G.R. No.
L-12283 July 25, 1918 Governor-General a prerequisite only to the purchase
ARTHUR F. ALLEN, plaintiff-appellee,
vs.
THE PROVINCE OF TAYABAS, defendant-appellant.
Provincial Fiscal of Tayabas Crispin Oben for appellant.
Lawrence & Ross for appellee.
MALCOLM, J.:
On April 18, 1914, the Province of Tayabas, represented
by the Director of Public Works, and Arthur F, Allen,
contractor, entered into a contract whereby the
contractor agreed to construct five reenforced concrete
bridges for P39,200. This contract was in the usual form.
One provision was that the bridges were to be
constructed "in accordance with the said
advertisements, instructions to bidders, general
conditions, plans, specifications, proposal, and this
agreement." Other paragraphs of the contract
concerned the method and rate of payment for extras.
Four of the bridges were accepted by the Government
and paid for. The dispute between the parties arose as to
the fifth bridge, No. 53.3 and as to certain extras. As to
this bridge, the Province of Tayabas paid to the
contractor P4,360 on account of the contract price
thereof, but refused to pay the balance of P2,840
because plaintiff had deviated from the specifications
and because the work was defective. The province
further refused to pay for certain extras. To recover the
balance upon the contract was the purpose of the
contractor in bringing action for P9,685 (amended
complaint), alleged to be due him by the Province of
Tayabas. The common averments of the six causes of
action were: (1) Residence; (2) the contract; (3) the
faithful compliance "with all the terms and conditions of
the said contract" on the part of the contractor, and
completion and delivery of the bridges in question; (4)
refusal of defendant to pay plaintiff the balance due for
bridge No. 53.3 for certain extras, and as damages,
although frequently requested to do so. Defendant
demurred to the complaint on the ground that it did not
state facts sufficient to constitute a cause of action,
because: (a) The approval of the Governor-General to
the contract had not been given as contemplated by
section 2 of the Provincial Government Act (No. 83) and
(b) the certificate for payment had not been
accomplished by the Director of Public Works or the
district engineer as provided by section 6, of Act No.
1401, as amended. The demurrer was overruled.
Thereupon defendant answered, renewing as a special
defense the grounds of the demurrer, alleging defective
work on the part of the plaintiff, and admitting a total of
P2,454.78, the amount certified by the Director of Public
Works and the district engineer, as due the plaintiff. The
trial court gave judgment for the plaintiff-contractor for
P4,905, with legal interest from July 14, 1914, and costs.
Defendant moved for a new trial, which was denied, duly
excepted and perfected a bill of exceptions to this court.
Appellant's assignments of error relate to the findings of
fact and two main issues of law. We pass the facts for the
moment, and two main issues of law. We pass the facts
for the moment, to discuss the legal questions.
The first contention of appellant is that the Province of
Tayabas is not obligated to pay the contractor anything
because the contract was not approved by the
Governor-General. This position is absolutely untenable.
The law in force when the contract entered into and
when the action was tried, section 2, Act No. 83, as
amended by Act No. 1600, made the approval of the
and conveyance of real estate by a province. The
grammatical construction of the English text, which is
controlling, makes this perfectly clear. Moreover, the law
now in force (Administrative Code of 1917, section 2068)
has removed any possibility of doubt and has at the
same time revealed legislative intention, by placing the
requirement for the Governor-General's approval of
transfers of real estate by provinces in a section separate
and distinct from the section of the Code giving the
corporate powers of provinces.
The remaining legal issue merits more extended
consideration. Appellant's contention is that the
certificate by the district engineer and the Director of
Public Works must be obtained before suit can be
brought on a contract; that the findings of these officials
are conclusive; and that the complaint must contain an
averment to this effect. Appellee's reply must contain an
averment to this effect. Appellee's reply is that neither the
law nor the contract requires the submission to arbitration
of disputes between the Government and the
contractor, and that a mere administrative procedure
incident to payment has been established.
Act No. 1401, as amended by Act No. 1752, was in force
when this action was instituted. The same provisions are
now found in slightly altered phraseology in section 1917-
1923 of the Administrative Code of 1917. The law gives a
district engineer supervision over all contacts connected
with public works, which exceed the estimated cost of
P500. Section 6 of Act No. 1401, as amended by section 3
of Act No. 1752, reads:
No payments, partial or final, shall be made on any
public works without a certificate on the vouchers
therefor to the effect that the work for which payment is
contemplated has been accomplished, inspected, and
accepted. Such certificate for work under the supervision
of the district engineer shall be signed by him or his duly
authorized representative. For work not under his
supervision such certificate shall be signed by the
provincial treasurer.
Section 1922 of the Administrative Code of 1917, reads:
No payment, partial or final, shall be made on any public
work of construction or repair without a certificate on the
voucher therefor to the effect that the work for which
payment is contemplated has been accomplished in
accordance with the terms of the contract and has been
duly inspected and accepted. Such certificate shall be
signed by a duly authorized representative of the Director
of Public Works having full knowledge of the facts in the
case.
Contractors are of course bound to take notice of the
provisions of the law relating to contracts. Statutory
requirements cannot be departed from for the
accommodation of either party to a contract. As a
matter of acts, in the present instance, this obligation is
intensified in so far as the contractor is concerned for the
instructions to bidders contains this clause: "The
contractor shall comply with all existing or future laws, the
municipal or provincial building ordinances and
regulations in so far as the same are binding upon or
affect the parties hereto, the work, or those engaged
thereon." (No. 23).
