Philippine Institute of

Arbitrators
Involved in Arbitration / ADR?

We know the different processes.

We can help you dissect and analyze them,

refine and combine them, and create
hybrid procedures to make them suitable
for particular relationships, as well as to
develop strategies and point you to the
right direction.
THE ARBITRATION AGREEMENT
by

MARIO E. VALDERRAMA
LLB, FCIArb, FHKIArb, FPIArb
General Counsel, CIAC
Arbitrator in CIAC, PDRC and WESM
CIArb Approved Tutor

Contact Details
Tel No 367 4001
Cell 0917 411 4594
E-mail <marval.law@gmail.com>
THE ARBITRATION AGREEMENT

OBJECTIVES OF PRESENTATION:
To provide an introduction to the
arbitration agreement and its
nuances.
Concept
Simply, it is an agreement between
two or more persons referring a
future or present controversy or
controversies to arbitration for
resolution.
Concept
Definition in New York Convention:
Each contracting State shall recognize
an agreement in writing under which
the parties undertake to submit to
arbitration all or any difference which
have arisen or which may arise between
them in respect of a defined legal
relationship, whether contractual or not,
concerning a subject matter capable of
settlement by arbitration (Art. 2 (1)).
Concept
Definition in Model Law 1985:
Arbitration agreement is an agreement by
the parties to submit to arbitration all or
certain disputes which have arisen or which
may arise between them in respect of a defined
legal relationship, whether conractual or not.
(Art. 7 (1)).
NOTE: Model Law 1985 requires that the
agreement be in writing. While the 2006
amendment allows unwritten agreements, still
the Convention requires that the agreement be
in writing.
Types
Arbitration Clause a clause referring future
disputes to arbitration. This could be:
A clause in a wider (or main) contract;

A clause in an incorporated instrument; or

A clause in a separate agreement.

Submission Agreement refers existing

dispute/s.
Continuing Offers to Arbitrate found in
treaties, etc.
 IMPORTANCE

The foundation of almost every arbitration.

Arbitration is a matter of contract and a party

cannot be required to submit to arbitration any
dispute which he has not agreed to submit.

See Born on page 1.

 MISLABELED AGREEMENTS
The referral should be to arbitration and
not to any other dispute resolution
process.

The label arbitration adopted by the

parties is not controlling. It is necessary to
determine the substance of the dispute
resolution process if it were really
arbitration.
 MISLABELED AGREEMENTS
The Elements (all must be present to qualify as
arbitration):

Consensual means to resolve the dispute/s.

(Contractual). A creature that owes its existence to the
will of the parties alone.
Non-Governmental decision maker selected by or for the
parties. (Private dispute resolution process)
Final and binding decision. (Judicial / adjudicatory)
Use of adjudicatory procedures.

Ref: Gary Born: International Arbitration: Law and Practice,

pp. 4 6.
 MISLABELED AGREEMENTS

CONCEPT OF ARBITRATION:
Arbitration is a device whereby the
settlement of a question, which is of interest for
two or more persons, is entrusted to one or more
other persons the arbitrator or arbitrators- who
derive their powers from a private agreement, not
from the authorities of a State, and who are to
proceed and decide the case on the basis of such
an agreement (Fouchard, Gaillard, Goldman on
International Commercial Arbitration para 7
citing several authors).
Many so-called arbitration in the Philippines will
not qualify.
 MISLABELED AGREEMENTS
Problem in the Philippines: What if
the law itself mislabeled the process?
There are many processes called
arbitration in the Philippines. Not all
of them will pass the tests. And not all
of them will qualify under the definition
of arbitration.
Thus, the need to qualify them, e.g.
CIAC arbitration, consumer arbitration,
labor arbitration, etc.
 CONSENT

Independent Consent consent is to

the procedure / dispute resolution
process.

Derivative Consent consent to

something carries with it consent to
the procedure / dispute resolution
process.
 OBJECT AND
CONSIDERATION
Mutual positive and negative obligations.
Positive mutual obligation to participate
cooperatively in arbitration.
Negative mutual obligation not to litigate.

