetary obligations not arising from loans or forebearance of credits or goods is 6% [10] per
annum in the absence of any stipulation to the contrary.
(II) Price escalation with the interest rate of 1-1/4% per month from 1 January 1985 to actual date of payment.

Petitioner contends that EWEI is not entitled to price escalation absent any stipulation to that effect in the
contract under which, the contract price is fixed, citing Paragraph 2 thereof, which stipulates:

2. CONTRACT PRICE -

xxx xxx

The applicable unit prices above fixed are based on the assumption that the disposal areas for cleared,
grubbed materials, debris, excess filling materials and other matters that are to be disposed of or are
within the boundary limits of the site, as designated in Annex A hereof. In the event that disposal areas
fixed and designated in Annex A are diverted and transferred to such other areas as would be outside the
limits of the site as would require additional costs to the contractor, then Owner shall be liable for such
additional hauling costs of P1.45/km/m3." (Annex "A", Contract for Site Development, page 55 of Rollo)

The phrase "prices above fixed" means that the contract price of the work shall be that agreed upon by the
parties at the time of the execution of the contract, which is the law between them provided it is not
contrary to law, morals, good customs, public order, or public policy. (Article 1306, New Civil Code). It
cannot be inferred therefrom, however, that the parties are prohibited from imposing future increases or
price escalation. It is a cardinal rule in the interpretation of contracts that "if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control."[11]

But price escalation is expressly allowed under Presidential Decree 1594, which law allows price
escalation in all contracts involving government projects including contracts entered into by government
entities and instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic
rule in contracts that the law is deemed written into the contract between the parties. And when there is no
prohibitory clause on price escalation, the Court will allow payment therefor. Thus, petitioner cannot rely
on the case of Llama Development Corporation vs. Court of Appeals and National Steel Corporation, GR
88093, Resolution, Third Division, 20 Sept 1989. It is not applicable here since in that case, the
contract explicitly provided that the contract price stipulated was fixed, inclusive of all costs and not
subject to escalation, (emphasis supplied). This, in effect, waived the provisions of PD 1594. The case
under scrutiny is different as the disputed contract does not contain a similar provision.
161
In a vain attempt to evade said law's application, they would like the Court to believe that it is an acquired
asset corporation and not a government owned or controlled corporation so that they are not within the
coverage of PD 1594. Whether NSC is an asset-acquired corporation or a government owned or
controlled corporation is of no moment. It is not determinative of the pivot of inquiry. It bears
emphasizing that during the hearings conducted by the Board of Arbitrators, there was presented
documentary evidence to show that NSC, despite its being allegedly an asset acquired corporation,
allowed price escalation to another contractor, Geo Transport and Construction, Inc. (GTCI). As said in
the decision of the Board of Arbitrators:

"On the other hand, there was documentary evidence presented that NSC granted Geo Transport and
Construction, Inc. (GTCI), the other favored contractor working side by side with EWEI on the site
development project during the same period the GTCE was granted upon request and paid by NSC an
actual sum of P6.9 million as price adjustment compensation even without the benefit of escalation
provision in the contract but allowed in accordance with PD NO. 1594 enforceable among government
controlled or owned corporation. The statement is embodied in an affidavit (Exhibit "111-h") submitted
by affiant Jose M. Mesina, Asst. to the President and Legal Counsel of GTCI, submitted to the Arbitrators
upon solicitation of EWEI, copy to NSC, on 3 October 1991. NSC did not assail the affidavit upon receipt
of such document as evidence until the hearing of 19 December 1991 when the affidavit was branded by
NSC counsel as incorrect and hearsay. Within 7 days reglamentary period after receipt of affidavit in 3
October 1991, the NSC had the recourse to contest the affidavit even preferably charge the affiant for
slander if NSC could disprove the statements as untrue."[12]

If Petitioner seeks to refute such evidence, it should have done so before the Board of Arbitrators, during
the hearings. To raise the issue now is futile.

However, the same line of reasoning with respect to the first award should be used in disregarding the
interest rate of 1-1/4%. The legal rate of 6% per annum should be similarly applied to the price escalation
to be computed from Jan. 1, 1985 until this decision becomes final and executory.
(III) The award of P50,000 as exemplary damages and P350,000 as attorney's fees;

The exemplary damages and attorneys fees awarded by the Board of Arbitrators should be deleted in light
of the circumstances surrounding the case.

The requirements for an award of exemplary damages, are: (1) they may be imposed by way of example
in addition to compensatory damages, and only after the claimants right to them has been established; (2)
that they cannot be recovered as a matter of right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant; (3) the act must be accompanied by bad
faith or done in a wanton, fraudulent, oppressive or malevolent manner.[13]

EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it refused payment of the
Final Billing No. 16. The belief that the work was never completed by EWEI and that it (NSC) had the
right to make it chargeable to the cost differential paid by the latter to another contractor was neither
wanton nor done in evident bad faith. The payment of legal rate of interest will suffice to compensate
EWEI of whatever prejudice it suffered by reason of the delay caused by NSC.

As regards the award of attorney's fees, award for attorney's fees without justification is a "conclusion
without a premise, its basis being improperly left to speculation and conjencture.[14] The "fixed counsel's
fee" of P350,000 should be disallowed. The trial court acted with grave abuse of discretion when it
adopted the same in toto.

WHEREFORE, the awards made by the Board of Arbitrators which the trial court adopted in its decision
of July 31,1996, are modified, thus:

(1) The award of P474,780.23 for Billing No. 16-Final and P1,335,514.20 for price adjustment shall be
paid with legal interest of six (6 %) percent per annum, from January 1, 1985 until this decision shall have
become final and executory;
162
(2) The award of P50,000 for exemplary damages and attorney's fees of P350,000 are deleted; and

(3) The cost of arbitration of P35,000 to supplement arbitration agreement has to be paid.

No pronouncement as to costs.

SO ORDERED.

Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

10.

SECOND DIVISION

[G.R. No. 155651. July 28, 2005]

COCA-COLA BOTTLERS PHILIPPINES, INC., SALES FORCE UNION-PTGWO-

BALAIS, petitioner, vs. COCA-COLA BOTTLERS, PHILIPPINES, INC., respondent.

DECISION

CHICO-NAZARIO, J.:

This is a petition for review on certiorari seeking the reversal of the Court of Appeals Decision[1] and
Resolution[2] dated 22 May 2002 and 03 October 2002, respectively, affirming the 21 January 2001
Decision of the panel of voluntary arbitrators (Panel) of the National Conciliation Mediation Board
(NCMB) for the reason that the Panel decision had already attained finality.

The following is a narration by the Court of Appeals of the undisputed facts:

The Coca-Cola Bottlers Philippines, Inc. Sales Force Union-PTGWO is a legitimate labor organization
duly registered with the Department of Labor and Employment, and is the sole and exclusive bargaining
representative of all regular route salesmen, regular relief route salesmen, regular lead helpers, regular
relief lead helpers, regular route helpers, regular relief route helpers and order-taker collectors who are
assigned in various sales offices specified in the parties collective bargaining agreement. On the other
hand, the respondent company is a domestic corporation duly organized and existing under the laws of the
Philippines and is engaged in the manufacture and distribution of its soft drink products.

In January 1989, the UNION filed a Notice of Strike with the National Conciliation and Mediation Board
raising certain issues for conciliation. As a result of said dispute, the UNION staged a strike.

Subsequently, the Board succeeded in making the parties agree to a voluntary settlement of the case via a
Memorandum of Agreement signed by them on February 9, 1989. Among others, the petitioner and the
respondent agreed, as follows:

...

1. Christmas Bonus
The Company shall grant to all those covered by the Bargaining Unit represented by the Union an amount
equivalent to fifty (50%) percent of their average commission for the last six (6) months.

The union hereby acknowledges that the granting of a Christmas bonus is purely a Management
prerogative and as such, in determining the amount thereof the same is solely a discretion of
Management. The parties however agree that henceforth whenever Management exercises this
prerogative, the same shall include the average commission for the last six (6) months prior to the grant.

Since then, the management granted to each covered employee every December of the year a certain
percentage of his basic pay and an amount equivalent to fifty (50%) percent of his average commission 163

for the last six months prior to the grant. However, in December 1999, the respondent granted a fixed
amount of P4,000.00 only, eliminating thereby the said 50% employees average commission for the last
six months for members of the union. Thus, claiming the same as violation of the MOA, the union
submitted its grievance to the respondent. No settlement was reached, hence, the case was then referred to
a Panel of Voluntary Arbitrators.

Petitioner claimed that the MOA establishes the companys obligation to pay additionally 50% of the
average commission whenever it decides to grant a bonus and that the fixed amount of P4,000.00 granted
in December 1999, although denominated as ex-gratia was actually a Christmas bonus. In support of its
stand, the Union submitted sample payslips for the prior years wherein the company granted a
performance grant or one time grant computed as a percentage of the employees basic salary. An
illustrative example was that given to Jose Manalusan. His payslip dated December 6, 1996 shows his
basic rate at P5,080.00 and an item SPL GRNT in the amount of P4,786.41. On top of the payslip (sic)
appear the words 80% performance grant. According to the Union, this amount of P4,786. is P722.41
more than 80% of Manalusans then basic rate (80% of P5,080.00 being PhP4,064.00). Thus, the Union
concludes that the difference of P722.41 represents additional 50% of average commission. In sum, the
Union asseverates that the grant of the additional 50% of the average commission has become a practice
since 1989 and has ripened into a contractual obligation.

On the other hand, the respondent company countered that in 1999 it suffered its worst financial
performance in its history; that its sales volume was twenty percent (20%) behind plan and ten percent
(10%) below the sales in 1998, as a result, it suffered an abnormal loss of Two Billion Five Hundred
Million Pesos (P2,500,000,000.00); that faced with tremendous losses, the management decided not to
grant bonuses to its employees in 1999; that through Memorandum 99010 dated December 14, 1999, its
President, Mr. Peter Baker explained to the employees the companys financial situation and the decision
not to grant bonuses; that in the same memo however, the company granted a special ex gratia payment
of Four Thousand Pesos (P4,000.00) to all its permanent employees, . . .

During the past year (sic) we have suffered greatly as a result of a number of internal and external issues
including the effect of the general economic pressures in the Philippines.

Our sales volume in 1999 is approximately 20% behind the plan and 10% below last year. This together
with lower than expected prices and increased costs will result in a financial performance which is
undoubtedly the worst in our history.

The Coca-cola Amatil Board has announced that it expects an abnormal loss of PhP2.5 Billion (AUD100
million) before tax at CCBPI in 1999 and that reported on-going results will be below everyones
expectations.

In these circumstances the CCBPI Executive Committee has decided that the CCBPI is not able to pay
bonuses to any staff in 1999. As your new president, it disappoints me greatly to have to inform you of
this situation.

Our situation has been discussed with the CCA Board and they are understanding of the difficulties we
face a (sic) present and grateful of the efforts of our associates at all levels. Furthermore, the management
of CCA has agreed to make a special Ex Gratia payment PhP4,000.00 to all permanent employees of
CCBPI. Our hope that [t]his will assist in some way to allow you and your families to enjoy the festive
season.

In denying the claim of the Union for the payment of the additional 50% of the average commission for
the last six months, the respondent argues that the said MOA is not applicable since the company did not
grant Christmas bonus in 1999.

After hearing and the submission of evidence and position papers, the Arbitration Panel composed of
Apron Mangabat and Noel Sanchez, as chairman and member, respectively, denied petitioners claim and
declared that the P4,000.00 given as ex gratia is not a bonus, while Arnel Dolendo, another member 164

dissented. The dispositive portion of the decision reads as follows:

WHEREFORE, judgment is hereby rendered declaring that the special Ex Gratia payment of P4,000.00
made pursuant to the Memo of Mr. Peter Baker dated December 14, 1999 was not a Christmas bonus and
therefore, the claim of the Union for an additional 50% of average commission on top of said P4,000.00 is
hereby denied.[3]

A copy of this Decision dated 21 January 2001 was received by petitioners counsel on 20 February 2001.
Said Decision was signed only by the Chairman of the Panel, Mr. Apron Mangabat, and one of its
members, Atty. Noel Sanchez. As to the third member, Atty. Arnel Dolendo, instead of a signature on top
of his printed name, the following notation appears:

Dissented during deliberation.

Will file a separate opinion.

No separate opinion, however, was attached to the Decision as received by petitioner, through its counsel.
Thus, on 22 February 2001 (two days after receipt of the Decision), petitioner filed an Urgent Ex-Parte
Manifestation with Motion where it essentially questioned the validity of the decision, opining that the
Panels decision without such dissenting and separate opinion attached thereto makes the decision
incomplete and prematurely issued. It consequently prayed that the questioned Decision be held in
abeyance and for the Panel to immediately issue an order to the effect that the prescriptive period
available to any of the parties to seek any legal remedy or relief be suspended in the meantime.

The Panel did not directly act on this motion. Instead, on 02 March 2001, petitioner received a Notice of
Transmittal from the NCMB furnishing it a copy of Atty. Dolendos separate opinion together with the 21
January 2001 Decision. Thus, on 12 March 2001, petitioner filed a motion for reconsideration of the 21
January 2001 Decision.

On 30 May 2001, the Panel denied petitioners motion for reconsideration. A copy of the Order of denial
was received by petitioner on 09 July 2001. By virtue thereof, petitioner filed a Petition for Review before
the Court of Appeals on 24 July 2001.

In dealing with the controversy, the Court of Appeals adopted a two-tiered approach. First, it held that
contrary to the view of the Panel, the P4,000.00 special ex gratia payment is a Christmas bonus, hence,
petitioners members are entitled to the additional 50% average commission for the last six months prior to
the grant pursuant to the Memorandum of Agreement entered into between petitioner and respondent
Coca-Cola Bottlers Philippines, Inc. This notwithstanding, the Court of Appeals dismissed the petition on
the ground that petitioners motion for reconsideration dated 12 March 2001 of the Decision of the Panel
that was originally received on 20 February 2001 was filed out of time; hence, the said Decision already
became final and executory after ten (10) calendar days from receipt of the copy of the Decision by the
parties pursuant to Article 262-A of the Labor Code. The Court of Appeals ratiocinated thus:

On the matter of procedure, Article 262-A of the Labor Code governs. It provides that the award or
decision of the Voluntary Arbitrator or panel of Voluntary Arbitrators shall be final and executory after
ten (10) calendar days from receipt of the copy of the award or decision by the parties. Moreover, Section
6, Rule VII of the NCMB Procedural Guidelines in the Conduct of Voluntary Arbitration Proceedings,
dated July 28, 1989, states categorically, to wit:
Section 6. Finality of Award or Decisions. Awards or decisions of voluntary arbitrator become final and
executory after ten (10) calendar days from receipt of copies of the award or decision by the parties.

The above-mentioned rule makes the voluntary arbitrators award final and executory after ten calendar
days from receipt of a copy of the decision or award by the parties. Presumably, the decision may still be
reconsidered by the Voluntary Arbitrator on the basis of a motion for reconsideration seasonably filed
during that period. Thus, the seasonable filing of a motion for reconsideration following the receipt by the
petitioner of a copy of the decision or award of the panel of Voluntary Arbitrators, is a mandatory
requirement to forestall the finality of such decision or award. In the case at bar however, the petitioner
165
filed on March 12, 2001 a motion for reconsideration of the arbitrators decision, which it received on
February 20, 2001. Without doubt at the time the said motion was filed, which was beyond the
reglementary period of ten (10) days, the decision had already become final and executory. It is a
hornbook rule that once a judgment has become final and executory, it may no longer be modified in any
respect, even if the modification is meant to be an erroneous conclusion of fact or law, and regardless of
whether the modification is attempted to be made by the court rendering it or by the highest court of the
land, as what remains to be done is the purely ministerial enforcement or execution of the judgment.

The doctrine of finality of judgment is grounded on fundamental considerations of public policy and
sound practice that at the risk of occasional errors, the judgment of adjudicating bodies must become final
and executory on some definite date fixed by law. In the more recent case of DBP v. NLRC, the Supreme
Court reiterated that the doctrine of immutability of final judgment is adhered to by necessity
notwithstanding occasional errors that may result thereby, since litigations must somehow come to an end
for otherwise, it would be even more intolerable than the wrong and injustice it is designed to correct.

And, acting on petitioners motion for reconsideration, the Court of Appeals held:

We cannot simply yield to the submission of the petitioner that the decision of the panel of Voluntary
Arbitrators had not yet became final and executory. It is not correct to say that March 2, 2001, the date
when the petitioner union received the January 21, 2001 decision of the panel of Voluntary Arbitrators
together with the dissenting opinion of Voluntary Arbitrator Arnel Dolendo should be considered as the
reckoning date for purposes of filing a motion for reconsideration. The absence of the dissenting opinion
in the copy of the assailed decision duly received by the petitioner on February 20, 2001 did not make the
said decision incomplete, for it disposed of all the issues of the case validly raised. Well settled is the rule
that a dissenting opinion, as it is, is a mere expression of the individual view of the dissenting justice from
the conclusion held by the majority of the court and therefore, not binding. It is the dispositive portion of
the decision or the fallo, which contains the final and actual adjudication of the rights of the parties that
constitutes the judgment of the court. Hence, to forestall the finality of the arbitrators award, petitioner
should have filed a motion for reconsideration within the reglementary period of ten (10) days, without
waiting for the dissenting opinion of Voluntary Arbitrator Dolendo. Thus, the filing of the motion for
reconsideration of the arbitrators award only on March 12, 2001 was way beyond the ten (10) day
reglementary period and had the effect of rendering the panel of Voluntary Arbitrators decision final and
executory. Certainly, in allowing the arbitrators award to lapse into finality on the flimsy excuse that it
has to receive the dissenting opinion of Arnel Dolendo does not find support in law. Finality of judgment
becomes a fact when the reglementary period to appeal lapses, and no appeal is perfected within such
period. It is a jurisdictional event which can not be made to depend on the convenience of a party.[4]

From this aspect of the Court of Appeals Decision and Resolution, petitioner now comes before us for
redress, assigning as sole issue the following:

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT

DISMISSED THE PETITION ON MERE TECHNICALITY CONTRARY TO SETTLED
JURISPRUDENCE, AFTER FAVORABLY RULING ON THE MERITS IN FAVOR OF PETITIONER

The resolution of the present controversy hinges for the most part on the correct disposition of petitioners
argument that the Panels Decision sans the dissenting opinion of one of its members was irregularly
issued; hence, did not toll the running of the prescriptive period within which to file a motion for
reconsideration. To sustain petitioners argument would mean that the subject Decision could still be
reviewed by the Court of Appeals. A contrary resolution would stamp the subject decision with finality
rendering it impervious to review pursuant to the doctrine of finality of judgments.

Rule VII, Section 1 of the Procedural Guidelines in the Conduct of Voluntary Arbitration Proceedings
provides the key. Therein, what constitutes the voluntary arbitrators decision (and, by extension, that of
the Panel of voluntary arbitrators) is defined with precision, to wit:

Section 1. Decision Award. -- The final arbitral disposition of issue/s submitted to voluntary arbitration is
the Decision. The disposition may take the form of a dismissal of a claim or grant of specific remedy, 166

either by way of prohibition of particular acts or specific performance of particular acts. In the latter case
the decision is called an Award.

In herein case, the Decision of the Panel was in the form of a dismissal of petitioners complaint.
Naturally, this dismissal was contained in the main decision and not in the dissenting opinion. Thus,
under Section 6, Rule VII of the same guidelines implementing Article 262-A of the Labor Code, this
Decision, as a matter of course, would become final and executory after ten (10) calendar days from
receipt of copies of the decision by the parties even without receipt of the dissenting opinion unless, in the
meantime, a motion for reconsideration[5] or a petition for review to the Court of Appeals under Rule 43
of the Rules of Court[6] is filed within the same 10-day period. As correctly pointed out by the Court of
Appeals, a dissenting opinion is not binding on the parties as it is a mere expression of the individual
view of the dissenting member from the conclusion held by the majority of the Court, following our
ruling in Garcia v. Perez[7] as reiterated in National Union of Workers in Hotels, Restaurants and Allied
Industries v. NLRC.[8]

Prescinding from the foregoing, the Court of Appeals correctly dismissed the petition before it as it no
longer had any appellate jurisdiction to alter or nullify the decision of the Panel.[9]The Panels Decision
had become final and executory, hence, unchallengeable.

We are not unmindful that in labor disputes, social justice exhorts courts to lean backwards in favor of the
working class. Corollary thereto, it is doctrinal that in labor disputes, rules of procedure cannot be applied
in a rigid and technical sense.[10] Thus, in appropriate cases, we have not hesitated to relax matters of
procedure in the interest of substantial justice.[11] As applied herein, however, our hands are tied by the
fact that the case had already attained finality long before it got here. As we declared in Nacuray v.
National Labor Relations Commission[12] --

. . . Nothing is more settled in law than that when a judgment becomes final and executory it becomes
immutable and unalterable. The same may no longer be modified in any respect, even if the modification
is meant to correct what is perceived to be an erroneous conclusion of fact or law, and whether made by
the highest court of the land. The reason is grounded on the fundamental considerations of public policy
and sound practice that, at the risk of occasional error, the judgments or orders of courts must be final at
some definite date fixed by law.