The instructions to bidders, a part of the contract, under
the heading of "Payments," also contains the following:
51. Payments will be made monthly, based upon the
estimates of work satisfactorily completed and accepted
by the Director during the preceding month. Upon such
estimates the Province of Tayabas, P.I. shall pay to the
contractor a sum equal to ninety (90) per cent thereof up
to and until such time as the total work shall have been
completed or the contract canceled, as herein provided.
52. The acceptance of the work from time to time for the
purpose of making partial payments, shall not be
considered as a final acceptance of the work in
question.
53. Whenever the contract, in the opinion of the Director,
shall be completely performed on the part of the
contractor, the Director shall proceed promptly to
measure the work and shall make out and certify the final
estimates and acceptance for the same. The province
shall then, excepting for cause herein specified, pay to
the contractor promptly after the execution of said
certificate the remainder which shall be found due,
excepting therefrom such sum or sums as may be lawfully
retained under any of the provisions of this
contract; Provided, That nothing herein contained shall
be construed to waive the right of the Director, hereby
reserved, to reject the whole or any portion of the
aforesaid work should the same be found to have been
constructed in violation of any of the conditions or
covenant of this contract.
Both the law and the contract provide in mandatory
language for a certificate of acceptance by the Director
of Public Works or his representative before any payment
shall be made on any public work for the Government.
Contracts of this character, giving into the hands of a
third person or of the purchaser the power of
acceptance or non-acceptance, are not unusual. Courts
have frequently upheld them. The law regards the parties
as competent to contract in this manner. Municipal and
provincial contracts, being on the same footing as those
of natural persons, may not be breached with impunity.
That mutuality exists in undoubted. The party who
deliberately enters into such an agreement, whether
wisely or unwisely, must abide by it. The public
corporation, in the absence of a showing of fraud or
concealment, is estopped by the approval of its officer
who is authorized to accept the work, from contesting
the contractor's right to the contract price. (City of
Omaha vs. Hammond [1876], 94 U.S., 98; City Street
Improvement Co. vs. City of Marysville, [1909], 155 cal.,
419.) Likewise, the contractor must not only deliver a
product with which the party of the second party ought
to be satisfied, but with which he must be satisfied, or he
is not bound to accept it. The rule is well-settled that in
the absence of fraud or of such gross mistake as would
necessarily imply bad faith, contractors with public
corporations are concluded by the decisions of
engineers or like officers where the contract contains
such a stipulation. The public corporation can rely on the
provision in a contract that performance by the other
party shall be approved by or satisfactory to it, or a
particular officer, board or committee. (Second Nat.
Bank vs. Pan-American Bridge Co. [1910], 183 Fed., 391,
reviewing Federal decisions; SilsbyManuf'g Co. vs. Town of
Chico [1885], 24 Fed., 893; 23 L.R.A. [1910], 322, Notes.)
A leading example is the case of Sweeney vs. United
States ([1883], 109 U.S., 618), in which a contractor sought
to recover from the United States the price of wall built by
him around the National Cemetery. The contract
provided that the wall shall be received and become the
property of the United States after the officer or civil
engineer, to be designated by the Government to
inspect the work, should certify that it was in all respects
such as the contractor agreed to construct. The officer
designated for that purpose refused to so certify on the
ground that neither the material nor the workmanship
was such as the contract required. As the officer
exercised an honest judgment in making his inspection
and as there was on his part neither fraud nor such grave
mistake as implied bad faith, it was adjudged that the
contractor had no cause of action on the contract
against the United States.
The old common law rule required a strict or literal
performance of contracts. The modern rule sanctions a
substantial performance of contractual relations. The law
now looks to the spirit of the contract and not to its letter.
Even though a plaintiff is not entirely free from fault or
omission, the courts will not turn him away if he has in
good faith mad substantial performance. Of course the
terms of the contract may be such that the contract has
agreed that the another shall have the absolute and
unreviewable right to reject the article or work if not
satisfied with it; in such case the contractor shall abide by
his word. But when the terms, or the nature of the
contract, or the circumstances are such as to make it
doubtful, whether the contractor has made any such
unwise agreement, the courts will ordinarily construe the
contract as an "agreement to do the thing in such way as
reasonably ought to satisfy the defendant."
(Parlin&Orendorff Co. vs. City of Greenville [1904], 127
Fed., 55; Swain vs. Seamens [1870], 9 Wall., 254.) Thus, it
has been held that the provision of a contract to perform
work for the city requiring the contractor to obtain the
certificate of the city engineer that the work has been
done in accordance with the contract and the approval
of such work by certain boards or committees, before he
is entitled to payment therefor, does not deprive him of
the right to recover for the work, if it has been done in
substantial conformity to the contract, because the city's
officers arbitrarily or unreasonably refuse the certificate
and approval called for. (City of Elizabeth vs.Fitzgerald
[1902], 200 U.S., 611.)
Substantial performance and the unfounded refusal of
the certificate of approval can be proved in various
ways. Thus, acceptance and occupancy of the building
by the owner amounts to an acknowledgment that the
work has been performed substantially as required by the
contract. (Campbell and Go-Tauco vs. Behn, Meyer &
co. [1904], 3 Phil., 590 affirmed on appeal to the United
States Supreme Court [1905], 200 U.S., 611.) Other
circumstances, as partial payment, also show
acquiescence on the part of purchaser.
