G.R. No.
204689 January 21, 2015 On July 13, 2010, the Regional Trial Court rendered a judgment in favor of the Spouses Stroem. The
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
SPOUSES RUNE and LEA STROEM, Respondents.
LEONEN, J.:
For resolution is a Petition for Review1 under Rule 45 of the Rules of Court assailing the
Decision2 dated November 20, 2012 of the Court of Appeals in CA-G.R. CV No. 96017. The Court of
Appeals ;iffirmed the Decision3 of the Regional Trial Court of Makati, Branch 133 in Civil Case No. 02-
1108 for collection of a sum of money.
This case involves the proper invocation of the Construction Industry Arbitration Committee's (CIAC)
jurisdiction through an arbitration clause in a construction contract. The main issue here is whether the
dispute — liability of a surety under a performance bond — is connected to a construction contract and,
therefore, falls under the exclusive jurisdiction of the CIAC.
Spouses Rune and Lea Stroem (Spouses Stroem) entered into an Owners-Contractor Agreement4 with
Asis-Leif & Company, Inc. (Asis-Leif) for the construction of a two-storey house on the lot owned by
Spouses Stroem. The lot was located at Lot 4A, Block 24, Don Celso Tuason Street, Valley Golf
Subdivision, Barangay Mayamot, Antipolo, Rizal.5
On November 15, 1999, pursuant to the agreement, Asis-Leif secured Performance Bond No.
LP/G(13)83056 in the amount of ₱4,500,000.00 from Stronghold Insurance Company, Inc.
(Stronghold).6 Stronghold and Asis-Leif, through Ms. Ma. Cynthia Asis-Leif, bound themselves jointly
and severally to pay the Spouses Stroem the agreed amount in the event that the construction project is
not completed.7
Asis-Leif failed to finish the projecton time despite repeated demands of the Spouses Stroem. 8
Spouses Stroem subsequently rescinded the agreement.9 They then hired an independent appraiser to
evaluate the progress of the construction project. 10
Appraiser Asian Appraisal Company, Inc.’s evaluation resulted in the following percentage of
completion: 47.53% of the residential building, 65.62% of the garage, and 13.32% of the swimming
pool, fence, gate, and land development.11
On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting that the company settle its obligations
withthe Spouses Stroem. No response was received from Asis-Leif.12
On September 12, 2002, the Spouses Stroem filed a Complaint (with Prayer for Preliminary
Attachment)13 for breach of contract and for sum of money with a claim for damages against Asis-Leif,
Ms. Cynthia Asis-Leif, and Stronghold.14 Only Stronghold was served summons. Ms. Cynthia Asis-Leif
allegedly absconded and moved out of the country.15
trial court ordered Stronghold to pay the Spouses Stroem ₱4,500,000.00 with 6% legal interest from the
time of first demand.16 The dispositive portion of the trial court Decision reads:
WHEREFORE, finding plaintiffs’ cause of action to be sufficiently established being supported by
evidence on records, judgement is hereby rendered in favor of the plaintiff spouses Rune and Lea
Stroem and against the defendant Stronghold Insurance Company Incorporated ordering the latter
topay the plaintiff the sums of:
1) Php4,500,000.00 with six (6%) percent legal interest from the time of first demand and
interest due shall earn legal interest from the time of judicial demand until fully paid.
2) Php35,000.00 by way of attorney’s fees and other litigation expenses.
Defendant is further ordered topay the costs of this suit.
SO ORDERED.17
Both Stronghold and the Spouses Stroem appealed to the Court of Appeals. 18
The Court of Appeals affirmed with modification the trial court’s Decision. It increased the amount of
attorney’s fees to ₱50,000.00.19
The dispositive portion of the Court of Appeals Decision reads:
WHEREFORE,the appeal of Stronghold Company, Inc[.] is DISMISSED, while the appeal of spouses
Rune and Lea Stroem is PARTLY GRANTED. The November 27, 2009 Decision of the Regional Trial
Court of Makati City is AFFIRMED with MODIFICATION that the award of attorney’s fees is increased
to ₱50,000.00
SO ORDERED.20
On March 20, 2013, this court required the Spouses Stroem to submit their Comment on the
Petition.21 We noted the Spouses Stroem’s Comment on July 31, 2013.22 We also required Stronghold
to file its Reply to the Comment,23 which was noted on December 9, 2013.24
Stronghold argues that the trial court did not acquire jurisdiction over the case and, therefore, the Court
of Appeals committed reversible error when it upheld the Decision of the Regional Trial Court.25 The
lower courts should have dismissed the case in viewof the arbitration clause in the agreement and
considering that "[Republic Act No. 876] explicitly confines the court’s authority only to pass upon the
issue of whether there is [an] agreement . . . providing for arbitration. In the affirmative, the statute
ordains that the court shall issue an order ‘summarily directing the parties to proceed with the arbitration
in accordance with the terms thereof.’"26 Moreover, "the stipulations in said Agreement are part and
parcel of the conditions in the bond. Were it not for such stipulations in said agreement, [Stronghold]
would not have agreed to issue a bond in favor of the Spouses Stroem. The parties tothe bond are
ALB/Ms. Asis-[L]eif, Spouses Stroem and [Stronghold] suchthat ALB/Ms. Asis-[L]eif never ceased to be
a party to the surety agreement."27
In any case, Stronghold’s liability under the performance bond is limited only to additional costs for the
completion of the project.28 In addition, the Court of Appeals erred inholding that Stronghold changed its
theory with regard to the notice requirement29 and in modifying the trial court’s award of attorney’s
fees.30
On the other hand, the Spouses Stroem argue that Stronghold committed forum shopping warranting
dismissal of the case.31 According to the Spouses Stroem, Stronghold deliberately committed forum
shopping when it filed the present petition despite the pendency of the Spouses Stroem’s Motion for
Partial Reconsideration of the Court of Appeals Decision dated November 20, 2012. 32
More importantly, the Owners-Contractor Agreement is "separate and distinct from the Bond. The
parties to the Agreement are ALB/Ms. Asis-Leif and Spouses Stroem, while the parties to the Bond are
Spouses Stroem and Stronghold. The considerations for the two contracts are likewise distinct. Thus,
the arbitration clause in the Agreement is binding only on the parties thereto, specifically ALB/Ms. Asis-
Leif and Spouses Stroem[.]"33
Contrary to Stronghold’s argument, Spouses Stroem argues that stronghold is liable for the full
amountof the performance bond. The terms of the bond clearly show that Stronghold is liable as
surety.34 Verily, notice to Stronghold is not required for its liability to attach. 35
The issues for consideration are:
(1) Whether the dispute involves a construction contract;
(2) Whether the CIAC has exclusive jurisdiction over the controversy between the parties;
(3) Whether the Regional Trial Court should have dismissed the petition outright as required by
law and jurisprudence and referred the matter to the CIAC; and
(4) Whether petitioner Stronghold Insurance Company, Inc. is liable under Performance Bond
No. LP/G(13)83056.
(a) Whether petitioner Stronghold Insurance Company, Inc. is only liable as to the extent of
any additional cost for the completion of the project due toany increase in prices for labor and
materials.
(b) Whether the case involves ordinary suretyship or corporate suretyship.
After considering the parties’ arguments and the records of this case, this court resolves to deny the
Petition.
On forum-shopping
Respondents argue that petitioner committed forum shopping; hence, the case should have been
dismissed outright.
Records show that petitioner received a copy of the Decision of the Court of Appeals on December 5,
2012.36Petitioner did not file a Motion for Reconsideration of the assailed Decision. It filed before this
court a Motion for Extension of Time To File Petition for Review requesting an additional period of 30
days from December 20, 2012 or until January 19, 2013 to file the Petition.37
Respondents filed their Motion for Partial Reconsideration of the Court of Appeals Decision on
December 11, 2012.38 They sought the modification of the Decision as to the amounts of moral
damages, exemplary damages, attorney’s fees, and costs of the suit.39
Respondents alleged in their Comment that as early as January 9, 2013, petitioner received a copy of
the Court of Appeals’ Resolution requiring Comment on the Motion for Partial Reconsideration. 40 Still,
petitioner did not disclose in its Verification and Certification Against Forum Shopping the pendency of
respondents’ Motion for Partial Reconsideration.41
For its part, petitioner claims that it did not commit forum shopping. It fully disclosed in its Petition that
what it sought to be reviewed was the Decision dated November 20, 2012 of the Court of Appeals.
"Petitioner merely exercised its available remedy with respect to the Decision of the Court of Appeals by
filing [the] Petition."42 What the rules mandate to be stated in the Certification Against Forum Shopping
is the status of "any other action." This other action involves the same issues and parties but is an
entirely different case.
Indeed, petitioner is guilty of forum shopping.
There is forum shopping when:
as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by appeal
or certiorari) in another. The principle applies not only with respect to suits filed in the courts but also in
connection with litigations commenced in the courts while an administrative proceeding is
pending[.]43 (Citation omitted)
This court has enumerated the elements of forum-shopping: "(a) identity of parties, or at least such
parties as represent the same interests in both actions; (b) identity of rights asserted and reliefs prayed
for, the reliefs being founded on the same facts; and (c) the identity with respect to the two preceding
particulars in the two cases issuch that any judgment rendered in the pending cases, regardless of
which party is successful, amount to res judicatain the other case." 44 Rule 42, Section 245 in relation to
Rule 45, Section 4 of the Rules of Court mandates petitioner to submit a Certification Against Forum
Shopping and promptly inform this court about the pendency of any similar action or proceeding before
other courts or tribunals. The rule’s purpose is to deter the unethical practice of pursuing simultaneous
remedies in different forums, which "wreaks havoc upon orderly judicial procedure." 46 Failure to comply
with the rule is a sufficient ground for the dismissal of the petition. 47
Records show that petitioner’s duly authorized officer certified the following on January 21, 2013: 4. I
further certify that: (a) I have not commenced any other action or proceeding involving the same issues
in the Supreme Court, Court of Appeals, or any other tribunal or agency; (b) to the best of my
knowledge, no such action or proceeding is pending in the Supreme Court, the Court of Appeals or
different Divisions thereof, or any tribunal or agency; (c) if I should thereafter learn that a similar action
or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different
Divisions thereof, or any other tribunal or agency, I undertake to promptly inform the aforesaid courts
and such tribunal or agency of the fact within five (5) days therefrom. 48
Petitioner failed to carry out its duty of promptly informing this court of any pending action or proceeding
before this court,the Court of Appeals, or any other tribunal or agency. This court cannot countenance
petitioner’s disregard of the rules.
This court has held before that:
[u]ltimately, what is truly important to consider in determining whether forum-shopping exists or not is
the vexation caused the courts and parties-litigant by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or to grant the same or substantially
the same reliefs, in the process creating the possibility of conflicting decisions being rendered by the
different fora upon the same issue.49 (Emphasis supplied)
On this basis, this case should be dismissed.
On arbitration and the CIAC’s jurisdiction
Petitioner changed the theory of its case since its participation in the trial court proceedings. It raised
the issue of lack of jurisdiction in view of an arbitration agreement for the first time. Generally, parties
may not raise issues for the first time on appeal.50 Such practice is violative of the rules and due
process and is frowned upon by the courts. However, it is also well-settled that jurisdiction can never be
waived or acquired by estoppel.51 Jurisdiction is conferred by the Constitution or by law.52 "Lack of
jurisdiction of the court over an action or the subject matter of an action cannot be cured by the silence,
by acquiescence, or even by express consent of the parties."53
Section 4 of Executive Order No. 100854 is clear in defining the exclusive jurisdiction of the CIAC:
SECTION 4. Jurisdiction – The CIAC shall have original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in construction in the Philippines,
whether the dispute arises before or after the completion of the contract, or after the abandonment or
breach thereof. These disputes may involve government or private contracts. For the Board to acquire
jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and
workmanship; violation of the terms of agreement; interpretation and/or application of contractual
timeand delays; maintenance and defects; payment, default of employer or contractor and changes in
contract cost.
Excluded from the coverage of thislaw are disputes arising from employer-employee relationships which
shall continue to be covered by the Labor Code of the Philippines. (Emphasis supplied)
Similarly, Section 35 of RepublicAct No. 9285 or the Alternative Dispute Resolution Act of 2004 states:
SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and exclusive
jurisdiction of the Construction Industry Arbitration Commission (the "Commission") shall include those
between or among parties to, or who are otherwise bound by, an arbitration agreement, directly or by
reference whether such parties are project owner, contractor, subcontractor, quantity surveyor,
bondsman or issuer of an insurance policy in a construction project.
The Commission shall continue to exercise original and exclusive jurisdiction over construction disputes
although the arbitration is "commercial" pursuant to Section 21 of this Act. (Emphasis supplied)
In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation,55 this court held that "there are two acts
which may vest the CIAC with jurisdiction over a construction dispute. One is the presence of an
arbitration clause in a construction contract, and the other is the agreement by the parties to submit the
dispute to the CIAC."56
This court has ruled that when a dispute arises from a construction contract, the CIAC has exclusive
and original jurisdiction.57 Construction has been defined as referring to "all on-site works on buildings
or altering structures, from land clearance through completion including excavation, erection and
assembly and installation of components and equipment." 58
In this case, there is no dispute asto whether the Owners-Contractor Agreement between Asis-Leif and
respondents is a construction contract. Petitioner and respondents recognize that CIAC has jurisdiction
over disputes arising from the agreement.
What is at issue in this case is the parties’ agreement, or lack thereof, to submit the case to arbitration.
Respondents argue that petitioner is not a party to the arbitration agreement. Petitioner did not consent
to arbitration. It is only respondent and Asis-Leif thatmay invoke the arbitration clause in the contract.
This court has previously held that a performance bond, which is meant "to guarantee the supply of
labor,materials, tools, equipment, and necessary supervision to complete the project[,]" 59 is significantly
and substantially connected to the construction contract and, therefore, falls under the jurisdiction of the
CIAC.60
Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc. 61 involved circumstances similar to the
present case. In Prudential, property owner Anscor Land, Inc. (ALI) entered into a contract for the
construction of an eight-unit townhouse located inCapitol Hills, Quezon City with contractor Kraft Realty
and Development Corporation (KRDC).62 KRDC secured the completion of the construction project
through a surety and performance bond issued by Prudential Guarantee and Assurance Inc. (PGAI). 63
The delay in the construction project resulted in ALI’s termination of the contract and claim against the
performance bond.64 "ALI [subsequently] commenced arbitration proceedings against KRDC and PGAI
in the CIAC."65 PGAI, however, argued that it was not a party to the construction contract.66
The CIAC ruled that PGAI was not liable under the performance bond. 67 Upon review, the Court of
Appeals held that PGAI was jointly and severally liable with KRDC under the performance bond. 68
PGAI appealed the Court of Appeals Decision and claimed that CIAC did not have jurisdiction over the
performance bond.69 This court ruled:
A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is an accessory
contract because it is dependent for its existence upon the principal obligation guaranteed by it.
In fact, the primary and only reason behind the acquisition of the performance bond by KRDC was to
guarantee to ALI that the construction project would proceed in accordance with the contract terms and
conditions. In effect, the performance bond becomes liable for the completion of the construction project
in the event KRDC fails in its contractual undertaking. Because of the performance bond, the This court, however, cannot apply the ruling in Prudential to the present case. Several factors militate
construction contract between ALI and KRDC is guaranteed to be performed even if KRDC fails in its against petitioner’s claim.
obligation. In practice, a performance bond is usually a condition or a necessary component of
construction contracts. In the case at bar, the performance bond was so connected with the The contractual stipulations in this case and in Prudential are different. The relevant provisions of the
construction contract that the former was agreed by the parties to be a condition for the latter to push Owners-Contractor Agreement in this case state:
through and at the same time, the former is reliant on the latter for its existence as an accessory
contract.
ARTICLE 5. THE CONTRACT DOCUMENTS
Although not the construction contract itself, the performance bond is deemed as an associate of the
main construction contract that it cannot be separated or severed from its principal. The Performance The following documents prepared by the CONTRACTOR shall constitute an integral part of this
Bond is significantly and substantially connected to the construction contract that there can be no doubt contract as fully as if hereto attached or herein stated, except asotherwise modified by mutual
it is the CIAC, under Section 4 of EO No. 1008, which has jurisdiction over any dispute arising from or agreement of parties, and attached to this agreement.
connected with it.70(Emphasis supplied, citations omitted)
Attachment 5.1 Working Drawings
At first look, the Owners-Contractor Agreement and the performance bond reference each other; the
performance bond was issued pursuant to the construction agreement. Attachment 5.2 Outline Specifications

A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement Attachment 5.3 Bill of Quantities
"whereby a party, called the surety, guarantees the performance by another party, called the principal or
obligor, of an obligation or undertaking in favor of another party, called the obligee."71 In the same vein, Attachment 5.4 CONTRACTOR Business License
a performance bond is "designed to afford the project owner security that the . . . contractor, will
faithfully comply with the requirements of the contract . . . and make good [on the] damages sustained
by the project owner in case of the contractor’s failure to so perform." 72 ....

It is settled that the surety’s solidary obligation for the performance of the principal debtor’s obligation is
indirect and merely secondary.73 Nevertheless, the surety’s liability tothe "creditor or promisee of the
principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with
the principal."74
Verily, "[i]n enforcing a surety contract, the ‘complementary contracts-construed-together’ doctrine finds
application. According to this principle, an accessory contract must beread in its entirety and together
with the principal agreement."75 Article 1374 of the Civil Code provides:
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.
ARTICLE 7. PERFORMANCE (SURETY) BOND
7.1 Within 30 days of the signing of this agreement, CONTRACTOR shall provide to OWNERS
a performance bond, issued by a duly licensed authority acceptable to the OWNERS, and
equal to the amount of PHP 4,500,000.00 (Four Million and Five Hundred Thousand Philippine
Pesos),with the OWNERS as beneficiary.
7.2 The performance bond will guarantee the satisfactory and faithful performance by the
CONTRACTOR of all provisions stated within this contract.