Obligations can be altered by agreement.

Obligations are enforceable by law.
Referral to arbitration.

Anti-suit injunctions.

Damages.

Non-recognition of judgments.
CAPACITIES OF THE PARTIES
Capacitated adults.
Capacities are governed by the national /
domiciliary law of the parties.

Note that, in international arbitration

and as a general proposition, a state
cannot use its own laws to evade
liability (i.e. to challenge its capacity or
arbitrability).
 PARTIES BOUND BY AN
ARBITRATION AGREEMENT
The parties to the agreement.
Non-signatories bound by the arbitration
agreement:
Agency.

Alter-ego (actual and apparent)- veil piercing.

Group of Companies Doctrine.

Succession (merger, business combination).

Assignment or Transfer.

Estoppel.

Corporate Officers and Directors?

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

Clearly, the Bill of Lading incorporates by reference

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

The liberal view is that a mere reference to a

contract containing an arbitration clause would
not of itself be sufficient to incorporate and
arbitration clause.

The strict view, said to be the prevalent view,

requires a specific reference to an arbitration
clause for an arbitration agreement to be
validly incorporated by reference.
 INCORPORATION CLAUSES
Cases (some only; there are more)
Carob Ind. Pty. Ltd. v Simto Pty. Ltd (1996)
TW Thomas & Co. Ltd. V Portsea Steamship Co.
Ltd (1912)
Aughton Ltd. V MF Kent Services Ltd (1991)
Roche Products Ltd v Freeman Process Systems
Ltd (1975)
Lexair Ltd v Edgar W. Taylor Ltd (1993)
Quantas Airways v Dillingham Corp (1985)
 INCORPORATION CLAUSES
The strict view the incorporation must
be specific was uniformly applied to
documents of title and insurance contracts
with incorporation clauses.
The liberal view is being applied, by
jurisprudence, to other contracts.
[I]t is (still) a matter of construing each
individual contract to determine whether or
not it was contractually agreed the disputes
should be resolved by way of arbitration.
(Carob Industries v Simto, others).
 INCORPORATION CLAUSES
Reasons for requiring specificity:

Autonomy of arbitration clauses.

Arbitration clauses amount to a waiver of the
right to go court, hence the waiver must be
clear.
Arbitration clauses are merely ancilliary or
collateral, hence not germane, to the main
contract.
With respect to transferable documents of title,
the transferee could not reasonably be
assumed to know that the incorporated
instrument has an arbitration clause (foreign
cases cited in previous slide).
 INCORPORATION CLAUSES
Philippine Arbitration Law mutated in
2004 with the passage of R.A. 9285.

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

states:
International commercial arbitration
shall be governed by the Model Law on
International Arbitration x x x.
 INCORPORATION CLAUSES
Model Law (1985) Chapter II Art. 7 (2)
states in its last sentence:

The reference in a contract to a

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

With the change in the law, it is now

reasonable to assume that, at least in
international arbitration, there would be a
change in the prevailing jurisprudence
involving incorporation clauses.

In interpreting the Model law, regard

shall be had to its international origin and
to the need for uniformity in its
interpretation x x x. (Model Law Sec. 20)
 INCORPORATION CLAUSES

Model Law Art. 7 was not one of the

provisions made applicable to our
domestic arbitration law.

Arts. 8, 10, 11, 12, 13, 14, 18 and 19 and

29 to 32 of the Model Law and Sections 22
to 31 of the preceding Chapter 4 shall
apply to domestic arbitration. (R.A. 9285
Sec. 33).
 INCORPORATION CLAUSES
Submission: it would be absurd if we were
to retain the prevailing rule if the
arbitration were domestic, and adopt the
new rule as provided for in the Model law
if the arbitration were international.