Appellee speaks of the provisions of the law and the
portions of the contract in questions as possibly
constituting an arbitration agreement. We deem these
provisions to be more correctly labeled a condition
precedent to the contractor's right to obtain payment;
the condition is for the satisfaction of the Government.
Nevertheless, considered as species of abitration, it was a
convenient and proper method, duly agreed upon
between the parties, to determine questions that would
necessarily arise in the performance of the contract,
about which men might honestly differ. It would be highly
improper, for courts out of untoward jealousy of their
jurisdiction. The New York theory of refusal to uphold such
agreements, because of the opinion that they violate the
spirit of the laws creating the courts, is hardly agreed to
by more progressive jurisdictions. (See U.S. Asphalt
Refining Co. vs. Trinidad Lake Petroleum Co. [1915], 222
Fed., 1006.) Unless the agreement is such as absolutely to
close the doors of the courts against the parties, which
agreement would be void (Wahl and
Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301), courts
will look with favor upon such amicable arrrangements
and will only with great reluctance interfere to anticipate
or nullify the action of the arbitrator. For instance, a policy
of fire insurance, contained a clause providing that in the
event of a loss under the policy, unless the company shall
deny all liability, as a condition precedent to the bringing
of any suit by the insured upon the policy, the latter
should first submit the question of liability and indemnity
to arbitration. Such a condition, the Supreme Court of the
Philippines held in Chang vs. Royal Exchange Assurance
Corporation of London ([1907], 8 Phil., 399), is a valid one
in law, and unless it be first complied with, no action can
be brought.
What then are the remedies of the contractor? In the first
place he has his administrative remedy, which is to
complete the work substantially according to the
contract and ask for the approval of the proper official. If
such officer refuse or culpably neglect to perform a
ministerial duty, such as making out the warrant, it is
possible that mandamus will lie to coerce the officer. A
stipulation requiring the approval of some one as a
condition to a recovery by the contractor would not bar
the party of his remedies by action at law. The right to
redress in the courts where substantial compliance with
the terms of a contract are set forth, and where the proof
discloses the withholding of the certificate by an officer
for insufficient reasons, should not be taken away by
inference or anything short of a district agreement to
waive it. (Aetna Indemnity Co. vs. Waters [1909], 110 Md.,
673.) As a condition precedent to action by the courts,
fraud or bad faith on the part of the responsible
Government official, or arbitrary or unreasonable refusal
of the certificate or approval must be alleged and
proved.
To concentrate our facts and legal principles — we find
the contractor supported by one expert insisting that the
work and the materials actually conform to the
specifications; and we have this as resolutely denied by
competent Government engineers. We find substantial
performance of the contract not proved to the
satisfaction of the Government's technical adviser, but
proved to the satisfaction of the trial court. Ordinarily, we
would not review the facts unless the findings of the trial
court are plainly and manifestly contrary to the proof. But
here it was incumbent on the trial court to take about the
same view of the findings of the Government's engineers
as the appellate court would take of the findings of the
trial court, or that any court would take of the findings of
customs boards, assessors, and the like. In order to set
aside the action of the Director of Public Works or his
authorized representative, fraud or bad faith on the part
of these engineers must be established. Has this been
proved? The judge in the course of his decision
incidentally remarked: "It may as well be said here that
there appears to have been a great deal of ill-feeling
between plaintiff and the engineer in charge of this
construction." Is this observation in connection with the
testimony of the plaintiff and of one engineer sufficient to
demonstrate fraud or bad faith? We think not. In other
words we believe that the contractor cannot maintain an
action for the stipulated price when the engineer has in
good faith, in pursuance of the contract, withheld his
certificate. The decision of the responsible engineer
cannot be subjected to the revisory power of the courts
without doing violence to the terms of the contract and
the law.
The Province of Tayabas, having accepted bridge No.
53.2, should of course pay the balance due, or P2,840. It
should not be permitted to deduct the cost of the test of
the bridge, P900.12, for this is a legal question for
resolution by the courts, and the contract contains no
such stipulation. (See Ripley vs. U.S. [1912], 223 U.S., 695.)
But the findings of the Government engineers on all the
other points covered by causes of action 2, 3, 4, 5 and 6
are deemed to be conclusive, fraud or bad faith not
having been proved. Thus, we have P2,840, plus P269.10,
plus P214.80, plus P6, plus P25, or P3,354.90 due plaintiff.
One point made by appellant is that the demurrer to the
complaint was improperly overruled. An elementary
principle of pleading heretofore approved by this court in
Government of Philippine Islands vs. Inchausti& Co.
([1913], 24 Phil., 315) is brought to our notice, namely: "If
the plaintiff's right of action depends upon a condition
precedent he must allege and prove the fulfillment of the
condition or a legal excuse for its non-fulfillment. And if he
omits such allegation, his declaration, complaint, or
petition, will be bad on demurrer." Undoubtedly, the
complaint should have alleged either the performance
of the condition precedent, approval by the Director of
Public Works or the District Engineer, or a good and
sufficient excuse for not obtaining it. It is possible that if
sitting in first instance, we would so hold with defendant,
but on appeal such a backward sweep would avail
nothing but delay. Moreover, the complaint contains the
general averment that the plaintiff fully and faithfully
complied with all the terms and conditions of the said
contract, while some months subsequent to the filing of
the complaint but previous to the trial, the defendant
accepted the bridge. A failure to allege a condition
precedent or a legal reason for dispensing with it may be
cured by the issues tendered by the answer and the
proof. (Donegan vs. Houston [1907], 5 Cal. App., 626.)