ARTICLE 8. ARBITRATION

Applying the "complementary-contracts-construed-together" doctrine, this court in Prudential held that 8.1 Any dispute between the parties hereto which cannot be amicably settled shall be finally settled by
the surety willingly acceded to the terms of the construction contract despite the silence of the arbitration in accordance with the provision of Republic Act 876, of The Philippines, as amended by the
performance bond as to arbitration: Executive Order 1008 dated February 4, 1985.77 (Emphasis in the original)

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the In contrast, the provisions of the construction contract in Prudential provide:
construction contract was clear as to arbitration in the event of disputes. Applying the said doctrine, we
rule that the silence of the accessory contract in this case could only be construed as acquiescence to
Article 1
the main contract. The construction contract breathes life into the performance bond. We are not ready
to assume that the performance bond contains reservations with regard to some of the terms and
conditions in the construction contract where in fact it is silent. On the other hand, it is more reasonable CONTRACT DOCUMENTS
to assume that the party who issued the performance bond carefully and meticulously studied the
construction contract that it guaranteed, and if it had reservations, it would have and should have 1.1 The following shall form part of this Contractand together with this Contract, are known as the
mentioned them in the surety contract.76 (Emphasis supplied) "Contract Documents":
 a. Bid Proposal
....
d. Notice to proceed
....
j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by
the Developer)78 (Emphasis supplied)
This court in Prudential held that the construction contract expressly incorporated the performance bond
into the contract.79 In the present case, Article 7 of the Owners-Contractor Agreement merely stated that
a performance bond shall be issued in favor of respondents, in which case petitioner and Asis-Leif
Builders and/or Ms. Ma. Cynthia Asis-Leif shall pay ₱4,500,000.00 in the event that Asis-Leif fails to
perform its duty under the Owners-Contractor Agreement.80 Consequently, the performance bond
merely referenced the contract entered into by respondents and Asis-Leif, which pertained to Asis-Leif’s
duty toconstruct a two-storey residence building with attic, pool, and landscaping over respondents’
property.81
To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is found.1âwphi1 The
construction agreement was signed only by respondents and the contractor, Asis-Leif, as represented
by Ms. Ma. Cynthia Asis-Leif. It is basic that "[c]ontracts take effect only between the parties, their
assigns and heirs[.]"82 Not being a party to the construction agreement, petitioner cannot invoke the
arbitration clause. Petitioner, thus, cannot invoke the jurisdiction of the CIAC.
Moreover, petitioner’s invocation of the arbitration clause defeats the purpose of arbitration in relation to
the construction business. The state has continuously encouraged the use of dispute resolution
mechanisms to promote party autonomy.83 In LICOMCEN, Incorporated v. Foundation Specialists,
Inc.,84 this court upheld the CIAC's jurisdiction in line with the state's policy to promote arbitration:
The CIAC was created through Executive Order No. 1008 (E. 0. 1008), in recognition of the need to
establish an arbitral machinery that would expeditiously settle construction industry disputes. The
prompt resolution of problems arising from or connected with the construction industry was considered
of necessary and vital for the fulfillment of national development goals, as the construction industry
provides employment to a large segment of the national labor force and is a leading contributor to the
gross national product.85 (Citation omitted)
However, where a surety in a. construction contract actively participates in a collection suit, it is
estopped from raising jurisdiction later. Assuming that petitioner is privy to the construction agreement,
we cannot allow petitioner to invoke arbitration at this late stage of the proceedings since to do so would
go against the law's goal of prompt resolution of cases in the construction industry.
WHEREFORE, the petition is DENIED. The case is DISMISSED. Petitioner's counsel is STERNLY
WARNED that a repetition or similar violation of the rule on Certification Against Forum Shopping will be
dealt with more severely.
SO ORDERED.
G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the
Decision2 and Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the
Decision4 of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461, ordering
respondent to pay petitioner a sum of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment (sic), accessories, spares, services and software, at a total purchase
price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars
(US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November
1999. To ensure the prompt payment of this amount, it obtained defendant UCPB General Insurance
Co., Inc.’s surety bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One
Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F",
"F-1" to "F-8"). All of the equipment (including the software components for which payment was secured
by the surety bond, was shipped by GILAT and duly received by One Virtual. Under an endorsement
dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtual’s conformity, an amendment
to the surety bond, Annex "A" thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the
due date of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to the surety
bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter (Exhibit
"G") for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand
has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on
the succeeding payment instalment date of 30 November 2000 as set out in Annex "A" of the surety
bond, prompting GILAT to send a second demand letter dated January 24, 2001, for the payment of the
full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses
(Exhibits "H") and which letter was received by the defendant surety on January 25, 2001. However,
defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant
complaint."5 (Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint 6 against respondent UCPB
General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus
interests and expenses. After due hearing, the RTC rendered its Decision, 7 the dispositive portion of
which is herein quoted:
WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against
the defendant, ordering, to wit:
1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand
Dollars (US$1,200,000.00) representing the principal debt under the Surety Bond, with legal
interest thereon at the rate of 12% per annum computed from the time the judgment becomes
final and executory until the obligation is fully settled; and
2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars
and Four Cents (US$44,004.04) representing attorney’s fees and litigation expenses.
Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject
equipments [sic] and the same was installed. Even with the delivery and installation made, One Virtual
failed to pay any of the payments agreed upon. Demand notwithstanding, defendant failed and refused
and continued to fail and refused to settle the obligation." 8
Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by
and between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond
Obligee,"9 respondent agreed and bound itself to pay in accordance with the Payment Milestones. This
obligation was not made dependent on any condition outside the terms and conditions of the Surety
Bond and Payment Milestones.10
Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while a
surety can be held liable for interest even if it becomes more onerous than the principal obligation, the
surety shall only accrue when the delay or refusal to pay the principal obligation is without any justifiable
cause.11 Here, respondent failed to pay its surety obligation because of the advice of its principal (One
Virtual) not to pay.12 The RTC then obligated respondent to pay petitioner the amount of
USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the rate
of 12% per annum computed from the time the judgment becomes final and executory, and
USD44,004.04 representing attorney’s fees and litigation expenses.
On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a Decision14 in
the following manner:
WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision
dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual
are ordered to proceed to arbitration, the outcome of which shall necessary bind the parties, including
the surety, defendant-appellant United Coconut Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’
doctrine finds application." According to this doctrine, the accessory contract must be construed with the
principal agreement.15 In this case, the appellate court considered the Purchase Agreement entered into
between petitioner and One Virtual as the principal contract, 16 whose stipulations are also binding on
the parties to the suretyship.17 Bearing in mind the arbitration clause contained in the Purchase
Agreement18 and pursuant to the policy of the courts to encourage alternative dispute resolution
methods,19 the trial court’s Decision was vacated; petitioner and One Virtual were ordered to proceed to
arbitration.
On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The
motion was denied for lack of merit in a Resolution 20 issued by the CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November 2010,
petitioner filed a Reply.22
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual
to arbitrate; and
2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does not give the surety the right to intervene in the principal
contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such
as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party
entitled to it applies for this relief.23 This referral, however, can only be demanded by one who is a party
to the arbitration agreement.24 Considering that neither petitioner nor One Virtual has asked for a
referral, there is no basis for the CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may proceed
against the surety without having first sued the principal debtor. 26 Even the Surety Agreement itself
states that respondent becomes liable upon "mere failure of the Principal to make such prompt
payment."27 Thus, petitioner should not be ordered to make a separate claim against One Virtual (via
arbitration) before proceeding against respondent. 28
On the other hand, respondent maintains that a surety contract is merely an accessory contract, which
cannot exist without a valid obligation.29 Thus, the surety may avail itself of all the defenses available to
the principal debtor and inherent in the debt30 – that is, the right to invoke the arbitration clause in the
Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal
debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes the
existence of a principal contract.31 Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is
said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the
principal.32 He becomes liable for the debt and duty of the principal obligor, even without possessing a
direct or personal interest in the obligations constituted by the latter. 33 Thus, a surety is not entitled to a
separate notice of default or to the benefit of excussion. 34 It may in fact be sued separately or together
with the principal debtor.35
After a thorough examination of the pieces of evidence presented by both parties, 36 the RTC found that
petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances,
One Virtual still failed to pay its obligation,37 triggering respondent’s liability to petitioner as the former’s
surety.1âwphi1 In other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary
obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the Purchase Agreement, being the principal
contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the
preferred mode of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., 38 that "[the]
acceptance [of a surety agreement], however, does not change in any material way the creditor’s
relationship with the principal debtor nor does it make the surety an active party to the principal creditor-
debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the
principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be
directly held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a
stranger to the Purchase Agreement. We agree with petitioner that respondent cannot invoke in its favor
the arbitration clause in the Purchase Agreement, because it is not a party to that contract. 39 An
arbitration agreement being contractual in nature,40 it is binding only on the parties thereto, as well as
their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only
take place "if at least one party so requests not later than the pre-trial conference, or upon the request
of both parties thereafter." Respondent has not presented even an iota of evidence to show that either
petitioner or One Virtual submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt itself. 43 They are contracted
precisely to mitigate risks of non-performance on the part of the obligor. This responsibility necessarily
places a surety on the same level as that of the principal debtor. 44 The effect is that the creditor is given
the right to directly proceed against either principal debtor or surety. This is the reason why excussion
cannot be invoked.45 To require the creditor to proceed to arbitration would render the very essence of
suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v.
Court of Appeals,46 "if the surety is dissatisfied with the degree of activity displayed by the creditor in the
pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and
remedies of the creditor."
Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the
payment of the latter’s obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per
annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second
demand on 24 January 2001 because of the latter’s delay in discharging its monetary
obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the
time it demanded the fulfilment of respondent’s obligation under the suretyship contract. Significantly,
respondent does not contest this point, but instead argues that it is only liable for legal interest of 6%
per annum from the date of petitioner’s last demand on 24 January 2001.
In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the
refusal of a party to pay is without any justifiable cause.48 In this case, respondent’s failure to heed the
demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings as
stated in the Purchase Agreement.49 The CA, however, made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and
the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of stipulation, the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply. 50 Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the fulfilment of obligations. 51 It is the
nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the surety) to
be in default, it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially. 53
Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation. 54 The increased liability is not because of
the contract, but because of the default and the necessity of judicial collection. 55
However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la
Hotel,56 citing RCPI v. Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force
of contracts, will not permit a party to be set free from liability for any kind of misperformance of the
contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers
upon the injured party a valid cause for recovering that which may have been lost or suffered. The
remedy serves to preserve the interests of the promissee that may include his "expectation interest,"
which is his interest in having the benefit of his bargain by being put in as good a position as he would
have been in had the contract been performed, or his "reliance interest," which is his interest in being
reimbursed for loss caused by reliance on the contract by being put in as good a position as he would
have been in had the contract not been made; or his "restitution interest," which is his interest in having
restored to him any benefit that he has conferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made the basis for action. The
effect of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who has
been injured by the failure of another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of
fortuitous event, to excuse him from his ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed
justified by the circumstances – that is, One Virtual’s advice regarding petitioner’s alleged breach of
obligations. The lower court’s Decision itself belied this contention when it said that "plaintiff is not
disputing that it did not complete commissioning work on one of the two systems because One Virtual at
that time is already in default and has not paid GILAT." 58 Assuming arguendo that the commissioning
work was not completed, respondent has no one to blame but its principal, One Virtual; if only it had
paid its obligation on time, petitioner would not have been forced to stop operations. Moreover, the
deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated that petitioner had delivered all
equipment, including the licensed software; and that the equipment had been installed and in fact, gone
into operation.59 Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the
time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-
judicial demand before an action for performance was filed, interest on the amount due begins to run,
not from the date of the filing of the complaint, but from the date of that extra-judicial
demand.60 Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with
the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000,61 we
agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5
June 2000), because the obligation was already due and demandable at that time.
With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames, 62 which
modified the guidelines established in Eastern Shipping Lines v. CA 63 in relation to Bangko Sentral-
Monetary Board Circular No. 799 (Series of 2013), to wit:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.1âwphi1 In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
Applying the above-discussed concepts and in the absence of an agreement as to interests, we are
hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000, its
first date of extra judicial demand, until the satisfaction of the debt in accordance with the revised
guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the
Regional Trial Court, Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as the
award of legal interest is concerned. Respondent is hereby ordered to pay legal interest at the rate of
6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract
and Purchase Agreement.
SO ORDERED.
G.R. No. 212081 February 23, 2015
DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES (DENR), Petitioner,
vs.
UNITED PLANNERS CONSULTANTS , INC. (UPCI), Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 is the Decision2 dated March 26, 2014 of the Court of
Appeals (CA) in CA-G.R. SP No. 126458 which dismissed the petition for certiorari filed by petitioner the
Department of Environment and Natural Resources (petitioner).
The Facts
On July 26, 1993, petitioner, through the Land Management Bureau (LMB), entered into an Agreement
for Consultancy Services3 (Consultancy Agreement) with respondent United Planners Consultants, Inc.
(respondent) in connection with the LMB' s Land Resource Management Master Plan Project
(LRMMP).4 Under the Consultancy Agreement, petitioner committed to pay a total contract price of
₱4,337,141.00, based on a predetermined percentage corresponding to the particular stage of work
accomplished.5
In December 1994, respondent completed the work required, which petitioner formally accepted on
December 27, 1994.6 However, petitioner was able to pay only 47% of the total contract price in the
amount of ₱2,038,456.30.7
On October 25, 1994, the Commission on Audit (COA) released the Technical Services Office
Report8 (TSO) finding the contract price of the Agreement to be 84.14% excessive.9 This
notwithstanding, petitioner, in a letter dated December 10, 1998, acknowledged its liability to
respondent in the amount of ₱2,239,479.60 and assured payment at the soonest possible time. 10
For failure to pay its obligation under the Consultancy Agreement despite repeated demands,
respondent instituted a Complaint11 against petitioner before the Regional Trial Court of Quezon City,
Branch 222 (RTC), docketed as Case No. Q-07-60321.12
Upon motion of respondent, the case was subsequently referred to arbitration pursuant to the arbitration
clause of the Consultancy Agreement,13 which petitioner did not oppose.14 As a result, Atty. Alfredo F.
Tadiar, Architect Armando N. Alli, and Construction Industry Arbitration Commission (CIAC) Accredited
Arbitrator Engr. Ricardo B. San Juan were appointed as members of the Arbitral Tribunal. The court-
referred arbitration was then docketed as Arbitration Case No. A-001.15
During the preliminary conference, the parties agreed to adopt the CIAC Revised Rules Governing
Construction Arbitration16 (CIAC Rules) to govern the arbitration proceedings.17 They further agreed to
submit their respective draft decisions in lieu of memoranda of arguments on or before April 21, 2010,
among others.18
On the due date for submission of the draft decisions, however, only respondent complied with the
given deadline,19 while petitioner moved for the deferment of the deadline which it followed with another
motion for extension of time, asking that it be given until May 11, 2010 to submit its draft decision. 20
In an Order21 dated April 30, 2010, the Arbitral Tribunal denied petitioner’s motions and deemed its non-
submission as a waiver, but declared that it would still consider petitioner’s draft decision if submitted
before May 7, 2010, or the expected date of the final award’s promulgation. 22 Petitioner filed its draft
decision23 only on May 7, 2010.
The Arbitral Tribunal rendered its Award24 dated May 7, 2010 (Arbitral Award) in favor of respondent,
directing petitioner to pay the latter the amount of (a) ₱2,285,089.89 representing the unpaid progress
billings, with interest at the rate of 12% per annum from the date of finality of the Arbitral Award upon
confirmation by the RTC until fully paid; (b) ₱2,033,034.59 as accrued interest thereon; (c) ₱500,000.00
as exemplary damages; and (d) ₱150,000.00 as attorney’s fees. 25 It also ordered petitioner to
reimburse respondent its proportionate share in the arbitration costs as agreed upon in the amount of
₱182,119.44.26
Unconvinced, petitioner filed a motion for reconsideration,27 which the Arbitral Tribunal merely noted
without any action, claiming that it had already lost jurisdiction over the case after it had submitted to the
RTC its Report together with a copy of the Arbitral Award.28
Consequently, petitioner filed before the RTC a Motion for Reconsideration 29 dated May 19, 2010 (May
19, 2010 Motion for Reconsideration)and a Manifestation and Motion 30 dated June 1, 2010 (June 1,
2010 Manifestation and Motion), asserting that it was denied the opportunity to be heard when the
Arbitral Tribunal failed to consider its draft decision and merely noted its motion for reconsideration. 31 It
also denied receiving a copy of the Arbitral Award by either electronic or registered mail. 32 For its part,
respondent filed an opposition thereto and moved for the confirmation 33 of the Arbitral Award in
accordance with the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules). 34
In an Order35 dated March 30, 2011, the RTC merely noted petitioner’s aforesaid motions, finding that
copies of the Arbitral Award appear to have been sent to the parties by the Arbitral Tribunal, including
the OSG, contrary to petitioner’s claim. Onthe other hand, the RTC confirmed the Arbitral Award
pursuant to Rule 11.2 (A)36 of the Special ADR Rules and ordered petitioner to pay respondent the
costs of confirming the award, as prayed for, in the total amount of ₱50,000.00. From this order,
petitioner did not file a motion for reconsideration.
Thus, on June 15, 2011, respondent moved for the issuance of a writ of execution, to which no
comment/opposition was filed by petitioner despite the RTC’s directive therefor. In an Order 37 dated
September 12, 2011, the RTC granted respondent’s motion.38
Petitioner moved to quash39 the writ of execution, positing that respondent was not entitled to its
monetary claims. It also claimed that the issuance of said writ was premature since the RTC should
have first resolved its May 19, 2010 Motion for Reconsideration and June 1, 2010 Manifestation and
Motion, and not merely noted them, thereby violating its right to due process. 40
The RTC Ruling
In an Order41 dated July 9, 2012, the RTC denied petitioner’s motion to quash.
It found no merit in petitioner’s contention that it was denied due process, ruling that its May 19, 2010
Motion for Reconsideration was a prohibited pleading under Section 17.2, 42 Rule 17 of the CIAC Rules.
It explained that the available remedy to assail an arbitral award was to file a motion for correction of
final award pursuant to Section 17.143 of the CIAC Rules, and not a motion for reconsideration of the
said award itself.44 On the other hand, the RTC found petitioner’s June 1, 2010 Manifestation and
Motion seeking the resolution of its May 19, 2010 Motion for Reconsideration to be defective for
petitioner’s failure to observe the three day notice rule. 45 Having then failed to avail of the remedies
attendant to an order of confirmation, the Arbitral Award had become final and executory. 46
On July 12, 2012, petitioner received the RTC’s Order dated July 9, 2012 denying its motion to quash.47
Dissatisfied, it filed on September 10, 2012a petition for certiorari 48 before the CA, docketed as CA-G.R.
SP No. 126458, averring in the main that the RTC acted with grave abuse of discretion in confirming
and ordering the execution of the Arbitral Award.
The CA Ruling
In a Decision49 dated March 26, 2014, the CA dismissed the certiorari petition on two (2) grounds,
namely: (a) the petition essentially assailed the merits of the Arbitral Award which is prohibited under
Rule 19.750 of the Special ADR Rules;51 and (b) the petition was filed out of time, having been filed way
beyond 15 days from notice of the RTC’s July 9, 2012 Order, in violation of Rule 19.28 52 in relation to
Rule 19.853 of said Rules which provide that a special civil action for certiorari must be filed before the
CA within 15 days from notice of the judgment, order, or resolution sought to be annulled or set aside
(or until July 27, 2012). Aggrieved, petitioner filed the instant petition.
The Issue Before the Court
The core issue for the Court’s resolution is whether or not the CA erred in applying the provisions of the
Special ADR Rules, resulting in the dismissal of petitioner’s special civil action for certiorari.