WHEREFORE, premises considered, the Court of Appeals Decision dated 22 May 2002 and its
Resolution dated 03 October 2002 are hereby AFFIRMED. No costs.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

9,

SECOND DIVISION

[G.R. NO. 135362. December 13, 1999]

HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself and as legal
guardian of the minor FABRICE CYRILL D. SALAS, MA. CRISTINA S. LESACA, and KARINA
TERESA D. SALAS, petitioners, vs. LAPERAL REALTY CORPORATION, ROCKWAY REAL
ESTATE CORPORATION, SOUTH RIDGE VILLAGE, INC., MAHARAMI DEVELOPMENT 167
CORPORATION, Spouses THELMA D. ABRAJANO and GREGORIO ABRAJANO, OSCAR
DACILLO, Spouses VIRGINIA D. LAVA and RODEL LAVA, EDUARDO A. VACUNA,
FLORANTE DE LA CRUZ, JESUS VICENTE B. CAPELLAN, and the REGISTER OF DEEDS
FOR LIPA CITY, respondents.

DECISION

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Order[1] of Branch 85 of the Regional Trial Court of
Lipa City[2] dismissing petitioners complaint[3] for rescission of several sale transactions involving land
owned by Augusto L. Salas, Jr., their predecessor-in-interest, on the ground that they failed to first resort
to arbitration.

Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas spanning 1,484,354
square meters.

On May 15, 1987, he entered into an Owner-Contractor Agreement[4] (hereinafter referred to as the
Agreement) with respondent Laperal Realty Corporation (hereinafter referred to as Laperal Realty) to
render and provide complete (horizontal) construction services on his land.

On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of respondent Laperal
Realty to exercise general control, supervision and management of the sale of his land, for cash or on
installment basis.

On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva Ecija. He never
returned.

On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati City a verified
petition for the declaration of presumptive death of her husband, Salas, Jr., who had then been missing for
more than seven (7) years. It was granted on December 12, 1996.[5]

Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold subdivided portions
thereof to respondents Rockway Real Estate Corporation and South Ridge Village, Inc. on February 22,
1990; to respondent spouses Abrajano and Lava and Oscar Dacillo on June 27, 1991; and to respondents
Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of whom are
hereinafter referred to as respondent lot buyers).

On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court of Lipa City a
Complaint[6] for declaration of nullity of sale, reconveyance, cancellation of contract, accounting and
damages against herein respondents which was docketed as Civil Case No. 98-0047.

On April 24, 1998, respondent Laperal Realty filed a Motion to Dismiss [7]on the ground that petitioners
failed to submit their grievance to arbitration as required under Article VI of the Agreement which
provides:

ARTICLE VI. ARBITRATION.

All cases of dispute between CONTRACTOR and OWNERS representative shall be referred to the
committee represented by:

a. One representative of the OWNER;

b. One representative of the CONTRACTOR;

c. One representative acceptable to both OWNER and CONTRACTOR.[8]

On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed a Joint Answer 168
with Counterclaim and Crossclaim[9] praying for dismissal of petitioners Complaint for the same reason.

On August 9, 1998, the trial court issued the herein assailed Order dismissing petitioners Complaint for
non-compliance with the foregoing arbitration clause.

Hence this petition.

Petitioners argue, thus:

The petitioners causes of action did not emanate from the Owner-Contractor Agreement.

The petitioners causes of action for cancellation of contract and accounting are covered by the exception
under the Arbitration Law.

Failure to arbitrate is not a ground for dismissal.[10]

In a catena of cases[11] inspired by Justice Malcolms provocative dissent in Vega v. San Carlos Milling
Co.[12], this Court has recognized arbitration agreements as valid, binding, enforceable and not contrary to
public policy so much so that when there obtains a written provision for arbitration which is not complied
with, the trial court should suspend the proceedings and order the parties to proceed to arbitration in
accordance with the terms of their agreement[13] Arbitration is the wave of the future in dispute
resolution.[14] To brush aside a contractual agreement calling for arbitration in case of disagreement
between parties would be a step backward.[15]

Nonetheless, we grant the petition.

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

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

Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of Salas, Jr.s land
when respondent Laperal Realty subdivided it and sold portions thereof to respondent lot buyers.Thus,
they instituted action[19]against both respondent Laperal Realty and respondent lot buyers for rescission of
the sale transactions and reconveyance to them of the subdivided lots. They argue that rescission, being
their cause of action, falls under the exception clause in Sec. 2 of Republic Act No. 876 which provides
that such submission [to] or contract [of arbitration] shall be valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of any contract.
The petitioners contention is without merit. For while rescission, as a general rule, is an arbitrable
issue,[20] they impleaded in the suit for rescission the respondent lot buyers who are neither parties to the
Agreement nor the latters assigns or heirs. Consequently, the right to arbitrate as provided in Article VI of
the Agreement was never vested in respondent lot buyers.

Respondent Laperal Realty, as a contracting party to the Agreement, has the right to compel petitioners to
first arbitrate before seeking judicial relief. However, to split the proceedings into arbitration for
respondent Laperal Realty and trial for the respondent lot buyers, or to hold trial in abeyance pending
arbitration between petitioners and respondent Laperal Realty, would in effect result in multiplicity of
169
suits, duplicitous procedure and unnecessary delay. On the other hand, it would be in the interest of
justice if the trial court hears the complaint against all herein respondents and adjudicates petitioners
rights as against theirs in a single and complete proceeding.

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

Costs against private respondents.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

8.

FIRST DIVISION

G.R. No. 107918 June 14, 1994

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, HON. MARINA L. BUZON, as Presiding Judge of RTC, Quezon
City, MM, Br. 91, VISITACION SERRA FLORES RTC, Quezon City, MM, Br. 91, MA.
ASUNCION FLORES, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO., SECURITY BANK & TRUST CO. and CITYTRUST BANKING
CORPORATION, respondents.

Soluta, Leonidas, Marifosque, Balce, Santiago & Aguila Law Office for petitioner.

Rector Law Office for respondent Flores.

Balgos and Perez Law Office for respondent PCIB.

Dumaraos, Oracion, Panganiban & Associates for respondent FEBTC.

Cauton, Banares, Carpio, Ishiwata and Associates for respondent SBTC.

Gonzaga, Soneja and Gale Law Offices for respondent Citytrust.

KAPUNAN, J.:

This is a petition for review on certiorari seeking the reversal of the decision of the Court of Appeals on
November 18, 1992 affirming in toto the Order of the Regional Trial Court of Quezon City, Branch 91
dismissing the petitioner’s third-party complaint against private respondent banks for lack of jurisdiction.

The facts of the case, as found by both the trial court and the Court of Appeals are undisputed:
In a complaint for Violation of the Negotiable Instrument Law and Damages, plaintiffs 1 seek the
recovery of the amount of P900,913.60 which defendant bank 2 charged against their current account by
virtue of the sixteen (16) checks drawn by them despite the apparent alterations therein with respect to the
name of the payee, that is, the name Filipinas Shell was erased and substituted with Ever Trading and
DBL Trading by their supervisor Jeremias Cabrera, without their knowledge and consent.

Answering the complaint, defendant bank claimed that the subject checks appeared to have been regularly
issued and free from any irregularity which would excite or arouse any suspicion or warrant their
dishonor when the same were negotiated and honored by it; that it observed and exercised the required
170
diligence, care and the prescribed standard verification procedures before finally accepting and honoring
the subject checks and that the proximate cause of plaintiffs’ loss, if any, was their own laxity, negligence
and lack of control, due care and diligence in the conduct of their business affairs.

With leave of court, defendant bank filed a Third-Party Complaint against Philippine Commercial
International Bank, Far East Bank & Trust Company, Security Bank and Trust Company and Citytrust
Banking Corporation for reimbursement, contribution, indemnity from said third-party defendants for
being the collecting banks of the subject checks and by virtue of their bank guarantee for all checks sent
for clearing to the Philippine Clearing House Corporation (PCHC), as provided for in Section 17,
(PCHC), as provided for in Section 17, PCHC Clearing House Rules and Regulations.

In its Answer to the Third-Party Complaint, Citytrust Banking Corporation averred that the subject checks
appeared to be complete and regular on their face with no indication that an original payee’s name was
erased and superimposed with another; that plaintiffs’ fault and negligence in failing to examine their
monthly bank statements, together with the returned checks and their own check stubs, put them under
estoppel and cannot recover the proceeds of the checks against it, an innocent third-party, and plaintiff
must suffer the loss as their negligence was the proximate cause thereof; and that third party plaintiff is
barred from recovering from it base on the provisions of Sections 20 and 21 of the Philippine Clearing
Rules and Regulations.

Philippine Commercial International Bank alleged that the subject check was complete and regular on its
face and was paid by it only upon presentment to the drawee bank for clearing who, upon examination
thereof, found the same to be complete and regular on its face; that it was only after said check was
cleared by third-party plaintiff for payment that it allowed the payee to withdraw the proceeds of the
check from its account; that the cause of action of the third-party plaintiff is barred by estoppel and/or
laches for its failure to return the check to it within the period provided for under Clearing House Rules
and Regulations; that this Court has no jurisdiction over the suit as it and third-party plaintiff are members
of the Philippine Clearing House and bound by the Rules and Regulations thereof providing for
arbitration.

A Motion To Dismiss was filed by Security Bank and Trust Company on the grounds that third-party
plaintiff failed to resort to arbitration as provided for in Section 36 of the Clearing House Rules and
Regulations of the Philippine Clearing House Corporation, and that it was released from any liability with
the acceptance by third-party plaintiff of the subject check.

The record does not show of any Answer to the Third-Party Complaint having been filed by Far East
Bank & Trust Company, although a "Reply To FEBTC Answer" was filed by third-party plaintiff.

On the other hand, third-party plaintiff maintains that this Court has jurisdiction over the suit as the
provisions of the Clearing House Rules and Regulations are applicable only if the suit or action is
between participating member banks, whereas the plaintiffs are private persons and the third-party
complaint between participating member banks is only a consequence of the original action initiated by
the plaintiffs. 3

The trial court dismissed the third-party complaint for lack of jurisdiction citing Section 36 of the
Clearing House Rules and Regulations of the PCHC providing for settlement of disputes and
controversies involving any check or item cleared through the body with the PCHC. It ruled — citing the
Arbitration Rules of Procedure — that the decision or award of the PCHC through its arbitration
committee/arbitrator is appealable only on questions of law to any of the Regional Trial Courts in the
National Capital Region where the head office of any of the parties is located. 4

On the plaintiffs’ contention that jurisdiction vests with the court only if the suit or action is between
participating member banks without the involvement of private parties the trial court held:

The third-party complaint concerning a dispute or controversy among clearing participants involving the
subject checks cleared through PCHC is actually independent of, separate and distinct from the plaintiff’s
complaint. . . .
171
xxx xxx xxx

As the plaintiffs are not parties to the third party complaint, the provisions of the clearing house rules and
regulations on arbitration are, therefore, applicable to Third-Party plaintiff and third party defendant.
Consequently this court has no jurisdiction over the third party complaint. 5

After the trial court denied plaintiffs Motion for Reconsideration, 6 petitioner appealed to the Court of
Appeals which promulgated the challenged decision on November 18, 1992 dismissing the petition for
lack of merit.

Undaunted, petitioner is now before this Court seeking a review of respondent court’s decision on a lone
assignment of error:

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER DRAWEE

BANK’S THIRD PARTY COMPLAINT AGAINST PRIVATE RESPONDENT COLLECTING
BANKS FALL WITHIN THE JURISDICTION OF THE PCHC AND NOT THE REGULAR COURT.

We find no merit in the petition.

The Clearing House Rules and Regulations on Arbitration of the Philippine Clearing House Corporation
are clearly applicable to petitioner and private respondents, third party plaintiff and defendants,
respectively, in the court below. Petitioner Associated Bank’s third party complaint in the trial court was
one for reimbursement, contribution and indemnity against the Philippine Commercial and Industrial
Bank (PCIB), the Far East Bank and Trust, Co. (FEBTC), Security Bank and Trust Co. (SBTC), and the
CityTrust Banking Corporation (CTBC), in connection with petitioner’s having honored sixteen checks
which said respondent banks supposedly endorsed to the former for collection in 1989. Under the rules
and regulations of the Philippine Clearing House Corporation (PCHC), the mere act of participation of the
parties concerned in its operations in effect amounts to a manifestation of agreement by the parties to
abide by its rules and regulations. 7 As a consequence of such participation, a party cannot invoke the
jurisdiction of the courts over disputes and controversies which fall under the PCHC Rules and
Regulations without first going through the arbitration processes laid out by the body. Since claims
relating to the regularity of checks cleared by banking institutions are among those claims which should
first be submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated Bank,
having voluntarily bound itself to abide by such rules and regulations, is estopped from seeking relief
from the Regional Trial Court on the coattails of a private claim and in the guise of a third party
complaint without first having obtained a decision adverse to its claim from the said body. It cannot
bypass the arbitration process on the basis of its averment that its third party complaint is inextricably
linked to the original complaint in the Regional Trial Court.

Under its Articles of Incorporation, the PCHC provides "an effective, convenient, efficient, economical
and relevant exchange and facilitate service limited to check processing and sorting by way of assisting
member banks, entities in clearing checks and other clearing items as defined and existing in future
Central Bank of the Philippines Circulars, memoranda, circular letters rules and regulations and policies
in pursuance of Section 107 of RA 265." Pursuant to its function involving the clearing of checks and
other clearing items, the PCHC has adopted rules and regulations designed to provide member banks with
a procedure whereby disputes involving the clearance of checks and other negotiable instruments undergo
a process of arbitration prior to submission to the courts below. This procedure not only ensures a
uniformity of rulings relating to factual disputes involving checks and other negotiable instruments but
also provides a mechanism for settling minor disputes among participating and member banks which
would otherwise go directly to the trial courts. While the PCHC Rules and Regulations allow appeal to
the Regional Trial Courts only on questions of law, this does not preclude our lower courts from dealing
with questions of fact already decided by the PCHC arbitration when warranted and appropriate.

In Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation 8 this Court had the
occasion to rule on the validity of these rules as well as the jurisdiction of the PCHC as a forum for
resolving disputes and controversies involving checks and other clearing items when it held that "the
172
participation of two banks. . . in the Clearing Operations of the PCHC (was) a manifestation of its
submission to its jurisdiction." 9

The applicable PCHC provisions on the question of jurisdiction provide:

Sec. 3 — AGREEMENT TO THESE RULES

It is the general agreement and understanding, that any participant in the PCHC MICR clearing
operations, by the mere act of participation, thereby manifests its agreement to these Rules and
Regulations, and its subsequent amendments.

xxx xxx xxx

Sec. 36 — ARBITRATION

36.1 Any dispute or controversy between two or more clearing participants involving any check/item
cleared thru PCHC shall be submitted to the Arbitration Committee, upon written complaint of any
involved participant by filing the same with the PCHC serving the same upon the other party or parties,
who shall within fifteen (15) days after receipt thereof, file with the Arbitration Committee its written
answer to such written complaint and also within the same period serve the same upon the complaining
participant. This period of fifteen (15) days may be extended by the Committee not more than once for
another period of fifteen (15) days, but upon agreement in writing of the complaining party, said
extension may be for such period as the latter may agree to.

Section 36.6 is even more emphatic:

36.6 The fact that a bank participates in the clearing operations of PCHC shall be deemed its written and
subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance
with Section 4 of the Republic Act No. 876 otherwise known as the Arbitration Law.

Thus, not only do the parties manifest by mere participation their consent to these rules, but such
participation is deemed (their) written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant subject to the Clearing House Rules and
Regulations of the PCHC may go on appeal to any of the Regional Trial Courts in the National Capital
Region where the head office of any of the parties is located only after a decision or award has been
rendered by the arbitration committee or arbitrator on questions of law. 10

Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to the
arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to do so. The
jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is particularly applicable
to all the parties in the third party complaint under their obligation to first seek redress of their disputes
and grievances with the PCHC before going to the trial court.

Finally, the contention that the third party complaint should not have been dismissed for being a
necessary and inseparable offshoot of the main case over which the court a quo had already exercised
jurisdiction misses the fundamental point about such pleading. A third party complaint is a mere
procedural device which under the Rules of Court is allowed only with the court’s permission. It is an
action "actually independent of, separate and distinct from the plaintiffs’ complaint" (s)uch that, were it
not for the Rules of Court, it would be necessary to file the action separately from the original complaint
by the defendant against the third party. 11

IN VIEW OF THE FOREGOING, the petition is DENIED for lack of merit. With costs against petitioner.

SO ORDERED.

7. 173

EN BANC

[G.R. No. 155001. May 5, 2003]

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL

ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON,
CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C.
HILARIO, MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and
PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners, vs.PHILIPPINE
INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and
SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents,

MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS

CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES
AIRPORT SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION,
MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS
CORPORATION, petitioners-in-intervention,

[G.R. No. 155547. May 5, 2003]

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G.

JARAULA, petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC.,
MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the
Department of Transportation and Communications, and SECRETARY SIMEON A.
DATUMANONG, in his capacity as Head of the Department of Public Works and
Highways, respondents,

JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON

VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON, and BENASING O. MACARANBON, respondents-intervenors,

[G.R. No. 155661. May 5, 2003]

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V.

GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON and SAMAHANG
MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP), petitioners, vs. PHILIPPINE
INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS,
SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents.

DECISION
PUNO, J.:

Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the
Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the
Department of Transportation and Communications (DOTC) and its Secretary from implementing the
following agreements executed by the Philippine Government through the DOTC and the MIAA and the
Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July
12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the First
Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second
174
Supplement to the Amended and Restated Concession Agreement dated September 4, 2000, and (5) the
Third Supplement to the Amended and Restated Concession Agreement dated June 22, 2001
(collectively, the PIATCO Contracts).

The facts are as follows:

In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive
study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can
cope with the traffic development up to the year 2010. The study consisted of two parts: first, traffic
forecasts, capacity of existing facilities, NAIA future requirements, proposed master plans and
development plans; and second, presentation of the preliminary design of the passenger terminal
building. The ADP submitted a Draft Final Report to the DOTC in December 1989.

Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry Sy, Sr.,
Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore the
possibility of investing in the construction and operation of a new international airport terminal. To
signify their commitment to pursue the project, they formed the Asias Emerging Dragon Corp. (AEDC)
which was registered with the Securities and Exchange Commission (SEC) on September 15, 1993.

On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a
build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law).[1]

On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification Bids
and Awards Committee (PBAC) for the implementation of the NAIA IPT III project.

On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National
Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by the
DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating
Council (NEDA ICC) Technical Board favorably endorsed the project to the ICC Cabinet Committee
which approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the
NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project.

On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an
invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in accordance with
Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the
Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the
Financial Proposal of the proponent.

On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid Documents and
the submission of the comparative bid proposals. Interested firms were permitted to obtain the Request for
Proposal Documents beginning June 28, 1996, upon submission of a written application and payment of a
non-refundable fee of P50,000.00 (US$2,000).

The Bid Documents issued by the PBAC provided among others that the proponent must have adequate
capability to sustain the financing requirement for the detailed engineering, design, construction,
operation, and maintenance phases of the project. The proponent would be evaluated based on its ability
to provide a minimum amount of equity to the project, and its capacity to secure external financing for the
project.

On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference on
July 29, 1996.

On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The
following amendments were made on the Bid Documents:

a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal 175
an additional percentage of gross revenue share of the Government, as follows:

i. First 5 years 5.0%

ii. Next 10 years 7.5%

iii. Next 10 years 10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. Proponent
may offer an Annual Guaranteed Payment which need not be of equal amount, but payment of which
shall start upon site possession.

c. The project proponent must have adequate capability to sustain the financing requirement for the
detailed engineering, design, construction, and/or operation and maintenance phases of the project as the
case may be. For purposes of pre-qualification, this capability shall be measured in terms of:

i. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount
of equity for the project; and

ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of the
consortium are banking with them, that the project proponent and/or the members are of good financial
standing, and have adequate resources.

d. The basis for the prequalification shall be the proponents compliance with the minimum technical and
financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum
amount of equity shall be 30% of the Project Cost.

e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were
made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the
PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT
Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to
AEDC, and that the challengers technical and financial proposals would remain confidential. The PBAC
also clarified that the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely
indicative and that other revenue sources may be included by the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated as Public
Utility Fees would be subject to regulation, and those charges which would be actually deemed Public
Utility Fees could still be revised, depending on the outcome of PBACs query on the matter with the
Department of Justice.