To summarize, we are of opinion and so hold that the law
makes the approval of the Governor-General a
prerequisite only to the purchase or conveyance of real
property by a province; that the provisions of the law and
the form of the contract, usually followed in this
jurisdiction, providing for the certificate of approval by
the Director of Public Works or his representative, are in
the nature of a condition precedent, which must be
alleged and proved, and that this certificate is conclusive
in the absence of a showing of fraud or bad faith.
Judgment shall be modified so that the plaintiff shall
recover from the defendant P3,354.90 with legal interest
thereon from July 14, 1914, until paid, without special
finding as to costs in either instance. So ordered.
Torres, Johnson and Fisher, JJ., concur.
Carson and Street, JJ., concur in the result.
[G.R. No. L-3567. August 20, 1907. ]
KAY B. CHANG, ET AL., Plaintiffs-Appellees, v. ROYAL
EXCHANGE ASSURANCE CORPORATION OF
LONDON, Defendant-Appellant.
Del-Pan, Ortigas& Fisher, for Appellant.
John W. Sleeper, for Appellees.
SYLLABUS
1. FIRE INSURANCE; CONDITION PRECEDENT. — policy of
fire insurance contained a clause providing that in the
event of a loss under the policy, unless the company
should deny all liability, as a condition precedent to the
bringing of any suit by the insured upon the policy the
latter should first submit the question of liability and
indemnity to arbitration. Such a condition is a valid one in
law, and unless it be first complied with no action can be
brought.
2. ID.; ID.; WAIVER. — If in the course of the settlement of
a loss. however, the action of the company or its agents
amounts to a refusal to pay, the company will be
deemed to have waived the condition precedent with
reference to arbitration and a suit upon the policy will lie.
DECISION
WILLARD, J. :
The arbitration clause in the fire policy in question in this
case is in part as follows:jgc:chanrobles.com.ph
"If a disagreement should at any time arise between the
corporation and the assured . . . respect of any loss or
damage alleged to have been caused by fire, every
such disagreement, when it may occur (unless the
corporation shall deny liability by reason of fraud or
breach of any of the conditions, or because the claimant
has by some other means waived his rights under the
policy), shall be referred to the arbitration of some person
to be selected by agreement of both parties . . . And by
virtue of these presents it is hereby expressly declared to
be a condition of this policy, and an essential element of
the contract between the corporation and the insured
that unless the corporation shall demand exemption from
liability by reason of fraud, breach of conditions, or
waiver, as stated, the assured, or claimant, shall have no
right to commence suit or other proceedings before any
court whatever upon this policy until the amount of the
loss or damage shall have been referred, investigated,
and determined as above provided, and then only for
the amount awarded, and the obtaining of such an
award shall be a condition precedent to the institution of
any suit upon this policy and to the liability and obligation
of the corporation to pay or satisfy any claim or demand
based upon this policy."cralaw virtua1aw library
The conditions contained in this clause of the policy are
valid, and no action can be maintained by the assured
unless as award has been made or sought, or unless the
company has denied liability on some of the grounds
stated therein. (Hamilton v. Liverpool, London and Globe
Insurance Company, 136 U.S., 242.) The duty of asking a
submission to arbitration does not rest exclusively upon
the company. If it takes no action in that respect it is the
duty of the assured to do so, and to ask that arbitrators
be appointed for the purpose of determining the amount
of the loss, in accordance with the provisions of this
policy. The company may, however, by its conduct,
waive the provisions of this clause relating to arbitration.
In fact, this is expressly stated in the policy itself, as will be
seen from the quotation above made, and the principal
question in this case is whether there has been such
waiver or not.
Simple silence of the company is not sufficient. If it
remains passive, it is the duty of the assured to take
affirmative action to secure arbitration. Neither will the
failure of the company to return proofs of loss, or its failure
to point out defects therein, amount to a waiver of the
arbitration clause. These acts may amount to a waiver of
the clause requiring the furnishing of proofs of loss, but
such an action can not constitute proof that the
company has refused to pay the policy because the
defendant has failed to comply with the terms and
conditions thereof.
It is claimed, however, by the plaintiffs and appellees,
that affirmative action was taken by the company
indicating its purpose not to pay anything to the insured.
The property insured, consisting of a stock of goods, was
entirely destroyed by a fire on the 11th day of March,
1905. On the same day the plaintiffs notified the agent of
the defendant of the loss and within fifteen days
thereafter presented to the company a detailed
statement of the articles which had been destroyed and
of their value. Plaintiffs were notified by the company that
this proof was insufficient and that they must obtain the
sworn certificates of two merchants to the truth of their
statement. This was done within a few days. Plaintiffs were
again notified that their proof was insufficient. Various
interviews were had between the agent of the
defendant and the plaintiff Chang and the plaintiffs’
lawyer between the latter part of March and the 21st of
June, 1905. During this time the plaintiffs furnished
additional evidence relating to the justice of their claim
and were told that their proofs were still insufficient. No
indication was made by the company’s agent as to what
other proofs should be furnished, he offering, however, at
one of the interview to settle the claim for 3,000 pesos.