The Court’s Ruling
The petition lacks merit.
I.
Republic Act No. (RA) 9285,54 otherwise known as the Alternative Dispute Resolution Act of 2004,"
institutionalized the use of an Alternative Dispute Resolution System (ADR System) 55 in the Philippines.
The Act, however, was without prejudice to the adoption by the Supreme Court of any ADR system as a
means of achieving speedy and efficient means of resolving cases pending before all courts in the
Philippines.56
Accordingly, A.M. No. 07-11-08-SC was created setting forth the Special Rules of Court on Alternative
Dispute Resolution (referred herein as Special ADR Rules) that shall govern the procedure to be
followed by the courts whenever judicial intervention is sought in ADR proceedings in the specific cases
where it is allowed.57
Rule 1.1 of the Special ADR Rules lists down the instances when the said rules shall apply, namely: "(a)
Relief on the issue of Existence, Validity, or Enforceability of the Arbitration Agreement; (b) Referral to
Alternative Dispute Resolution ("ADR"); (c) Interim Measures of Protection; (d) Appointment of
Arbitrator; (e) Challenge to Appointment of Arbitrator; (f) Termination of Mandate of Arbitrator; (g)
Assistance in Taking Evidence; (h) Confirmation, Correction or Vacation of Award in Domestic
Arbitration; (i) Recognition and Enforcement or Setting Aside of an Award in International Commercial
Arbitration; (j) Recognition and Enforcement of a Foreign Arbitral Award; (k) Confidentiality/Protective
Orders; and (l) Deposit and Enforcement of Mediated Settlement Agreements." 58
Notably, the Special ADR Rules do not automatically govern the arbitration proceedings itself. A pivotal
feature of arbitration as an alternative mode of dispute resolution is that it is a product of party
autonomy or the freedom of the parties to make their own arrangements to resolve their own
disputes.59 Thus, Rule 2.3 of the Special ADR Rules explicitly provides that "parties are free to agree on
the procedure to be followed in the conduct of arbitral proceedings. Failing such agreement, the arbitral
tribunal may conduct arbitration in the manner it considers appropriate." 60
In the case at bar, the Consultancy Agreement contained an arbitration clause.61 Hence, respondent,
after it filed its complaint, moved for its referral to arbitration 62 which was not objected to by
petitioner.63 By its referral to arbitration, the case fell within the coverage of the Special ADR Rules.
However, with respect to the arbitration proceedings itself, the parties had agreed to adopt the CIAC
Rules before the Arbitral Tribunal in accordance with Rule 2.3 of the Special ADR Rules.
On May 7, 2010, the Arbitral Tribunal rendered the Arbitral Award in favor of respondent. Under Section
17.2, Rule 17 of the CIAC Rules, no motion for reconsideration or new trial may be sought, but any of
the parties may file a motion for correction64 of the final award, which shall interrupt the running of the
period for appeal,65 based on any of the following grounds, to wit: a. an evident miscalculation of
figures, a typographical or arithmetical error;
b. an evident mistake in the description of any party, person, date, amount, thing or property referred to
in the award;
c. where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits of
the decision upon the matter submitted;
d. where the arbitrators have failed or omitted to resolve certain issue/s formulated by the parties in the
Terms of Reference (TOR) and submitted to them for resolution, and
e. where the award is imperfect in a matter of form not affecting the merits of the controversy.
The motion shall be acted upon by the Arbitral Tribunal or the surviving/remaining members. 66
Moreover, the parties may appeal the final award to the CA through a petition for review under Rule43
of the Rules of Court.67
Records do not show that any of the foregoing remedies were availed of by petitioner. Instead, it filed
the May 19, 2010 Motion for Reconsideration of the Arbitral Award, which was a prohibited pleading
under the Section 17.2,68Rule 17 of the CIAC Rules, thus rendering the same final and executory.
Accordingly, the case was remanded to the RTC for confirmation proceedings pursuant to Rule 11 of
the Special ADR Rules which requires confirmation by the court of the final arbitral award. This is
consistent with Section 40, Chapter 7 (A) of RA 9285 which similarly requires a judicial confirmation of a
domestic award to make the same enforceable:
SEC. 40. Confirmation of Award.– The confirmation of a domestic arbitral award shall be governed by
Section 2369 of R.A. 876.70
A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the regional trial court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with the
Rules of Procedure to be promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided
under E.O. No. 1008. (Emphases supplied)
During the confirmation proceedings, petitioners did not oppose the RTC’s confirmation by filing a
petition to vacate the Arbitral Award under Rule 11.2 (D)71 of the Special ADR Rules. Neither did it seek
reconsideration of the confirmation order in accordance with Rule 19.1 (h) thereof. Instead, petitioner
filed only on September 10, 2012 a special civil action for certiorari before the CA questioning the
propriety of (a) the RTC Order dated September 12, 2011 granting respondent’s motion for issuance of
a writ of execution, and (b) Order dated July 9,2012 denying its motion to quash. Under Rule 19.26 of
the Special ADR Rules, "[w]hen the Regional Trial Court, in making a ruling under the Special ADR
Rules, has acted without or in excess of its jurisdiction, or with grave abuse of discretion amounting to
lack or excess of jurisdiction, and there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law, a party may file a special civil action for certiorari to annul or set aside a ruling of
the Regional Trial Court." Thus, for failing to avail of the foregoing remedies before resorting to
certiorari, the CA correctly dismissed its petition.
II.
Note that the special civil action for certiorari described in Rule 19.26 above may be filed to annul or set
aside the following orders of the Regional Trial Court.
a. Holding that the arbitration agreement is in existent, invalid or unenforceable;
b. Reversing the arbitral tribunal’s preliminary determination upholding its jurisdiction;
c. Denying the request to refer the dispute to arbitration;
d. Granting or refusing an interim relief;
e. Denying a petition for the appointment of an arbitrator;
f. Confirming, vacating or correcting a domestic arbitral award;
g. Suspending the proceedings to set aside an international commercial arbitral award and referring the
case back to the arbitral tribunal;
h. Allowing a party to enforce an international commercial arbitral award pending appeal;
i. Adjourning or deferring a ruling on whether to set aside, recognize and or enforce an international
commercial arbitral award;
j. Allowing a party to enforce a foreign arbitral award pending appeal; and
k. Denying a petition for assistance in taking evidence. (Emphasis supplied)
Further, Rule 19.772 of the Special ADR Rules precludes a party to an arbitration from filing a petition for
certiorari questioning the merits of an arbitral award.
If so falling under the above-stated enumeration, Rule 19.28 of the Special ADR Rules provide that said
certiorari petition should be filed "with the [CA] within fifteen (15) days from notice of the judgment, order
or resolution sought to be annulled or set aside. No extension of time to file the petition shall be
allowed."
In this case, petitioner asserts that its petition is not covered by the Special ADR Rules (particularly,
Rule 19.28 on the 15-day reglementary period to file a petition for certiorari) but by Rule 65 of the Rules
of Court (particularly, Section 4 thereof on the 60-day reglementary period to file a petition for certiorari),
which it claimed to have suppletory application in arbitration proceedings since the Special ADR Rules
do not explicitly provide for a procedure on execution. The position is untenable.
Execution is fittingly called the fruit and end of suit and the life of the law. A judgment, if left unexecuted,
would be nothing but an empty victory for the prevailing party.73
While it appears that the Special ADR Rules remain silent on the procedure for the execution of a
confirmed arbitral award, it is the Court’s considered view that the Rules’ procedural mechanisms cover
not only aspects of confirmation but necessarily extend to a confirmed award’s execution in light of the
doctrine of necessary implication which states that every statutory grant of power, right or privilege is
deemed to include all incidental power, right or privilege. In Atienza v. Villarosa, 74 the doctrine was
explained, thus:
No statute can be enacted that can provide all the details involved in its application.1âwphi1 There is
always an omission that may not meet a particular situation. What is thought, at the time of enactment,
to be an all embracing legislation may be inadequate to provide for the unfolding of events of the future.
So-called gaps in the law develop as the law is enforced. One of the rules of statutory construction used
to fill in the gap is the doctrine of necessary implication. The doctrine states that what is implied in a
statute is as much a part thereof as that which is expressed. Every statute is understood, by implication,
to contain all such provisions as may be necessary to effectuate its object and purpose, or to make
effective rights, powers, privileges or jurisdiction which it grants, including all such collateral and
subsidiary consequences as may be fairly and logically inferred from its terms. Ex necessitate legis.
And every statutory grant of power, right or privilege is deemed to include all incidental power, right or
privilege. This is so because the greater includes the lesser, expressed in the maxim, in eo plus sit,
simper inest et minus.75 (Emphases supplied)
As the Court sees it, execution is but a necessary incident to the Court’s confirmation of an arbitral
award. To construe it otherwise would result in an absurd situation whereby the confirming court
previously applying the Special ADR Rules in its confirmation of the arbitral award would later shift to
the regular Rules of Procedure come execution. Irrefragably, a court’s power to confirm a judgment
award under the Special ADR Rules should be deemed to include the power to order its execution for
such is but a collateral and subsidiary consequence that may be fairly and logically inferred from the
statutory grant to regional trial courts of the power to confirm domestic arbitral awards.
All the more is such interpretation warranted under the principle of ratio legis est anima which provides
that a statute must be read according to its spirit or intent, 76 for what is within the spirit is within the
statute although it is not within its letter, and that which is within the letter but not within the spirit is not
within the statute.77Accordingly, since the Special ADR Rules are intended to achieve speedy and
efficient resolution of disputes and curb a litigious culture, 78 every interpretation thereof should be made
consistent with these objectives.
Thus, with these principles in mind, the Court so concludes that the Special ADR Rules, as far as
practicable, should be made to apply not only to the proceedings on confirmation but also to the
confirmed award’s execution.
Further, let it be clarified that – contrary to petitioner’s stance – resort to the Rules of Court even in a
suppletory capacity is not allowed. Rule 22.1 of the Special ADR Rules explicitly provides that "[t]he
provisions of the Rules of Court that are applicable to the proceedings enumerated in Rule 1.1 of these
Special ADR Rules have either been included and incorporated in these Special ADR Rules or
specifically referred to herein."79 Besides, Rule 1.13 thereof provides that "[i]n situations where no
specific rule is provided under the Special ADR Rules, the court shall resolve such matter summarily
and be guided by the spirit and intent of the Special ADR Rules and the ADR Laws."
As above-mentioned, the petition for certiorari permitted under the Special ADR Rules must be filed
within a period of fifteen (15) days from notice of the judgment, order or resolution sought to be annulled
or set aside.80Hence, since petitioner’s filing of its certiorari petition in CA-G.R. SP No. 126458 was
made nearly two months after its receipt of the RTC’s Order dated July 9, 2012,or on September 10,
2012,81 said petition was clearly dismissible.82
III.
Discounting the above-discussed procedural considerations, the Court still finds that the certiorari
petition had no merit.
Indeed, petitioner cannot be said to have been denied due process as the records undeniably show that
it was accorded ample opportunity to ventilate its position. There was clearly nothing out of line when
the Arbitral Tribunal denied petitioner’s motions for extension to file its submissions having failed to
show a valid reason to justify the same or in rendering the Arbitral Award sans petitioner’s draft decision
which was filed only on the day of the scheduled promulgation of final award on May 7, 2010. 83 The
touchstone of due process is basically the opportunity to be heard. Having been given such opportunity,
petitioner should only blame itself for its own procedural blunder.
On this score, the petition for certiorari in CA-G.R. SP No. 126458 was likewise properly dismissed.
IV.
Nevertheless, while the Court sanctions the dismissal by the CA of the petition for certiorari due to
procedural infirmities, there is a need to explicate the matter of execution of the confirmed Arbitral
Award against the petitioner, a government agency, in the light of Presidential Decree No. (PD)
144584 otherwise known as the "Government Auditing Code of the Philippines." Section 26 of PD 1445
expressly provides that execution of money judgment against the Government or any of its subdivisions,
agencies and instrumentalities is within the primary jurisdiction of the COA, to wit:
SEC. 26. General jurisdiction. The authority and powers of the Commission shall extend to and
comprehend all matters relating to auditing procedures, systems and controls, the keeping of the
general accounts of the Government, the preservation of vouchers pertaining thereto for a period of ten
years, the examination and inspection of the books, records, and papers relating to those accounts; and
the audit and settlement of the accounts of all persons respecting funds or property received or held by
them in an accountable capacity, as well as the examination, audit, and settlement of all debts and
claims of any sort due from or owing to the Government or any of its subdivisions, agencies and
instrumentalities. The said jurisdiction extends to all government-owned or controlled corporations,
including their subsidiaries, and other self-governing boards, commissions, or agencies of the
Government, and as herein prescribed, including non-governmental entities subsidized by the
government, those funded by donation through the government, those required to pay levies or
government share, and those for which the government has put up a counterpart fund or those partly
funded by the government. (Emphases supplied)
From the foregoing, the settlement of respondent’s money claim is still subject to the primary jurisdiction
of the COA despite finality of the confirmed arbitral award by the RTC pursuant to the Special ADR
Rules.85 Hence, the respondent has to first seek the approval of the COA of their monetary claim. This
appears to have been complied with by the latter when it filed a "Petition for Enforcement and Payment
of Final and Executory Arbitral Award"86 before the COA. Accordingly, it is now the COA which has the
authority to rule on this latter petition. WHEREFORE, the petition is DENIED. The Decision dated March
26, 2014 of the Court of Appeals in CA-G.R. SP No. 126458 which dismissed the petition for certiorari
filed by petitioner the Department of Environment and Natural Resources is hereby AFFIRMED.
SO ORDERED.
G.R. No. 174938 October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a contract
entered into by the corporation they represent if there are allegations of bad faith or malice in their acts
representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006
resolution. The Court of Appeals affirmed the trial court's decision holding that petitioners, as director,
should submit themselves as parties tothe arbitration proceedings between BF Corporation and
Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-Laand
the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo
Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into
agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel
parking structure along EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3However, by October 1991, Shangri-La started defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the
buildings using its own funds and credit despite Shangri-La’s default.5 According to BF Corporation,
ShangriLa misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay
in payment was simply a matter of delayed processing of BF Corporation’s progress billing statements.6
BF Corporation eventually completed the construction of the buildings. 7 Shangri-La allegedly took
possession of the buildings while still owing BF Corporation an outstanding balance. 8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to
it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well as
for the damages that BF Corporation incurred as a result of Shangri-La’s default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s failure to
submit its dispute to arbitration, in accordance with the arbitration clauseprovided in its contract, quoted
in the motion as follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or the Project
Manager on his behalf and the Contractor, either during the progress or after the completion or
abandonment of the Works as to the construction of this Contract or as to any matter or thing of
whatsoever nature arising there under or inconnection therewith (including any matter or thing left by
this Contract to the discretion of the Project Manager or the withholding by the Project Manager of any
certificate to which the Contractor may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under clauses
25, 26, 32 or 33 of these Conditions), the owner and the Contractor hereby agree to exert all efforts to
settle their differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may have against
the other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13
In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend proceedings. 14
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory
counter claim against BF Corporation and crossclaim against Shangri-La.15 They alleged that they had
resigned as members of Shangri-La’s board of directors as of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and
Benjamin Ramos filed a petition for certiorari with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission of
the dispute to arbitration.18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari with
this court.19 On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the
dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and
Shangri-La failed to agree as to the law that should govern the arbitration proceedings. 21 On October
27, 1998, the trial court issued the order directing the parties to conduct the proceedings in accordance
with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking
to clarify the term, "parties," and whether Shangri-La’s directors should be included in the arbitration
proceedings and served with separate demands for arbitration.23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be
excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s
agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all
defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors were
interested parties who "must also be served with a demand for arbitration to give them the opportunity
to ventilate their side of the controversy, safeguard their interest and fend off their respective
positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the trial court on January
19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion in
the issuance of orders compelling them to submit to arbitration proceedings despite being third parties
to the contract between Shangri-La and BF Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari. The
Court of Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration
proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts in representation
of the party to the contract pursuant to Art. 31 of the Corporation Code, and that as directors of the
defendant corporation, [they], in accordance with Art. 1217 of the Civil Code, stand to be benefited or
injured by the result of the arbitration proceedings, hence, being necessary parties, they must be joined
in order to have complete adjudication of the controversy. Consequently, if [they were] excluded as
parties in the arbitration proceedings and an arbitral award is rendered, holding [Shangri-La] and its
board of directors jointly and solidarily liable to private respondent BF Corporation, a problem will arise,
i.e., whether petitioners will be bound bysuch arbitral award, and this will prevent complete
determination of the issues and resolution of the controversy. 31
The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would be
contrary to the policy against multiplicity of suits." 32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19,
2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED. 33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006 resolution. 34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals
decision and the October 5, 2006 Court of Appeals resolution. 35
The issue in this case is whether petitioners should be made parties to the arbitration proceedings,
pursuant to the arbitration clause provided in the contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or obligations.36 The
corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are solidarily
liable with Shangri-La.37Neither did they bind themselves personally nor did they undertake to shoulder
Shangri-La’s obligations should it fail in its obligations.38 BF Corporation also failed to establish fraud or
bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF Corporation and Shangri-
La.40Provisions including arbitration stipulations should bind only the parties.41 Based on our arbitration
laws, parties who are strangers to an agreement cannot be compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to submit to arbitration is against this purpose and may be
tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo
C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that Shangri-
La’sdirectors, being non-parties to the contract, should not be made personally liable for Shangri-La’s
acts.46Since the contract was executed only by BF Corporation and Shangri-La, only they should be
affected by the contract’s stipulation.47 BF Corporation also failed to specifically allege the unlawful acts
of the directors that should make them solidarily liable with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the corporation[.]" 49 BF
Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code.50 Section 31 makes directors solidarily liable for
fraud, gross negligence, and bad faith.51Petitioners are not really third parties to the agreement because
they are being sued as Shangri-La’s representatives, under Section 31 of the Corporation Code. 52
BF Corporation further argued that because petitioners were impleaded for their solidary liability, they
are necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice. 54
In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal
had already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF Corporation’s
claims against them.56Petitioners stated that "[they] were included by the Arbitral Tribunal in the
proceedings conducted . . . notwithstanding [their] continuing objection thereto. . . ." 57 They also stated
that "[their] unwilling participation in the arbitration case was done ex abundante ad cautela, as
manifested therein on several occasions." 58Petitioners informed the court that they already manifested
with the trial court that "any action taken on [the Arbitral Tribunal’s decision] should be without prejudice
to the resolution of [this] case."59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and
Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that they
should not be held liable for Shangri-La’s default and made parties to the arbitration proceedings
because only BF Corporation and Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability under
Section 31 of the Corporation Code. Shangri-La added that their exclusion from the arbitration
proceedings will result in multiplicity of suits, which "is not favored in this jurisdiction." 60 It pointed out
that the case had already been mooted by the termination of the arbitration proceedings, which
petitioners actively participated in.61 Moreover, BF Corporation assailed only the correctness of the
Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required
memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were
already dismissed with finality, and the claims against them were likewise dismissed with finality, they
no longer have any interest orpersonality in the arbitration case. Thus, there is no longer any need to
resolve the present Petition, which mainly questions the inclusion of petitioners in the arbitration
proceedings."64 The court’s decision in this case will no longer have any effect on the issue of
petitioners’ inclusion in the arbitration proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that principles may
be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon. Enage, 66 this
court disregarded the fact that petitioner in that case already escaped from prison and ruled on the
issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, still, as
set forth at the opening of this opinion, the fact that this case is moot and academic should not preclude
this Tribunal from setting forth in language clear and unmistakable, the obligation of fidelity on the part
of lower court judges to the unequivocal command of the Constitution that excessive bail shall not be
required.67
This principle was repeated in subsequent cases when this court deemed it proper to clarify important
matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance
with Shangri-Laand BF Corporation’s agreement, in order to determine if the distinction between
Shangri-La’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation
and settle disputes amicably and more expeditiously by themselves and through their choice of
arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as early as
1949. It was later institutionalized by the approval of Republic Act No. 876,70 which expressly
authorized, made valid, enforceable, and irrevocable parties’ decision to submit their controversies,
including incidental issues, to arbitration. This court recognized this policy in Eastboard Navigation, Ltd.