In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos queries and the PBACs
responses were as follows:

1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as
prescribed in Section 8.3.4 of the Bid Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of their current respective business
undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to
just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that
embodies a commitment to infuse the required capital in case the project is awarded to the Joint Venture
instead of increasing each corporations current authorized capital stock just for prequalification
purposes.

In prequalification, the agency is interested in ones financial capability at the time of prequalification, not
future or potential capability.

A commitment to put up equity once awarded the project is not enough to establish that present financial 176

capability. However, total financial capability of all member companies of the Consortium, to be
established by submitting the respective companies audited financial statements, shall be acceptable.

2. At present, Paircargo is negotiating with banks and other institutions for the extension of a
Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to
them.However, Paircargo is being required to submit a copy of the draft concession as one of the
documentary requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of the
approved negotiated agreement between the PBAC and the AEDC at the soonest possible time.

A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes
would be made known to prospective challengers through bid bulletins. However, a final version will be
issued before the award of contract.

The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required
Bid Security.

On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing Co., Inc.
(Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank)
(collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September
23, 1996, the PBAC opened the first envelope containing the prequalification documents of the Paircargo
Consortium. On the following day, September 24, 1996, the PBAC prequalified the Paircargo
Consortium.

On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the Paircargo
Consortium, which include:

a. The lack of corporate approvals and financial capability of PAIRCARGO;

b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that
Security Bank could legally invest in the project;

d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification
purposes; and

e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the
operation of a public utility.

The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues raised by
the latter, and that based on the documents submitted by Paircargo and the established prequalification
criteria, the PBAC had found that the challenger, Paircargo, had prequalified to undertake the project. The
Secretary of the DOTC approved the finding of the PBAC.

The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which
contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos financial
capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections
1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7,
1996, AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC
meeting and the accompanying technical evaluation report where each of the issues they raised were
addressed.

On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo
Consortium containing their respective financial proposals. Both proponents offered to build the NAIA
177
Passenger Terminal III for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross revenues
for the next ten years of operation, and 10% share in gross revenues for the last ten years of operation, in
accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered to pay the
government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium
offered to pay the government a total of P17.75 billion for the same period.

Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the
Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to
match the said bid, otherwise, the project would be awarded to Paircargo.

As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs failure to
match the proposal.

On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals
Co., Inc. (PIATCO).

AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections
as regards the prequalification of PIATCO.

On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of the
NEDA-ICC.

On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of
Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman
of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of
the PBAC Technical Committee.

On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a no-
objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad referendum gathered
only four (4) of the required six (6) signatures, the NEDA merely noted the agreement.

On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO,
through its President, Henry T. Go, signed the Concession Agreement for the Build-Operate-and-Transfer
Arrangement of the Ninoy Aquino International Airport Passenger Terminal III (1997 Concession
Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal
during the concession period and to collect the fees, rentals and other charges in accordance with the rates
or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the concession
period shall be for twenty-five (25) years commencing from the in-service date, and may be renewed at
the option of the Government for a period not exceeding twenty-five (25) years. At the end of the
concession period, PIATCO shall transfer the development facility to MIAA.

On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession
Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the
ARCA were: Sec. 1.11 pertaining to the definition of certificate of completion; Sec. 2.05 pertaining to the
Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the
Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the Development
Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10 with respect to
the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts
that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility
fees and charges; the entire Article VIII concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in case a dispute or controversy arises
between the parties to the agreement.

Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
178
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and the Third
Supplement on June 22, 2001 (collectively, Supplements).

The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining Revenues or Gross
Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for
the upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are
owned or operated by MIAA; and further providing additional special obligations on the part of GRP
aside from those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a
stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in
lieu of the proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP and
PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It also amended
Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by
inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of
Percentage Share in Gross Revenues.

The Second Supplement to the ARCA contained provisions concerning the clearing, removal, demolition
or disposal of subterranean structures uncovered or discovered at the site of the construction of the
terminal by the Concessionaire. It defined the scope of works; it provided for the procedure for the
demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO; it
provided for time extensions, incremental and consequential costs and losses consequent to the existence
of such structures; and it provided for some additional obligations on the part of PIATCO as regards the
said structures.

Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the
construction of the surface road connecting Terminals II and III.

Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I
and II, had existing concession contracts with various service providers to offer international airline
airport services, such as in-flight catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing, and other services, to several international
airlines at the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings Aviation
Systems Corp., and the MacroAsia Group.Miascor, DNATA and MacroAsia, together with Philippine
Airlines (PAL), are the dominant players in the industry with an aggregate market share of 70%.

On September 17, 2002, the workers of the international airline service providers, claiming that they stand
to lose their employment upon the implementation of the questioned agreements, filed before this Court a
petition for prohibition to enjoin the enforcement of said agreements.[2]

On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a motion
for intervention and a petition-in-intervention.

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a
similar petition with this Court.[3]

On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of
the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes, Eduardo
C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and
Benasing O. Macaranbon, moved to intervene in the case as Respondents-Intervenors. They filed their
Comment-In-Intervention defending the validity of the assailed agreements and praying for the dismissal
of the petitions.

During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29,
2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace, stated that she will not
honor (PIATCO) contracts which the Executive Branchs legal offices have concluded (as) null and
179
void.[5]

Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The
Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective
Comments in behalf of the public respondents.

On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the Court
then resolved in open court to require the parties to file simultaneously their respective Memoranda in
amplification of the issues heard in the oral arguments within 30 days and to explore the possibility of
arbitration or mediation as provided in the challenged contracts.

In their consolidated Memorandum, the Office of the Solicitor General and the Office of the Government
Corporate Counsel prayed that the present petitions be given due course and that judgment be rendered
declaring the 1997 Concession Agreement, the ARCA and the Supplements thereto void for being
contrary to the Constitution, the BOT Law and its Implementing Rules and Regulations.

On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO commenced
arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration
(ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the Government of the
Republic of the Philippines acting through the DOTC and MIAA.

In the present cases, the Court is again faced with the task of resolving complicated issues made difficult
by their intersecting legal and economic implications. The Court is aware of the far reaching fall out
effects of the ruling which it makes today. For more than a century and whenever the exigencies of the
times demand it, this Court has never shirked from its solemn duty to dispense justice and resolve actual
controversies involving rights which are legally demandable and enforceable, and to determine whether or
not there has been grave abuse of discretion amounting to lack or excess of jurisdiction.[6] To be sure, this
Court will not begin to do otherwise today.

We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar
the resolution of the instant controversy.

Petitioners Legal Standing to File

the present Petitions

a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service providers [7] having separate
concession contracts with MIAA and continuing service agreements with various international airlines to
provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance and
provisions, cargo handling and warehousing and other services. Also included as petitioners are labor
unions MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees
Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose
rights and interests stand to be violated by the implementation of the PIATCO Contracts.

Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws
engaged in the business of providing in-flight catering, passenger handling, ramp and ground support,
aircraft maintenance and provisions, cargo handling and warehousing and other services to several
international airlines at the Ninoy Aquino International Airport. Petitioners-Intervenors allege that as tax-
paying international airline and airport-related service operators, each one of them stands to be irreparably
injured by the implementation of the PIATCO Contracts. Each of the petitioners-intervenors have
separate and subsisting concession agreements with MIAA and with various international airlines which
they allege are being interfered with and violated by respondent PIATCO.

In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan
ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the
employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the contracts
180
entered into by the Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT
III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the
implementation of the PIATCO Contracts.

Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which
directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its
Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the
MIAA, by entering into said contracts, have committed grave abuse of discretion amounting to lack or
excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy or
adequate remedy in the ordinary course of law.

In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which
grant PIATCO the exclusive right to operate a commercial international passenger terminal within the
Island of Luzon, except those international airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the commencement of operations at the NAIA IPT III,
the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and
II as international passenger terminals. With respect to existing concession agreements between MIAA
and international airport service providers regarding certain services or operations, the 1997 Concession
Agreement and the ARCA uniformly provide that such services or operations will not be carried over to
the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate
agreement duly entered into with PIATCO.[8]

With respect to the petitioning service providers and their employees, upon the commencement of
operations of the NAIA IPT III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II as all international airlines and
passengers will be diverted to the NAIA IPT III. The petitioning service providers will thus be compelled
to contract with PIATCO alone for such services, with no assurance that subsisting contracts with MIAA
and other international airlines will be respected. Petitioning service providers stress that despite the very
competitive market, the substantial capital investments required and the high rate of fees, they entered
into their respective contracts with the MIAA with the understanding that the said contracts will be in
force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service
providers to recoup their investments and obtain a reasonable return thereon.

Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the
other hand allege that with the closure of the NAIA Terminals I and II as international passenger
terminals under the PIATCO Contracts, they stand to lose employment.

The question on legal standing is whether such parties have alleged such a personal stake in the outcome
of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon
which the court so largely depends for illumination of difficult constitutional questions. [9] Accordingly, it
has been held that the interest of a person assailing the constitutionality of a statute must be direct and
personal. He must be able to show, not only that the law or any government act is invalid, but also that he
sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not
merely that he suffers thereby in some indefinite way. It must appear that the person complaining has
been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to
be subjected to some burdens or penalties by reason of the statute or act complained of.[10]
We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have a
direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts. They
stand to lose their source of livelihood, a property right which is zealously protected by the Constitution.
Moreover, subsisting concession agreements between MIAA and petitioners-intervenors and service
contracts between international airlines and petitioners-intervenors stand to be nullified or terminated by
the operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about by
the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests
sufficient to confer on them the requisite standing to file the instant petitions.
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b. G.R. No. 155547

In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of Representatives,
they are especially interested in the PIATCO Contracts, because the contracts compel the Government
and/or the House of Representatives to appropriate funds necessary to comply with the provisions
therein.[11] They cite provisions of the PIATCO Contracts which require disbursement of unappropriated
amounts in compliance with the contractual obligations of the Government. They allege that the
Government obligations in the PIATCO Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the
Constitution that [n]o money shall be paid out of the treasury except in pursuance of an appropriation
made by law.[12]

Standing is a peculiar concept in constitutional law because in some cases, suits are not brought by parties
who have been personally injured by the operation of a law or any other government act but by concerned
citizens, taxpayers or voters who actually sue in the public interest. Although we are not unmindful of the
cases of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v. Raquiza[14] wherein this Court
held that appropriation must be made only on amounts immediately demandable, public interest
demands that we take a more liberal view in determining whether the petitioners suing as
legislators, taxpayers and citizens have locus standi to file the instant petition. In Kilosbayan, Inc. v.
Guingona,[15]this Court held [i]n line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and non-profit civic organizations
were allowed to initiate and prosecute actions before this Court to question the constitutionality or
validity of laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of
discretion as to whether or not it should be entertained.[17] As such . . . even if, strictly speaking, they [the
petitioners] are not covered by the definition, it is still within the wide discretion of the Court to waive the
requirement and so remove the impediment to its addressing and resolving the serious constitutional
questions raised.[18] In view of the serious legal questions involved and their impact on public interest, we
resolve to grant standing to the petitioners.

Other Procedural Matters

Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as
factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO alleges that
submission of this controversy to this Court at the first instance is a violation of the rule on hierarchy of
courts. They contend that trial courts have concurrent jurisdiction with this Court with respect to a special
civil action for prohibition and hence, following the rule on hierarchy of courts, resort must first be had
before the trial courts.

After a thorough study and careful evaluation of the issues involved, this Court is of the view that the crux
of the instant controversy involves significant legal questions. The facts necessary to resolve these legal
questions are well established and, hence, need not be determined by a trial court.

The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases
at bar. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate
courts or where exceptional and compelling circumstances justify availment of a remedy within and
calling for the exercise of this Courts primary jurisdiction.[19]

It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of
the rule. Both petitioners and respondents agree that these cases are of transcendental importance as
they involve the construction and operation of the countrys premier international airport. Moreover, the
crucial issues submitted for resolution are of first impression and they entail the proper legal
interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and
Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be
182
lowered to give way for the speedy disposition of the instant cases.

Legal Effect of the Commencement

of Arbitration Proceedings by

PIATCO

There is one more procedural obstacle which must be overcome. The Court is aware that arbitration
proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent
PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of its
jurisdiction over the cases at bar.

In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration clause in
the Distributorship Agreement in question is valid and the dispute between the parties is arbitrable, this
Court affirmed the trial courts decision denying petitioners Motion to Suspend Proceedings pursuant to
the arbitration clause under the contract. In so ruling, this Court held that as contracts produce legal effect
between the parties, their assigns and heirs, only the parties to the Distributorship Agreement are bound
by its terms, including the arbitration clause stipulated therein. This Court ruled that arbitration
proceedings could be called for but only with respect to the parties to the contract in question.
Considering that there are parties to the case who are neither parties to the Distributorship Agreement nor
heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal Realty
Corporation,[21] held that to tolerate the splitting of proceedings by allowing arbitration as to some of
the parties on the one hand and trial for the others on the other hand would, in effect, result
in multiplicity of suits, duplicitous procedure and unnecessary delay.[22] Thus, we ruled that
the interest of justice would best be served if the trial court hears and adjudicates the case in a single and
complete proceeding.

It is established that petitioners in the present cases who have presented legitimate interests in the
resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be
bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to
arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present
controversy, including those raised by petitioners, cannot be made before an arbitral tribunal. The
object of arbitration is precisely to allow an expeditious determination of a dispute. This objective would
not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain
issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to
resolve.

Now, to the merits of the instant controversy.

Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly pre-
qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to
meet the financial capability required under the BOT Law and the Bid Documents. They allege that in
computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the
project, the entire net worth of Security Bank, a member of the consortium, should not be
considered.

PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996 issued by
the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to have a
combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the project. The
said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to President Fidel V.
Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not
have the financial resources to put up the required minimum equity of P2,700,000,000.00. This contention
183
is based on the restriction under R.A. No. 337, as amended or the General Banking Act that a commercial
bank cannot invest in any single enterprise in an amount more than 15% of its net worth. In the said
Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will
be evaluated based on total financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a combined net worth
of P3,926,421,242.00 that could support a project costing approximately P13 Billion.

It is not a requirement that the net worth must be unrestricted. To impose that as a requirement now will
be nothing less than unfair.

The financial statement or the net worth is not the sole basis in establishing financial capability. As stated
in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by
reputable banks. The Challenger has complied with this requirement.

To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money
to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in
establishing if there is enough basis to believe that the challenger can comply with the required 30%
equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract
(Section 12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same document).[23]

Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be awarded to
the bidder who, having satisfied the minimum financial, technical, organizational and legal
standards required by the law, has submitted the lowest bid and most favorable terms of the
project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide:

Section 5.4 Pre-qualification Requirements.

c. Financial Capability: The project proponent must have adequate capability to sustain the financing
requirements for the detailed engineering design, construction and/or operation and maintenance phases
of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in
terms of (i) proof of the ability of the project proponent and/or the consortium to provide a
minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are banking with them, that
they are in good financial standing, and that they have adequate resources. The government
agency/LGU concerned shall determine on a project-to-project basis and before pre-qualification, the
minimum amount of equity needed. (emphasis supplied)

Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending the
financial capability requirements for pre-qualification of the project proponent as follows:

6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical
and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No.
6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be based shall be thirty
percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of
the Bid Documents. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a
of the draft concession agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.

Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to the
unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to
undertake the project in the minimum amount of 30% of the project cost through (i) proof of the
184
ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable
banks attesting that the project proponent or members of the consortium are banking with them, that they
are in good financial standing, and that they have adequate resources.

As the minimum project cost was estimated to be US$350,000,000.00 or

[25]
roughly P9,183,650,000.00, the Paircargo Consortium had to show to the satisfaction of the PBAC that
it had the ability to provide the minimum equity for the project in the amount of at
least P2,755,095,000.00.

Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth
of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security Banks
Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the
amount of P3,523,504,377.00.[28]

We agree with public respondents that with respect to Security Bank, the entire amount of its net worth
could not be invested in a single undertaking or enterprise, whether allied or non-allied in accordance
with the provisions of R.A. No. 337, as amended or the General Banking Act:

Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary Board,
whenever it shall deem appropriate and necessary to further national development objectives or support
national priority projects, may authorize a commercial bank, a bank authorized to provide
commercial banking services, as well as a government-owned and controlled bank, to operate under
an expanded commercial banking authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment House as provided in Presidential
Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or all of the equity
in a financial intermediary other than a commercial bank or a bank authorized to providecommercial
banking services: Provided, That (a) the total investment in equities shall not exceed fifty percent (50%)
of the net worth of the bank; (b) the equity investment in any one enterprise whether allied or non-
allied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity investment of
the bank, or of its wholly or majority-owned subsidiary, in a single non-allied undertaking shall not
exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent
(35%) of the voting stock in that enterprise; and (d) the equity investment inother banks shall be deducted
from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk
assets.

Further, the 1993 Manual of Regulations for Banks provides:

SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also
apply regarding equity investments of banks.

a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at
any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec.
X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is
only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the
Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of
its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less than
the prescribed minimum equity investment required for the project in the amount of P2,755,095,000.00 or
30% of the project cost.

The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity, the
ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at the
185
pre-qualification stage, the law requires the government agency to examine and determine the ability of
the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder
may invest in the project at the time of pre-qualification.

The PBAC has determined that any prospective bidder for the construction, operation and maintenance of
the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of
30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid
Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine the maximum
amounts that each member of the consortium may commit for the construction, operation and
maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to Security Bank,
the maximum amount which may be invested by it would only be 15% of its net worth in view of the
restrictions imposed by the General Banking Act. Disregarding the investment ceilings provided by
applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to
undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true
maximum amount which a bidder may invest in the project.

Further, the determination of whether or not a bidder is pre-qualified to undertake the project requires an
evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the
required documents presented by the bidder. The PBAC should not be allowed to speculate on the future
financial ability of the bidder to undertake the project on the basis of documents submitted. This would
open doors to abuse and defeat the very purpose of a public bidding. This is especially true in the case at
bar which involves the investment of billions of pesos by the project proponent. The relevant government
authority is duty-bound to ensure that the awardee of the contract possesses the minimum required
financial capability to complete the project. To allow the PBAC to estimate the bidders future financial
capability would not secure the viability and integrity of the project. A restrictive and conservative
application of the rules and procedures of public bidding is necessary not only to protect the impartiality
and regularity of the proceedings but also to ensure the financial and technical reliability of the project. It
has been held that:

The basic rule in public bidding is that bids should be evaluated based on the required documents
submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive
public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the
bidding process is the only safeguard to a fair, honest and competitive public bidding.[30]

Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are
submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be
properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the
Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the
PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by
the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.

While it would be proper at this juncture to end the resolution of the instant controversy, as the legal
effects of the disqualification of respondent PIATCOs predecessor would come into play and necessarily
result in the nullity of all the subsequent contracts entered by it in pursuance of the project, the Court feels
that it is necessary to discuss in full the pressing issues of the present controversy for a complete
resolution thereof.
II

Is the 1997 Concession Agreement valid?

Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains
provisions that substantially depart from the draft Concession Agreement included in the Bid Documents.
They maintain that a substantial departure from the draft Concession Agreement is a violation of public
policy and renders the 1997 Concession Agreement null and void.

PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is intended 186
to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear to all
participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed in Part
C (6) of Bid Bulletin No. 3 issued by the PBAC which states:

6. Amendments to the Draft Concessions Agreement

Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.

By its very nature, public bidding aims to protect the public interest by giving the public the best possible
advantages through open competition. Thus:

Competition must be legitimate, fair and honest. In the field of government contract law, competition
requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same
subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to
injure or defraud the government.[31]

An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply
in terms of application of the procedural rules and regulations imposed by the relevant government
agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the
same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain
provisions in the contract awarded such that the contract is altered in any material respect, then the
essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a farce if
after the contract is awarded, the winning bidder may modify the contract and include provisions which
are favorable to it that were not previously made available to the other bidders. Thus:

It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The specifications
should, accordingly, operate equally or indiscriminately upon all bidders.[32]

The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:

The law is well settled that where, as in this case, municipal authorities can only let a contract for public
work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to
permit free and full competition. Nor can they enter into a contract with the best bidder containing
substantial provisions beneficial to him, not included or contemplated in the terms and
specifications upon which the bids were invited.[33]

In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted above, the
PBAC also clarified that [s]aid amendments shall only cover items that would not materially affect
the preparation of the proponents proposal.

While we concede that a winning bidder is not precluded from modifying or amending certain provisions
of the contract bidded upon, such changes must not constitute substantial or material amendments
that would alter the basic parameters of the contract and would constitute a denial to the other
bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a
modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether
the contract, when taken as a whole, would contain substantially different terms and conditions that would
have the effect of altering the technical and/or financial proposals previously submitted by other bidders.
The alterations and modifications in the contract executed between the government and the winning
bidder must be such as to render such executed contract to be an entirely different contract from the
one that was bidded upon.