This offer was refused by the plaintiffs. In the final interview
on June 21, between the company’s agent and the
counsel for the plaintiffs, the former
said:jgc:chanrobles.com.ph
"I can not go on with your case, Mr. Sleeper; I have not
enough proof.
"Q. What did Mr. Sleeper state?
"A. I think, so far as I can remember, that he said he
wanted to bring the matter to a basis, but I would not say
so to the court."cralaw virtua1aw library
This action was commenced on the 24th of June, 1905.
The plaintiffs at no time requested the appointment of
arbitrators. After the suit had been commenced, and on
the same day, the defendant requested in writing that
arbitrators be appointed in accordance with the terms of
the policy. This was the first communication in writing
which the defendant made to the plaintiffs after the loss.
Under all the circumstances in the case, we think that the
statement made by the company’s agent on the 21st
day of June amounted to a denial of liability on the
ground that proper proofs of loss had not been presented
and that, therefore, there had been a failure of the
assured to comply with one of the terms of the policy. The
delay of the company in taking any affirmative action
between the 11th day of March and the 21st day of
June; its repeated statements that the proofs were
insufficient without indicating in any way what other
proofs should be furnished, and its final statement that it
could go no further with the case, was sufficient
evidence to show that it did not intend to pay. This view is
somewhat confirmed by what took place afterwards
before the arbitrators, both of whom were appointed by
the defendant in accordance with the terms of the
policy. At the first meeting of these arbitrators the
defendant objected to any award being made upon the
ground that the proof of loss which had been furnished
was sworn to before a notary public and not before the
municipal judge, as required by the provisions of the
Code of Commerce.
In the case of The Phenix Insurance Company v. Stocks
(149 Ill., 319) the company wrote two letters to the United States, and the plaintiff, Chang, testified that he
insured, in the first of which they had no hand at the time of the fire a large amount of
said:jgc:chanrobles.com.ph property, products of the country, which were not
imported through the customs.
"The circumstances under which this fire occurred are
such that we do not feel justified in extending to you any In view of all the evidence in the case, we can not say
measure of grace, in considering your claim, which you that it preponderates against the finding of the judge
may not fairly demand under the terms of the policy. below as to the amount of the loss.
There is at least one fact that looks very peculiar, and
until our minds are relieved of the doubts which we have The judgment of the court below is hereby affirmed, with
come to receive in regard to the integrity of this loss, we the costs of this instance against the Appellant.
shall offer you no benefits that you may not demand
under a strict construction of the policy."cralaw virtua1aw Torres, Johnson, and Tracey, JJ., concur.
library
Separate Opinions
In the other letter the company
said:jgc:chanrobles.com.ph
ARELLANO, C.J., dissenting:chanrob1es virtual 1aw library
"Replying to your letter of August 23d, received this
morning, we beg to say that our views of this matter have All the steps taken by Kay B. Chang and his attorney, in
been fully expressed in our previous correspondence, order to reach an extrajudicial agreement and avoid a
and have nothing at this time to add."cralaw virtua1aw litigation with the "Royal Exchange Assurance
library Corporation of London," were of a private nature, or, as it
is stated in the judgment appealed from, "trying to reach
The court said (p. 334):jgc:chanrobles.com.ph an agreement and settlement of the loss." (Bill of
exceptions, p. 15.)
"The mere silence of the company would not amount to
a waiver of its right to insist upon the condition [as to The representative of the insurance company having
arbitration], but when it placed its determination upon replied to the attorney of the insured, "I can not go on
the grounds stated in the correspondence, which were with your case, Mr. Sleeper; I have not enough proof," the
such as could not be submitted to arbitration under the bringing of an action became imperative. The proper
provisions of the policy, it must be held to have waived procedure will be found in the provisions of articles 404 to
the condition requiring arbitration (German Ins. Co. v. 411 of the Code of Commerce, among which attention is
Gueck, 130 Ill., 345), and especially is this so where the called to article 405, which reads:jgc:chanrobles.com.ph
assured would be misled to their prejudice into bringing
suit upon the policy without first having obtained an "The insured must prove the loss suffered, proving the
award. The company was not bound to speak at all., but existence of the goods before the fire occurred" — to
when asked in effect, what its determination was, if it article 406 which provides that —
answered, good faith required that it should disclose the
true ground of its defense."cralaw virtua1aw library "The appraisement of the damage cause by the first shall
be made by experts in the manner established in the
It is apparent in the case at bar that the counsel for the policy, . . ." —
plaintiffs sought the interview of June 21 for the express
purpose of finding out what the decision of the company and to article 407, according to which —
was, and after receiving the answer which has been
heretofore quoted, the plaintiffs were fully justified in "The experts shall decide:jgc:chanrobles.com.ph
bringing the action at once, without seeking any
arbitration. "(1) The cause of the fire.