v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the
issue that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said
agreement is void and without effect for it amounts to removing said dispute from the jurisdiction of the
courts in which the parties are domiciled or where the dispute occurred. It is true that there are
authorities which hold that "a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitrators and to them alone, is contrary to public policy and cannot oust the
courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however,
there are authorities which favor "the more intelligent view that arbitration, as an inexpensive, speedy
and amicable method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public policy or
settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view when it reproduced in
the new Civil Code the provisions of the old Code on Arbitration. And only recently it approved Republic
Act No. 876 expressly authorizing arbitration of future disputes. 72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are liberally
construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with
mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging
judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It
is thus regarded as the "wave of the future" in international civil and commercial disputes. Brushing
aside a contractual agreement calling for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods,
courts should liberally construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration.74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that
would render effective an arbitration clause was later expressed in Republic Act No. 9285: 75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make their own arrangements to
resolve their disputes. Towards this end, the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice
and declog court dockets. As such, the State shall provide means for the use of ADR as an efficient tool
and an alternative procedure for the resolution of appropriate cases. Likewise, the State shall enlist
active private sector participation in the settlement of disputes through ADR. This Act shall be without
prejudice to the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means of resolving
cases pending before all courts in the Philippines which shall be governed by such rules as the
Supreme Court may approve from time to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the policy
of the law in favor of arbitration.Where action is commenced by or against multiple parties, one or more
of whomare parties who are bound by the arbitration agreement although the civil action may continue
as to those who are not bound by such arbitration agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for purposes
ofavoiding litigation and expediting resolution of the dispute, that interpretation shall be adopted.
Petitioners’ main argument arises from the separate personality given to juridical persons vis-à-vis their
directors, officers, stockholders, and agents. Since they did not sign the arbitration agreement in any
capacity, they cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in accordance
with the arbitration agreement. Moreover, they had already resigned as directors of Shangri-Laat the
time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct
from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This means that while it is not a person,
naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is
an individual with a personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives, 77 and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural persons with physical existence and
capabilities to act on their own.78 For instance, they have the power to sue and enter into transactions or
contracts. Section 36 of the Corporation Code enumerates some of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the
power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers
through itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or enter
into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations, incurred through official
acts of its representatives, are its own. A stockholder, director, or representative does not become a
party to a contract just because a corporation executed a contract through that stockholder, director or
representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by
the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of
the corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that an arbitration
clause shall not apply to persons who were neither parties to the contract nor assignees of previous
parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on
arbitration, binds the parties thereto, as well as their assigns and heirs. But only they. 80 (Citations
omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is
part of that contract and is itself a contract. As a rule, contracts are respected as the law between the
contracting parties and produce effect as between them, their assigns and heirs. Clearly, only parties to
the Agreement . . . are bound by the Agreement and its arbitration clause as they are the only
signatories thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co., Inc.83
Stanfilco Employees v. DOLE Philippines, Inc., et al.84
As a general rule, therefore, a corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she is generally not considered a party
to that agreement.
However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate
fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues." 85 It is also warranted in alter ego cases
"where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation." 86
When corporate veil is pierced, the corporation and persons who are normally treated as distinct from
the corporation are treated as one person, such that when the corporation is adjudged liable, these
persons, too, become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain circumstances are its
directors and officers. Section 31 of the Corporation Code provides the instances when directors,
trustees, or officers may become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed inhim in confidence, as to
which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise would have accrued to the corporation.
(n)
Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily
liable with it for all damages suffered by the corporation, its stockholders or members, and other
persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate
act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
and director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto"; 87
b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action."89
When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should be
treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the
courts or tribunals must first determine whether circumstances exist towarrant the courts or tribunals to
disregard the distinction between the corporation and the persons representing it. The determination of
these circumstances must be made by one tribunal or court in a proceeding participated in by all parties
involved, including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds that
circumstances exist warranting the piercing of the corporate veil, the corporate representatives are
treated as the corporation itself and should be held liable for corporate acts. The corporation’s distinct
personality is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a
business under the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging
malice orbad faith on their part in directing the affairs of the corporation, complainants are effectively
alleging that the directors and the corporation are not acting as separate entities. They are alleging that
the acts or omissions by the corporation that violated their rights are also the directors’ acts or
omissions.90 They are alleging that contracts executed by the corporation are contracts executed by the
directors. Complainants effectively pray that the corporate veilbe pierced because the cause of action
between the corporation and the directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting the cause
of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a
single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the basis of
the same cause of action, the filing of one or a judgment upon the merits in any one is available as a
ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be indistinct that
we rule that petitioners may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are
not overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that
only parties to an arbitration agreement may be compelled to submit to arbitration. In that case, this
court recognizedthat persons other than the main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered parties to an arbitration agreement
entered into by their assignor because the assignor’s rights and obligations are transferred to them
upon assignment. In other words, the assignor’s rights and obligations become their own rights and
obligations. In the same way, the corporation’s obligations are treated as the representative’s
obligations when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed
its policy against multiplicity of suits and unnecessary delay. This court said that "to split the proceeding
into arbitration for some parties and trial for other parties would "result in multiplicity of suits, duplicitous
procedure and unnecessary delay."91 This court also intimated that the interest of justice would be best
observed if it adjudicated rights in a single proceeding. 92 While the facts of that case prompted this court
to direct the trial court to proceed to determine the issues of thatcase, it did not prohibit courts from
allowing the case to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the incidental
issue of whether piercing of the corporate veil is warranted, should be determined in a single
proceeding. Such finding would determine if the corporation is merely an aggregation of persons whose
liabilities must be treated as one with the corporation.
However, when the courts disregard the corporation’s distinct and separate personality from its directors
or officers, the courts do not say that the corporation, in all instances and for all purposes, is the same
as its directors, stockholders, officers, and agents. It does not result in an absolute confusion of
personalities of the corporation and the persons composing or representing it. Courts merely discount
the distinction and treat them as one, in relation to a specific act, in order to extend the terms of the
contract and the liabilities for all damages to erring corporate officials who participated in the
corporation’s illegal acts. This is done so that the legal fiction cannot be used to perpetrate illegalities
and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate
veil, parties who are normally treated as distinct individuals should be made to participate in the
arbitration proceedings in order to determine ifsuch distinction should indeed be disregarded and, if so,
to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the
existence of circumstances that render petitioners and the other directors solidarily liable. It ruled that
petitioners and Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La
to BF Corporation. The Arbitral Tribunal’s decision was made with the participation of petitioners, albeit
with their continuing objection. In view of our discussion above, we rule that petitioners are bound by
such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and resolution
of October 5, 2006 are AFFIRMED.
SO ORDERED.
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.
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 Donation 14 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.21 Notably, the 2005 Lease Contract contained an
arbitration clause similar to that in the 2000 Lease Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and
respondent.22 (Emphasis supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in favor of
herein petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner executed an
Assignment and Assumption of Lease and Donation25 —wherein FKI, with the conformity of the
respondent, formally assigned all of its interests and obligations under the Amended Deed of Donation
and the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the 2005
Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental stipulations
of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they
violated one of the" material conditions " of the donation of the subject land, as stated in the Deed of
Donation and Amended Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually established not
only one but two (2) lease agreements between FKI and respondent, i.e. , one lease for the first twenty-
five (25)years or from 1975 to 2000, and another lease for the next twenty-five (25)years thereafter or
from 2000 to 2025. 27 Both leases are material conditions of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was
not fixed in the Deed of Donation and Amended Deed of Donation , both deeds nevertheless prescribed
rules and limitations by which the same may be determined. Such rules and limitations ought to be
observed in any succeeding lease agreements between petitioner and respondent for they are, in
themselves, material conditions of the donation of the subject land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation
that supposedly limits the amount of rent for the lease over the second twenty-five (25) years to only "
three percent (3%) of the fair market value of the subject land excluding the improvements. 29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract
cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation of the
aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of Donation .
Consequently, petitioner insists that the amount of rent it has to pay thereon is and must still be
governed by the limitations prescribed in the Deed of Donation and Amended Deed of Donation. 30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter) 31 to petitioner notifying the latter of its
default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of the rent and "
donation " due for the year 2009. Respondent, in the same letter, further intimated of canceling the 2005
Lease Contract should petitioner fail to settle the said obligations. 32 Petitioner received the First
Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the
rental stipulations of the 2005 Lease Contract — calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals mandated by the Amended Deed of
Donation." In lieu of the amount demanded by the respondent, which purportedly totaled to
₱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.36 Respondent refused
this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter) 38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease Contract.
The Second Demand Letter also contained a demand for petitioner to " immediately vacate the leased
premises " should it fail to pay such obligations within seven (7) days from its receipt of the letter.39 The
respondent warned of taking " legal steps " in the event that petitioner failed to comply with any of the
said demands.40 Petitioner received the Second Demand Letter on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009,
petitioner filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission or
cancellation of the Deed of Donation and Amended Deed of Donation against the respondent. This case
is currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the
Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and
was docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim. 44 In it, petitioner
reiterated its objection over the rental stipulations of the 2005 Lease Contract for being violative of the
material conditions of the Deed of Donation and Amended Deed of Donation. 45 In addition to the
foregoing, however, petitioner also interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in view
of the insufficiency of respondent’s demand.46 The First Demand Letter did not contain an actual
demand to vacate the premises and, therefore, the refusal to comply there with does not give rise to an
action for unlawful detainer.47
2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same until the
disagreement between the parties is first referred to arbitration pursuant to the arbitration clause of the
2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would not lie as
the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005 Lease Contract requiring
petitioner to give yearly " donations " to respondent is a simulation, for they are, in fact, parts of the rent.
50 Such grants were only denominated as " donations " in the contract so that the respondent—anon-
stock and non-profit corporation—could evade payment of the taxes otherwise due thereon. 51
In due course, petitioner and respondent both submitted their position papers, together with their other
documentary evidence.52 Remarkably, however, respondent failed to submit the Second Demand Letter
as part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to
dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the
petitioner with respect to the issues regarding the insufficiency of the respondent’s demand and the
nullity of the 2005 Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to
costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch 274
of the RTC of Parañaque City and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from the
subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial Court,
Branch 77, Parañaque City, is hereby reversed, judgment is thus rendered in favor of the plaintiff-
appellant and against the defendant-appellee, and ordering the latter –
(1) to vacate the lease[d] premises made subject of the case and to restore the possession thereof to
the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two Thousand Four
Hundred Thirty Six Pesos (₱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.
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner and
respondent emanates from the rental stipulations of the 2005 Lease Contract. The respondent insists
upon the enforce ability and validity of such stipulations, whereas, petitioner, in substance, repudiates
them. It is from petitioner’s apparent breach of the 2005 Lease Contract that respondent filed the instant
unlawful detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the
petitioner and respondent arose from the application or execution of the 2005 Lease Contract .
Undoubtedly, such kinds of dispute are covered by the arbitration clause of the 2005 Lease Contract to
wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and
respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the "
interpretation, application or execution " of the 2005 Lease Contract ought to be submitted to
arbitration.70 To the mind of this Court, such stipulation is clear and is comprehensive enough so as to
include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contract including the
one that presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain
legal effects. However, before discussing what these legal effects are, We shall first deal with the
challenges posed against the application of such arbitration clause.
Challenges Against the Application of the
Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as well
as the MeTC, RTC and the Court of Appeals, vouched for the non-application of the same in the instant
case. A plethora of arguments was hurled in favor of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against the
application of the arbitration clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is non-arbitrable as it will inevitably touch
upon the issue of the validity of the 2005 Lease Contract.71 It was submitted that one of the reasons
offered by the petitioner in justifying its failure to pay under the 2005 Lease Contract was the nullity of
such contract for being contrary to law and public policy. 72 The Supreme Court, in Gonzales v. Climax
Mining, Ltd.,73 held that " the validity of contract cannot be subject of arbitration proceedings " as such
questions are " legal in nature and require the application and interpretation of laws and jurisprudence
which is necessarily a judicial function ." 74
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the
same time, impugn such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the 2005 Lease
Contract , petitioner still did not file a formal application before the MeTC so as to render such
arbitration clause operational.76 Section 24 of Republic Act No. 9285 requires the party seeking
arbitration to first file a " request " or an application therefor with the court not later than the preliminary
conference.77
4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR) proceedings before
the RTC.78 Hence, a further referral of the dispute to arbitration would only be circuitous. 79 Moreover, an
ejectment case, in view of its summary nature, already fulfills the prime purpose of arbitration, i.e. , to
provide parties in conflict with an expedient method for the resolution of their dispute. 80 Arbitration then
would no longer be necessary in this case.81
None of the arguments have any merit.
First. As highlighted in the previous discussion, the disagreement between the petitioner and
respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease Contract.
While it may be conceded that in the arbitration of such disagreement, the validity of the 2005 Lease
Contract, or at least, of such contract’s rental stipulations would have to be determined, the same would
not render such disagreement non-arbitrable. The quotation from Gonzales that was used to justify the
contrary position was taken out of context. A rereading of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and
Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance Agreement
and other mining related agreements entered into by private parties. 82
Grounds invoked for the nullification of such agreements include fraud and unconstitutionality. 83 The
pivotal issue that confronted the Court then was whether the PA-MGB has jurisdiction over that
particular arbitration complaint. Stated otherwise, the question was whether the complaint for arbitration
raises arbitrable issues that the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction
to take cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No.
7942, or the Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only over
mining disputes, i.e., disputes involving " rights to mining areas," "mineral agreements or permits," and "
surface owners, occupants, claim holders or concessionaires" requiring the technical knowledge and
experience of mining authorities in order to be resolved.84 Accordingly, since the complaint for
arbitration in Gonzales did not raise mining disputes as contemplated under R.A. No. 7942 but only
issues relating to the validity of certain mining related agreements, this Court held that such complaint
could not be arbitrated before the PA-MGB.85 It is in this context that we made the pronouncement now
in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the
parties as to some provisions of the contract between them, which needs the interpretation and the
application of that particular knowledge and expertise possessed by members of that Panel. It is not
proper when one of the parties repudiates the existence or validity of such contract or agreement on the
ground of fraud or oppression as in this case. The validity of the contract cannot be subject of arbitration
proceedings. Allegations of fraud and duress in the execution of a contract are matters within the
jurisdiction of the ordinary courts of law. These questions are legal in nature and require the application
and interpretation of laws and jurisprudence which is necessarily a judicial function. 86 (Emphasis
supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground
that the issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The real
consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon the jurisdiction
of the PA-MGB as an arbitral body . Gonzales rejected the complaint for arbitration because the issue
raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason, and only for this
reason, that such issue is rendered non-arbitrable before the PA-MGB. As stated beforehand, R.A. No.
7942 clearly limited the jurisdiction of the PA-MGB only to mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc.
v. San Fernando Regal Trading, Inc.88 In Cargill , this Court answered the question of whether issues
involving the rescission of a contract are arbitrable. The respondent in Cargill argued against
arbitrability, also citing therein Gonzales . After dissecting Gonzales , this Court ruled in favor of
arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause is
conceded, the CA's decision declining referral of the parties' dispute to arbitration is still correct. It
claims that its complaint in the RTC presents the issue of whether under the facts alleged, it is entitled
to rescind the contract with damages; and that issue constitutes a judicial question or one that requires
the exercise of judicial function and cannot be the subject of an arbitration proceeding. Respondent
cites our ruling in Gonzales, wherein we held that a panel of arbitrator is bereft of jurisdiction over the
complaint for declaration of nullity/or termination of the subject contracts on the grounds of fraud and
oppression attendant to the execution of the addendum contract and the other contracts emanating
from it, and that the complaint should have been filed with the regular courts as it involved issues which
are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding
the fact that it assails the validity of such contract. This is due to the doctrine of separability. 91
Under the doctrine of separability, an arbitration agreement is considered as independent of the main
contract.92Being a separate contract in itself, the arbitration agreement may thus be invoked regardless
of the possible nullity or invalidity of the main contract. 93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the doctrine
of separability, even the very party who repudiates the main contract may invoke its arbitration clause. 94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of the
petitioner to file a formal "request" or application therefor with the MeTC. We find that the filing of a
"request" pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an arbitration clause
may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it
finds that the arbitration agreement is null and void, inoperative or incapable of being performed.
[Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of A.M.
No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration
agreement, whether contained in an arbitration clause or in a submission agreement, may request the
court to refer the parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action is filed .
- The request for referral shall be made not later than the pre-trial conference. After the pre-trial
conference, the court will only act upon the request for referral if it is made with the agreement of all
parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is filed
but the parties subsequently enter into an arbitration agreement, they may request the court to refer
their dispute to arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which shall
state that the dispute is covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the arbitration
agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and time when
it would be heard. The party making the request shall serve it upon the respondent to give him the
opportunity to file a comment or opposition as provided in the immediately succeeding Rule before the
hearing. [Emphasis ours; italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a pending
action filed in violation of the arbitration agreement x x x may request the court to refer the parties to
arbitration in accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No. 9285, the
Special ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a pending
suit solely via such "request." After all, non-compliance with an arbitration agreement is a valid defense
to any offending suit and, as such, may even be raised in an answer as provided in our ordinary rules of
procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration before
the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with
Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in the 2005
Lease 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."100 Arbitration agreements manifest not only the desire of the parties in conflict for
an expeditious resolution of their dispute. They also represent, if not more so, the parties’ mutual
aspiration to achieve such resolution outside of judicial auspices, in a more informal and less
antagonistic environment under the terms of their choosing. Needless to state, this critical feature can
never be satisfied in an ejectment case no matter how summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease
Agreement in this case, We shall now proceed with the discussion of its legal effects.