In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34] this Court quoted with approval
the ruling of the trial court that an amendment to a contract awarded through public bidding, when such
subsequent amendment was made without a new public bidding, is null and void:
187

The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after
public bidding is a limitation upon the right of the contracting parties to alter or amend it without another
public bidding, for otherwise what would a public bidding be good for if after the execution of a
contract after public bidding, the contracting parties may alter or amend the contract, or even
cancel it, at their will? Public biddings are held for the protection of the public, and to give the public the
best possible advantages by means of open competition between the bidders. He who bids or offers the
best terms is awarded the contract subject of the bid, and it is obvious that such protection and best
possible advantages to the public will disappear if the parties to a contract executed after public
bidding may alter or amend it without another previous public bidding.[35]

Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same agreement
that was offered for public bidding, i.e., the draft Concession Agreement attached to the Bid
Documents? A close comparison of the draft Concession Agreement attached to the Bid Documents and
the 1997 Concession Agreement reveals that the documents differ in at least two material respects:

a. Modification on the Public

Utility Revenues and Non-Public

Utility Revenues that may be

collected by PIATCO

The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the
1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject to
periodic adjustment of once every two years in accordance with a prescribed parametric formula and
adjustments are made effective only upon written approval by MIAA; (2) fees other than those included
in the first category which maybe adjusted by PIATCO whenever it deems necessary without need for
consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not
been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I,
pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between the
draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in each
category and the extent of the supervision and regulation which MIAA is allowed to exercise in relation
thereto.

For fees under the first category, i.e., those which are subject to periodic adjustment in accordance with a
prescribed parametric formula and effective only upon written approval by MIAA, the draft Concession
Agreement includes the following:[36]

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) groundhandling fees;

(4) rentals and airline offices;

(5) check-in counter rentals; and

(6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon MIAA
approval are classified as Public Utility Revenues and include:[37]

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) check-in counter fees; and 188

(4) Terminal Fees.

The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in
relation to fees included in the second category identified above. Under the 1997 Concession
Agreement, fees which PIATCO may adjust whenever it deems necessary without need for consent of
DOTC/MIAA are Non-Public Utility Revenues and is defined as all other income not classified as Public
Utility Revenues derived from operations of the Terminal and the Terminal Complex.[38] Thus, under the
1997 Concession Agreement, groundhandling fees, rentals from airline offices and porterage fees are no
longer subject to MIAA regulation.

Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to regulate (1)
lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO.
Such regulation may be made by periodic adjustment and is effective only upon written approval of
MIAA. The full text of said provision is quoted below:

Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft
tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees
shall be allowed only once every two years and in accordance with the Parametric Formula attached
hereto as Annex F. Provided that adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the
conformity of the adjustments with the above said parametric formula. The first adjustment shall be made
prior to the In-Service Date of the Terminal.

The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and
vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section
6.01 if in its judgment the users of the airport shall be deprived of a free option for the services they
cover.[39]

On the other hand, the equivalent provision under the 1997 Concession Agreement reads:

Section 6.03 Periodic Adjustment in Fees and Charges.

(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public
Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify
the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become
exorbitant resulting in the unreasonable deprivation of End Users of such services.[40]

Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2) porterage fee
and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and justify the
fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to MIAA
regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is covered
by the first paragraph of the same provision. There is an obvious relaxation of the extent of control and
regulation by MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO, i.e.,
new fees and charges that may be imposed by PIATCO which have not been previously imposed or
collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft
Concession Agreement MIAA has reserved the right to regulate the same under the same conditions that
MIAA may regulate fees under the first category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only upon written approval by MIAA.
However, under the 1997 Concession Agreement, adjustment of fees under the third category is not
subject to MIAA regulation.
189
With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was included
within the category of Public Utility Revenues under the 1997 Concession Agreement. This
classification is significant because under the 1997 Concession Agreement, Public Utility Revenues are
subject to an Interim Adjustment of fees upon the occurrence of certain extraordinary events specified in
the agreement.[42] However, under the draft Concession Agreement, terminal fees are not included in the
types of fees that may be subject to Interim Adjustment.[43]

Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal fees, are
denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In the draft
Concession Agreement, no such stipulation was included. By stipulating that Public Utility Revenues
will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine
currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of
the Philippine Peso, while being effectively insulated from the detrimental effects of exchange rate
fluctuations.

When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in
the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to
other fees are significant amendments that substantially distinguish the draft Concession Agreement from
the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives
PIATCO more favorable terms than what was available to other bidders at the time the contract
was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement
translate to direct and concrete financial advantages for PIATCO which were not available at the time
the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only
Public Utility Revenues are subject to MIAA regulation. Adjustments of all other fees imposed and
collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the
1997 Concession Agreement, the same is further subject to Interim Adjustments not previously stipulated
in the draft Concession Agreement. Finally, the change in the currency stipulated for Public Utility
Revenues under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit
which was not available at the time of bidding.

b. Assumption by the

Government of the liabilities of

PIATCO in the event of the latters

default thereof

Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors who
have provided, loaned or advanced funds for the NAIA IPT III project does not result in the assumption
by the Government of these liabilities. In fact, nowhere in the said contract does default of PIATCOs
loans figure in the agreement. Such default does not directly result in any concomitant right or obligation
in favor of the Government.

However, the 1997 Concession Agreement provides:

Section 4.04 Assignment.

.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default
has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date
of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such
default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire
and operator of the Development Facility in accordance with the terms and conditions hereof, or designate
a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not have served 190
the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities.

(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If
the concession company, acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the
Development Facility and assume Attendant Liabilities.

The term Attendant Liabilities under the 1997 Concession Agreement is defined as:

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the
Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually
used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by Concessionaire to its
suppliers, contractors and sub-contractors.

Under the above quoted portions of Section 4.04 in relation to the definition of Attendant
Liabilities, default by PIATCO of its loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the Government of the liability for the
loans. Only in one instance may the Government escape the assumption of PIATCOs liabilities, i.e.,
when the Government so elects and allows a qualified operator to take over as Concessionaire. However,
this circumstance is dependent on the existence and availability of a qualified operator who is
willing to take over the rights and obligations of PIATCO under the contract, a circumstance that is
not entirely within the control of the Government.

Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04 of the
1997 Concession Agreement may be considered a form of security for the loans PIATCO has obtained to
finance the project, an option that was not made available in the draft Concession Agreement. Section
4.04 is an important amendment to the 1997 Concession Agreement because it grants PIATCO
a financial advantage or benefit which was not previously made available during the bidding
process. This financial advantage is a significant modification that translates to better terms and
conditions for PIATCO.

PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft
Concession Agreement is subject to amendment because the Bid Documents permit financing or
borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.

We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project
proponent or the winning bidder to obtain financing for the project, especially in this case which involves
the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the project
proponent of its undertakings therein would involve a substantial amount of investment. It is therefore
inevitable for the awardee of the contract to seek alternate sources of funds to support the project. Be that
as it may, this Court maintains that amendments to the contract bidded upon should always conform to
the general policy on public bidding if such procedure is to be faithful to its real nature and purpose. By
its very nature and characteristic, competitive public bidding aims to protect the public interest by giving
the public the best possible advantages through open competition.[45] It has been held that the three
principles in public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a basis
for the exact comparison of bids. A regulation of the matter which excludes any of these factors destroys
the distinctive character of the system and thwarts the purpose of its adoption.[46] These are the basic
parameters which every awardee of a contract bidded out must conform to, requirements of financing and
borrowing notwithstanding. Thus, upon a concrete showing that, as in this case, the contract signed by the 191
government and the contract-awardee is an entirely different contract from the contract bidded, courts
should not hesitate to strike down said contract in its entirety for violation of public policy on public
bidding. A strict adherence on the principles, rules and regulations on public bidding must be sustained if
only to preserve the integrity and the faith of the general public on the procedure.

Public bidding is a standard practice for procuring government contracts for public service and for
furnishing supplies and other materials. It aims to secure for the government the lowest possible price
under the most favorable terms and conditions, to curtail favoritism in the award of government contracts
and avoid suspicion of anomalies and it places all bidders in equal footing.[47] Any government action
which permits any substantial variance between the conditions under which the bids are invited
and the contract executed after the award thereof is a grave abuse of discretion amounting to lack
or excess of jurisdiction which warrants proper judicial action.

In view of the above discussion, the fact that the foregoing substantial amendments were made on
the 1997 Concession Agreement renders the same null and void for being contrary to public policy.
These amendments convert the 1997 Concession Agreement to an entirely different agreement from the
contract bidded out or the draft Concession Agreement. It is not difficult to see that the amendments on
(1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof and
(2) the assumption by the Government, under certain conditions, of the liabilities of PIATCO directly
translates concrete financial advantages to PIATCO that were previously not available during the
bidding process. These amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The amendments discussed above
present new terms and conditions which provide financial benefit to PIATCO which may have altered the
technical and financial parameters of other bidders had they known that such terms were available.

III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement
provides:

Section 4.04 Assignment

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of
such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of
the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire
and operator of the Development facility in accordance with the terms and conditions hereof, or designate
a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served
the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter
shall form and organize a concession company qualified to takeover the operation of the Development
Facility. If the concession company should elect to designate an operator for the Development Facility,
the concession company shall in good faith identify and designate a qualified operator acceptable to GRP
within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a qualified operator within the aforesaid
period, then GRP shall at the end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
192
.

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of
the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties, associated fees, charges, surcharges,
indemnities, reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.[48]

It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults in its
loan obligations, is obligated to pay all amounts recorded and from time to time outstanding from the
books of PIATCO which the latter owes to its creditors.[49] These amounts include all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements and other related expenses. [50] This
obligation of the Government to pay PIATCOs creditors upon PIATCOs default would arise if the
Government opts to take over NAIA IPT III. It should be noted, however, that even if the Government
chooses the second option, which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the
Government is still at a risk of being liable to PIATCOs creditors should the latter be unable to designate
a qualified operator within the prescribed period.[51] In effect, whatever option the Government chooses
to take in the event of PIATCOs failure to fulfill its loan obligations, the Government is still at a
risk of assuming PIATCOs outstanding loans. This is due to the fact that the Government would only
be free from assuming PIATCOs debts if the unpaid creditors would be able to designate a qualified
operator within the period provided for in the contract. Thus, the Governments assumption of liability
is virtually out of its control. The Government under the circumstances provided for in the 1997
Concession Agreement is at the mercy of the existence, availability and willingness of a qualified
operator. The above contractual provisions constitute a direct government guarantee which is prohibited
by law.

One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct
the infrastructure and development projects necessary for economic growth and development. This is why
private sector resources are being tapped in order to finance these projects. The BOT law allows the
private sector to participate, and is in fact encouraged to do so by way of incentives, such as minimizing
the unstable flow of returns,[52] provided that the government would not have to unnecessarily expend
scarcely available funds for the project itself. As such, direct guarantee, subsidy and equity by the
government in these projects are strictly prohibited.[53] This is but logical for if the government would
in the end still be at a risk of paying the debts incurred by the private entity in the BOT projects,
then the purpose of the law is subverted.

Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee An agreement whereby the government or any of its agencies or local
government units assume responsibility for the repayment of debt directly incurred by the project
proponent in implementing the project in case of a loan default.

Clearly by providing that the Government assumes the attendant liabilities, which consists of PIATCOs
unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee for the debts
incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment that the
relevant sections are subsumed under the title of assignment. The provisions providing for direct
government guarantee which is prohibited by law is clear from the terms thereof.

The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article
IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:

Section 4.04 Security

.
193
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into
direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement
shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably
acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters:

(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans,
the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other
rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation under
security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a
nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA
Terminal 3] or transfer the Concessionaires [PIATCO] rights and obligations under this Agreement to a
transferee which is qualified under sub-clause (viii) below;

(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a
nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred
eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP and
the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to the
Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA
Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the
Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said
180-day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be
transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a
termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter
defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if
greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the
transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto;

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to
time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any
other persons or entities who have provided, loaned, or advanced funds or provided financial facilities
to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related expenses (including
the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at
maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO]
to its professional consultants and advisers, suppliers, contractors and sub-contractors.[54]

It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan
obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into an
agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified
nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the Government are
unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO,
upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of
the project or the value of the attendant liabilities whichever is greater. Attendant liabilities as defined
in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior
Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have
loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT
III. The amount of PIATCOs debt that the Government would have to pay as a result of PIATCOs default
in its loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and 194
no other agreement relating to NAIA IPT III has been reached between the Government and the Senior
Lenders -- includes, but is not limited to, all principal, interest, associated fees, charges, reimbursements,
and other related expenses . . . whether payable at maturity, by acceleration or otherwise.[55]

It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to
pay PIATCOs loans not only to its Senior Lenders but all other entities who provided PIATCO
funds or services upon PIATCOs default in its loan obligation with its Senior Lenders. The fact that
the Governments obligation to pay PIATCOs lenders for the latters obligation would only arise after the
Senior Lenders fail to appoint a qualified nominee or transferee does not detract from the fact that, should
the conditions as stated in the contract occur, the ARCA still obligates the Government to pay any and all
amounts owed by PIATCO to its lenders in connection with NAIA IPT III. Worse, the conditions that
would make the Government liable for PIATCOs debts is triggered by PIATCOs own default of its loan
obligations to its Senior Lenders to which loan contracts the Government was never a party to. The
Government was not even given an option as to what course of action it should take in case PIATCO
defaulted in the payment of its senior loans. The Government, upon PIATCOs default, would be merely
notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a
qualified nominee or transferee. Should the Senior Lenders fail to make such an appointment, the
Government is then automatically obligated to directly deal and negotiate with the Senior Lenders
regarding NAIA IPT III. The only way the Government would not be liable for PIATCOs debt is for a
qualified nominee or transferee to be appointed in place of PIATCO to continue the construction,
operation and maintenance of NAIA IPT III.This pre-condition, however, will not take the contract out of
the ambit of a direct guarantee by the government as the existence, availability and willingness of a
qualified nominee or transferee is totally out of the governments control. As such the Government is
virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior
Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some
other arrangement with the Government) and the existence of a qualified nominee or transferee who is
able and willing to take the place of PIATCO in NAIA IPT III.

The proscription against government guarantee in any form is one of the policy considerations
behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government to pay for all
loans, advances and obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior
Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would make the
Government liable for PIATCOs loans should the conditions as set forth in the ARCA arise. This is a
form of direct government guarantee.

The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT
project may be accepted, the following conditions must first be met: (1) the project involves a new
concept in technology and/or is not part of the list of priority projects, (2) no direct government
guarantee, subsidy or equity is required, and (3) the government agency or local government unit has
invited by publication other interested parties to a public bidding and conducted the same. [56] The failure
to meet any of the above conditions will result in the denial of the proposal. It is further provided that the
presence of direct government guarantee, subsidy or equity will necessarily disqualify a proposal from
being treated and accepted as an unsolicited proposal.[57] The BOT Law clearly and strictly prohibits
direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a
provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a
proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the
contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract
itself. A prohibited provision, the inclusion of which would result in the denial of a proposal cannot, and
should not, be allowed to later on be inserted in the contract resulting from the said proposal. The basic
rules of justice and fair play alone militate against such an occurrence and must not, therefore, be
countenanced particularly in this instance where the government is exposed to the risk of shouldering
hundreds of million of dollars in debt.

This Court has long and consistently adhered to the legal maxim that those that cannot be done directly
195
cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear statutory
prohibition against a direct government guarantee would not only make a mockery of what the
BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a monetary
obligation resulting from a contract of loan between the project proponent and its lenders and to
which the Government is not a party to -- but would also render the BOT Law useless for what it
seeks to achieve - to make use of the resources of the private sector in the financing, operation and
maintenance of infrastructure and development projects[59] which are necessary for national growth
and development but which the government, unfortunately, could ill-afford to finance at this point
in time.

IV

Temporary takeover of business affected with public interest

Article XII, Section 17 of the 1987 Constitution provides:

Section 17. In times of national emergency, when the public interest so requires, the State may, during the
emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of
any privately owned public utility or business affected with public interest.

The above provision pertains to the right of the State in times of national emergency, and in the exercise
of its police power, to temporarily take over the operation of any business affected with public interest. In
the 1986 Constitutional Commission, the term national emergency was defined to include threat from
external aggression, calamities or national disasters, but not strikes unless it is of such proportion that
would paralyze government service.[60] The duration of the emergency itself is the determining factor as to
how long the temporary takeover by the government would last.[61] The temporary takeover by the
government extends only to the operation of the business and not to the ownership thereof. As such
the government is not required to compensate the private entity-owner of the said business as there
is no transfer of ownership, whether permanent or temporary. The private entity-owner affected by the
temporary takeover cannot, likewise, claim just compensation for the use of the said business and its
properties as the temporary takeover by the government is in exercise of its police power and not of its
power of eminent domain.

Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:

Section 5.10 Temporary Take-over of operations by GRP.

(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or
any part thereof, become the subject matter of or be included in any notice, notification, or declaration
concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national
emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the
Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency, the operations shall
be returned to Concessionaire, at which time, the Concession period shall commence to run
again. Concessionaire shall be entitled to reasonable compensation for the duration of the
temporary take over by GRP, which compensation shall take into account the reasonable cost for
the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to the debt
service requirements of Concessionaire, if the temporary take over should occur at the time when
Concessionaire is still servicing debts owed to project lenders), any loss or damage to the Development
Facility, and other consequential damages. If the parties cannot agree on the reasonable compensation of
Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance with
Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire shall be
offset from the amount next payable by Concessionaire to GRP.[62]

PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on

196
temporary government takeover and obligate the government to pay reasonable cost for the use of
the Terminal and/or Terminal Complex.[63] Article XII, section 17 of the 1987 Constitution envisions a
situation wherein the exigencies of the times necessitate the government to temporarily take over or direct
the operation of any privately owned public utility or business affected with public interest. It is the
welfare and interest of the public which is the paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in effecting the temporary takeover is
exercising its police power. Police power is the most essential, insistent, and illimitable of powers. [64] Its
exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its exercise.[65] Thus, requiring the
government to pay reasonable compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.

Regulation of Monopolies

A monopoly is a privilege or peculiar advantage vested in one or more persons or companies, consisting
in the exclusive right (or power) to carry on a particular business or trade, manufacture a particular article,
or control the sale of a particular commodity.[66] The 1987 Constitution strictly regulates monopolies,
whether private or public, and even provides for their prohibition if public interest so requires. Article
XII, Section 19 of the 1987 Constitution states:

Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.

Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the
government in carrying on an enterprise or to aid in the performance of various services and functions in
the interest of the public.[67] Nonetheless, a determination must first be made as to whether public
interest requires a monopoly. As monopolies are subject to abuses that can inflict severe prejudice to the
public, they are subject to a higher level of State regulation than an ordinary business undertaking.

In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted
the exclusive right to operate a commercial international passenger terminal within the Island of Luzon at
the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such as
those located in the Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark Special Economic
Zone (CSEZ) and in Laoag City.[69] As such, upon commencement of PIATCOs operation of NAIA IPT
III, Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This,
however, does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any
other manner as it may deem appropriate except those activities that would compete with NAIA IPT III in
the latters operation as an international passenger terminal.[70] The right granted to PIATCO
to exclusively operate NAIA IPT III would be for a period of twenty-five (25) years from the In-Service
Date[71] and renewable for another twenty-five (25) years at the option of the government.[72] Both the
1997 Concession Agreement and the ARCA further provide that, in view of the exclusive right
granted to PIATCO, the concession contracts of the service providers currently servicing Terminals
1 and 2 would no longer be renewed and those concession contracts whose expiration are
subsequent to the In-Service Date would cease to be effective on the said date.[73]
The operation of an international passenger airport terminal is no doubt an undertaking imbued with
public interest. In entering into a BuildOperate-and-Transfer contract for the construction, operation and
maintenance of NAIA IPT III, the government has determined that public interest would be served better
if private sector resources were used in its construction and an exclusive right to operate be granted to the
private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege given to
PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA,
which is the government agency authorized to operate the NAIA complex, as well as DOTC, the
department to which MIAA is attached.[74]
197
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be
regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by
providing a climate of minimum government regulations,[76] the same does not mean that Government
must completely surrender its sovereign power to protect public interest in the operation of a public utility
as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the detriment
of the public which it seeks to serve. The right granted to the public utility may be exclusive but the
exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate
NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the right
and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA IPT
III cannot also violate the rights of third parties.

Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:

3.01 Concession Period

(e) GRP confirms that certain concession agreements relative to certain services and operations
currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that
these services and operations shall not be carried over to the Terminal and the Concessionaire is
under no legal obligation to permit such carry-over except through a separate agreement duly entered
into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any
such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on
full indemnity basis from and against any loss and/or any liability resulting from any such litigation,
including the cost of litigation and the reasonable fees paid or payable to Concessionaires counsel of
choice, all such amounts shall be fully deductible by way of an offset from any amount which the
Concessionaire is bound to pay GRP under this Agreement.