Alternatively, are we to retain the

prevailing rule even if the arbitration were
international?
 DRAFTING ARBITRATION
AGREEMENTS
Could be short or standardized.
Could be long and tailor made.
Could be very long.
Could be made applicable to a series
of related contracts / multiple
parties.
Could be generic but concise and well
tested.
 DRAFTING ARBITRATION
AGREEMENTS: Choices
- The place or seat of arbitration
- The types of arbitration
- The governing law of the contract
- The number of arbitrators
- The language of arbitration

Note: The last four are covered by

default rules under Philippine law.
 CHOICES: The place or seat of
arbitration
The Model Law view is that an arbitration
must be juridically rooted in a particular
jurisdiction and must be conducted under that
jurisdictions arbitration law.

The arbitration law provides the framework

for arbitration, but not the procedure which is left
to the parties.

There is danger that a delocalized

arbitration, or one without a seat, would likely
not be enforced.
Institutions have provided rules to meet the
problem.
 CHOICES: The place or seat of
arbitration
This choice will impact on three stages of the
arbitration:

1. recognition of the arbitration agreement a country

may have entered into treaties involving arbitration.
The more successful is the New York Convention of 1958.

2. proceedings dependent on the law of the place.

3. recognition or enforcement of the award same as

item 1.
 CHOICES: Type of Arbitration
a. ad hoc do it yourself arbitration. The
parties will have to make their own rules.

b. Institutional administered by an arbitral

institution, usually under its own rules.

- fully administered. Example: ICC arbitration

- partly administered.
CHOICES: Governing Law of the Contract
and the Arbitration Agreement

- the laws are not necessarily the same

because the arbitration agreement is generally
treated as separate from the main contract

- the Model Law and the Convention have

default provisions re law governing the
arbitration agreement. But interpretation of the
Convention default provision varies, depending on
the operating concept of the country involved, if
parties stipulated on the law of the contract.
CHOICES: The Number of Arbitrators

- the default provision is 3.

CHOICES: The Language of Arbitration

- in the Philippines, the default

provision is English or arbitrator
discretion in international
arbitration; English or Filipino or
arbitrator discretion in domestic
arbitration.
CHOICES: Others
- there are several other choices
but we cannot discuss all of them.
They are usually discussed under the
topic preliminary conference, agenda
items and terms of reference.
 VALIDITY AND ENFORCEABILITY
ISSUES
Autonomy of the Arbitration Agreement from the Main
Contract

- challenge should generally be on the agreement, not on

the main contract.
- if event causing invalidity of the main contract also affects
the arbitration clause, then both should be declared void by
the arbitral tribunal.
- autonomy is a legal concept, not a factual determination.
- consequences: effect of status of main contract;
assignments; governing law
 VALIDITY AND ENFORCEABILITY
ISSUES: Form
Must be in writing.

- note that the meaning of in writing has

evolved

- while new Model Law allows unwritten

arbitration agreements, still the
Convention requires a written form for
enforceability.
 VALIDITY AND ENFORCEABILITY
ISSUES: Substantive Validity
Test: generally contractual. Null and void,
inoperative or incapable of being
performed.

null and void

Unconscionability
Fraud
Mistake
Lack of capacity
Illegality
 VALIDITY AND ENFORCEABILITY
ISSUES: Substantive Validity
Test: generally contractual. Null and void,
inoperative or incapable of being
performed. (cont)

inoperative
Termination
Waiver
Changed circumstances
Repudiation
Inconvenient arbitral seat
 VALIDITY AND ENFORCEABILITY
ISSUES: Substantive Validity
Test: generally contractual. Null and void,
inoperative or incapable of being
performed. (cont)

incapable of being performed

Impossibility and similar defenses
 VALIDITY AND ENFORCEABILITY
ISSUES: Arbitrability

As a general proposition, all disputes are

potentially arbitrable in respect of any
defined relationship, whether contractual
or not (Convention, Art. II(1); Model Law
Art. 7(1).
Some disputes, however, are generally
recognized as inherently non-arbitrable.
Others are non-arbitrable by law.
 VALIDITY AND ENFORCEABILITY
ISSUES: Arbitrability

Legal Non-Arbitrability (Non-Arbitrability

Doctrine)
Premise: Each state decides which matters may
or may not be resolved by arbitration in
accordance with its own political, social and
economic policy. (Redfern on page 124).
The resolution of the excluded disputes are
reserved to courts and specialized bodies.
The exclusions are enforceable by courts if
backed by statutes.
VALIDITY AND ENFORCEABILITY ISSUES:
Pathological Clauses
An agreement that will hamper or
defeat the constitution of the tribunal
or invite court intervention is
pathological.