Judgment was entered in the court below in favor of the
plaintiffs for the sum of 5,265 pesos and 25 centavos, with
interest from the 24th of June, 1905, and costs. It is
claimed by the appellant that the finding of the court
below as to the amount of the loss is not justified by the
evidence. A great many witnesses were presented by
each side, but the only persons who had any real
knowledge as to the amount of stock in the store at the
time of the fire, and as to its value, were the plaintiff
Chang and his clerk. They testified that it was worth more
than 10,000 pesos, the amount named in the policy. No
one of the witnesses for the defendant fixed the value of
the stock then on hand at more than 500 pesos. The
arbitrators appointed by the defendant found that the
value was 2,106 pesos. The defendant’s agent testified
that during negotiations he offered to settle for 3,000
pesos. That the plaintiff (Chang) was carrying on a
business of some importance was proved at the trial by
the introduction of the records of the customs in Cebu, by
which it appeared that between the month of July, 1904,
and February, 1905, he had imported through the
custom-house goods which with the duty added were of
the value of 4,758 dollars and 48 cents, money of the
"(2) The true value of the goods insured . . .
"(3) The value of the same goods after the fire, and
everything else which may be submitted to their
judgment.
As it is seen, the above are the principal precepts on
which the insured must rely from the time the underwriter
refuses to come to an amicable settlement or
extrajudicial agreement. There is no law in force which
contains such a provision as that which the judgment
appealed from sets forth in the manner of a rule in the
following words:jgc:chanrobles.com.ph
"It is a duty incumbent on said defendant company to
return, within a reasonable period of time after the
presentation of the claim and proof of the loss, said proof
of the loss together with a clear and itemized statement
of the reasons why they are not considered sufficient and
satisfactory. Noncompliance with this duty, or failure to
notify the assured with reasonable time, amounts to a
waiver on the part of the insurance company to require
the presentation of other proof, and is also equivalent to
a denial of the loss or responsibility, and, consequently,
under the arbitration clause of said policy, there is
nothing left for its submission to arbitration." (Bill of
exceptions, pp. 19 and 20.)
The insured complied with the first part of article 404, by
informing the underwriter of the fire. Not so with the
second part of the same, concerning the statement to
be filed with the municipal judge or justice of the peace,
in accordance with the proposed change inserted in the
preamble (Exposicion de Motivos) of the Code of
Commerce of the Philippine Islands (p. 8). Aside from this,
since all the steps taken to come to an agreement of a
private nature had been ended by the words addressed
to Mr. Sleeper, and since a legal suit had already been
commenced, nothing contained in the above-quoted
precepts bear any relation to the matter in controversy.
Instead of presuming on the part of the underwriter an
implicit waiver of the stipulation agreed upon under the
policy, it was necessary to make a finding of fact or of
law, which should explain the manifest neglect of the
procedure required by the above-named articles of the
Code of Commerce now in force. Unless this neglect is
properly justified, the infringement of the general
provisions of law on the subject of this litigation becomes
self-evident.
Although the requirements of articles 409 and 410 are of
an adjective nature (Which do not certainly correspond
with any of the judicial proceedings of the old Spanish
Code of Civil Procedure), those of articles 404 to 408 and
411 are substantive, and constitute the essential elements
on which an action for the exercise of the right arising
from the insurance contract should be based. This
contract being a fire insurance personal property,
factories, or stores, requires, as its — evidence mentioned in paragraph 2 and 3 of article 407
"First and essential condition, the exercise of a real and
certain subject-matter, not only at the time of the signing
of the same, but likewise at the time of the fire, it being
also essential that said subject-matter shall not have
suffered, during the stated period, any change or
alteration in the nature or place designated in the policy;
and this doctrine is based on the very nature of the
insurance contract, whose object is the prevention of
loss, and not the securing of profit . . ." [Preamble
(Exposicion de Motivos) of the Code of Commerce. ]
Besides the general provisions of law governing the
contract, the policy embodies a special requirement,
compulsory for both the insured and the underwriter, in
order that the actual loss suffered at the time of the fire
might be the basis for the institution of an action arising
from the contract. And this is the arbitration agreed upon
— "as an essential element of the contract between the
corporation and the insured, that unless the corporation
shall demand exemption from liability by reason of fraud,
breach of the conditions, or waiver, as stated (waiver by
claimant), the assured, or claimant, shall have no right to
commerce suit or other proceedings before any court
whatever upon this policy until the amount of the loss or
damage shall been referred, investigated, and
determined as above provided, and then only for the
amount awarded, and the obtaining of such an award
shall be a condition precedent to the institution of any
suit upon this policy and to the liability and obligation of
the corporation to pay or satisfy any claim or demand
based upon this policy, "etc.
The compliance with this special provision is compulsory
under article 1255 of the Civil Code.
The insured might be excused from submitting his claim to
arbitration in case of an express refusal of the underwriter
to heed the former’s demand to carry out that essential
condition of the contract. Yet, the writer of this dissenting
opinion does not hold the insured exempt from
compliance with this special condition, because of the
more or less correct constitute which he might give to the
action of the underwriter in regard to his claim, neither
because of this phrase, "I can not go on with your case,
Mr. Sleeper; I have not enough proof," nor because of this
other one, "I think, as far as I can remember, that he said
he wanted to bring the matter to a basis."cralaw
virtua1aw library
Such is the opinion of the writer in regard to the first
question brought before us by the appeal.
With reference to the second question, or the amount in
controversy, if the contention that the bringing of the suit
without first complying with that condition be right, the
writer does not see any reason why the amount of the
judgment shall be 5,265 pesos and 25 centavos, and not
10,000 pesos, the sum stipulated in the policy and
demanded in the complaint.