Legal Effect of the Application of the
Arbitration Clause
Since there really are no legal impediments to the application of the arbitration clause of the 2005
Contract of Lease in this case, We find that the instant unlawful detainer action was instituted in
violation of such clause. The Law, therefore, should have governed the fate of the parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue arising
out of an agreement providing for the arbitration thereof, the court in which such suit or proceeding is
pending, upon being satisfied that the issue involved in such suit or proceeding is referable to
arbitration, shall stay the action or proceeding until an arbitration has been had in accordance with the
terms of the agreement: Provided, That the applicant for the stay is not in default in proceeding with
such arbitration.[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it
finds that the arbitration agreement is null and void, in operative or incapable of being performed.
[Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been stayed; 101 the
petitioner and the respondent should have been referred to arbitration pursuant to the arbitration clause
of the 2005 Lease Contract . The MeTC, however, did not do so in violation of the law—which violation
was, in turn, affirmed by the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid all
proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with
Counterclaim —the point when the petitioner and the respondent should have been referred to
arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said point.
Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated and set aside.
The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration clause
of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about to make.
Nonetheless, this Court must make the same if only to stress the point that, in our jurisdiction, bona fide
arbitration agreements are recognized as valid;102 and that laws,103 rules and regulations104 do exist
protecting and ensuring their enforcement as a matter of state policy. Gone should be the days when
courts treat otherwise valid arbitration agreements with disdain and hostility, if not outright "
jealousy,"105 and then get away with it. Courts should instead learn to treat alternative means of dispute
resolution as effective partners in the administration of justice and, in the case of arbitration
agreements, to afford them judicial restraint.106 Today, this Court only performs its part in upholding a
once disregarded state policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of Donation
against the respondent. The case is currently pending before Branch 257 of the RTC, docketed as Civil
Case No. CV 09-0346.
This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve
matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract. However,
since the records of Civil Case No. CV 09-0346 are not before this Court, We can never know with true
certainty and only speculate. In this light, let a copy of this Decision be also served to Branch 257of the
RTC of Parañaque for its consideration and, possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby render
a Decision:
1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of
Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of its Answer with
Counterclaim ;
2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by petitioner of
its Answer with Counterclaim;
3. SETTING ASIDE the following:
a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865,
b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of Parañaque City in Civil
Case No. 10-0255,
c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of Parañaque City in Civil
Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to arbitration pursuant to the arbitration clause of the Factual Antecedents
2005 Lease Contract, repeatedly included in the 2000 Lease Contract and in the 1976 Amended Deed
of Donation. On May 24, 2000, RCBC entered into a Share Purchase Agreement5 (SPA) with Equitable-PCI Bank,
Inc. (EPCIB), George L. Go and the individual shareholders 6 of Bankard, Inc. (Bankard) for the sale to
Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its consideration and, RCBC of 226,460,000 shares (Subject Shares) of Bankard, constituting 67% of the latter’s capital stock.
possible, application to Civil Case No. CV 09-0346. After completing payment of the contract price (₱1,786,769,400), the corresponding deeds of sale over
the subject shares were executed in January 2001.
No costs.
The dispute between the parties arose sometime in May 2003 when RCBC informed EPCIB and the
SO ORDERED. other selling shareholdersof an overpayment of the subject shares, claiming there was an
overstatement of valuation of accounts amounting to ₱478 million and that the sellers violated their
warrantyunder Section 5(g)of the SPA.7
G.R. No. 196171 December 10, 2012
As no settlement was reached, RCBC commenced arbitration proceedings with the ICC-ICA in
RCBC CAPITAL CORPORATION, Petitioners, accordance with Section 10 of the SPA which states:
vs.
BANCO DE ORO UNIBANK, INC., Respondent. Section 10.Arbitration

X- - - - - - - - - - - - - - - - - - - - - - - - - -X Should there be any dispute arising between the parties relating to this Agreement including the
interpretation or performance hereof which cannot be resolved by agreement of the parties within fifteen
G.R. No. 199238 (15) days after written notice by a party to another, such matter shall then be finally settled by arbitration
under the Rules of Conciliation and Arbitration of the International Chamber of Commerce in force as of
BANCO DE ORO UNIBANK, INC., Petitioner, the time of arbitration, by three arbitrators appointed in accordance with such rules. The venue of
vs. arbitration shall be in Makati City, Philippines and the arbitration proceedings shall be conducted in the
COURT OF APPEALS and RCBC CAPITAL CORPORATION, Respondents. English language. Substantive aspects of the dispute shall be settled by applying the laws of the
Philippines. The decision of the arbitrators shall be final and binding upon the parties hereto and the
expenses of arbitration (including without limitation the award of attorney’s fees to the prevailing party)
DECISION shall be paid as the arbitrators shall determine.8

VILLARAMA, JR., J.:
Before the Court are two consolidated petitions separately filed by the parties in an arbitration case
administered by the International Chamber of Commerce-International Court of Arbitration (ICC-ICA)
pursuant to the arbitration clause in their contract.
The Case
In G.R. No. 196171, a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, RCBC Capital Corporation (RCBC) seeks to reverse the Court of Appeals (CA)
Decision1 dated December 23, 2010 in CA-G.R. SP No. 113525 which reversed and set aside the June
24, 2009 Order2 of the Regional Trial Court (RTC) of Makati City, Branch 148 in SP Proc. Case No. M-
6046.
In G.R. No. 199238,a petition for certiorari under Rule 65, Banco De Oro Unibank, Inc. (BDO)assails
the Resolution3 dated September 13, 2011 in CA-G.R. SP No. 120888 which denied BDO’s application
for the issuance of a stay order and/or temporary restraining order (TRO)/preliminary injunction against
the implementation of the Writ of Execution4 dated August 22, 2011 issued by the Makati City RTC,
Branch 148 in SP Proc. Case No. M-6046.
In its Request for Arbitration9 dated May 12, 2004, Claimant RCBC charged Bankard with deviating from
and contravening generally accepted accounting principles and practices, due to which the financial
statements of Bankard prior to the stock purchase were far from fair and accurate, and resulted in the
overpayment of ₱556 million. For this violation of sellers’representations and warranties under the SPA,
RCBC sought its rescission, as well as payment of actual damages in the amount of ₱573,132,110,
legal interest on the purchase price until actual restitution, moral damages and litigation and attorney’s
fees, with alternative prayer for award of damages in the amount of at least ₱809,796,082 plus legal
interest.
In their Answer,10 EPCIB, Go and the other selling individual shareholders (Respondents) denied
RCBC’s allegations contending that RCBC’s claim is one for overpayment or price reduction under
Section 5(h) of the SPA which is already time-barred, the remedy of rescission is unavailable, and even
assuming that rescission is permitted by the SPA, RCBC failed to file its claim within a reasonable time.
They further asserted that RCBC is not entitled to its alternative prayer for damages, being guilty of
laches and failing to set out the details of the breach as required under Section 7 of the SPA. A
counterclaim for litigation expenses and costs of arbitration in the amount of US$300,000, as well as
moral and exemplary damages, was likewise raised by the Respondents.
RCBC submitted a Reply11 to the aforesaid Answer.
Subsequently, the Arbitration Tribunal was constituted. Mr. Neil Kaplan was nominated by RCBC;
Justice Santiago M. Kapunan (a retired Member of this Court) was nominated by the Respondents; and
Sir Ian Barker was appointed by the ICC-ICA as Chairman.
On August 13, 2004, the ICC-ICA informed the parties that they are required to pay US$350,000 as
advance on costs pursuant to Article 30 (3) of the ICC Rules of Arbitration (ICC Rules). RCBC paid its
share of US$107,000, the balance remaining after deducting payments of US$2,500 and US$65,000 it
made earlier. Respondents’ share of the advance on costs was thus fixed at US$175,000.
Respondents filed an Application for Separate Advances on Costs 12 dated September 17, 2004 under
Article 30(2) of the ICC Rules, praying that the ICC fix separate advances on the cost of the parties’
respective claims and counterclaims, instead of directing them to share equally on the advance cost of
Claimant’s (RCBC) claim. Respondents deemed this advance cost allocation to be proper, pointing out
that the total amount of RCBC’s claim is substantially higher – more than 40 times –the total amount of
their counterclaims, and that it would be unfair to require them to share in the costs of arbitrating what is
essentially a price issue that is now time-barred under the SPA.
On September 20, 2004, the ICC-ICA informed Respondents that their application for separate
advances on costs was premature pending the execution of the Terms of Reference (TOR). 13 The TOR
was settled by the parties and signed by the Chairman and Members of the Arbitral Tribunal by October
11, 2004. On December 3, 2004,14 the ICC-ICA denied the application for separate advances on costs
and invited anew the Respondents to pay its share in the advance on costs. However, despite
reminders from the ICC-ICA, Respondents refused to pay their share in the advance cost fixed by the
ICC-ICA. On December 16, 2004, the ICC-ICA informed the parties that if Respondents still failed to
pay its share in the advance cost, it would apply Article 30(4) of the ICC Rules and request the
Arbitration Tribunal to suspend its work and set a new time limit, and if such requested deposit remains
unpaid at the expiry thereof, the counterclaims would be considered withdrawn.15
In a fax-letter dated January 4, 2005, the ICC-ICA invited RCBC to pay the said amount in substitution
of Respondents.It also granted an extension until January 17, 2005 within which to pay the balance of
the advance cost (US$175,000). RCBC replied that it was not willing to shoulder the share of
Respondents in the advance on costs but nevertheless requested for a clarification as to the effect of
such refusal to substitute for Respondents’share.16
On March 10, 2005, the ICC-ICA instructed the Arbitration Tribunal to suspend its work and granted the
parties a final time-limit of 15 days to pay the balance of the advanceon costs, failing which the claims
shall be considered withdrawn, without prejudice to their reintroduction at a later date in another
proceeding. The parties were advised that if any of them objects to the measure, it should make a
request in writing within such period.17 For the same reason of non-receipt of the balance of the
advance cost, the ICC-ICA issued Procedural Order No. 3 for the adjournment of the substantive
hearings and granting the Respondents a two-month extension within which to submit their brief of
evidence and witnesses.
RCBC objected to the cancellation of hearings, pointing out that Respondents have been given ample
time and opportunity to submit their brief of evidence and prepare for the hearings and that their request
for postponement serves no other purpose but to delay the proceedings. It alleged that Respondents’
unjustified refusal to pay their share in the advance on costs warrants a ruling that they have lost
standing to participate in the proceedings. It thus prayed that Respondents be declared as in default,
the substantive hearings be conducted as originally scheduled, and RCBC be allowed to submit rebuttal
evidence and additional witness statements.18
On December 15, 2005, the ICC-ICA notified the parties of its decision to increase the advances on
costs from US$350,000 to US$450,000 subject to later readjustments, and again invited the
Respondents to pay the US$100,000 increment within 30 days from notice. Respondents, however,
refused to pay the increment, insisting that RCBC should bear the cost of prosecuting its own claim and
that compelling the Respondents to fund such prosecution is inequitable. Respondents reiterated that it
was willing to pay the advance on costs for their counterclaim. 19
On December 27, 2005, the ICC-ICA advised that it was not possible to fix separate advances on costs
as explained in its December 3, 2004 letter, and again invited Respondents to pay their share in the
advance on costs. Respondents’ response contained in the letter dated January 6, 2006 was still the
same: it was willing to pay only the separate advance on costs of their counterclaim. 20 In view of
Respondents’ continuing refusal to pay its equal share in the advance on costs and increment, RCBC
wrote the ICC-ICA stating that the latter should compel the Respondents to pay as otherwise RCBC will
be prejudiced and the inaction of the ICC-ICA and the Arbitration Tribunal will detract from the
effectiveness of arbitration as a means of settling disputes. In accordance with Article 30(4) of the ICC
Rules, RCBC reiterated its request to declare the Respondents as in default without any personality to
participate in the proceedings not only with respect to their counterclaims but also to the claim of
RCBC.21
Chairman Ian Barker, in a letter dated January 25, 2006, stated in part:
xxxx
2. The Tribunal has no power under the ICC Rules to order the Respondents to pay the advance
on costs sought by the ICC or to give the Claimant any relief against the Respondents’ refusal to
pay. The ICC Rules differ from, for example, the Rules of the LCIA (Article 24.3) which enables a party
paying the share of costs which the other party has refused to pay, to recover "that amount as a debt
immediately due from the defaulting party."
3. The only sanction under the ICC Rules is contained within Article 30 (4). Where a request for an
advance on costs has not been complied with, after consultation with the Tribunal, the Secretary-
General may direct the Tribunal to suspend its work. After expiry of a time limit, all claims and
counterclaims are then considered as withdrawn. This provision cannot assist a Claimant who is
anxious to litigate its claim. Such a Claimant has to pay the sums requested (including the
Respondents’ share) if it wishes the arbitration to proceed.
4. It may be possible for a Claimant in the course of the arbitral hearing (or whenever costs are
being considered by the Tribunal) to make submissions based on the failure of the Respondents
to pay their share of the costs advance.What relief, if any, would have to be then determined by
the Tribunal after having heard submissions from the Respondents.
5. I should be pleased if the Claimant will advise the Tribunal of its intention in relation to the costs
advance. If the costs are not paid, the arbitration cannot proceed. 22 (Italics in the original; emphasis
supplied)
RCBC paid the additional US$100,000 under the second assessment to avert suspension of the
Arbitration Tribunal’s proceedings.
Upon the commencement of the hearings, the Arbitration Tribunal decided that hearings will be initially
confined to issues of liability (liability phase) while the substantial issues will be heard on a later date
(quantum phase).
Meanwhile, EPCIB’s corporate name was officially changed to Banco De Oro (BDO)-EPCIB after its
merger with BDO was duly approved by the Securities and Exchange Commission. As such, BDO
assumed all the obligations and liabilities of EPCIB under the SPA.
On September 27, 2007, the Arbitration Tribunal rendered a Partial Award 23 (First Partial Award) in ICC-
ICA Case No. 13290/MS/JB/JEM,as follows:
15 AWARD AND DIRECTIONS
15.1 The Tribunal makes the following declarations by way of Partial Award:
(a) The Claimant’s claim is not time-barred under the provisions of this SPA.
(b) The Claimant is not estopped by its conduct or the equitable doctrine of laches from pursuing its
claim.
(c) As detailed in the Partial Award, the Claimant has established the following breaches by the
Respondents of clause 5(g) of the SPA:
i) the assets, revenue and net worth of Bankard were overstated by reason of its policy on and
recognition of Late Payment Fees;
ii) reported receivables were higher than their realisable values by reason of the ‘bucketing’ method,
thus overstating Bankard’s assets; and
iii) the relevant Bankard statements were inadequate and misleading in that their disclosures caused
readers to be misinformed about Bankard’s accounting policies on revenue and receivables.
(d) Subject to proof of loss the Claimant is entitled to damages for the foregoing breaches.
(e) The Claimant is not entitled to rescission of the SPA.
(f) All other issues, including any issue relating to costs, will be dealt with in a further or final
award.
15.2 A further Procedural Order will be necessary subsequent to the delivery of this Partial Award to
deal with the determination of quantum and in particular, whether there should be an Expert appointed
by the Tribunal under Article 20(4) of the ICC Rules to assist the Tribunal in this regard.
15.3 This Award is delivered by a majority of the Tribunal (Sir Ian Barker and Mr. Kaplan). Justice
Kapunan is unable to agree with the majority’s conclusion on the claim of estoppel brought by the
Respondents.24(Emphasis supplied)
On October 26, 2007, RCBC filed with the Makati City RTC, Branch 148 (SP Proc. Case No. M-
6046)amotion to confirm the First Partial Award, while Respondents filed a motion to vacate the same.
ICC-ICA by letter25 dated October 12, 2007 increased the advance on costs from US$450,000 to
US$580,000. Under this third assessment, RCBC paid US$130,000 as its share on the increment.
Respondents declined to pay its adjudged total share of US$290,000 on account of its filing in the RTC
of a motion to vacate the First Partial Award.26 The ICC-ICA then invited RCBC to substitute for
Respondents in paying the balance of US$130,000 by December 21, 2007.27 RCBC complied with the
request, making its total payments in the amount of US$580,000.28
While RCBC paid Respondents’ share in the increment (US$130,000), it reiterated its plea that
Respondents be declared as in default and the counterclaimsdeemed as withdrawn.29
Chairman Barker’s letter dated December 18, 2007 states in part:
xxxx
8. Contrary to the Complainant’s view, the Tribunal has no jurisdiction to declare that the Respondents
have no right to participate in the proceedings concerning the claim. Article 30(4) of the ICC Rules
applies only to any counterclaim of the Respondents.
9. The Tribunal interprets the Claimant’s latest letter as an application by the Claimant to the
Tribunal for the issue of a partial award against the Respondents in respect of their failure to
pay their share of the ICC’s requests for advance on costs.
10. I should be grateful if the Claimant would confirm that this is the situation. If so, the Claimant should
propose a timetable for which written submissions should be made by both parties. This is an
application which can be considered by the Tribunal on written submissions. 30 (Emphasis supplied)
RCBC, in a letter dated December 26, 2007, confirmed the Arbitration Tribunal’s interpretation that it
was applying for a partial award against Respondents’ failure to pay their share in the advance on
costs.31
Meanwhile, on January 8, 2008, the Makati City RTC, Branch 148 issued an order in SP Proc. Case No.
M-6046 confirming the First Partial Award and denying Respondents’ separate motions to vacate and to
suspend and inhibit Barker and Kaplan. Respondents’ motion for reconsideration was likewise denied.
Respondents directly filed with this Court a petition for review on certiorari under Rule 45, docketed
as G.R. No. 182248 and entitled Equitable PCI Banking Corporation v. RCBC Capital Corporation.32 In
our Decision dated December 18, 2008, we denied the petition and affirmed the RTC’s ruling confirming
the First Partial Award.
On January 18, 2008, the Arbitration Tribunal set a timetable for the filing of submission by the parties
on whether it should issue a Second Partial Award in respect of the Respondents’ refusal to pay an
advance on costs to the ICC-ICA.