During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention for G.R.
No. 155001 stated that there are two service providers whose contracts are still existing and whose
validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other until
2010.[77]

We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute
right for the renewal or the extension of their respective contracts, those contracts whose duration extends
beyond NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These contracts must be
respected not just by the parties thereto but also by third parties. PIATCO cannot, by law and certainly not
by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient of claiming an
exclusive right to operate, cannot require the Government to break its contractual obligations to the
service providers. In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil
Trading Corporation v. Lazaro[78] whose contracts consist of temporary hold-over permits, the affected
service providers in the cases at bar, have a valid and binding contract with the Government, through
MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the
1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to
supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary government
agency tasked with the job,[79] it is MIAAs responsibility to ensure that whoever by contract is given the
right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights
of third parties and above all, the interest of the public.

VI

CONCLUSION

In sum, this Court rules that in view of the absence of the requisite financial capacity of the Paircargo
Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the 198
construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that
the 1997 Concession Agreement contains material and substantial amendments, which amendments had
the effect of converting the 1997 Concession Agreement into an entirely different agreement from the
contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to
public policy. The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997
Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a
direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing
Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA,
are likewise null and void.

WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement
and the Supplements thereto are set aside for being null and void.

SO ORDERED.

6.

THIRD DIVISION

[G.R. No. 121171. December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS, JESUS S. CABARRUS,

SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE MIGUEL CABARRUS,
ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M. ANTONIO, as
Minority Stock Holders of Marinduque Mining and Industrial Corporation, respondents.

DECISION

KAPUNAN, J.:

The petition for review on certiorari before us seeks us to reverse and set aside the decision of the Court
of Appeals which denied due course to the petition for certiorari filed by the Asset Privatization Trust
(APT) assailing the order of the Regional Trial Court (RTC) Branch 62, Makati City. The Makati RTCs
order upheld and confirmed the award made by the Arbitration Committee in favor of Marinduque
Mining and Industrial Corporation (MMIC) and against the Government, represented by herein petitioner
APT for damages in the amount of P2.5 BILLION (or approximately P4.5 BILLION, including interest).

Ironically, the staggering amount of damages was imposed on the Government for exercising its
legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the latters failure
to pay its overdue and unpaid obligation of P22 billion to the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP).
The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao Mineral Reservation
have been authorized by Republic Act No. 1828, as amended by Republic Acts No. 2077 and 4167, by
virtue of which laws, a Memorandum of Agreement was drawn on July 3, 1968, whereby the Republic of
the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore,
develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation. [1] MMIC is a
domestic corporation engaged in mining with respondents Jesus S. Cabarrus, Sr. as President and among
its original stockholders.

The Philippine Government undertook to support the financing of MMIC by purchase of MMIC
debenture and extension of guarantees. Further, the Philippine Government obtained a firm, commitment
from the DBP and/or other government financing institutions to subscribed in MMIC and issue
guarantee/s for foreign loans or deferred payment arrangements secured from the US Eximbank, Asian
199
Development Bank, Kobe Steel, of amount not exceeding US$100 Million.[2]

DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were based on the
unutilized portion of the Government commitment. Thereafter, the Government extended
accommodations to MMIC in various amounts.

On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement[3] whereby MMIC, as
mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees, over all MMICs
assets, subject of real estate and chattel mortgage executed by the mortgagor, and additional assets
described and identified, including assets of whatever kind, nature or description, which the mortgagor
may acquire whether in substitution of, in replenishment, or in addition thereto.

Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly includes the
event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage Trust Agreement
when due.[4]

Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the enumerated events
of defaults, circumstances by which the mortgagor may be declared in default, the procedure therefor,
waiver of period to foreclose, authority of Trustee before, during and after foreclosure, including taking
possession of the mortgaged properties.[5]

In various request for advances/remittances of loans of huge amounts, Deeds of Undertakings, Promissory
Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC invariably committed to pay either on
demand or under certain terms the loans and accommodations secured from or guaranteed by both DBP
and PNB.

By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had reached
tremendous proportions, and MMIC was having a difficult time meeting its financial obligations. MMIC
had an outstanding loan with DBP in the amount of P13,792,607,565.92 as of August 31, 1984 and in the
amount of P8,789,028,249.38 as of July 15, 1984 or a total Government exposure of Twenty Two Billion
Six Hundred Sixty-Eight Million Five Hundred Thirty-Seven Thousand Seven Hundred Seventy and
05/100 (P22,668,537,770.05), Philippine Currency.[6] Thus, a financial restructuring plan (FRP) designed
to reduce MMIC' interest expense through debt conversion to equity was drafted by the Sycip Gorres
Velayo accounting firm.[7] On April 30, 1984, the FRP was approved by the Board of Directors of the
MMIC.[8] However, the proposed FRP had never been formally adopted, approved or ratified by either
PNB or DBP.[9]

In August and September 1984, as the various loans and advances made by DBP and PNB to MMIC had
become overdue and since any restructuring program relative to the loans was no longer feasible, and in
compliance with the directive of Presidential Decree No. 385, DBP and PNB as mortgagees of MMIC
assets, decided to exercise their right to extrajudicially foreclose the mortgages in accordance with the
Mortgage Trust Agreement.[10]

The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly formed
corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation, and
Island Cement Corporation. In 1986, these assets were transferred to the Asset Privatization Trust
(APT).[11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a
derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of
Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil Case No. 9900, prayed
that the court: (1) annul the foreclosure, restore the foreclosed assets to MMIC, and require the banks to
account for their use and operation in the interim; (2) direct the banks to honor and perform their
commitments under the alleged FRP; and (3) pay moral and exemplary damages, attorneys fees, litigation
expenses and costs.

In the course of the trial, private respondents and petitioner APT, as successor of the DBP and PNBs
200
interest in MMIC, mutually agreed to submit the case to arbitration by entering into a Compromise and
Arbitration Agreement, stipulating, inter alia:

NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual covenants
contain herein, the parties agreed as follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw their respective claims from the
Trial Court and to resolve their dispute through arbitration by praying to the Trial Court to issue a
Compromise Judgment based on this Compromise and Arbitration Agreement.

In withdrawing their dispute form the court and in choosing to resolve it through arbitration, the parties
have agreed that:

(a) their respective money claims shall be reduced to purely money claims; and

(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC accounts, APT shall
likewise succeed to the rights and obligations of PNB and DBP in respect of the controversy subject of
Civil Case No. 9900 to be transferred to arbitration and any arbitral award/order against either PNB
and/or DBP shall be the responsibility of, be discharged by and be enforceable against APT, the partied
having agreed to drop PNB and DBP from the arbitration.

2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No. 9900 shall,
with the approval of the Trial Court of this Compromise and Arbitration Agreement, be transferred and
reduced to pure pecuniary/money claims with the parties waiving and foregoing all other forms of reliefs
which they prayed for or should have payed for in Civil Case No. 9900.[13]

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether PLAINTIFFS
have the capacity or the personality to institute this derivative suit in behalf of the MMIC or its directors;
(b) Whether or not the actions leading to, and including, the PNB-DBP foreclosure of the MMIC assets
were proper, valid and in good faith.[14]

This agreement was presented for approval to the trial court. On October 14, 1992, the Makati RTC,
Branch 62, issued an order, to wit:

WHEREFORE, this Court orders:

1. Substituting PNB and DBP with the Asset Privatization Trust as party defendant.

2. Approving the Compromise and Arbitration Agreement dated October 6, 1992, attached as Annex C of
the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this case into pure money
claims; and

4. The Complaint is hereby DISMISSED.[15]

The Arbitration Committee was composed of retired Supreme Court Justice Abraham Sarmiento as
Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal Elma as Members. On
November 24, 1993, after conducting several hearings, the Arbitration Committee rendered a majority
decision in favor of MMIC, the pertinent portions of which read as follows:

Since, as this Committee finds, there is no foreclosure at all was not legally and validly done, the
Committee holds and so declares that the loans of PNB and DBP to MMIC, for the payment and recovery
of which the void foreclosure sales were undertaken, continue to remain outstanding and
unpaid. Defendant APT as the successor-in-interest of PNB and DBP to the said loans is therefore entitled
201
and retains the right, to collect the same from MMIC pursuant to and based on the loan documents signed
by MMIC, subject to the legal and valid defenses that the latter may duly and seasonably interpose. Such
loans shall, however, be reduced by the amount which APT may have realized from the sale of the seized
assets of MMIC which by agreement should no longer be returned even if the foreclosure were found to
be null and void.

The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B; Exhibits 100; and also
Exhibit ZZZ) as their exhibits would show that the total outstanding obligation due to DBP and PNB as of
the date of foreclosure is P22,668,537,770.05, more or less.

Therefore, defendant APT can, and is still entitled to, collect the outstanding obligations of MMIC to
PNB and DBP amounting to P22,668.537,770.05, more or less, with interest thereon as stipulated in the
loan documents from the date of foreclosure up to the time they are fully paid less the proportionate
liability of DBP as owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in obligations of MMIC in proportion to its 87% equity in the
total capital stock of MMIC.

x x x.

As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to 87%. So pursuant to the
above provision of the Compromise and Arbitration Agreement, the 87% equity of DBP is hereby
deducted from the actual damages of P19,486,118,654.00 resulting in the net actual damages
of P2,531,635,425.02 plus interest.

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the DBP,
the sum of P2,531,635,425.02 with interest thereon at the legal rate of six per cent (6%) per
annumreckoned from August 3, 9, and 24, 1984, pari passu, as and for actual damages. Payment of these
actual damages shall be offset by APT from the outstanding and unpaid loans of the MMIC with DBP and
PNB, which have not been converted into equity. Should there be any balance due to the MMIC after the
offsetting, the same shall be satisfied from the funds representing the purchase price of the sale of the
shares of Island Cement Corporation in the amount of P503,000,000.00 held under escrow pursuant to the
Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supercede
[sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the DBP,
the sum of P13,000,000.00 as and for moral and exemplary damages. Payment of these moral and
exemplary damages shall be offset by APT from the outstanding and unpaid loans of MMIC with DBP
and PNB, which have not been converted into equity. Should there be any balance due to MMIC after the
offsetting, the same shall be satisfied from the funds representing the purchase price of the sale of the
shares of Island Cement Corporation in the of P503,000,000.00 held under escrow pursuant to the Escrow
Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum of P10,000,000.00, to be
satisfied likewise from the funds held under escrow pursuant to the Escrow Agreement dated April 22,
1988 or to such subsequent escrow agreement that would supercede it, pursuant to paragraph (9) of the
Compromise and Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED.[16] 202

Motions for reconsiderations were filed by both parties, but the same were denied.

On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an Application/Motion
for Confirmation of Arbitration Award. Petitioner countered with an Opposition and Motion to Vacate
Judgment raising the following grounds:

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court, considering that the
said motion is neither a part nor the continuation of the proceedings in Civil Case No. 9900 which was
dismissed upon motion of the parties. In fact, the defendants in the said Civil Case No. 9900 were the
Development Bank of the Philippines and the Philippine National Bank (PNB);

2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission shall be deemed a
special proceedings and a party to the controversy which was arbitrated may apply to the court having
jurisdiction, (not necessarily with this Honorable Court) for an order confirming the award;

3. The issues submitted for arbitration have been limited to two: (1) propriety of the plaintiffs filing the
derivative suit and (2) the regularity of the foreclosure proceedings. The arbitration award sought to be
confirmed herein far exceeded the issues submitted and even granted moral damages to one of the herein
plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award where the
arbitrators exceeded their powers, or so imperfectly executed them, that a mutual final and definite award
upon the subject matter submitted to them was not made.[17]

Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984, arguing that a
dismissal of Civil case No. 9900 was merely a qualified dismissal to pave the way for the submission of
the controversy to arbitration, and operated simply as a mere suspension of the proceedings. They denied
that the Arbitration Committee had exceeded its powers.

In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:

WHEREFORE, premises considered, and in the light of the parties [sic] Compromise and Arbitration
Agreement dated October 6, 1992, the Decision of the Arbitration Committee promulgated on November
24, 1993, as affirmed in a Resolution dated July 26, 1994, and finally settled and clarified in the Separate
Opinion dated September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876,also known as the Arbitration Law, this Court GRANTS PLAINTIFFS APPLICATION AND THUS
CONFIRMS THE ARBITRATION AWARD, AND JUDGMENT IS HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation (MMIC, except the
DBP, the sum of P3,811,757,425.00, as and for actual damages, which shall be partially satisfied from the
funds held under escrow in the amount of P503,000,000.00 pursuant to the Escrow Agreement dated
April 22, 1988. The Balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of P13,000,000.00 as and moral
and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00 as and for moral
damages; and

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum of P1,705,410.22 as
arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of the Compromise
and Arbitration Agreement, and the final edict of the Arbitration Committees decision, and with this
Courts Confirmation, the issuance of the Arbitration Committees Award shall henceforth be final and
executory. 203

SO ORDERED.[18]

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated November 28,
1994. Private respondents, in turn, submitted their reply and opposition thereto.

On January 18, 1995, the trial court handed down its order denying APTs motion for reconsideration for
lack of merit and for having been filed out of time. The trial court declared that considering that the
defendant APT through counsel, officially and actually received a copy of the Order of this Court dated
November 28, 1994 on December 6, 1994, the Motion for Reconsideration thereof filed by the defendant
APT on December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15-day
reglementary period prescribed or provided for by law for the filing of an appeal from final orders,
resolutions, awards, judgments or decisions of any court in all cases, and by necessary implication for the
filling of a motion for reconsideration thereof.

On February 7, 1995, petitioner received private respondents motion for Execution and Appointment of
Custodian of Proceeds of Execution dated February 6, 1995.

Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with temporary
restraining order and/or preliminary injunction dated February 13, 1996 to annul and declare as void the
Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995 for having been issued
without or in excess of jurisdiction and/or with grave abuse of discretion.[19] As ground therefor, petitioner
alleged that:

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS, HAS
THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD CONSIDERING THAT THE
ORIGINAL CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.

II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE QUESTIONED ORDERS
CONFIRMING THE ARBITRAL AWARD AND DENYING THE MOTION FOR
RECONSIDERATION OF ORDER OF AWARD.

III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT OR
IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE COUNTING OF THE
PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM THE DATE OF SERVICE OF
THE COURTS COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF A XEROX COPY OF
WHAT PRESUMABLY IS THE OPPOSING COUNSELS COPY THEREOF.[20]

On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and dismissed the
petition for certiorari.

Hence, the instant petition for review on certiorari imputing to the Court of Appeals the following errors.
ASSIGNMENT OF ERRORS

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI REGIONAL TRIAL
COURT, BRANCH 62 WHICH HAS PREVIOULSY DISMISSED CIVIL CASE NO. 9900 HAD LOST
JURISDICTION TO CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE AND
IN NOT RULING THAT THE APPLICATION FOR CONFIRMATION SHOULD HAVE BEEN
FILED AS A NEW CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE
RTC. 204

II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS

ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN PETITIONER
QUESTIONED THE JURISDICTION OF THE RTC-MAKATI, BRANCH 62 AND AT THE SAME
TIME MOVED TO VACATE THE ARBITRAL AWARD.

III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL COURT
SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE RESPONDENTS MOTION/PETITION
FOR CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE CONSIDERED
THE MERITS OF THE MOTION TO VACATE ARBITRAL AWARD.

IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS PETITION

FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER CONFIRMING THE AWARD

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN TO
RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR RECONSIDERATION. [21]

The petition is impressed with merit.

I
The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term dismissed is not a mere semantic imperfection. The dispositive portion of the Order of
the trial court dated October 14, 1992 stated in no uncertain terms:

4. The Complaint is hereby DISMISSED.[22]

The term dismiss has a precise definition in law. To dispose of an action suit, or motion without trial on
the issues involved. Conclude, discontinue, terminate, quash.[23]

Admittedly the correct procedure was for the parties to go back to the court where the case was pending
to have the award confirmed by said court. However, Branch 62 made the fatal mistake of issuing a final
order dismissing the case. While Branch 62 should have merely suspended the case and not dismissed
it,[24] neither of the parties questioned said dismissal. Thus, both parties as well as said court are bound by
such error.

It is erroneous then to argue, as private respondents do, that petitioner APT was charged with the
knowledge that the case was merely stayed until arbitration finished, as again, the order of Branch 62 in
very clear terms stated that the complaint was dismissed. By its own action, Branch 62 had lost
jurisdiction over the vase. It could not have validly reacquired jurisdiction over the said case on mere
motion of one of the parties. The Rules of Court is specific on how a new case may be initiated and such
is not done by mere motion in a particular branch of the RTC. Consequently, as there was no pending
action to speak of, the petition to confirm the arbitral award should have been filed as a new case and
raffled accordingly to one of the branches of the Regional Trial Court.

II
Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the RTC to
confirm the arbitral award because it sought affirmative relief in said court by asking that the arbitral 205
award be vacated.

The rule is that Where the court itself clearly has no jurisdiction over the subject matter or the nature of
the action, the invocation of this defense may de done at any time. It is neither for the courts nor for the
parties to violate or disregard that rule, let alone to confer that jurisdiction, this matter being legislative in
character.[25] As a rule the, neither waiver nor estoppel shall apply to confer jurisdiction upon a
court barring highly meritorious and exceptional circumstances.[26] One such exception was enunciated
in Tijam vs. Sibonghanoy,[27] where it was held that after voluntarily submitting a cause and encountering
an adverse decision on the merits, it is too late for the loser to question the jurisdiction or power of the
court."

Petitioners situation is different because from the outset, it has consistently held the position that the
RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot be said that it
was estopped from questioning the RTCs jurisdiction. Petitioners prayer for the setting aside of the
arbitral award was not inconsistent with its disavowal of the courts jurisdiction.

III
Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts denial of APTs
motion for reconsideration of the trial courts order confirming the arbitral award, on the ground that said
motion was filed beyond the 15-day reglementary period; consequently, the petition for certiorari could
not be resorted to as substitute to the lost right of appeal.

We do not agree.

Section 29 of Republic Act No. 876,[28] provides that:

x x x An appeal may be taken from an order made in a proceeding under this Act, or from a judgment
entered upon an award through certiorari proceedings, but such appeals shall be limited to question of
law. x x x.

The aforequoted provision, however, does not preclude a party aggrieved by the arbitral award from
resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of Court where, as in this
case, the Regional Trial Court to which the award was submitted for confirmation has acted without
jurisdiction, or with grave abuse of discretion and there is no appeal, nor any plain, speedy remedy in the
course of law.

Thus, Section 1 of Rule 65 provides:

SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising judicial functions, has
acted without or in excess of its or his jurisdiction, or with grave abuse of discretion and there is no
appeal, nor any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the proceedings, as the law requires, of such tribunal, board
or officer.
In the instant case, the respondent court erred in dismissing the special civil action for certiorari, it being
from the pleadings and the evidence that the trial court lacked jurisdiction and/or committed grave abuse
of discretion in taking cognizance of private respondent motion to confirm the arbitral award and, worse,
in confirming said award which is grossly and patently not in accord with the arbitration agreement, as
will be hereinafter demonstrated.

IV
The nature and limits of the Arbitrators powers.

206
As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or
as to the facts.[29] Courts are without power to amend or overrule merely because of disagreement with
matters of law or facts determined by the arbitrators.[30] They will not review the findings of law and fact
contained in an award, and will not undertake to substitute their judgment for that of the arbitrators, since
any other rule would make an award the commencement, not the end, of litigation.[31] Errors of law and
fact, or an erroneous decision of matters submitted to the judgment of the arbitrators, are insufficient to
invalidate an award fairly and honestly made.[32] Judicial review of an arbitration is, thus, more limited
than judicial review of a trial.[33]

Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators cannot resolve
issues beyond the scope of the submission agreement.[34] The parties to such an agreement are bound by
the arbitrators award only to the extent and in the manner prescribed by the contract and only if the award
is rendered in conformity thereto.[35] Thus, Sections 24 and 25 of the Arbitration Law provide grounds for
vacating, rescinding or modifying an arbitration award. Where the conditions described in Articles
2038,[36] 2039[37] and 2040[38] of the Civil Code applicable to compromises and arbitration are attendant,
the arbitration award may also be annulled.

In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:

x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators awards is
not absolute and without exceptions. Where the conditions described in Articles 2038, 2039, and 2040
applicable to both compromises and arbitration are obtaining, the arbitrators' award may be annulled or
rescinded. Additionally, under Sections 24 and 25, of the Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrators award. Thus, if and when the factual circumstances referred to in
the above-cited provisions are present, judicial review of the award is properly warranted.

Accordingly, Section 20 of R.A. 876 provides:

SEC. 20. Form and contents of award. The award must be made in writing and signed and acknowledged
by a majority of the arbitrators, if more than one; and by the sole arbitrator, if there is only one. Each
party shall be furnished with a copy of the award. The arbitrators in their award may grant any remedy or
relief which they deem just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.

xxx

The arbitrators shall have the power to decide only those matters which have been submitted to them. The
terms of the award shall be confined to such disputes. (Underscoring ours).

xxx.