Nor is he of the opinion that such obligation, once take
subject of a litigation, should consist of the sum awarded
by the arbitrators appointed by the underwriter, because
the case has never been submitted to arbitration, as
stipulated in the insurance contract.
As the judgment appealed from does not specify facts
sufficient to justify a decision for the amount adjudged, I
am of the opinion that the case should be returned to the
trial court, in order that expert witnesses may furnish the
of the Code of Commerce; the proof stated in
paragraph 1 of said article not being necessary in view of
the fact that both the insured and the underwriter have
come to an understanding as to the cause of the fire.
G.R. No. 96283 February 25, 1992
CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and
Officers namely: HUANG KUO-CHANG, HUANG AN-
CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE
B. AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA
TERESA SOLIVEN and VIRGILIO M. DEL
ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding
Judge, Regional Trail Court of Makati [Branch 57]) and
ROBLECOR PHILIPPINES, INC., respondents.
ROMERO, J.:
This is a special civil action for certiorari seeking to annul
the Resolutions of the Court of Appeals* dated October
22, 1990 and December 3, 1990 upholding the Orders of
July 31, 1990 and August 23, 1990 of the Regional Trial
Court of Makati, Branch 57, in Civil Case No. 90-1335.
Respondent Court of Appeals affirmed the ruling of the
trial court that herein petitioners, after submitting
themselves for arbitration and agreeing to the terms and
conditions thereof, providing that the arbitration award
shall be final and unappealable, are precluded from
seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu
Industries (Philippines) (Chung Fu for brevity) and private
respondent Roblecor Philippines, Inc. (Roblecor for short)
forged a construction agreement 1 whereby respondent
contractor committed to construct and finish on
December 31, 1989, petitioner corporation's
industrial/factory complex in Tanawan, Tanza, Cavite for
and in consideration of P42,000,000.00. In the event of
disputes arising from the performance of subject
contract, it was stipulated therein that the issue(s) shall be
submitted for resolution before a single arbitrator chosen
by both parties.
Apart from the aforesaid construction agreement, Chung
Fu and Roblecor entered into two (2) other ancillary
contracts, to wit: one dated June 23, 1989, for the
construction of a dormitory and support facilities with a
contract price of P3,875,285.00, to be completed on or
before October 31, 1989; 2 and the other dated August
12, 1989, for the installation of electrical, water and
hydrant systems at the plant site, commanding a price of
P12.1 million and requiring completion thereof one month
after civil works have been finished. 3
However, respondent Roblecor failed to complete the
work despite the extension of time allowed it by Chung
Fu. Subsequently, the latter had to take over the
construction when it had become evident that Roblecor
was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and
unpaid progress billings of P2,370,179.23, Roblecor on
May 18, 1990, filed a petition for Compulsory Arbitration
with prayer for Temporary Restraining Order before
respondent Regional Trial Court, pursuant to the
arbitration clause in the construction agreement. Chung
Fu moved to dismiss the petition and further prayed for
the quashing of the restraining order.
Subsequent negotiations between the parties eventually
led to the formulation of an arbitration agreement which,
among others, provides:
2. The parties mutually agree that the
arbitration shall proceed in accordance
with the following terms and conditions:
—
x xx x xx x xx
d. The parties mutually
agree that they will
abide by the decision of
the arbitrator including
any amount that may
be awarded to either
party as compensation,
consequential damage
and/or interest thereon;
e. The parties mutually
agree that the decision
of the arbitrator shall be
final and unappealable.
Therefore, there shall be
no further judicial
recourse if either party
disagrees with the whole
or any part of the
arbitrator's award.
f. As an exception to
sub-paragraph (e)
above, the parties
mutually agree that
either party is entitled to
seek judicial assistance
for purposes of
enforcing the arbitrator's
award;
xxxxxxxxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration
agreement thru its Order of May 30, 1990. Thereafter,
Engr. Willardo Asuncion was appointed as the sole
arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners
to immediately pay respondent contractor, the sum of
P16,108,801.00. He further declared the award as final
and unappealable, pursuant to the Arbitration
Agreement precluding judicial review of the award.
Consequently, Roblecor moved for the confirmation of
said award. On the other hand, Chung Fu moved to
remand the case for further hearing and asked for a
reconsideration of the judgment award claiming that
Arbitrator Asuncion committed twelve (12) instances of
grave error by disregarding the provisions of the parties'
contract.
Respondent lower court denied Chung Fu's Motion to
Remand thus compelling it to seek reconsideration
therefrom but to no avail. The trial court granted
Roblecor's Motion for Confirmation of Award and
accordingly, entered judgment in conformity therewith.
Moreover, it granted the motion for the issuance of a writ
of execution filed by respondent.
Chung Fu elevated the case via a petition for certiorari to
respondent Court of Appeals. On October 22,1990 the
assailed resolution was issued. The respondent appellate
court concurred with the findings and conclusions of
respondent trial court resolving that Chung Fu and its
officers, as signatories to the Arbitration Agreement are
bound to observe the stipulations thereof providing for
the finality of the award and precluding any appeal
therefrom.
A motion for reconsideration of said resolution was filed
by petitioner, but it was similarly denied by respondent
Court of Appeals thru its questioned resolution of
December 3, 1990.