In compliance, RCBC filed on February 7, 2008an Application for Reimbursement of Advance on Costs
Paid, praying for the issuance of a partial award directing the Respondents to reimburse its payment in
the amount of US$290,000 representing Respondents’ share in the Advance on Costs and to consider
Respondents’ counterclaim for actual damages in the amount of US$300,000, and moral and exemplary
damages as withdrawn for their failure to pay their equal share in the advance on costs. RCBC invoked
the plain terms of Article 30 (2) and (3) to stress the liability of Respondents to share equally in paying
the advance on costs where the Arbitration Tribunal has fixed the same.33
Respondents, on the other hand, filed their Opposition34 to the said application alleging that the
Arbitration Tribunal has lost its objectivity in an unnecessary litigation over the payment of Respondents’
share in the advance costs. They pointed out that RCBC’s letter merely asked that Respondents be
declared as in default for their failure to pay advance costs but the Arbitration Tribunal, while denying
the request offered an alternative to RCBC: a Partial Award for Respondents’ share in the advance
costs even if it was clear from the language of RCBC’s December 11, 2007 letter that it had no intention
of litigating for the advance costs. Chairman Barker, after ruling earlier that it cannot grant RCBC’s
request to declare the Respondents as having no right to participate in the proceedings concerning the
claim, interpreted RCBC’s letter as an application for the Arbitration Tribunal to issue a partial award in
respect of such refusal of Respondents to pay their share in the advance on costs, and subsequently
directed the parties to make submissions on the matter.Aside from violating their right to due process
and to be heard by an impartial tribunal, Respondents also argued that in issuing the award for advance
cost, the ArbitrationTribunal decided an issue beyond the terms of the TOR.
Respondents also emphasized that the parties agreed on a two-part arbitration: the first part of the
Tribunal’s proceedings would determine Respondents’ liability, if any, for alleged violation of Section
5(g) and (h) of the SPA; and the second part of the proceedings would determine the amounts owed by
one party to another as a consequence of a finding of liability or lack thereof. An award for
"reimbursement of advances for costs" clearly falls outside the scope of either proceedings. Neither can
the Tribunal justify such proceedings under Article 23 of the ICC Rules (Conservatory and Interim
Measures) because that provision does not contemplate an award for the reimbursement of advance on
costs in arbitration cases. Respondents further asserted that since the advances on costs have been
paid by the Claimant (RCBC), the main claim and counterclaim may both be heard by the Arbitration
Tribunal.
In his letter dated March 13, 2008, Chairman Barker advised the parties, as follows:
1. The Tribunal acknowledges the Respondents’ response to the Claimant’s application for a Partial
Award, based on the Respondents’ failure to pay their share of the costs, as requested by the ICC.
2. The Tribunal notes that neither party has referred to an article by Mat[t]hew Secomb on this
very subject which appears in the ICC Bulletin Vol. 14 No.1 (Spring 2003). To assist both sides and
to ensure that the Tribunal does not consider material on which the parties have not been given an
opportunity to address, I attach a copy of this article, which also contains reference to other scholarly
works on the subject.
3. The Tribunal will give each party seven days within which to submit further written comments as a
consequence of being alerted to the above authorities.35 (Additional emphasis supplied)
The parties complied by submitting their respective comments.
RCBC refuted Respondents’ allegation of partiality on the part of Chairman Barker and reiterated the
prayer in its application for reimbursement of advance on costs paid to the ICC-ICA. RCBC
contended that based on Mr. Secomb’s article, whether the "contractual" or "provisional measures"
approach is applied, the Arbitration Tribunal is vested with jurisdiction and authority to render an award
with respect to said reimbursement of advance cost paid by the non-defaulting party.36
Respondents, on the other hand, maintained that RCBC’s application for reimbursement of advance
cost has no basis under the ICC Rules. They contended that no manifest injustice can be inferred from
an act of a party paying for the share of the defaulting party as this scenario is allowed by the ICC
Rules. Neither can a partial award for advance cost be justified under the "contractual approach" since
the matter of costs for arbitration is between the ICC and the parties, not the Arbitration Tribunal and the
parties. An arbitration tribunal can issue decisions on costs only for those costs not fixed by the ICC. 37
Respondents reiterated their position that Article 30(3) envisions a situation whereby a party would
refuse to pay its share on the advance on costs and provides a remedy therefor – the other party "shall
be free to pay the whole of the advance on costs." Such party’s reimbursement for payments of the
defaulting party’s share depends on the final arbitral award where the party liable for costs would be
determined. This is the only remedy provided by the ICC Rules. 38
On May 28, 2008, the Arbitration Tribunal rendered the Second Partial Award,39 as follows:
7 AWARD
7.1 Having read and considered the submissions of both parties, the Tribunal AWARDS, DECLARES
AND ORDERS as follows:
(a) The Respondents are forthwith to pay to the Claimant the sum of US$290,000.
(b) The Respondents’ counterclaim is to be considered as withdrawn.
(c) All other questions, including interest and costs, will be dealt with in a subsequent award.40
The above partial award was received by RCBC and Respondents on June 12, 2008.
On July 11, 2008, EPCIB filed a Motion to Vacate Second Partial Award41 in the Makati City RTC,
Branch 148 (SP Proc. Case No. M-6046). On July 10, 2008, RCBC filed in the same court a Motion to
Confirm Second Partial Award.42
EPCIB raised the following grounds for vacating the Second Partial Award: (a) the award is void ab
initio having been rendered by the arbitrators who exceeded their power or acted without it; and (b) the
award was procured by undue means or issued with evident partiality or attended by misbehavior on the
part of the Tribunal which resulted in a material prejudice to the rights of the Respondents. EPCIB
argued that there is no express agreement either in the SPA or the ICC Rules for such right of
reimbursement. There is likewise no implied agreement because from the ICC Rules, the only inference
is that the parties agreed to await the dispositions on costs liability in the Final Award, not before.
On the ruling of the Arbitration Tribunal that Respondents’ application for costs are not counterclaims,
EPCIB asserted that this is contrary to Philippine law as it is basic in our jurisdiction that counterclaims
for litigation expenses, moral and exemplary damages are proper counterclaims, which rule should be
recognized in view of Section 10 of the SPA which provides that "substantive aspects of the dispute
shall be settled by applying the laws of the Philippines." Finally, EPCIB takes issue with Chairman pronouncements in the Joint Order dated March 23, 2010 in which, instead of recusing himself, he
Barker’s interpretation of RCBC’s December 11, 2007 letter as an application for a partial award for imputed malice and unethical conduct in the entry of appearance of Belo Gozon Elma Asuncion and
reimbursement of the substituted payments. Such conduct of Chairman Barker is prejudicial and proves Lucila Law Offices in SP Proc. Case No. M-6046, which warrants his voluntary inhibition.
his evident partiality in favor of RCBC.
Meanwhile, on June 16, 2010, the Arbitration Tribunal issued the Final Award, 49 as follows:
RCBC filed its Opposition,43 asserting that the Arbitration Tribunal had jurisdiction to consider
Respondents’ counterclaim as withdrawn, the same having been abandoned by not presenting any 15 AWARD
computation or substantiation by evidence, their only computation relates only to attorney’s fees which
are simply cost of litigation properly brought at the conclusion of the arbitration. It also pointed out that
the Arbitration Tribunal was empowered by the parties’ arbitral clause to determine the manner of 15.1 The Tribunal by a majority (Sir Ian Barker & Mr. Kaplan) awards, declares and adjudges as follows:
payment of expenses of arbitration, and that the Second Partial Award was based on authorities and
treatiseson the mandatory and contractual nature of the obligation to pay advances on costs. (a) the Respondents are to pay damages to the Claimant for breach of the sale and purchase
agreement for Bankard shares in the sum of ₱348,736,920.29.
In its Reply,44 EPCIB contended that RCBC had the option to agree to its proposal for separate
advances on costs but decided against it; RCBC’s act of paying the balance of the advance cost in (b) The Respondents are to pay to the Claimant the sum of US$880,000 in respect of the costs of the
substitution of EPCIB was for the purpose of having EPCIB defaulted and the latter’s counterclaim arbitration as fixed by the ICC Court.
withdrawn. Having agreed to finance the arbitration until its completion, RCBC is not entitled to
immediate reimbursement of the amount it paid in substitution of EPCIB under an interim award, as its (c) The Respondents are to pay to the Claimant the sum of US$582,936.56 for the fees and expenses
right to a partial or total reimbursement will have to be determined under the final award. EPCIB of Mr. Best.
asserted that the matter of reimbursement of advance cost paid cannot be said to have properly arisen
during arbitration. EPCIB reiterated that Chairman Barker’s interpretation of RCBC’s December 11,
2007 letter as an application for interim award for reimbursement is tantamount to a promise that the (d) The Respondents are to pay to the Claimant their expenses of the arbitration as follows:
award will be issued in due course.
(i) Experts’ fees ₱7,082,788.55
After a further exchange of pleadings, and other motions seeking relief from the court in connection with
the arbitration proceedings (quantum phase), the Makati City RTC, Branch 148 issued the Order 45 dated (ii) Costs of without prejudice meeting ₱22,571.45
June 24, 2009 confirming the Second Partial Award and denying EPCIB’s motion to vacate the same.
Said court held that since the parties agreed to submit any dispute under the SPA to arbitration and to
(iii) Costs of arbitration hearings ₱553,420.66
be bound by the ICC Rules, they are also bound to pay in equal shares the advance on costs as
provided in Article 30 (2) and (3). It noted that RCBC was forced to pay the share of EPCIB in
substitution of the latter to prevent a suspension of the arbitration proceedings, while EPCIB’s non- (iv) Costs of transcription service ₱483,597.26
payment seems more like a scheme to delay such proceedings. On the Arbitration Tribunal’s ruling on Total ₱8,144,377.62
EPCIB’s counterclaim, no error was committed in considering it withdrawn for failure of EPCIB to
quantify and substantiate it with supporting evidence. As to EPCIB’s claim for attorney’s fees, the RTC (e) The Respondents are to pay to the Claimant the sum of ₱7,000,000 for party-and-party legal costs.
agreed that these should be brought only at the close of arbitration.
(f) The Counterclaims of the Respondents are all dismissed.
EPCIB moved to reconsider the June 24, 2009 Order and for the voluntary inhibition of the Presiding
Judge (Judge Oscar B. Pimentel) on the ground that EPCIB’s new counsel represented another client in
(g) All claims of the Claimant are dismissed, other than those referred to above.
another case before him in which said counsel assailed his conduct and had likewise sought his
inhibition. Both motions were denied in the Joint Order46 dated March 23, 2010.
15.2 Justice Kapunan does not agree with the majority of the members of the Tribunal and has issued a
dissenting opinion. He has refused to sign this Award. 50
On April 14, 2010, EPCIB filed in the CA a petition for review47 with application for TRO and/or writ of
preliminary injunction (CA-G.R. SP No. 113525) in accordance with Rule 19, Section 4 of the Special
Rules of Court on Alternative Dispute Resolution48 (Special ADR Rules). EPCIB assailed the Makati City On July 1, 2010 BDO filed in the Makati City RTC a Petition to Vacate Final Award Ad
RTC, Branch 148 in denying its motion to vacate the Second Partial Award despite (a) said award Cautelam,51 docketed as SP Proc. Case No. M-6995, which was raffled to Branch 65.
having been rendered in excess of jurisdiction or power, and contrary to public policy; (b) the fact that it
was issued with evident partiality and serious misconduct; (c) the award deals with a dispute not On July 28, 2010, RCBC filed with the Makati City RTC, Branch 148 (SP Proc. Case No. M-6046) a
contemplated within the terms of submission to arbitration or beyond the scope of such submission, Motion to Confirm Final Award.52 BDO filed its Opposition With Motion to Dismiss53 on grounds that a
which therefore ought to be vacated pursuant to Article 34 of the UNCITRAL Model Law; and (d) the Petition to Vacate Final Award Ad Cautelamhad already been filed in SP Proc. Case No. M-6995. BDO
Presiding Judge having exhibited bias and prejudice against BDO and its counsel as confirmed by his also pointed out that RCBC did not file the required petition but instead filed a mere motion which did
not go through the process of raffling to a proper branch of the RTC of Makati City and the payment of
the required docket/filing fees. Even assuming that Branch 148 has jurisdiction over RCBC’s motion to
confirm final award, BDO asserted that RCBC had filed before the Arbitration Tribunal an Application for
Correction and Interpretation of Award under Article 29 of the ICC Rules, which is irreconcilable with its
Motion to Confirm Final Award before said court. Hence, the Motion to Confirm Award was filed
precipitately.
On August 18, 2010, RCBC filed an Omnibus Motion in SP Proc. Case No. M-6995 (Branch 65) praying
for the dismissal of BDO’s Petition to Vacate Final Award or the transfer of the same to Branch 148 for
consolidation with SP Proc. Case No. M-6046. RCBC contended that BDO’s filing of its petition with
another court is a blatant violation of the Special ADR Rules and is merely a subterfuge to commit
forum-shopping. BDO filed its Opposition to the Omnibus Motion.54
On October 28, 2010, Branch 65 issued a Resolution55 denying RCBC’s omnibus motion and directing
the service of the petition to RCBC for the latter’s filing of a comment thereon. RCBC’s motion for
reconsideration was likewise denied in the said court’s Order dated December 15, 2010. RCBC then
filed its Opposition to the Petition to Vacate Final Award Ad Cautelam.
Meanwhile, on November 10, 2010, Branch 148 (SP Proc. Case No. M-6046) issued an
Order56 confirming the Final Award "subject to the correction/interpretation thereof by the Arbitral
Tribunal pursuant to the ICC Rules and the UNCITRAL Model Law," and denying BDO’s Opposition
with Motion to Dismiss.
On December 30, 2010, George L. Go, in his personal capacity and as attorney-in-fact of the other
listed shareholders of Bankard, Inc. in the SPA (Individual Shareholders), filed a petition in the CA, CA-
G.R. SP No. 117451, seeking to set aside the above-cited November 10, 2010 Order and to enjoin
Branch 148 from further proceeding in SP Proc. Case No. M-6046. By Decision57 dated June 15, 2011,
the CA dismissed the said petition. Their motion for reconsideration of the said decision was likewise
denied by the CA in its Resolution58 dated December 14, 2011.
On December 23, 2010, the CA rendered its Decision in CA-G.R. SP No. 113525, the dispositive
portion of which states:
WHEREFORE, premises considered, the following are hereby REVERSED and SET ASIDE:
1. the Order dated June 24, 2009 issued in SP Proc. Case No. M-6046 by the Regional Trial Court of
Makati City, Branch 148, insofar as it denied the Motion to Vacate Second Partial Award dated July 8,
2008 and granted the Motion to Confirm Second Partial Award dated July 10, 2008;
2. the Joint Order dated March 23, 2010 issued in SP Proc. Case No. M-6046 by the Regional Trial
Court of Makati City, Branch 148, insofar as it denied the Motion For Reconsideration dated July 28,
2009 relative to the motions concerning the Second Partial Award immediately mentioned above; and
3. the Second Partial Award dated May 28, 2008 issued in International Chamber of Commerce Court
of Arbitration Reference No. 13290/MS/JB/JEM.
SO ORDERED.59
RCBC filed a motion for reconsideration but the CA denied the same in its Resolution 60 dated March 16,
2011. On April 6, 2011, it filed a petition for review on certiorari in this Court (G.R. No. 196171).
On February 25, 2011, Branch 65 rendered a Decision61 in SP Proc. Case No. M-6995, as follows:
WHEREFORE, premises considered, the Final Award dated June 16, 2010 in ICC Ref. No.
13290/MS/JB/JEM is hereby VACATED with cost against the respondent.
SO ORDERED.62
In SP Proc. Case No. M-6046, Branch 148 issued an Order63 dated August 8, 2011 resolving the
following motions: (1) Motion for Reconsideration filed by BDO, Go and Individual Shareholders of the
November 10, 2010 Order confirming the Final Award; (2) RCBC’s Omnibus Motion to expunge the
motion for reconsideration filed by Go and Individual Shareholders, and for execution of the Final
Award; (3) Motion for Execution filed by RCBC against BDO; (4) BDO’s Motion for Leave to File
Supplement to the Motion for Reconsideration; and (5) Motion for Inhibition filed by Go and Individual
Shareholders. Said Order decreed:
WHEREFORE, premises considered, it is hereby ORDERED, to wit:
1. Banco De Oro’s Motion for Reconsideration, Motion for Leave to File Supplement to Motion for
Reconsideration, and Motion to Inhibit are DENIED for lack of merit.
2. RCBC Capital’s Motion to Expunge, Motion to Execute against Mr. George L. Go and the Bankard
Shareholders, and the Motion to Execute against Banco De Oro are hereby GRANTED.
3. The damages awarded to RCBC Capital Corporation in the amount of Ph₱348,736,920.29 is subject
to an interest of 6% per annum reckoned from the date of RCBC Capital’s extra-judicial demand or from
May 5, 2003 until the confirmation of the Final Award. Likewise, this compounded amount is subject to
12% interest per annum from the date of the confirmation of the Final Award until its satisfaction. The
costs of the arbitration amounting to US$880,000.00, the fees and expenses of Mr. Best amounting to
US$582,936.56, the Claimant’s expenses of the arbitration amounting to Ph₱8,144,377.62, and the
party-and-party legal costs amounting to Ph₱7,000,000.00 all ruled in favor of RCBC Capital
Corporation in the Final Award of the Arbitral Tribunal dated June 16, 2010 are subject to 12% legal
interest per annum, also reckoned from the date of the confirmation of the Final Award until its
satisfaction.
4. Pursuant to Section 40 of R.A. No. 9285, otherwise known as the Alternative Dispute Resolution Act
of 2004 in relation to Rule 39 of the Rules of Court, since the Final Award have been confirmed, the
same shall be enforced in the same manner as final and executory decisions of the Regional Trial
Court, let a writ of execution be issued commanding the Sheriff to enforce this instant Order confirming
this Court’s Order dated November 10, 2010 that judicially confirmed the June 16, 2010 Final Award.
SO ORDERED.64
Immediately thereafter, RCBC filed an Urgent Motion for Issuance of a Writ of Execution. 65 On August
22, 2011, after approving the execution bond, Branch 148 issued a Writ of Execution for the
implementation of the said court’s "Order dated August 8, 2011 confirming the November 10, 2010
Order that judicially confirmed the June 16, 2010 Final Award x x x."66
BDO then filed in the CA, a "Petition for Review (With Application for a Stay Order or Temporary
Restraining Order and/or Writ of Preliminary Injunction," docketed as CA-G.R. SP No. 120888. BDO
sought to reverse and set aside the Orders dated November 10, 2010 and August 8, 2011, and any writ
of execution issued pursuant thereto, as well as the Final Award dated June 16, 2010 issued by the
Arbitration Tribunal.
In its Urgent Omnibus Motion67 to resolve the application for a stay order and/or TRO/writ of preliminary
injunction, and to quash the Writ of Execution dated August 22, 2011 and lift the Notices of
Garnishment dated August 22, 2011, BDO argued that the assailed orders of execution (Writ of
Execution and Notice of Garnishment) were issued with indecent haste and despite the non-compliance
with the procedures in Special ADR Rules of the November 10, 2010 Order confirming the Final Award.