- agreements that are muddled,

unclear or incomplete such that it is
not effective to cover all the disputes
that the parties intended to submit to
arbitration are pathological clauses.
 VALIDITY AND ENFORCEABILITY
ISSUES: Pathological Clauses
1. The one-off clause in international ad hoc
arbitration agreements:

All disputes arising out of the present contract shall be

settled by way or arbitration.

There would be difficulty in constituting the tribunal in

case of recalcitrance as there is no indication of the law that
will apply to the arbitration or any competent authority that
may be called upon to assist.

Note: Institutional rules normally provide a solution to the

problem.
VALIDITY AND ENFORCEABILITY
ISSUES: Pathological Clauses
2. Imprecise or false designation of the arbitral
institution

Any dispute or contravention of the present contract

shall be submitted to the French Chamber of Commerce of
Sao Paolo.

In case of no amicable settlement, all disputes that

may arise shall be settled pursuant to the arbitration rules
of the International Chamber of Commerce of Singapore.

Any dispute arising out of the present contract shall be

submitted to arbitration to be administered by the
Philippine Chamber of Commerce and Industry under its
rules that are presently in force.
VALIDITY AND ENFORCEABILITY
ISSUES: Pathological Clauses
3. Internally contradictory agreements

The arbitration shall be seated in Miami, but the seat

of arbitration shall be at the ICC in Paris.

The rules shall be ICC Rules, to be administered by

the SIAC.

Agreements that appear to provide for both arbitration

and litigation.
VALIDITY AND ENFORCEABILITY
ISSUES: Pathological Clauses
4. Optional or non-mandatory agreements

- using the word may.

- giving the parties an option to either arbitrate or

litigate.
 EFFECT OF VALID AND ENFORCEABLE
ARBITRATION AGREEMENT

Arbitration is a compulsory dispute

resolution procedure involving a final
and binding decision.
 EFFECT OF VALID AND ENFORCEABLE
ARBITRATION AGREEMENT ON DISPUTE
BROUGHT TO LITIGATION

1. Any party may apply to the court for an

order to refer the parties to arbitration. With time
bar.

- Time bar under the Model Law: not later

than the time when the applicant submits his first
statement on the substance of the dispute (Art.
8.1.).

- Time bar under R.A. 9285: not later than the

pre-trial conference (Sec. 24).
 EFFECT OF VALID AND ENFORCEABLE
ARBITRATION AGREEMENT ON DISPUTE
BROUGHT TO LITIGATION
2. Once a prima facie existence of the arbitration
agreement were established, the court has no discretion
except to refer the parties to arbitration (Model Law Art.
8.1.; R.A. 9285 Sec. 24).

- Court may hear the matter if the court finds that the
arbitration agreement is null and void, or inoperative, or
incapable of being performed (ibid).

NOTE: Initiating the court case/ its pendency is not a

ground to stop the initiation and continuation of the arbitral
proceedings as well as the rendition of the award ( Model
Law Art. 8.2.; made applicable to domestic arbitration by
R.A. 9285 Sec. 33).
THE ARBITRATION AGREEMENT
QUESTIONS?

Comments and suggestions, critical, adverse or

otherwise, welcomed. I would love to hear from you
if you find any error or omission in this presentation
or if you have any suggestion on how to improve it.

E-mail to <marval.law@gmail.com>.
Visit our website at
<www.philippinearbitrators.org>.
 WANT TO KNOW MORE?
Attend our courses and seminars.
Contact us for schedules.
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Philippine Institute of Arbitrators

c/o Atty. Mario E. Valderrama
Tel. No. (632) 367 4001
Mobile 0917 4114 594
E-mail: marval.law@gmail.com