Section 24 of the same law enumerating the grounds for vacating an award states:

SEC. 24. Grounds for vacating award. In any one of the following cases, the court must make an order
vacating the award upon the petition of any party to the controversy when such party proves affirmatively
that in the arbitration proceedings:

(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient
cause shown, or in refusing to hear evidence pertinent and material to the controversy; that one or more of
the arbitrators was disqualified to act as such under section nine hereof, and willfully refrained from
disclosing such disqualifications or any other misbehavior by which the rights of any party have been
materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and
definite award upon the subject matter submitted to them was not made. (Underscoring ours). 207

xxx.

Section 25 which enumerates the grounds for modifying the award provides:

SEC. 25. Grounds for modifying or correcting award In anyone of the following cases, the court must
make an order modifying or correcting the award, upon the application of any party to the controversy
which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in the description of any
person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits of
the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the controversy, and if it
had been a commissioners report, the defect could have been amended or disregarded by the court.

x x x.

Finally, it should be stressed that while a court is precluded from overturning an award for errors in
determination of factual issues, nevertheless, if an examination of the record reveals no support whatever
for the arbitrators determinations, their award must be vacated.[40] In the same manner, an award must be
vacated if it was made in manifest disregard of the law.[41]

Against the backdrop of the foregoing provisions and principles, we find that the arbitrators came out
with an award in excess of their powers and palpably devoid of factual and legal basis.

V
There was no financial structuring program; foreclosure of mortgage was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to foreclose of the mortgages
of MMIC whose obligations were past due. The foreclosure was not a wrongful act of the banks and,
therefore, could not be the basis of any award of damages. There was no financial restructuring agreement
to speak of that could have constituted an impediment to the exercise of the banks right to foreclose.

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote a separate
opinion:

1. The various loans and advances made by DBP and PNB to MMIC have become overdue and remain
unpaid. The fact that a FRP was drawn up is enough to establish that MMIC has not been complying with
the terms of the loan agreement. Restructuring simply connotes that the obligations are past due that is
why it is restructurable;

2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only means that
MMIC had been informed or notified that its obligations were past due and that foreclosure is
forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the FRP or
proceeding with the foreclosure. Cabarrus, who filed this case supposedly in behalf of MMIC should have
insisted on the FRP. Yet Cabarrus himself opposed the FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but with honest and
sincere belief that foreclosure was the only alternative; a decision further explained by Dr. Placido Mapa
who testified that foreclosure was, in the judgment of PNB, the best move to save MMIC itself.

Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh. 37-A for the
respondent, may I know from you, Dr. Mapa what you meant by that the decision to foreclose was neither 208

precipitate nor arbitrary?

A : Well, it is not a whimsical decision but rather decision arrived at after weighty considerations of the
information that we have received, and listening to the prospects which reported to us that we had
assumed would be the premises of the financial rehabilitation plan was not materialized nor expected to
materialized.

Q : And this statement that it was premised upon the known fact that means, it was referring to the
decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier approved by
the stockholders was no longer feasible, just what is meant by no longer feasible?

A : Because the revenue that they were counting on to make the rehabilitation plan possible, was not
anymore expected to be forthcoming because it will result in a short fall compared to the prices that were
actually taking place in the market.

Q : And I supposed that was you were referring to when you stated that the production targets and
assumed prices of MMICs products, among other projections, used in the financial reorganization
program that will make it viable were not met nor expected to be met?

A : Yes.

xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP absolutely unjustified in
foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied that MMIC accounts in PNB-DBP
were past due. The drawing up of the FRP is the best proof of this. When MMIC adopted a restructuring
program for its loan, it only meant that these loans were already due and unpaid. If these loans were
restructurable because they were already due and unpaid, they are likewise forecloseable. The option is
with the PNB-DBP on what steps to take.

The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is legally binding and implementable. It must be pointed that
said FRP will, in effect, supersede the existing and past due loans of MMIC with PNB-DBP. It will
become the new loan agreement between the lenders and the borrowers. As in all other contracts, there
must therefore be a meeting of minds of the parties; the PNB and DBP must have to validly adopt and
ratify such FRP before they can be bound by it; before it can be implemented. In this case, not an iota of
proof has been presented by the PLAINTIFFS showing that PNB and DBP ratified and adopted the FRP.
PLAINTIFFS simply relied on a legal doctrine of promissory estoppel to support its allegation in this
regard.[42]

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No. 385, which
took effect on January 31, 1974. The decree requires government financial institutions to foreclose
collaterals for loans where the arrearages amount to 20% of the total outstanding obligations. The
pertinent provisions of said decree read as follows:
SEC. 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this Decree to foreclose the collaterals and/or securities for any loan, credit,
accommodations, and/or guarantees granted by them whenever the arrearages on such account, including
accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of account and/or related
records of the financial institutions concerned. This shall be without prejudice to the exercise by the
government financial institutions of such rights and/or remedies available to them under their respective
contracts with their debtor, including the right to foreclosure on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty percent (20%). 209

SEC. 2. No restraining order, temporary or permanent injunction shall be issued by the court against any
government financial institution in any action taken by such institution in compliance with the mandatory
foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent
injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial institution concerned that twenty
percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure
proceedings. (Underscoring supplied.)

Private respondents thesis that the foreclosure proceedings were null and void because of lack of
publication in the newspaper is nothing more than a mere unsubstantiated allegation not borne out by the
evidence. In any case, a disputable presumption exists in favor of petitioner that official duty has been
regularly performed and ordinary course of business has been followed.[43]

VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the facts of the
case, the arbitrators in making the award went beyond the arbitration agreement.

In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for judgment in
their favor:

1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of MMIC null and
void and directing said defendants to restore the foreclosed assets to the possession of MMIC, to render
an accounting of their use and/or operation of said assets and to indemnify MMIC for the loss occasioned
by its dispossession or the deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their commitments under the financial
reorganization plan which was approved at the annual stockholders meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs actual
damages consisting of the loss of value of their investment amounting to not less than P80,000,000.00,
the damnum emerges and lucrum cessans in such amount as may be establish during the trial, moral
damages in such amount as this Honorable Court may deem just and equitable in the premises, exemplary
damages in such amount as this Honorable Court may consider appropriate for the purpose of setting an
example for the public good, attorneys fees and litigation expenses in such amounts as may be proven
during the trial, and the costs legally taxable in this litigation.

Further, Plaintiffs pray for such other reliefs as may be just and equitable in the premises.[44]

Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties clearly and
explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of
the MMIC or its directors;

(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of the MMIC assets
were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to render its decision,
as well as the nature thereof:

8. Decision. The committee shall issue a decision on the controversy not later than six (6) months from
the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this suit and extra-judicial
foreclosure of the MMIC assets wrongful, it shall make an award in favor of the PLAINTIFFS (excluding
DBP), in an amount as may be established or warranted by the evidence which shall be payable in
Philippine Pesos at the time of the award. Such award shall be paid by the APT or its successor-in-interest 210

within sixty (60) days from the date of the award in accordance with the provisions of par. 9 hereunder. x
x x. The PLAINTIFFS remedies under this Section shall be in addition to other remedies that may be
available to the PLAINTIFFS, all such remedies being cumulative and not exclusive of each other.

On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to sue
and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in favor of APT
based on the counterclaims of DBP and PNB in an amount as may be established or warranted by the
evidence. This decision of the arbitration committee in favor of APT shall likewise finally settle all issues
regarding the foreclosure of the MMIC assets so that the funds held in escrow mentioned in par. 9
hereunder will thus be released in full in favor of APT.[46]

The clear and explicit terms of the submission notwithstanding, the Arbitration Committee clearly
exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid the FRP; (b) in
awarding damages to MMIC which was not a party to the derivative suit; and (c) in awarding moral
damages to Jesus S. Cabarrus, Sr.
The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers when it ruled
on the validity of, and gave effect to, the proposed FRP.

In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the validity of the
foreclosure and to transform the reliefs prayed for therein into pure money claims.

There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the proposed
FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the parties
thereto.[47] The contract must bind both contracting parties.[48] Private respondents even by their own
admission recognized that the FRP had yet not been carried out and that the loans of MMIC had not yet
been converted into equity.[49]

However, the arbitration Committee not only declared the FRP valid and effective, but also converted the
loans of MMIC into equity raising the equity of DBP to 87%.[50]

The Arbitration Committee ruled that there was a commitment to carry out the FRP[51] on the ground of
promissory estoppel.

Similarly, the principle of promissory estoppel applies in the present case considering as we observed, the
fact that the government (that is Alfredo Velayo) was the FRPs proponent. Although the plaintiffs are
agreed that the government executed no formal agreement, the fact remains that the DBP itself which
made representations that the FRP constituted a way out for MMIC. The Committee believes that
although the DBP did not formally agree (assuming that the board and stockholders approvals were not
formal enough), it is bound nonetheless if only for its conspicuous representations.

Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs equity (at that time)
and as MMICs creditor-the DBP can not validly renege on its commitments simply because at the same
time, it held interest against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being carried out although apparently, it
would supposedly fall short of its targets. Assuming that the FRP would fail to meet its targets, the DBP-
and so this Committee holds-can not, in any event, brook any denial that it was bound to begin with, and
the fact is that adequate or not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success, although it raised DBPs equity in MMIC
to 87%. It is not excuse, however, for the government to deny its commitments.[52]

Atty. Sison, however, did not agree and correctly observed that:
211
But the doctrine of promissory estoppel can hardly find application here. The nearest that there can be
said of any estoppel being present in this case is the fact that the board of MMIC was, at the time the FRP
was adopted, mostly composed of PNB and DBP representatives. But those representatives, singly or
collectively, are not themselves PNB or DBP. They are individuals with personalities separate and distinct
from the banks they represent. PNB and DBP have different boards with different members who may
have different decisions. It is unfair to impose upon them the decision of the board of another company
and thus pin them down on the equitable principle of estoppel. Estoppel is a principle based on equity and
it is certainly not equitable to apply it in this particular situation. Otherwise the rights of entirely separate,
distinct and autonomous legal entities like PNB and DBP with thousands of stockholders will be
suppressed and rendered nugatory.[53]

As a rule, a corporation exercises its powers, including the power to enter into contracts, through its board
of directors. While a corporation may appoint agents to enter into a contract in its behalf, the agent,
should not exceed his authority.[54] In the case at bar, there was no showing that the representatives of
PNB and DBP in MMIC even had the requisite authority to enter into a debt-for-equity swap. And if they
had such authority, there was no showing that the banks, through their board of directors, had ratified the
FRP.

Further, how could the MMIC be entitled to a big amount of moral damages when its credit reputation
was not exactly something to be considered sound and wholesome. Under Article 2217 of the Civil Code,
moral damages include besmirched reputation which a corporation may possibly suffer. A corporation
whose overdue and unpaid debts to the Government alone reached a tremendous amount of P22 Billion
Pesos cannot certainly have a solid business reputation to brag about. As Atty. Sison in his separate
opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral damages. While
the Supreme Court may have awarded moral damages to a corporation for besmirched reputation in
Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application in this case. It must be pointed out
that when the supposed wrongful act of foreclosure was done, MMICs credit reputation was no longer a
desirable one. The company then was already suffering from serious financial crisis which definitely
projects an image not compatible with good and wholesome reputation. So it could not be said that there
was a reputation besmirches by the act of foreclosure.[55]
The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded as
a party. It was not joined as a party plaintiff or party defendant at any stage of the proceedings. As it is,
the award of damages to MMIC, which was not a party before the Arbitration Committee, is a complete
nullity.

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the
stockholder filing suit for the corporations behalf is only nominal party. The corporation should be
included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein
he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest. x x x.[56]

It is a condition sine qua non that the corporation be impleaded as a party because-

x x x. Not only is the corporation an indispensible party, but it is also the present rule that it must be
served with process. The reason given is that the judgment must be made binding upon the corporation
and in order that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporations must be joined
as party because it is its cause of action that is being litigated and because judgment must be a res 212

ajudicata against it.[57]

The reasons given for not allowing direct individual suit are:

(1) x x x the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit of the
stockholders. In other words, to allow shareholders to sue separately would conflict with the separate
corporate entity principle;

(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case
of Evangelista v. Santos, that the stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among them of part of the corporate assets
before the dissolution of the corporation and the liquidation of its debts and liabilities, something which
cannot be legally done in view of section 16 of the Corporation Law xxx;

(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all
concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.[58]

If at all an award was due MMIC, which it was not, the same should have been given sans deduction,
regardless of whether or not the party liable had equity in the corporation, in view of the doctrine that a
corporation has a personality separate and distinct from its individual stockholders or members. DBPs
alleged equity, even if it were indeed 87%, did not give it ownership over any corporate property,
including the monetary award, its right over said corporate property being a mere expectancy or inchoate
right.[59]Notably, the stipulation even had the effect of prejudicing the other creditors of MMIC.
The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it is a derivative
suit, in which the aggrieved party or the real party in interest is supposedly the MMIC, and at the same
time award moral damages to an individual stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of P10,000,000.00, to be
satisfied likewise from the funds held under escrow pursuant to the Escrow Agreement dated April 22,
1988 or to such subsequent escrow agreement that would supersede it, pursuant to paragraph (9),
Compromise and Arbitration Agreement, as and for moral damages; x x x[60]

The majority decision of the Arbitration Committee sought to justify its award of moral damages to Jesus
S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the government were assets
belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the majority stockholder. It then
acknowledge that Cabarrus had already recovered said assets in the RTC, but that he won no more than
actual damages. While the Committee cannot possibly speak for the RTC, there is no doubt that Jesus S.
Cabarrus, Sr., suffered moral damages on account of that specific foreclosure, damages the Committee
believes and so holds, he Jesus S. Cabarrus, Sr., may be awarded in this proceeding.[61]

Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the majority
stockholder, having been ventilated in a complaint he previously filed with the RTC, from which he
obtained actual damages, he was barred res judicata from filing a similar case in another court, this time
asking for moral damages which he failed to get from the earlier case. [62] Worse, private respondents
violated the rule against non-forum shopping.
213

It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong
was committed in the foreclosure, it was done against the corporation. Another reason is that Jesus S.
Cabarrus, Sr. cannot directly claim those damages for himself that would result in the appropriation by,
and the distribution to, him part of the corporations assets before the dissolution of the corporation and
the liquidation of its debts and liabilities. The Arbitration Committee, therefore, passed upon matters not
submitted to it. Moreover, said cause of action had already been decided in a separate case. It is thus quite
patent that the arbitration committee exceeded the authority granted to it by the parties Compromise and
Arbitration Agreement by awarding moral damages to Jesus S. Cabarrus, Sr.

Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral damages to
Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues, the parties themselves
have agreed that the basic ingredient of the causes of action in this case is the wrong committed on the
corporation (MMIC) for the alleged illegal foreclosure of its assets. By agreeing to this
stipulation, PLAINTIFFS themselves (Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that the shareholders have no
title, legal or equitable to the property which is owned by the corporation (13 Am. Jur. 165; Pascual vs.
Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6 SCRA 373, the rule has been reiterated
that a stockholder is not the co-owner of corporate property. Since the property or assets foreclosed
belongs [sic] to MMIC, the wrong committed, if any, is done against the corporation. There is therefore
no direct injury or direct violation of the rights of Cabarrus et al. There is no way, legal or equitable, by
which Cabarrus et al. could recover damages in their personal capacities even assuming or just because
the foreclosure is improper or invalid. The Compromise and Arbitration Agreement itself and the
elementary principles of Corporation Law say so. Therefore, I am constrained to dissent from the award
of moral damages to Cabarrus.[64]

From the foregoing discussions, it is evident that, not only did the arbitration committee exceed its
powers or so imperfectly execute them, but also, its findings and conclusions are palpably devoid of any
factual basis and in manifest disregard of the law.

We do not find it necessary to remand this case to the RTC for appropriate action. The pleadings and
memoranda filed with this Court, as well as in the Court of Appeals, raised and extensively discussed the
issues on the merits. Such being the case, there is sufficient basis for us to resolve the controversy
between the parties anchored on the records and the pleadings before us.[65]

WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the Orders of the
Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January 19, 1995, is hereby
REVERSED and SET ASIDE, and the decision of the Arbitration Committee is hereby VACATED.

SO ORDERED
5.

THIRD DIVISION

[G.R. No. 139273. November 28, 2000]

CALIFORNIA AND HAWAIIAN SUGAR COMPANY; PACIFIC GULF MARINE, INC.; and
C.F. SHARP & COMPANY, petitioners, vs. PIONEER INSURANCE AND SURETY
CORPORATION, respondent.
214
DECISION

PANGANIBAN, J.:

Under the pre-1997 Rules of Court, a preliminary hearing on affirmative defenses may be allowed when a
motion to dismiss has not been filed or when, having been filed, it has not been denied
unconditionally. Hence, if its resolution has merely been deferred, the grounds it invokes may still be
raised as affirmative defenses, and a preliminary hearing thereon allowed.
The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
January 21, 1999 Decision of the Court of Appeals[1] (CA) in CA-GR SP No. 33723, as well as the July 6,
1999 CA Resolution[2] denying reconsideration. The challenged Decision, which sustained the Orders[3]of
the Regional Trial Court of Makati City, disposed as follows:

WHEREFORE, [there being] no grave abuse of discretion on the part of public respondent, the instant
petition is hereby DISMISSED.[4] (emphasis in the original)
The Facts

The facts, as summarized by the CA, are as follows:

On November 27, 1990, the vessel MV SUGAR ISLANDER arrived at the port of Manila carrying a
cargo of soybean meal in bulk consigned to several consignees, one of which was the Metro Manila Feed
Millers Association (Metro for [b]revity). Discharging of cargo from vessel to barges commenced on
November 30, 1990. From the barges, the cargo was allegedly offloaded, rebagged and reloaded on
consignees delivery trucks. Respondent, however, claims that when the cargo [was] weighed on a
licensed truck scale a shortage of 255.051 metric tons valued at P1,621,171.16 was discovered. The
above-mentioned shipment was insured with private respondent against all risk in the amount of
P19,976,404.00. Due to the alleged refusal of petitioners to settle their respective liabilities, respondent,
as insurer, paid the consignee Metro Manila Feed Millers Association. On March 26, 1992, as alleged
subrogee of Metro, private respondent filed a complaint for damages against herein petitioners. Within the
reglementary period to file an Answer, petitioners filed a Motion to Dismiss the complaint on the ground
that respondents claim is premature, the same being arbitrable. Private respondent filed its Opposition
thereto and petitioners filed their Reply to Opposition.

On November 11, 1992, [the RTC] issued an Order deferring the hearing on the Motion to Dismiss until
the trial and directing petitioners to file their Answer. Petitioners then moved to reconsider said Order
which was, however, denied by [the RTC] on the ground that the reason relied upon by herein petitioners
in its Motion to Dismiss and Motion for Reconsideration [was] a matter of defense which they must prove
with their evidence.

On August 20, 1993, petitioners filed their Answer with Counterclaim and Crossclaim alleging therein
that plaintiff, herein respondent, did not comply with the arbitration clause of the charter party; hence, the
complaint was allegedly prematurely filed. The trial court set the case for pre-trial on November 26, 1993.

On November 15 and 16, 1993, petitioners filed a Motion to Defer Pre-Trial and Motion to Set for
Preliminary Hearing the Affirmative Defense of Lack of Cause of Action for Failure to comply with
Arbitration Clause, respectively. Private respondent did not file an Opposition to the said Motion to Set
for Preliminary Hearing. On December 28, 1993, [the RTC] issued an Order denying the Motion to Set
for Preliminary Hearing. On February 2, 1994 petitioners filed a Motion for Reconsideration of the Order
dated December 28, 1993. On February 11, 1994, [the RTC] issued an Order denying petitioners Motion
for Reconsideration. Hence, the instant petition.[5]
Ruling of the Court of Appeals

Affirming the trial court, the CA held that petitioners cannot rely on Section 5, Rule 16 [6] of the pre-1997
Rules of Court,[7] because a Motion to Dismiss had previously been filed. Further, it ruled that the 215

arbitration clause provided in the charter party did not bind respondent. It reasoned as follows:

Petitioners argue that [the RTC] committed grave abuse of discretion amounting to lack or excess of
jurisdiction in denying the preliminary hearing of the affirmative defense of lack of cause of action for
failure to comply with the arbitration clause.

Petitioners, in so filing the Motion to Set for Preliminary Hearing the Affirmative Defense of Lack of
Cause of Action for Failure to Comply with Arbitration Clause, premised their alleged right to a
preliminary hearing on the provision of Section 5, Rule 16 of the Old Rules of Court which provide[s]:

Sec. 5. Pleading grounds as affirmative defenses. Any of the grounds for dismissal provided for in this
rule, except improper venue, may be pleaded as an affirmative defense and a preliminary hearing may be
had thereon as if a motion to dismiss had been filed.