BDO was not given sufficient time to respond to the demand for payment or to elect the method of
satisfaction of the judgment debt or the property to be levied upon. In any case, with the posting of a
bond by BDO, Branch 148 has no jurisdiction to implement the appealed orders as it would pre-empt
the CA from exercising its review under Rule 19 of the Special ADR Rules after BDO had perfected its
appeal. BDO stressed that the bond posted by RCBC was for a measly sum of ₱3,000,000.00 to cause
execution pending appeal of a monetary award that may reach ₱631,429,345.29. RCBC also failed to
adduce evidence of "good cause" or "good reason" to justify discretionary execution under Section 2(a),
Rule 39 of the Rules of Court.
BDO further contended that the writ of execution should be quashed for having been issued with grave
abuse of discretion amounting to lack or excess of jurisdiction as Branch 148 modified the Final Award
at the time of execution by imposing the payment of interests though none was provided therein nor in
the Order confirming the same.
During the pendency of CA-G.R. SP No. 120888, Branch 148 continued with execution proceedings
and on motion by RCBC designated/deputized additional sheriffs to replace Sheriff Flora who was
supposedly physically indisposed.68 These court personnel went to the offices/branches of BDO
attempting to serve notices of garnishment and to levy the furniture, fixtures and equipment.
On September 12, 2011, BDO filed a Very Urgent Motion to Lift Levy and For Leave to Post Counter-
Bond69before Branch 148 praying for the lifting of the levy of BDO Private Bank, Inc. (BPBI) shares and
the cancellation of the execution sale thereof scheduled on September 15, 2011, which was set for
hearing on September 14, 2011. BDO claimed that the levy was invalid because it was served by the
RTC Sheriffs not to the authorized representatives of BPBI, as provided under Section 9(b), Rule 39 in
relation to Section 7, Rule 57 of the Rules of Court stating that a notice of levy on shares of stock must
be served to the president or managing agent of the company which issued the shares. However, BDO
was advised by court staff that Judge Sarabia was on leave and the case could not be set for hearing.
In its Opposition to BDO’s application for injunctive relief, RCBC prayed for its outright denial as BDO’s
petition raises questions of fact and/or law which call for the CA to substitute its judgment with that of
the Arbitration Tribunal, in patent violation of applicable rules of procedure governing domestic
arbitration and beyond the appellate court’s jurisdiction. RCBC asserted that BDO’s application has
become moot and academic as the writ of execution was already implemented and/or enforced. It also
contended that BDO has no clear and unmistakable right to warrant injunctive relief because the issue
of jurisdiction was already ruled upon in CA-G.R. SP No. 117451 which dismissed the petition filed by
Go and the Individual Shareholders of Bankard questioning the authority of Branch 148 over RCBC’s
motion to confirm the Final Award despite the earlier filing by BDO in another branch of the RTC
(Branch 65) of a petition to vacate the said award.
On September 13, 2011, BDO, to avert the sale of the BPBI shares scheduled on September 15, 2011
and prevent further disruption in the operations of BDO and BPBI, paid under protest by tendering a
Manager’s Check in the amount of ₱637,941,185.55, which was accepted by RCBC as full and
complete satisfaction of the writ of execution. BDO manifested before Branch 148 that such payment
was made without prejudice to its appeal before the CA.70
On even date, the CA denied BDO’s application for a stay order and/or TRO/preliminary injunction for
non-compliance with Rule 19.25 of the Special ADR Rules. The CA ruled that BDO failed to show the
existence of a clear right to be protected and that the acts sought to be enjoined violated any right.
Neither was BDO able to demonstrate that the injury to be suffered by it is irreparable or not susceptible
to mathematical computation.
BDO did not file a motion for reconsideration and directly filed with this Court a petition for certiorari with
urgent application for writ of preliminary mandatory injunction (G.R. No. 199238).
The Petitions
In G.R. No. 196171, RCBC set forth the following grounds for the reversal of the CA Decision dated
December 23, 2010:
I.
THE COURT OF APPEALS ACTED CONTRARY TO LAW AND PRIOR RULINGS OF THIS
HONORABLE COURT AND COMMITTED REVERSIBLE ERROR IN VACATING THE SECOND
PARTIAL AWARD ON THE BASIS OF CHAIRMAN BARKER’S ALLEGED PARTIALITY, WHICH IT
CLAIMS IS INDICATIVE OF BIAS CONSIDERING THAT THE ALLEGATIONS CONTAINED IN
BDO/EPCIB’S PETITION FALL SHORT OF THE JURISPRUDENTIAL REQUIREMENT THAT THE
SAME BE SUPPORTED BY CLEAR AND CONVINCING EVIDENCE.
II.
THE COURT OF APPEALS ACTED CONTRARY TO LAW AND PRIOR RULINGS OF THIS
HONORABLE COURT AND COMMITTED REVERSIBLE ERROR WHEN IT REVERSED THE
ARBITRAL TRIBUNAL’S FINDINGS OF FACT AND LAW IN THE SECOND PARTIAL AWARD IN
PATENT CONTRAVENTION OF THE SPECIAL ADR RULES WHICH EXPRESSLY PROHIBITS THE
COURTS, IN AN APPLICATION TO VACATE AN ARBITRAL AWARD, FROM DISTURBING THE
FINDINGS OF FACT AND/OR INTERPRE[TA]TION OF LAW OF THE ARBITRAL TRIBUNAL.71
BDO raises the following arguments in G.R. No. 199238:
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN PERFUNCTORILY DENYING PETITIONER BDO’S
APPLICATION FOR STAY ORDER, AND/OR TEMPORARY RESTRAINING ORDER AND
PRELIMINARY INJUNCTION DESPITE THE EXISTENCE AND CONCURRENCE OF ALL THE
ELEMENTS FOR THE ISSUANCE OF SAID PROVISIONAL RELIEFS
A. PETITIONER BDO HAS CLEAR AND UNMISTAKABLE RIGHTS TO BE PROTECTED BY THE
ISSUANCE OF THE INJUNCTIVE RELIEF PRAYED FOR, WHICH, HOWEVER, WERE
DISREGARDED BY PUBLIC RESPONDENT WHEN IT DENIED PETITIONER BDO’S PRAYER FOR
ISSUANCE OF A STAY ORDER AND/OR TRO
B. PETITIONER BDO’S RIGHT TO DUE PROCESS AND EQUAL PROTECTION OF THE LAW WAS
GROSSLY VIOLATED BY THE RTC-MAKATI CITY BRANCH 148, THE DEPUTIZED SHERIFFS AND
RESPONDENT RCBC CAPITAL, WHICH VIOLATION WAS AIDED BY PUBLIC RESPONDENT’S
INACTION ON AND EVENTUAL DENIAL OF THE PRAYER FOR STAY ORDER AND/OR TRO
C. DUE TO THE ACTS AND ORDERS OF RTC BRANCH 148, PETITIONER BDO SUFFERED
IRREPARABLE DAMAGE AND INJURY, AND THERE WAS DIRE AND URGENT NECESSITY FOR
THE ISSUANCE OF THE INJUNCTIVE RELIEF PRAYED FOR WHICH PUBLIC RESPONDENT
DENIED IN GRAVE ABUSE OF DISCRETION72
Essentially, the issues to be resolved are: (1) whether there is legal ground to vacate the Second Partial
Award; and (2) whether BDO is entitled to injunctive relief in connection with the execution proceedings
in SP Proc. Case No. M-6046.
In their TOR, the parties agreed on the governing law and rules as follows:
Laws to be Applied
13 The Tribunal shall determine the issues to be resolved in accordance with the laws of the Republic of
the Philippines.
Procedure to be Applied
14 The proceedings before the Tribunal shall be governed by the ICC Rules of Arbitration (1 January
1998) and the law currently applicable to arbitration in the Republic of the Philippines. 73
As stated in the Partial Award dated September 27, 2007, although the parties provided in Section 10 of
the SPA that the arbitration shall be conducted under the ICC Rules, it was nevertheless arbitration
under Philippine law since the parties are both residents of this country. The provisions of Republic Act
No. 87674 (RA 876),as amended by Republic Act No. 928575 (RA 9285)principally applied in the
arbitration between the herein parties.76
The pertinent provisions of R.A. 9285 provide:
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.
xxxx
SEC. 41. Vacation Award. – A party to a domestic arbitration may question the arbitral award with the
appropriate regional trial court in accordance with the rules of procedure to be promulgated by the
Supreme Court only on those grounds enumerated in Section 25 of Republic Act No. 876. Any other
ground raised against a domestic arbitral award shall be disregarded by the regional trial court.
Rule 11.4 of the Special ADR Rules sets forth the grounds for vacating an arbitral award:
Rule 11.4. Grounds.—(A) To vacate an arbitral award. – The arbitral award may be vacated on the
following grounds:
a. The arbitral award was procured through corruption, fraud or other undue means;
b. There was evident partiality or corruption in the arbitral tribunal or any of its members;
c. The arbitral tribunal was guilty of misconduct or any form of misbehavior that has materially
prejudiced the rights of any party such as refusing to postpone a hearing upon sufficient cause shown
or to hear evidence pertinent and material to the controversy;
d. One or more of the arbitrators was disqualified to act as such under the law and willfully refrained
from disclosing such disqualification; or
e. The arbitral tribunal exceeded its powers, or so imperfectly executed them, such that a complete,
final and definite award upon the subject matter submitted to them was not made.
The award may also be vacated on any or all of the following grounds:
a. The arbitration agreement did not exist, or is invalid for any ground for the revocation of a contract or
is otherwise unenforceable; or
b. A party to arbitration is a minor or a person judicially declared to be incompetent.
xxxx
In deciding the petition to vacate the arbitral award, the court shall disregard any other ground than
those enumerated above. (Emphasis supplied)
Judicial Review
At the outset, it must be stated that a review brought to this Court under the Special ADR Rules is not a
matter of right. Rule 19.36 of said Rules specified the conditions for the exercise of this Court’s
discretionary review of the CA’s decision.
Rule 19.36.Review discretionary.—A review by the Supreme Court is not a matter of right, but of sound
judicial discretion, which will be granted only for serious and compelling reasons resulting in grave
prejudice to the aggrieved party. The following, while neither controlling nor fully measuring the
court’s discretion, indicate the serious and compelling, and necessarily, restrictive nature of the grounds
that will warrant the exercise of the Supreme Court’s discretionary powers, when the Court of
Appeals:
a. Failed to apply the applicable standard or test for judicial review prescribed in these Special
ADR Rules in arriving at its decision resulting in substantial prejudice to the aggrieved party;
b. Erred in upholding a final order or decision despite the lack of jurisdiction of the court that rendered
such final order or decision;
c. Failed to apply any provision, principle, policy or rule contained in these Special ADR Rules resulting
in substantial prejudice to the aggrieved party; and
d. Committed an error so egregious and harmful to a party as to amount to an undeniable excess of
jurisdiction.
The mere fact that the petitioner disagrees with the Court of Appeals’ determination of questions of fact,
of law or both questions of fact and law, shall not warrant the exercise of the Supreme Court’s
discretionary power. The error imputed to the Court of Appeals must be grounded upon any of the
above prescribed grounds for review or be closely analogous thereto.
A mere general allegation that the Court of Appeals has committed serious and substantial error or that
it has acted with grave abuse of discretion resulting in substantial prejudice to the petitioner without
indicating with specificity the nature of such error or abuse of discretion and the serious prejudice
suffered by the petitioner on account thereof, shall constitute sufficient ground for the Supreme Court to
dismiss outright the petition. (Emphasis supplied)
The applicable standard for judicial review of arbitral awards in this jurisdiction is set forth in Rule 19.10
which states:
Rule 19.10. Rule on judicial review on arbitration in the Philippines.--As a general rule, the court can
only vacate or set aside the decision of an arbitral tribunal upon a clear showing that the award suffers
from any of the infirmities or grounds for vacating an arbitral award under Section 24 of Republic
Act No. 876 or under Rule 34 of the Model Law in a domestic arbitration, or for setting aside an
award in an international arbitration under Article 34 of the Model Law, or for such other grounds
provided under these Special Rules.
xxxx
The court shall not set aside or vacate the award of the arbitral tribunal merelyon the ground that the
arbitral tribunal committed errors of fact, or of law, or of fact and law, as the court cannot substitute its
judgment for that of the arbitral tribunal. (Emphasis supplied)
The above rule embodied the stricter standard in deciding appeals from arbitral awards established by
jurisprudence. In the case of Asset Privatization Trust v. Court of Appeals,77 this Court held:
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.Courts are without power to amend or overrule merely because of disagreement with
matters of law or facts determined by the arbitrators.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.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. Judicial review of an arbitration is, thus,
more limited than judicial review of a trial.78
Accordingly, we examine the merits of the petition before us solely on the statutory ground raised for
vacating the Second Partial Award: evident partiality, pursuant to Section 24 (b) of the Arbitration Law
(RA 876) and Rule 11.4 (b) of the Special ADR Rules.
Evident Partiality
Evident partiality is not defined in our arbitration laws. As one of the grounds for vacating an arbitral
award under the Federal Arbitration Act (FAA) in the United States (US), the term "encompasses both
an arbitrator’s explicit bias toward one party and an arbitrator’s inferred bias when an arbitrator fails to
disclose relevant information to the parties."79
From a recent decision80 of the Court of Appeals of Oregon, we quote a brief discussion of the common
meaning of evident partiality:
To determine the meaning of "evident partiality," we begin with the terms themselves. The common
meaning of "partiality" is "the inclination to favor one side."Webster’s Third New Int'l Dictionary 1646
(unabridged ed 2002); see also id. (defining "partial" as "inclined to favor one party in a cause or one
side of a question more than the other: biased, predisposed" (formatting in original)). "Inclination," in
turn, means "a particular disposition of mind or character : propensity, bent" or "a tendency to a
particular aspect, state, character, or action."Id. at 1143 (formatting in original); see also id. (defining
"inclined" as "having inclination, disposition, or tendency").
The common meaning of "evident" is "capable of being perceived esp[ecially] by sight : distinctly visible
: being in evidence : discernable[;] * * * clear to the understanding : obvious, manifest, apparent."Id. at
789 (formatting in original); see also id. (stating that synonyms of "evident" include "apparent, patent,
manifest, plain, clear, distinct, obvious, [and] palpable" and that, "[s]ince evident rather naturally
suggests evidence, it may imply the existence of signs and indications that must lead to an
identification or inference" (formatting in original)). (Emphasis supplied)
Evident partiality in its common definition thus implies "the existence of signs and indications that must
lead to an identification or inference" of partiality.81 Despite the increasing adoption of arbitration in
many jurisdictions, there seems to be no established standard for determining the existence of evident
partiality. In the US, evident partiality "continues to be the subject of somewhat conflicting and
inconsistent judicial interpretation when an arbitrator’s failure to disclose prior dealings is at issue." 82
The first case to delineate the standard of evident partiality in arbitration proceedings
was Commonwealth Coatings Corp. v. Continental Casualty Co., et al.83 decided by the US Supreme
Court in 1968. The Court therein addressed the issue of whether the requirement of impartiality applies
to an arbitration proceeding. The plurality opinion written by Justice Black laid down the rule that the
arbitrators must disclose to the parties "any dealings that might create an impression of possible
bias,"84 and that underlying such standard is "the premise that any tribunal permitted by law to try cases
and controversies not only must be unbiased but also must avoid even the appearance of bias." 85 In a
separate concurring opinion, Justice White joined by Justice Marshall, remarked that "[t]he Court does
not decide today that arbitrators are to be held to the standards of judicial decorum of Article III judges,
or indeed of any judges."86 He opined that arbitrators should not automatically be disqualified from an
arbitration proceeding because of a business relationship where both parties are aware of the
relationship in advance, or where the parties are unaware of the circumstances but the relationship is
trivial. However, in the event that the arbitrator has a "substantial interest" in the transaction at hand,
such information must be disclosed.
Subsequent cases decided by the US Court of Appeals Circuit Courts adopted different approaches,
given the imprecise standard of evident partiality in Commonwealth Coatings.
In Morelite Construction Corp. v. New York District Council Carpenters Benefit Funds,87 the Second
Circuit reversed the judgment of the district court and remanded with instructions to vacate the
arbitrator’s award, holding that the existence of a father-son relationship between the arbitrator and the
president of appellee union provided strong evidence of partiality and was unfair to appellant
construction contractor. After examining prior decisions in the Circuit, the court concluded that –
x x x we cannot countenance the promulgation of a standard for partiality as insurmountable as "proof of
actual bias" -- as the literal words of Section 10 might suggest. Bias is always difficult, and indeed often
impossible, to "prove." Unless an arbitrator publicly announces his partiality, or is overheard in a
moment of private admission, it is difficult to imagine how "proof" would be obtained. Such a standard,
we fear, occasionally would require that we enforce awards in situations that are clearly repugnant to
our sense of fairness, yet do not yield "proof" of anything.
If the standard of "appearance of bias" is too low for the invocation of Section 10, and "proof of
actual bias" too high, with what are we left? Profoundly aware of the competing forces that have
already been discussed, we hold that "evident partiality" within the meaning of 9 U.S.C. § 10 will be
found where a reasonable person would have to conclude that an arbitrator was partial to one
party to the arbitration.x x x88 (Emphasis supplied)
In Apperson v. Fleet Carrier Corporation,89 the Sixth Circuit agreed with the Morelite court’s analysis,
and accordingly held that to invalidate an arbitration award on the grounds of bias, the challenging party
must show that "a reasonable person would have to conclude that an arbitrator was partial" to the other
party to the arbitration.
This "myriad of judicial interpretations and approaches to evident partiality" resulted in a lack of a
uniform standard, leaving the courts "to examine evident partiality on a case-by-case basis."90 The case
at bar does not present a non-disclosure issue but conduct allegedly showing an arbitrator’s partiality to
one of the parties.
EPCIB/BDO, in moving to vacate the Second Partial Award claimed that the Arbitration Tribunal
exceeded its powers in deciding the issue of advance cost not contemplated in the TOR, and that
Chairman Barker acted with evident partiality in making such award. The RTC held that BDO failed to
substantiate these allegations. On appeal, the CA likewise found that the Arbitration Tribunal did not go
beyond the submission of the parties because the phrasing of the scope of the agreed issues in the
TOR ("[t]he issues to be determined by the Tribunal are those issues arising from the said Request for
Arbitration, Answer and Reply and such other issues as may properly arise during the arbitration")is
broad enough to accommodate a finding on the liability and the repercussions of BDO’s failure to share
in the advances on costs. Section 10 of the SPA also gave the Arbitration Tribunal authority to decide
how the costs should be apportioned between them.
However, the CA found factual support in BDO’s charge of partiality, thus:
On the issue on evident partiality, the rationale in the American case of Commonwealth Coatings Corp.
v. Continental Cas. Co. appears to be very prudent. In Commonwealth, the United States Supreme
Court reasoned that courts "should…be even more scrupulous to safeguard the impartiality of
arbitrators than judges, since the former have completely free rein to decide the law as well as the facts,
and are not subject to appellate review" in general. This taken into account, the Court applies the
standard demanded of the conduct of magistrates by analogy. After all, the ICC Rules require that
an arbitral tribunal should act fairly and impartially. Hence, an arbitrator’s conduct should be beyond
reproach and suspicion. His acts should be free from the appearances of impropriety.