Petitioners reliance on said provision is misplaced. The above-mentioned provision contemplates a

situation where no motion to dismiss is filed. If a motion to dismiss has been filed, as in the case at bar,
Section 5, Rule 16 of the Old Rules of Court will not come into play. Furthermore, the same provision
gives the judge discretion whether to set for preliminary hearing the grounds for affirmative
defenses. Respondent judge deferred the hearing and determination of the Motion to Dismiss until the
trial since the ground relied upon by petitioners therein did not appear to be indubitable. Petitioners then
filed their Answer as ordered by the Court again raising as an affirmative defense lack of cause of action
for failure to comply with [the] arbitration clause, praying for the dismissal of the complaint against them,
and filing afterwards a Motion to Set for Preliminary Hearing the Affirmative Defense of lack of Cause of
Action. In effect, petitioners are asking the trial court to set aside its Order denying the Motion to Dismiss
and Order denying the Motion for Reconsideration thereof.

Petitioners cannot do this.

The remedy of the aggrieved party in a denied motion to dismiss is to file an answer and interpose as
defense or defenses, the objection or objections raised by him in said motion to dismiss, then proceed to
trial and, in case of adverse decision, to elevate the entire case by appeal in due course. Petitioners could
also resort to the extraordinary legal remedies of certiorari, prohibition and mandamus to question the
denial of the motion to dismiss. As correctly ruled by the trial court in its Order dated June 30, 1993,
denying the Motion for Reconsideration of the Order dated November 11, 1992 (denying the Motion to
Dismiss) the ground relied upon by petitioners is a matter of defense which petitioners must prove with
their evidence at the trial.

Petitioners in asking the lower court to set the case for preliminary hearing further argue that this would
give the court and the parties a shorter time to resolve the matter and the case without a full blown
trial. However, petitioners fail to realize that they themselves are delaying the determination and
resolution of the issues involved by resorting to an improper remedy.

On the issue raised by petitioners that private respondents claim is premature for failure to comply with
[the] arbitration clause, we hold that the right of the respondent as subrogee, in filing the complaint
against herein petitions is not dependent upon the charter party relied upon by petitioners; nor does it
grow out of any privity contract or upon written assignment of claim. It accrues simply upon payment of
the insurance claim by respondent as insurer to the insured. This was the pronouncement by the Supreme
Court in the case of Pan Malayan Insurance Corp. vs. Court of Appeals 184 SCRA 54, to wit:

Payment by the insurer to the insured operates as an equitable assignment to the former of all the
remedies which the latter may have against the third party whose negligence or wrongful (sic) caused the
loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity contract or upon
written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer.[8]

Hence, this recourse.[9]

216
The Issues

In their Memorandum, petitioners submit the following issues for our consideration:[10]

1. Whether or not insurer, as subrogee of the consignee, is bound by the charter party which is
incorporated and referred to in the bill of lading.

2. Whether or not the motion to dismiss should be granted on the ground that a condition precedent has
not been complied with, based on the arbitration clause incorporated in the bill of lading.

3. Whether or not the Court of Appeals erred in holding that the trial court did not commit grave abuse of
discretion in denying petitioners motion for preliminary hearing.

4. Whether or not the trial court can defer the resolution of a motion to dismiss on the ground that the
ground relied upon is indubitable.

5. Whether or not the petitioners have resorted to an improper remedy which makes them responsible for
delaying the case.

In the main, the two principal matters before us are: (1) the denial of petitioners Motion for Preliminary
Hearing and (2) the propriety of the CA ruling regarding the arbitration clause.
The Courts Ruling

The Petition is meritorious.

First Issue: Preliminary Hearing of Affirmative Defense

At the outset, we must emphasize that the crux of the present controversy is the trial courts Order denying
petitioners Motion to Set for Preliminary Hearing the affirmative defense of lack of cause of action. Not
questioned here is the said courts Order holding in abeyance the hearing of petitioners Motion to Dismiss.
Affirmative Defense May Be Raised

Still in effect when the case was before the trial court, Section 5, Rule 16 of the pre-1997 Rules of Court,
reads:

Sec. 5. Pleading grounds as affirmative defenses. - Any of the grounds for dismissal provided for in this
Rule, except improper venue, may be pleaded as an affirmative defense, and a preliminary hearing may
be had thereon as if a motion to dismiss had been filed.

Respondent argues that the above provision cannot be applied, because petitioners have already filed a
Motion to Dismiss.

We disagree. Respondent relies on the amendments introduced in the 1997 Rules on Civil Procedure
("1997 Rules), but ignores equally relevant provisions thereof, as well as the clear intendment of the pre-
1997 Rules. True, Section 6, Rule 16 of the 1997 Rules,[11] specifically provides that a preliminary
hearing on the affirmative defenses may be allowed only when no motion to dismiss has been
filed. Section 6, however, must be viewed in the light of Section 3 of the same Rule, [12] which requires
courts to resolve a motion to dismiss and prohibits them from deferring its resolution on the ground of
indubitability. Clearly then, Section 6 disallows a preliminary hearing of affirmative defenses once a
motion to dismiss has been filed because such defense should have already been resolved. In the present
case, however, the trial court did not categorically resolve petitioners Motion to Dismiss, but merely
deferred resolution thereof.[13]

Indeed, the present Rules are consistent with Section 5, Rule 16 of the pre-1997 Rules of Court, because
both presuppose that no motion to dismiss had been filed; or in the case of the pre-1997 Rules, if one has
been filed, it has not been unconditionally denied.[14] Hence, the ground invoked may still be pleaded as
an affirmative defense even if the defendants Motion to Dismiss has been filed but not definitely resolved,
217
or if it has been deferred as it could be under the pre-1997 Rules.[15]
Denial of the Motion for a Preliminary Hearing Was a Grave Abuse of Discretion

The more crucial question that we must settle here is whether the trial court committed grave abuse of
discretion when it denied petitioners Motion for a Preliminary Hearing on their affirmative defense of
lack of cause of action. Undeniably, a preliminary hearing is not mandatory, but subject to the discretion
of the trial court.[16] In the light of the circumstances in this case, though, we find that the lower court
committed grave abuse of discretion in refusing to grant the Motion.

We note that the trial court deferred the resolution of petitioners Motion to Dismiss because of a single
issue. It was apparently unsure whether the charter party that the bill of lading referred to was indeed the
Baltimore Berth Grain Charter Party submitted by petitioners.

Considering that there was only one question, which may even be deemed to be the very touchstone of the
whole case, the trial court had no cogent reason to deny the Motion for Preliminary Hearing. Indeed, it
committed grave abuse of discretion when it denied a preliminary hearing on a simple issue of fact that
could have possibly settled the entire case. Verily, where a preliminary hearing appears to suffice, there is
no reason to go on to trial. One reason why dockets of trial courts are clogged is the unreasonable refusal
to use a process or procedure, like a motion to dismiss, which is designed to abbreviate the resolution of a
case.
Second Issue: The Arbitration Clause

The CA also erred when it held that the arbitration clause was not binding on respondent. We reiterate
that the crux of this case is whether the trial court committed grave abuse of discretion in denying the
aforecited Motion. There was neither need nor reason to rule on the applicability of the arbitration clause.

Be that as it may, we find the CAs reasoning on this point faulty. Citing Pan Malayan Insurance
Corporation v. CA,[17] it ruled that the right of respondent insurance company as subrogee was not based
on the charter party or any other contract; rather, it accrued upon the payment of the insurance claim by
private respondent to the insured consignee. There was nothing in Pan Malayan, however, that prohibited
the applicability of the arbitration clause to the subrogee. That case merely discussed, inter alia, the
accrual of the right of subrogation and the legal basis therefor.[18] This issue is completely different from
that of the consequences of such subrogation; that is, the rights that the insurer acquires from the insured
upon payment of the indemnity.

WHEREFORE, the Petition is GRANTED and the appealed Decision is hereby REVERSED. The case
is REMANDED to the trial court for preliminary hearing on petitioners affirmative defense. No costs.

SO ORDERED.
4.

THIRD DIVISION

G.R. No. 96283 February 25, 1992

CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG
KUO-CHANG, HUANG AN-CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE 218
B. AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and
VIRGILIO M. DEL ROSARIO, petitioners,

vs.

COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail Court of
Makati [Branch 57]) and ROBLECOR PHILIPPINES, INC., respondents.

ROMERO, J.:

This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July 31, 1990 and
August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-1335.
Respondent Court of Appeals affirmed the ruling of the trial court that herein petitioners, after submitting
themselves for arbitration and agreeing to the terms and conditions thereof, providing that the arbitration
award shall be final and unappealable, are precluded from seeking judicial review of subject arbitration
award.

It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for brevity) and
private respondent Roblecor Philippines, Inc. (Roblecor for short) forged a construction
agreement 1 whereby respondent contractor committed to construct and finish on December 31, 1989,
petitioner corporation's industrial/factory complex in Tanawan, Tanza, Cavite for and in consideration of
P42,000,000.00. In the event of disputes arising from the performance of subject contract, it was
stipulated therein that the issue(s) shall be submitted for resolution before a single arbitrator chosen by
both parties.

Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2) other
ancillary contracts, to wit: one dated June 23, 1989, for the construction of a dormitory and support
facilities with a contract price of P3,875,285.00, to be completed on or before October 31, 1989; 2 and the
other dated August 12, 1989, for the installation of electrical, water and hydrant systems at the plant site,
commanding a price of P12.1 million and requiring completion thereof one month after civil works have
been finished. 3

However, respondent Roblecor failed to complete the work despite the extension of time allowed it by
Chung Fu. Subsequently, the latter had to take over the construction when it had become evident that
Roblecor was not in a position to fulfill its obligation.

Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of P2,370,179.23,

Roblecor on May 18, 1990, filed a petition for Compulsory Arbitration with prayer for Temporary
Restraining Order before respondent Regional Trial Court, pursuant to the arbitration clause in the
construction agreement. Chung Fu moved to dismiss the petition and further prayed for the quashing of
the restraining order.

Subsequent negotiations between the parties eventually led to the formulation of an arbitration agreement
which, among others, provides:
2. The parties mutually agree that the arbitration shall proceed in accordance with the following terms and
conditions: —

xxx xxx xxx

d. The parties mutually agree that they will abide by the decision of the arbitrator including any amount
that may be awarded to either party as compensation, consequential damage and/or interest thereon;

e. The parties mutually agree that the decision of the arbitrator shall be final and unappealable.
Therefore, there shall be no further judicial recourse if either party disagrees with the whole or any part 219
of the arbitrator's award.

f. As an exception to sub-paragraph (e) above, the parties mutually agree that either party is entitled to
seek judicial assistance for purposes of enforcing the arbitrator's award;

xxx xxx xxx 4

(Emphasis supplied)

Respondent Regional Trial Court approved the arbitration agreement thru its Order of May 30, 1990.
Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.

On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent contractor, the
sum of P16,108,801.00. He further declared the award as final and unappealable, pursuant to the
Arbitration Agreement precluding judicial review of the award.

Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung Fu moved
to remand the case for further hearing and asked for a reconsideration of the judgment award claiming
that Arbitrator Asuncion committed twelve (12) instances of grave error by disregarding the provisions of
the parties' contract.

Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek reconsideration
therefrom but to no avail. The trial court granted Roblecor's Motion for Confirmation of Award and
accordingly, entered judgment in conformity therewith. Moreover, it granted the motion for the issuance
of a writ of execution filed by respondent.

Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On October
22,1990 the assailed resolution was issued. The respondent appellate court concurred with the findings
and conclusions of respondent trial court resolving that Chung Fu and its officers, as signatories to the
Arbitration Agreement are bound to observe the stipulations thereof providing for the finality of the
award and precluding any appeal therefrom.

A motion for reconsideration of said resolution was filed by petitioner, but it was similarly denied by
respondent Court of Appeals thru its questioned resolution of December 3, 1990.

Hence, the instant petition anchored on the following grounds:

First

Respondents Court of Appeals and trial Judge gravely abused their discretion and/or exceeded their
jurisdiction, as well as denied due process and substantial justice to petitioners, — (a) by refusing to
exercise their judicial authority and legal duty to review the arbitration award, and (b) by declaring that
petitioners are estopped from questioning the arbitration award allegedly in view of the stipulations in the
parties' arbitration agreement that "the decision of the arbitrator shall be final and unappealable" and that
"there shall be no further judicial recourse if either party disagrees with the whole or any part of the
arbitrator's award."

Second
Respondent Court of Appeals and trial Judge gravely abused their discretion and/or exceeded their
jurisdiction, as well as denied due process and substantial justice to petitioner, by not vacating and
annulling the award dated 30 June 1990 of the Arbitrator, on the ground that the Arbitrator grossly
departed from the terms of the parties' contracts and misapplied the law, and thereby exceeded the
authority and power delegated to him. (Rollo, p. 17)

Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of dispute
settlement.

Because conflict is inherent in human society, much effort has been expended by men and institutions in 220

devising ways of resolving the same. With the progress of civilization, physical combat has been ruled out
and instead, more specific means have been evolved, such as recourse to the good offices of a
disinterested third party, whether this be a court or a private individual or individuals.

Legal history discloses that "the early judges called upon to solve private conflicts were primarily the
arbiters, persons not specially trained but in whose morality, probity and good sense the parties in conflict
reposed full trust. Thus, in Republican Rome, arbiter and judge (judex) were synonymous. The
magistrate or praetor, after noting down the conflicting claims of litigants, and clarifying the issues,
referred them for decision to a private person designated by the parties, by common agreement, or
selected by them from an apposite listing (the album judicium) or else by having the arbiter chosen by lot.
The judges proper, as specially trained state officials endowed with own power and jurisdiction, and
taking cognizance of litigations from beginning to end, only appeared under the Empire, by the so-
called cognitio extra ordinem." 5

Such means of referring a dispute to a third party has also long been an accepted alternative to litigation at
common law. 6

Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines, it was
nonetheless recognized in the Spanish Civil Code; specifically, the provisions on compromises made
applicable to arbitrations under Articles 1820 and 1821.7 Although said provisions were repealed by
implication with the repeal of the Spanish Law of Civil Procedure, 8 these and additional ones were
reinstated in the present Civil Code. 9

Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103 (1936) provided for compulsory arbitration as the state policy
to be administered by the Court of Industrial Relations, in time such a modality gave way to voluntary
arbitration. While not completely supplanting compulsory arbitration which until today is practiced by
government officials, the Industrial Peace Act which was passed in 1953 as Republic Act No. 875,
favored the policy of free collective bargaining, in general, and resort to grievance procedure, in
particular, as the preferred mode of settling disputes in industry. It was accepted and enunciated more
explicitly in the Labor Code, which was passed on November 1, 1974 as Presidential Decree No. 442,
with the amendments later introduced by Republic Act No. 6715 (1989).

Whether utilized in business transactions or in employer-employee relations, arbitration was gaining wide
acceptance. A consensual process, it was preferred to orders imposed by government upon the disputants.
Moreover, court litigations tended to be time-consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of evidence.

As early as the 1920's, this Court declared:

In the Philippines fortunately, the attitude of the courts toward arbitration agreements is slowly
crystallizing into definite and workable form. . . . The rule now is that unless the agreement is such as
absolutely to close the doors of the courts against the parties, which agreement would be void, the courts
will look with favor upon such amicable arrangements and will only with great reluctance interfere to
anticipate or nullify the action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged when
Republic Act No. 876 (1953), otherwise known as the Arbitration Law, was passed. "Said Act was
obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that "the
provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force." 11

In recognition of the pressing need for an arbitral machinery for the early and expeditious settlement of
disputes in the construction industry, a Construction Industry Arbitration Commission (CIAC) was
created by Executive Order No. 1008, enacted on February 4, 1985.
221

In practice nowadays, absent an agreement of the parties to resolve their disputes via a particular mode, it
is the regular courts that remain the fora to resolve such matters. However, the parties may opt for
recourse to third parties, exercising their basic freedom to "establish such stipulation, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy." 12 In such a case, resort to the arbitration process may be spelled out by
them in a contract in anticipation of disputes that may arise between them. Or this may be stipulated in a
submission agreement when they are actually confronted by a dispute. Whatever be the case, such
recourse to an extrajudicial means of settlement is not intended to completely deprive the courts of
jurisdiction. In fact, the early cases on arbitration carefully spelled out the prevailing doctrine at the time,
thus: ". . . a clause in a contract providing that all matters in dispute between the parties shall be referred
to arbitrators and to them alone is contrary to public policy and cannot oust the courts of Jurisdiction." 13

But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing dispute to
one is valid. Being part of a contract between the parties, it is binding and enforceable in court in case one
of them neglects, fails or refuses to arbitrate. Going a step further, in the event that they declare their
intention to refer their differences to arbitration first before taking court action, this constitutes a condition
precedent, such that where a suit has been instituted prematurely, the court shall suspend the same and the
parties shall be directed forthwith to proceed to arbitration. 14

A court action may likewise be proven where the arbitrator has not been selected by the parties. 15

Under present law, may the parties who agree to submit their disputes to arbitration further provide that
the arbitrators' award shall be final, unappealable and executory?

Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:

Any stipulation that the arbitrators' award or decision shall be final is valid, without prejudice to Articles
2038, 2039 and 2040.

Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be final and
inappealable except on questions of law which shall be appealable to the Supreme Court." 16

Under the original Labor Code, voluntary arbitration awards or decisions were final, unappealable and
executory. "However, voluntary arbitration awards or decisions on money claims, involving an amount
exceeding One Hundred Thousand Pesos (P100,000.00) or forty-percent (40%) of the paid-up capital of
the respondent employer, whichever is lower, maybe appealed to the National Labor Relations
Commission on any of the following grounds: (a) abuse of discretion; and (b) gross incompetence." 17 It is
to be noted that the appeal in the instances cited were to be made to the National Labor Relations
Commission and not to the courts.

With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary arbitrator is
now mandated to render an award or decision within twenty (20) calendar days from the date of
submission of the dispute and such decision shall be final and executory after ten (10) calendar days from
receipt of the copy of the award or decision by the parties. 18

Where the parties agree that the decision of the arbitrator shall be final and unappealable as in the instant
case, the pivotal inquiry is whether subject arbitration award is indeed beyond the ambit of the court's
power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators' award is not absolute and without exceptions. Where the conditions described in Articles
2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the arbitrators' award
may be annulled or rescinded. 19 Additionally, under Sections 24 and 25 of the Arbitration Law, there are
grounds for vacating, modifying or rescinding an arbitrator's award. 20 Thus, if and when the factual
circumstances referred to in the above-cited provisions are present, judicial review of the award is
properly warranted.

What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to determine
222
whether it is in accordance with law or within the scope of his authority? How may the power of judicial
review be invoked?

This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to be
borne in mind, however, that this action will lie only where a grave abuse of discretion or an act without
or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown. For "the writ
of certiorari is an extra-ordinary remedy and that certiorari jurisdiction is not to be equated with appellate
jurisdiction. In a special civil action of certiorari, the Court will not engage in a review of the facts found
nor even of the law as interpreted or applied by the arbitrator unless the supposed errors of fact or of law
are so patent and gross and prejudicial as to amount to a grave abuse of discretion or an exces de
pouvoir on the part of the arbitrator." 21

Even decisions of administrative agencies which are declared "final" by law are not exempt from judicial
review when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al. v. Flerida Ruth P.
Romero, et al., 22 this Court had occasion to rule that:

. . . Inspite of statutory provisions making "final" the decisions of certain administrative agencies, we have
taken cognizance of petitions questioning these decisions where want of jurisdiction, grave abuse of
discretion, violation of due process, denial of substantial justice or erroneous interpretation of the
lawwere brought to our attention . . . 23 (Emphasis ours).

It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity. 24 It stands to reason, therefore, that their decisions should not be beyond the scope of the power
of judicial review of this Court.

In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which allege
error on the part of the arbitrator in granting compensation for various items which apparently are
disputed by said petitioners:

1. The Honorable Arbitrator committed grave error in failing to apply the terms and conditions of the
Construction Agreement, Dormitory Contract and Electrical Contract, and in using instead the "practices"
in the construction industry;

2. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss of
productivity due to adverse weather conditions;

3. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss
due to delayed payment of progress billings;

4. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss of
productivity due to the cement crisis;

5. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for losses
allegedly sustained on account of the failed coup d'état;

6. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the
alleged unpaid billings of Chung Fu;
7. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the
alleged extended overhead expenses;

8. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing
expenses for change order for site development outside the area of responsibility of Roblecor;

9. The Honorable Arbitrator committed grave error in granting to Roblecor the cost of warehouse No. 2;

10. The Honorable Arbitrator committed grave error in granting to Roblecor extra compensation for
airduct change in dimension; 223

11. The Honorable Arbitrator committed grave error in granting to Roblecor extra compensation for
airduct plastering; and

12. The Honorable Arbitrator committed grave error in awarding to Roblecor attorney's fees.

After closely studying the list of errors, as well as petitioners' discussion of the same in their Motion to
Remand Case For Further Hearing and Reconsideration and Opposition to Motion for Confirmation of
Award, we find that petitioners have amply made out a case where the voluntary arbitrator failed to apply
the terms and provisions of the Construction Agreement which forms part of the law applicable as
between the parties, thus committing a grave abuse of discretion. Furthermore, in granting unjustified
extra compensation to respondent for several items, he exceeded his powers — all of which would have
constituted ground for vacating the award under Section 24 (d) of the Arbitration Law.