An examination of the circumstances claimed to be illustrative of Chairman Barker’s partiality is
indicative of bias. Although RCBC had repeatedly asked for reimbursement and the withdrawal of
BDO’s counterclaims prior to Chairman Barker’s December 18, 2007 letter, it is baffling why it is only in
the said letter that RCBC’s prayer was given a complexion of being an application for a partial
award. To the Court, the said letter signaled a preconceived course of action that the relief
prayed for by RCBC will be granted.
That there was an action to be taken beforehand is confirmed by Chairman Barker’s furnishing the
parties with a copy of the Secomb article. This article ultimately favored RCBC by advancing its
cause. Chairman Barker makes it appear that he intended good to be done in doing so but due
process dictates the cold neutrality of impartiality. This means that "it is not enough…[that] cases
[be decided] without bias and favoritism. Nor is it sufficient that…prepossessions [be rid of]. [A]ctuations
should moreover inspire that belief." These put into the equation, the furnishing of the Secomb article
further marred the trust reposed in Chairman Barker. The suspicion of his partiality on the subject
matter deepened. Specifically, his act established that he had pre-formed opinions.
Chairman Barker’s providing of copies of the said text is easily interpretable that he had prejudged the
matter before him. In any case, the Secomb article tackled bases upon which the Second Partial Award
was founded. The subject article reflected in advance the disposition of the ICC arbitral
tribunal. The award can definitely be viewed as an affirmation that the bases in the Secomb article
were adopted earlier on. To the Court, actuations of arbitrators, like the language of judges, "must be
guarded and measured lest the best of intentions be misconstrued."
x x x x91 (Emphasis supplied)
We affirm the foregoing findings and conclusion of the appellate court save for its reference to
the obiter in Commonwealth Coatings that arbitrators are held to the same standard of conduct imposed
on judges. Instead, the Court adopts the reasonable impression of partiality standard, which requires a
showing that a reasonable person would have to conclude that an arbitrator was partial to the other
party to the arbitration. Such interest or bias, moreover, "must be direct, definite and capable of
demonstration rather than remote, uncertain, or speculative."92 When a claim of arbitrator’s evident
partiality is made, "the court must ascertain from such record as is available whether the arbitrators’
conduct was so biased and prejudiced as to destroy fundamental fairness."93
Applying the foregoing standard, we agree with the CA in finding that Chairman Barker’s act of
furnishing the parties with copies of Matthew Secomb’s article, considering the attendant
circumstances,is indicative of partiality such that a reasonable man would have to conclude that he was
favoring the Claimant, RCBC. Even before the issuance of the Second Partial Award for the
reimbursement of advance costs paid by RCBC, Chairman Barker exhibited strong inclination to grant
such relief to RCBC, notwithstanding his categorical ruling that the Arbitration Tribunal "has no
power under the ICC Rules to order the Respondents to pay the advance on costs sought by the ICC or
to give the Claimantany relief against the Respondents’ refusal to pay." 94 That Chairman Barker was
predisposed to grant relief to RCBC was shown by his act of interpreting RCBC’s letter, which merely
reiterated its plea to declare the Respondents in default and consider all counterclaims withdrawn – as
what the ICC Rules provide – as an application to the Arbitration Tribunal to issue a partial award in
respect of BDO’s failure to share in the advance costs. It must be noted that RCBC in said letter did not
contemplate the issuance of a partial order, despite Chairman Barker’s previous letter which mentioned
the possibility of granting relief upon the parties making submissions to the Arbitration Tribunal.
Expectedly, in compliance with Chairman Barker’s December 18, 2007 letter, RCBC formally applied for
the issuance of a partial award ordering BDO to pay its share in the advance costs.
Mr. Secomb’s article, "Awards and Orders Dealing With the Advance on Costs in ICC Arbitration:
Theoretical Questions and Practical Problems"95 specifically dealt with the situation when one of the
parties to international commercial arbitration refuses to pay its share on the advance on costs. After a
brief discussion of the provisions of ICC Rules dealing with advance on costs, which did not provide for
issuance of a partial award to compel payment by the defaulting party, the author stated:
4. As we can see, the Rules have certain mechanisms to deal with defaulting parties. Occasionally,
however, parties have sought to use other methods to tackle the problem of a party refusing to pay its
part of the advance on costs. These have included seeking an order or award from the arbitral tribunal
condemning the defaulting party to pay its share of the advance on costs.1âwphi1 Such applications are
the subject of this article.96
By furnishing the parties with a copy of this article, Chairman Barker practically armed RCBC with
supporting legal arguments under the "contractual approach" discussed by Secomb. True enough,
RCBC in its Application for Reimbursement of Advance Costs Paid utilized said approach as it
singularly focused on Article 30(3)97 of the ICC Rules and fiercely argued that BDO was contractually
bound to share in the advance costs fixed by the ICC.98 But whether under the "contractual approach" or
"provisional approach" (an application must be treated as an interim measure of protection under Article
23 [1] rather than enforcement of a contractual obligation), both treated in the Secomb article, RCBC
succeeded in availing of a remedy which was not expressly allowed by the Rules but in practice has
been resorted to by parties in international commercial arbitration proceedings. It may also be
mentioned that the author, Matthew Secomb, is a member of the ICC Secretariat and the "Counsel in
charge of the file", as in fact he signed some early communications on behalf of the ICC Secretariat
pertaining to the advance costs fixed by the ICC. 99 This bolstered the impression that Chairman Barker
was predisposed to grant relief to RCBC by issuing a partial award.
Indeed, fairness dictates that Chairman Barker refrainfrom suggesting to or directing RCBC towards a
course of action to advance the latter’s cause, by providing it with legal arguments contained in an
article written by a lawyer who serves at the ICC Secretariat and was involved or had participation --
insofar as the actions or recommendations of the ICC – in the case. Though done purportedly to assist
both parties, Chairman Barker’s act clearly violated Article 15 of the ICC Rules declaring that "[i]n all
cases, the Arbitral Tribunal shall act fairly and impartially and ensure that each party has a reasonable
opportunity to present its case." Having pre-judged the matter in dispute, Chairman Barker had lost his
objectivity in the issuance of the Second Partial Award.
In fine, we hold that the CA did not err in concluding that the article ultimately favored RCBC as it
reflected in advance the disposition of the Arbitral Tribunal, as well as "signalled a preconceived course
of action that the relief prayed for by RCBC will be granted." This conclusion is further confirmed by the
Arbitral Tribunal’s pronouncements in its Second Partial Award which not only adopted the "contractual
approach" but even cited Secomb’s article along with other references, thus:
6.1 It appears to the Tribunal that the issue posed by this application is essentially a contractual one. x x
x
xxxx
6.5 Matthew Secomb, considered these points in the article in 14 ICC Bulletin No. 1 (2003) which was
sent to the parties. At Para. 19, the learned author quoted from an ICC Tribunal (Case No. 11330) as
follows:
"The Arbitral Tribunal concludes that the partiesin arbitrations conducted under the ICC Rules have a
mutually binding obligation to pay the advance on costs as determined by the ICC Court, based on
Article 30-3 ICC Rules which – by reference – forms part of the parties’ agreement to arbitration under
such Rules."100
The Court, however, must clarify that the merits of the parties’ arguments as to the propriety of the
issuance of the Second Partial Award are not in issue here. Courts are generally without power to
amend or overrule merely because of disagreement with matters of law or facts determined by the
arbitrators. 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. A contrary rule would make an
arbitration award the commencement, not the end, of litigation. 101 It is the finding of evident partiality
which constitutes legal ground for vacating the Second Partial Award and not the Arbitration Tribunal’s
application of the ICC Rules adopting the "contractual approach" tackled in Secomb’s article.
Alternative dispute resolution methods or ADRs – like arbitration, mediation, negotiation and conciliation
– are encouraged by this Court. By enabling parties to resolve their disputes amicably, they provide
solutions that are less time-consuming, less tedious, less confrontational, and more productive of
goodwill and lasting relationship.102 Institutionalization of ADR was envisioned as "an important means
to achieve speedy and impartial justice and declog court dockets."103 The most important feature of
arbitration, and indeed, the key to its success, is the public’s confidence and trust in the integrity of the
process.104 For this reason, the law authorizes vacating an arbitral award when there is evident partiality
in the arbitrators.
Injunction Against Execution Of Arbitral Award
Before an injunctive writ can be issued, it is essential that the following requisites are present: (1) there
must be a right inesse or the existence of a right to be protected; and (2) the act against which
injunction to be directed is a violation of such right. The onus probandi is on movant to show that there
exists a right to be protected, which is directly threatened by the act sought to be enjoined. Further,
there must be a showing that the invasion of the right is material and substantial and that there is an
urgent and paramount necessity for the writ to prevent a serious damage.105
Rule 19.22 of the Special ADR Rules states:
Rule 19.22. Effect of appeal.—The appeal shall not stay the award, judgment, final order or resolution
sought to be reviewed unless the Court of Appeals directs otherwise upon such terms as it may deem
just.
We find no reversible error or grave abuse of discretion in the CA’s denial of the application for stay
order or TRO upon its finding that BDO failed to establish the existence of a clear legal right to enjoin
execution of the Final Award confirmed by the Makati City RTC, Branch 148, pending resolution of its
appeal.It would be premature to address on the merits the issues raised by BDO in the present petition
considering that the CA still has to decide on the validity of said court's orders confirming the Final
Award. But more important, since BOO had already paid ₱637,941,185.55 m manager's check, albeit
under protest, and which payment was accepted by RCBC as full and complete satisfaction of the writ
of execution, there is no more act to be enjoined.
Settled is the rule that injunctive reliefs are preservative remedies for the protection of substantive rights
and interests. Injunction is not a cause of action in itself, but merely a provisional remedy, an adjunct to
a main suit. When the act sought to be enjoined has become fait accompli, the prayer for provisional
remedy should be denied. 106
Thus, the Court ruled in Gov. Looyuko107 that when the events sought to be prevented by injunction or
prohibition have already happened, nothing more could be enjoined or prohibited. Indeed, it is a
universal principle of law that an injunction will not issue to restrain the performance of an act already
done. This is so for the simple reason that nothing more can be done in reference thereto. A writ of
injunction becomes moot and academic after the act sought to be enjoined has already been
consummated.
WHEREFORE, premises considered, the petition m G.R. No. 199238 is DENIED. The Resolution dated
September 13,2011 ofthe Court of Appeals in CA-G.R. SP No. 120888 is AFFIRMED.
The petition in G.R. No. 196171 is DENIED. The Decision dated December 23, 2010 of the Court of
Appeals in CA-G.R. SP No. 113525 is hereby AFFIRMED.
SO ORDERED.
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 Agreement 3 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, 2008.4Payment of the balance of the
contract price will be based on actual work finished within 15 days from receipt of the monthly progress
billings. Per the agreed work schedule, the completion date of the project was December
2008.5 Mabuhay also submitted the required Performance Bond6 issued by respondent Utility
Assurance Corporation (UTASSCO) in the amount equivalent to 20% down payment or ₱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%)
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 Arbitration10 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
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 137718 of the Civil
Code, the CA said that the provision should be construed in favor of petitioner considering that the
obscurely phrased provision was drawn up by respondent and Mabunay. Further, the appellate court
stated that respondent could not possibly guarantee the down payment because it is not Mabunay who
owed the down payment to petitioner but the other way around. Consequently, the completion by
Mabunay of 31.39% of the construction would not lead to the extinguishment of respondent’s liability.
The ₱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 ALTERNATIVE
DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE
RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW
ARBITRAL AWARDS.
B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN
ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF
REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS
FILED BEFORE THE COURT.
C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE
CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO
DO WITH CONSTRUCTION AGREEMENTS.21
Our Ruling
On the procedural issues raised, we find no merit in petitioner’s contention that with the
institutionalization of alternative dispute resolution under Republic Act (R.A.) No. 9285, 22 otherwise
known as the Alternative Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review
the decisions or awards of the CIAC. Petitioner erroneously relied on the provision in said law allowing
any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition either to confirm,
correct or vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or
decisions of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares
that confirmation by the RTC is not required, thus:
SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by
Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with the
Rules of Procedure to be promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided
under E.O. No. 1008. (Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion of the contract, or after the
abandonment or breach thereof. By express provision of Section 19 thereof, the arbitral award of the
CIAC is final and unappealable, except on questions of law, which are appealable to the Supreme
Court. With the amendments introduced by R.A. No. 7902 and promulgation of the 1997 Rules of Civil
Procedure, as amended, the CIAC was included in the enumeration of quasijudicial agencies whose
decisions or awards may be appealed to the CA in a petition for review under Rule 43. Such review of
the CIAC award may involve either questions of fact, of law, or of fact and law. 23
Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this
Court and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards
from domestic arbitration awards that need to be confirmed to be executory, said awards are therefore
not covered by Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO No. 1008,
as amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing
Construction Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in
Section 18 thereof, which reads:
SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the
parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the
Rules of Court.
As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated
before the CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the
performance of his obligations under the Construction Agreement was the very first issue stipulated in
the Terms of Reference26(TOR), which is distinct from the issue of the extent of respondent’s liability
under the Performance Bond.
Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the
liquidated damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA
opined that delay should be reckoned only after the lapse of the one-year contract period, and
consequently Mabunay’s liability for liquidated damages arises only upon the happening of such
condition.
We reverse the CA.
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a
cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.27
Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable for the
damage for not completing it within such time, unless the delay is excused or waived. 28
The Construction Agreement provides in Article 10 thereof the following conditions as to completion
time for the project
1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR Project : Villa Beatriz
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. Subject : Notice of Delay

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER
Dear Mr. Mabunay:
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 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
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1)
40% completed as of this date. This delay will create major impact on your over-all schedule as the
that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and
finishing works will all be dependent on the enclosure of the building.
(3) that the creditor requires the performance judicially or extrajudicially.30

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical
In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform
materials on site. We would highly appreciate if you could attend our next regular meeting so we could
or complete the project was not yet demandable as of November 19, 2008 when petitioner terminated
immediately address this matter. Thank you.
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 Very truly yours,
giving rise to the contractor’s liability for damages.
Engr. Sheila N. Botardo
We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction Manager – LMI/FEPI32
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 October 15, 2008
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 xxxx
be deemed in default if, among others, it had delayed without justifiable cause the completion of the
project "by more than thirty (30) calendar days based on official work schedule duly approved by the Dear Mr. Mabunay,
OWNER."31
We have noticed continuous absence of all the Engineers that you have assigned on-site to administer
Records showed that as early as April 2008, or within four months after Mabunay commenced work and supervise your contracted work. For the past two (2) weeks, your company does not have a
activities, the project was already behind schedule for reasons not attributable to petitioner. In the Technical Representative manning the jobsite considering the critical activities that are in progress and
succeeding months, Mabunay was still unable to catch up with his accomplishment even as petitioner the delays in schedule that you have already incurred. In this regard, we would highly recommend the
constantly advised him of the delays, as can be gleaned from the following notices of delay sent by immediate replacement of your Project Engineer within the week.
petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:
We would highly appreciate your usual attention on this matter.
April 30, 2008
x x x x33
Seven Shades of Blue
Boracay Island November 5, 2008
Malay, Aklan
xxxx
1âwphi1
Dear Mr. Mabunay,
Attention : Mr. Martin Mabunay
General Manager 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
Thru : Engr. Reynaldo Gapasin
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.
b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or
delays shall not relieve it of the obligation to complete and finish the construction.
Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts
retained under Article 9 or retained by the OWNER when the works called for under this Agreement
have been finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors
collectibles without prior consent and concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any
further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a)
above, from any and all money or amounts due or which will become due to the CONTRACTOR by
virtue of this Agreement and/or to collect such amounts from the Performance Bond filed by the
CONTRACTOR in this Agreement.36 (Emphasis supplied.)
Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:
ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case
of breach thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated
by the parties in agreeing upon the liquidated damages, the law shall determine the measure of
damages, and not the stipulation.
A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has
a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 37 The amount agreed upon
answers for damages suffered by the owner due to delays in the completion of the project. 38 As a
precondition to such award, however, there must be proof of the fact of delay in the performance of the
obligation.39
Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to
complete the project within the stipulated period or the extension granted by the owner. However, this
will not defeat petitioner’s claim for damages nor respondent’s liability under the Performance Bond.
Mabunay was clearly in default considering the dismal percentage of his accomplishment (32.38%) of
the work he contracted on account of delays in executing the scheduled work activities and repeated
failure to provide sufficient manpower to expedite construction works. The events of default and
remedies of the Owner are set forth in Article 13, which reads:
ARTICLE 13 – DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.
xxxx
g. In case the CONTRACTOR has done any of the following:
(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress
of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30)
calendar days based on official work schedule duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations
under the Agreement.
(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the contrary,
sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER
may after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site
and expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the
CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also without
diminishing or affecting the rights and powers conferred on the OWNER by this Agreement and the
OWNER may himself complete the work or may employ any other contractor to complete the work. If
the OWNER shall enter and expel the CONTRACTOR under this clause, the OWNER shall be entitled
to confiscate the performance bond of the CONTRACTOR to compensate for all kinds of damages the
OWNER may suffer. All expenses incurred to finish the Project shall be charged to the CONTRACTOR
and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of
execution, damages for the delay in the completion, if any, and all; other expenses incurred by the
OWNER have been ascertained which amount shall be deducted from any money due to the
CONTRACTOR on account of this Agreement. The CONTRACTOR will not be compensated for any
loss of profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity,
additional financing cost or overhead or opportunity losses related to the unaccomplished portions of
the work.40 (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to his failure to substantially
perform the work on account of tremendous delays in executing the scheduled work activities. Where a
party to a building construction contract fails to comply with the duty imposed by the terms of the
contract, a breach results for which an action may be maintained to recover the damages sustained
thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially
in accordance with the terms of the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure
to complete the building. Having elected to terminate the contract and expel the contractor from the
project site under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the
bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such
stipulation allowing the confiscation of the contractor’s performance bond partakes of the nature of a
penalty clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume
greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen the
coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of damages caused by the breach. It is well-
settled that so long as such stipulation does not contravene law, morals, or public order, it is strictly
binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the
terms of the surety bond it issued, its liability is limited to the performance by said contractor to the
extent equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the
project by Mabunay, its liability was extinguished because the value of such accomplishment already
exceeded the 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:
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 With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC
executed.45 Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth No pronouncement as to costs.
Insurance Corporation v. Court of Appeals46
SO ORDERED.
Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds
was made on the condition that its liability shall in no case exceed the amount of the said bonds.

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

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

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.