But the respondent trial court's refusal to look into the merits of the case, despite prima facie showing of
the existence of grounds warranting judicial review, effectively deprived petitioners of their opportunity
to prove or substantiate their allegations. In so doing, the trial court itself committed grave abuse of
discretion. Likewise, the appellate court, in not giving due course to the petition, committed grave abuse
of discretion. Respondent courts should not shirk from exercising their power to review, where under the
applicable laws and jurisprudence, such power may be rightfully exercised; more so where the objections
raised against an arbitration award may properly constitute grounds for annulling, vacating or modifying
said award under the laws on arbitration.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated October 22,
1990 and December 3, 1990 as well as the Orders of respondent Regional Trial Court dated July 31, 1990
and August 23, 1990, including the writ of execution issued pursuant thereto, are hereby SET ASIDE.
Accordingly, this case is REMANDED to the court of origin for further hearing on this matter. All
incidents arising therefrom are reverted to the status quo ante until such time as the trial court shall have
passed upon the merits of this case. No costs.

SO ORDERED.

3.

SECOND DIVISION

G.R. No. 91228. March 22, 1993.

PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC, INC.,
respondents.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND
DELIVERY. — We agree with the court a quo that the sales contract is comprehensive enough to include
claims for damages arising from carriage and delivery of the goods. As a general rule, the seller has the
obligation to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to
deliver the same.

2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER

PARTIES, CONSTRUED. — American jurisprudence defines charter party as a contract by which an
entire ship or some principal part thereof is let by the owner to another person for a specified time or use.
224
Charter or charter parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.

3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. — Under the demise or bareboat
charter of the vessel, the charterer will generally be considered as owner for the voyage or service
stipulated. The charterer mans the vessel with his own people and becomes, in effect, the owner pro hac
vice, subject to liability to others for damages caused by negligence. To create a demise the owner of a
vessel must completely and exclusively relinquish possession, anything short of such a complete transfer
is a contract of affreightment (time or voyage charter party) or not a charter party at all.

4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. — A contract of

affreightment is in which the owner of the vessel leases part or all of its space to haul goods for others. It
is a contract for a special service to be rendered by the owner of the vessel and under such contract the
general owner retains the possession, command and navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in return for his payment of the charter hire. If the charter is a
contract of affreightment, which leaves the general owner in possession of the ship as owner for the
voyage, the rights, responsibilities of ownership rest on the owner and the charterer is usually free from
liability to third persons in respect of the ship.

5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A
VESSEL. — Responsibility to third persons for goods shipped on board a vessel follows the vessel's
possession and employment; and if possession is transferred to the charterer by virtue of a demise, the
charterer, and not the owner, is liable as carrier on the contract of affreightment made by himself or by the
master with third persons, and is answerable for loss, damage or non-delivery of goods received for
transportation. An owner who retains possession of the ship, though the hold is the property of the
charterer, remains liable as carrier and must answer for any breach of duty as to the care, loading or
unloading of the cargo.

6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED
AND RESPECTED. — Whether the liability of respondent should be based on the same contract or that
of the bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales
contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot escape
from his obligation under the arbitration clause as stated therein. Arbitration has been held valid and
constitutional. Even before the enactment of Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. The rule now is that unless the agreement is such as absolutely
to close the doors of the courts against the parties, which agreement would be void, the courts will look
with favor upon such amicable arrangements and will only interfere with great reluctance to anticipate or
nullify the action of the arbitrator. As pointed out in the case of Mindanao Portland Cement Corp. v.
McDough Construction Company of Florida 18 wherein the plaintiff sued defendant for damages arising
from a contract, the Court said: "Since there obtains herein a written provision for arbitration as well as
failure on respondent's part to comply therewith, the court a quo rightly ordered the parties to proceed to
their arbitration in accordance with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's
arguments touching upon the merits of the dispute are improperly raised herein. They should be addressed
to the arbitrators. This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The
duty of the court in this case is not to resolve the merits of the parties' claims but only to determine if they
should proceed to arbitration or not. And although it has been ruled that a privolous or patently baseless
claim should not be ordered to arbitration it is also recognized that the mere fact that a defense exist
against a claim does not make it frivolous or baseless."
7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED
THEREOF, PART OF THE RECORD. — Petitioner contend that the arbitration provision in the bills of
lading should not have been discussed as an issue in the decision of the Court of Appeals since it was not
raised as a special or affirmative defense. The three bills of lading were attached to the complaint as
Annexes "A," "B," and "C," and are therefore parts thereof and may be considered as evidence although
not introduced as such. Hence, it was then proper for the court a quo to discuss the contents of the bills of
lading, having been made part of the record.

DECISION
225

NOCON, J p:

This is a special civil action for certiorari and prohibition to annul and set aside the Decision of the
respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial court and
dismissing petitioner's compliant in Civil Case No. 89-47403, entitled Puromines, Inc. v. Maritime
Factors, Inc. and Philipp Brothers Oceanic, Inc.

Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines for
brevity) and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with private
respondents Philipp Brothers Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales Contract No.
S151.8.01018 provided, among others an arbitration clause which states, thus:

"9. Arbitration

"Any disputes arising under this contract shall be settled by arbitration in London in accordance with the
Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is to appoint an
Arbitrator, and should they be unable to agree, the decision of an Umpire appointed by them to be final.
The Arbitrators and Umpire are all to be commercial men and resident in London. This submission may
be made a rule of the High Court of Justice in England by either party." 2

On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny, USSR a
shipment of 15,500 metric tons prilled Urea in bulk complete and in good order and condition for
transport to Iloilo and Manila, to be delivered to petitioner. Three bills of lading were issued by the ship-
agent in the Philippines, Maritime Factors Inc., namely: Bill of Lading No. dated May 12, 1988 covering
10,000 metric tons for discharge Manila; Bill of Lading No. 2 of even date covering 4,000 metric tons for
unloading in Iloilo City; and Bill of Lading No. 3, also dated May 12, 1988, covering 1,500 metric tons
likewise for discharged in Manila

The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good order
and condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were discharged in Manila
in bad order and condition, caked, hardened and lumpy, discolored and contaminated with rust and dirt.
Damages were valued at P683, 056. 29 including additional discharging expenses.

Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of carriage against
Maritime Factors Inc. (which was not included as respondent in this petition) as ship-agent in the
Philippines for the owners of the vessel MV "Liliana Dimitrova," while private respondent, Philipp
Brothers Oceanic Inc., was impleaded as charterer of the said vessel and proper party to accord petitioner
complete relief. Maritime Factors, Inc. filed its Answer 5 to the complaint, while private respondent filed
a motion to dismiss, dated February 9, 1989, on the grounds that the complaint states no cause of action;
that it was prematurely filed; and that petitioner should comply with the arbitration clause in the sales
contract. 6

The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration clause
inasmuch as the cause of action did not arise from a violation of the terms of the sales contract but rather
for claims of cargo damages where there is no arbitration agreement. On April 26, 1989, the trial court
denied respondent's motion to dismiss in this wise:

"The sales contract in question states in part:

'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)

"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the cause of
action of the complaint arose from a breach of contract of carriage by the vessel chartered by the
defendant Philipp Brothers Oceanic, Inc. Thus, the aforementioned arbitration clause cannot apply to the
dispute in the present action which concerns plaintiff's claim for cargo loss/damage arising from breach of
contract of carriage.

"That the defendant is not the ship owner or common carrier and therefore plaintiff does not have legal
right against it since every action must be brought against the real party in interest has no merit either for 226

by the allegations in the complaint the defendant herein has been impleaded as charterer of the vessel,
hence, a proper party." 7

Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The appellate court
found that the arbitration provision in the sales contract and/or the bills of lading is applicable in the
present case. Said the court:

"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to include the
claim for damages arising from the carriage and delivery of the goods subject-matter thereof.

"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state, in part,
'any dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime Arbitration
Commission at the USSR Chamber of Commerce and Industry, 6 Kuibyshevskaia Str., Moscow, USSR,
in accordance with the rules of procedure of said commission.'

Considering that the private respondent was one of the signatories to the sales contract . . . all parties are
obliged o respect the terms and conditions of the said sales contract, including the provision thereof on
'arbitration.' "

Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this contract" in the
arbitration clause of the sales contract covers a cargo claim against the vessel (owner and/or charterers)
for breach of contract of carriage.

Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV 'Liliana
Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner further alleged that
the caking and hardening, wetting and melting, and contamination by rust and dirt of the damaged
portions of the shipment were due to the improper ventilation and inadequate storage facilities of the
vessel; that the wetting of the cargo was attributable to the failure of the crew to close the hatches before
and when it rained while the shipment was being unloaded in the Port of Manila; and that as a direct and
natural consequence of the unseaworthiness and negligence of the vessel (sic), petitioner suffered
damages in the total amount of P683, 056.29 Philippine currency." 8 (Emphasis supplied)

Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of the
complaint arose from breach of contract of carriage by the vessel that was chartered by defendant Philipp
Brothers." 9

In the present petition, petitioner argues that the sales contract does not include the contract of carriage
which is a different contract entered into by the carrier with the cargo owners. That it was an error for the
respondent court to touch upon the arbitration provision of the bills lading in its decision inasmuch as the
same was not raised as an issue by private respondent who was not a party in the bills of lading (emphasis
Ours). Petitioner contradicts itself.

We agree with the court a quo that the sales contract is comprehensive enough to include claims for
damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation to
transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the same.
Art. 1523 of the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send the goods
to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases
provided for in article 1503, first, second and third paragraphs, or unless a contrary intent appear.

"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on behalf of
the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of
the case. If the seller omit so to do, and the goods are lost or damaged in course of transit, the buyer may
decline to treat the delivery to the carrier as a delivery to himself,, or may hold the seller responsible in
227
damages."

xxx xxx xxx

The disputed sales contact provides for conditions relative to the delivery of goods, such as date of
shipment, demurrage, weight as determined by the bill of lading at load port and more particularly the
following provisions:

"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and approximately
15,000 metric tons to Makati Agro. However, Sellers to have right to ship material as partial shipment or
co-shipment in addition to above. In the event of co-shipment to a third party within Philippines same to
be discussed with and acceptable to both Puromines and Makati Agro.

"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first discharge
port and final survey at last discharge port. Surveyors results to be binding and final. In the event draft
survey results show a quantity less than the combined Bills of Lading quantity for both Puromines and
Makati Agro, Sellers to refund the difference. In the event that draft survey results show a quantity in
excess of combined Bills of Lading of quantity of both Puromines and Makati Agro then Buyers to refund
the difference.

"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability to
separate cargo or to deliver cargo separately or to deliver minimum/maximum quantities stated on
individual Bills of Lading. At each port vessel is to discharge in accordance with Buyers local
requirements and it is Buyer's responsibility to separate individual quantities required by each of them at
each port during or after discharged."

As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo from the
bill of lading which is the contract of affreightment together with the sales contract. Consequently, the
(petitioner) is bound by the provisions and terms of said bill of lading and of the arbitration clause
incorporated in the sales contract."

Assuming arguendo that the liability of respondent is not based on the sales contract, but rather on the
contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would, therefore, be
material to show what kind of charter party the respondent had with the shipowner to determine
respondent's liability.

American jurisprudence defines charter party as a contract by which an entire ship or some principal part
thereof is let by the owner to another person for a specified time or use. 10 Charter or charter parties are
of two kinds. Charter of demise or bareboat and contracts of affreightment.

Under the demise or bareboat charter of the vessel, the charterer will generally be considered as owner for
the voyage or service stipulated. The charterer mans the vessel with his own people and becomes, in
effect, the owner pro hac vice, subject to liability to others for damages caused by negligence. 11 To
create a demise the owner of a vessel must completely and exclusively relinquish possession, anything
short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a
charter party at all.

On the other hand, a contract of affreightment is in which the owner of the vessel leases part or all of its
space to haul goods for others. It is a contract for a special service to be rendered by the owner of the
vessel 12 and under such contract the general owner retains the possession, command and navigation of
the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of
the charter hire. 13 If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on the owner
and the charterer is usually free from liability to third persons in respect of the ship. 14

Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and
employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and not
the owner, is liable as carrier on the contract of affreightment made by himself or by the master with third
228
persons, and is answerable for loss, damage or non-delivery of goods received for transportation. An
owner who retains possession of the ship, though the hold is the property of the charterer, remains liable
as carrier and must answer for any breach of duty as to the care, loading or unloading of the cargo. 15

Assuming that in the present case, the charter party is a demise or bareboat charter, then Philipp Brothers
is liable to Puromines, Inc., subject to the terms and conditions of the sales contract. On the other hand, if
the contract between respondent and the owner of the vessel MV "Liliana Dimitrova" was merely that of
affreightment, then it cannot be held liable for the damages caused by the breach of contract of carriage,
the evidence of which is the bills of lading

In any case, whether the liability of respondent should be based on the same contract or that of the bill of
lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales contract
and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot escape from
his obligation under the arbitration clause as stated therein.

Neither can petitioner contend that the arbitration provision in the bills of lading should not have been
discussed as an issue in the decision of the Court of Appeals since it was not raised as a special or
affirmative defense. The three bills of lading were attached to the complaint as Annexes "A," "B," and
"C," and are therefore parts thereof and may be considered as evidence although not introduced as such.
16 Hence, it was then proper for the court a quo to discuss the contents of the bills of lading, having been
made part of the record.

Going back to the main subject of this case, arbitration has been held valid and constitutional. Even
before the enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of
the courts against the parties, which agreement would be void, the courts will look with favor upon such
amicable arrangements and will only interfere with great reluctance to anticipate or nullify the action of
the arbitrator. 17

As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction Company of
Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said:

"Since there obtains herein a written provision for arbitration as well as failure on respondent's part to
comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration in accordance
with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the
merits of the dispute are improperly raised herein. They should be addressed to the arbitrators. This
proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in
this case is not to resolve the merits of the parties' claims but only to determine if they should proceed to
arbitration or not. And although it has been ruled that a frivolous or patently baseless claim should not be
ordered to arbitration it is also recognized that the mere fact that a defense exist against a claim does not
make it frivolous or baseless." 19

In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the parties to
submit their disputes to arbitration and We held as follows:

"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended complaint are
based upon the supposed violations committed by the defendants of the 'Contract of Construction of a
Building' and that 'the provisions of paragraph 15 hereof leave a very little room for doubt that the said
causes of action are embraced within the phrase 'any and all questions, disputes or differences between
the parties hereto relative to the construction of the building,' which must be determined by arbitration of
two persons and such determination by the arbitrators shall be 'final, conclusive and binding upon both
parties unless they to court, in which the case the determination by arbitration is a condition precedent 'for
taking any court action."

xxx xxx xxx

"We hold that the terms of paragraph 15 clearly express the intention of the parties that all disputes
between them should first be arbitrated before court action can be taken by the aggrieved party." 21 229

Premises considered, We uphold the validity and applicability of the arbitration clause as stated in Sales
Contract No. S151.8.01018 to the present dispute.

WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.

SO ORDERED.

2.

FIRST DIVISION

G.R. No. 199650 June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,

vs.
UTILITY ASSURANCE CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

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

The Facts

On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo
Han Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue
Trading and Services, entered into a Construction Agreement3 whereby the latter undertook to build the
former's 72-room condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf
& Resort in Boracay Island, Malay, Aklan. The project, costing ₱42,000,000.00, 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 ₱8,400,000.00 down
payment was fully paid on January 14, 2008.4 Payment of the balance of the contract price will be based
on actual work finished within 15 days from receipt of the monthly progress billings. Per the agreed work
schedule, the completion date of the project was December 2008.5 Mabuhay also submitted the required
Performance Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the amount
equivalent to 20% down payment or ₱8.4 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
₱15,979,472.03 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%) 230

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 (₱1,049,364.45)

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 ₱1,563,553.34 amount
creditable to SSB after deducting the withholding tax is ₱1,538,424.84

4) The unrecouped amount of the down payment is ₱2,379,441.53 after deducting the cost of materials on
site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed
is ₱27,880,419.52.9 (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 ₱8,980,575.89 as liquidated damages and ₱2,379,441.53 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) ₱4,469,969.90, 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) ₱2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum 231
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 ₱8.4 million.

2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, 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 ₱100,000.00 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 ₱8.4 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 232
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
233
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
234
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.

235
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 ₱27,880,419.52. 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.
236
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
237
(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations under
the Agreement.

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

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER
may after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site
and expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the
CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also without
diminishing or affecting the rights and powers conferred on the OWNER by this Agreement and the
OWNER may himself complete the work or may employ any other contractor to complete the work. If the
OWNER shall enter and expel the CONTRACTOR under this clause, the OWNER shall be entitled to
confiscate the performance bond of the CONTRACTOR to compensate for all kinds of damages the
OWNER may suffer. All expenses incurred to finish the Project shall be charged to the CONTRACTOR
and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of
execution, damages for the delay in the completion, if any, and all; other expenses incurred by the
OWNER have been ascertained which amount shall be deducted from any money due to the
CONTRACTOR on account of this Agreement. The CONTRACTOR will not be compensated for any
loss of profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity,
additional financing cost or overhead or opportunity losses related to the unaccomplished portions of the
work.40 (Emphasis supplied.)

As already demonstrated, the contractor’s default in this case pertains to his failure to substantially
perform the work on account of tremendous delays in executing the scheduled work activities. Where a
party to a building construction contract fails to comply with the duty imposed by the terms of the
contract, a breach results for which an action may be maintained to recover the damages sustained
thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in
accordance with the terms of the contract.41

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

Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the
terms of the surety bond it issued, its liability is limited to the performance by said contractor to the extent
equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the project by
Mabunay, its liability was extinguished because the value of such accomplishment already exceeded the
sum equivalent to 20% down payment (₱8.4 million).

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

The pertinent portions of the Performance Bond provide: 238

The conditions of this obligation are as follows:

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

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

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case
exceed the sum of ₱8,400,000.00 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

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

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

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

Petitioner’s liability under the suretyship contract is different from its liability under the
law.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.

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:
239
1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the
Performance Bond, ₱8,400,000.00, 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 ₱100,000.00 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.

1.

SECOND DIVISION

G.R. No. 198075 September 4, 2013

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

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

DECISION

PEREZ, J.:

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

The facts:

The Donation

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

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

The Lease and the Amended Deed of Donation

One of the conditions of the donation required the respondent to lease the subject land back to FKI under
terms specified in their Deed of Donation.9 With the respondent’s acceptance of the donation, a lease
agreement between FKI and the respondent was, therefore, effectively incorporated in the Deed of
Donation.
240
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 ₱40,126.00 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 ₱4,000,000 for the
first year up to ₱4,900,000 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
₱4,200,000.19 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 ₱3,000,000 for the
first year up to ₱3,900,000for the fifth year.21Notably, 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) 241

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 ₱8,394,000.00, exclusive of interests,
petitioner offered to pay only ₱80,502.79,35 in accordance with the rental provisions of the Deed of
Donation and Amended Deed of Donation.36Respondent 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
242
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 complaint 42 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- 243
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 (₱9,362,436.00), 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 ₱100,000.00 plus appearance fee of ₱3,000.00;

(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. 244

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 245

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,
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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 247

that the dispute is covered by an arbitration agreement.

A part from other submissions, the movant shall attach to his motion an authentic copy of the arbitration
agreement.

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

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

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

In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration before
the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with
Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in the 2005 Lease
Contract96 and, more significantly, of its desire to have the same enforced in this case. 97 This act of
petitioner is enough valid invocation of his right to arbitrate. Fourth . The fact that the petitioner and
respondent already under went through JDR proceedings before the RTC, will not make the subsequent
conduct of arbitration between the parties unnecessary or circuitous. The JDR system is substantially
different from arbitration proceedings.

The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation which
entails the submission of a dispute before a " JDR judge " who shall merely " facilitate settlement "
between the parties in conflict or make a " non-binding evaluation or assessment of the chances of each
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."100Arbitration 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
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Agreement in this case, We shall now proceed with the discussion of its legal effects.

Legal Effect of the Application of the

Arbitration Clause

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

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

R.A. No. 9285

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

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

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

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

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

Civil Case No. CV 09-0346

This Court notes that, on 30 September 2009, petitioner filed with the RTC of 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
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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.

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

No costs.

SO ORDERED.