Hence, the instant petition anchored on the following
grounds:
First
Respondents Court of Appeals and trial
Judge gravely abused their discretion
and/or exceeded their jurisdiction, as
well as denied due process and
substantial justice to petitioners, — (a) by
refusing to exercise their judicial authority
and legal duty to review the arbitration
award, and (b) by declaring that
petitioners are estopped from
questioning the arbitration award
allegedly in view of the stipulations in the
parties' arbitration agreement that "the
decision of the arbitrator shall be final
and unappealable" and that "there shall
be no further judicial recourse if either
party disagrees with the whole or any
part of the arbitrator's award."
 Second
Respondent Court of Appeals and trial
Judge gravely abused their discretion
and/or exceeded their jurisdiction, as
well as denied due process and
substantial justice to petitioner, by not
vacating and annulling the award dated
30 June 1990 of the Arbitrator, on the
ground that the Arbitrator grossly
departed from the terms of the parties'
contracts and misapplied the law, and
thereby exceeded the authority and
power delegated to him. (Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the
evolution of arbitration as a mode of dispute settlement.
Because conflict is inherent in human society, much effort
has been expended by men and institutions in devising
ways of resolving the same. With the progress of
civilization, physical combat has been ruled out and
instead, more specific means have been evolved, such
as recourse to the good offices of a disinterested third
party, whether this be a court or a private individual or
individuals.
Legal history discloses that "the early judges called upon
to solve private conflicts were primarily the arbiters,
persons not specially trained but in whose morality,
probity and good sense the parties in conflict reposed full
trust. Thus, in Republican Rome, arbiter and judge (judex)
were synonymous. The magistrate or praetor, after noting
down the conflicting claims of litigants, and clarifying the
issues, referred them for decision to a private person
designated by the parties, by common agreement, or
selected by them from an apposite listing (the album
judicium) or else by having the arbiter chosen by lot. The
judges proper, as specially trained state officials
endowed with own power and jurisdiction, and taking
cognizance of litigations from beginning to end, only
appeared under the Empire, by the so-called cognitio
extra ordinem." 5
Such means of referring a dispute to a third party has also
long been an accepted alternative to litigation at
common law. 6
Sparse though the law and jurisprudence may be on the
subject of arbitration in the Philippines, it was nonetheless
recognized in the Spanish Civil Code; specifically, the
provisions on compromises made applicable to
arbitrations under Articles 1820 and 1821.7 Although said
provisions were repealed by implication with the repeal
of the Spanish Law of Civil Procedure, 8 these and
additional ones were reinstated in the present Civil
Code. 9
Arbitration found a fertile field in the resolution of labor-
management disputes in the Philippines. Although early
on, Commonwealth Act 103 (1936) provided for
compulsory arbitration as the state policy to be
administered by the Court of Industrial Relations, in time
such a modality gave way to voluntary arbitration. While
not completely supplanting compulsory arbitration which
until today is practiced by government officials, the
Industrial Peace Act which was passed in 1953 as
Republic Act No. 875, favored the policy of free
collective bargaining, in general, and resort to grievance
procedure, in particular, as the preferred mode of settling
disputes in industry. It was accepted and enunciated
more explicitly in the Labor Code, which was passed on
November 1, 1974 as Presidential Decree No. 442, with
the amendments later introduced by Republic Act No.
6715 (1989).
Whether utilized in business transactions or in employer-
employee relations, arbitration was gaining wide
acceptance. A consensual process, it was preferred to
orders imposed by government upon the disputants.
Moreover, court litigations tended to be time-consuming,
costly, and inflexible due to their scrupulous observance
of the due process of law doctrine and their strict
adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude
of the courts toward arbitration
agreements is slowly crystallizing into
definite and workable form. . . . The rule
now is that unless the agreement is such
as absolutely to close the doors of the
courts against the parties, which
agreement would be void, the courts will
look with favor upon such amicable
arrangements and will only with great
reluctance interfere to anticipate or
nullify the action of the arbitrator. 10
That there was a growing need for a law regulating
arbitration in general was acknowledged when Republic
Act No. 876 (1953), otherwise known as the Arbitration
Law, was passed. "Said Act was obviously adopted to
supplement — not to supplant — the New Civil Code on
arbitration. It expressly declares that "the provisions of
chapters one and two, Title XIV, Book IV of the Civil Code
shall remain in force." 11
In recognition of the pressing need for an arbitral
machinery for the early and expeditious settlement of
disputes in the construction industry, a Construction
Industry Arbitration Commission (CIAC) was created by
Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the
parties to resolve their disputes via a particular mode, it is
the regular courts that remain the fora to resolve such
matters. However, the parties may opt for recourse to
third parties, exercising their basic freedom to "establish
such stipulation, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public
policy." 12 In such a case, resort to the arbitration process
may be spelled out by them in a contract in anticipation
of disputes that may arise between them. Or this may be
stipulated in a submission agreement when they are
actually confronted by a dispute. Whatever be the case,
such recourse to an extrajudicial means of settlement is
not intended to completely deprive the courts of
jurisdiction. In fact, the early cases on arbitration carefully
spelled out the prevailing doctrine at the time, thus: ". . . a
clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitrators and to
them alone is contrary to public policy and cannot oust
the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to
an arbitrator or to submit an ongoing dispute to one is
valid. Being part of a contract between the parties, it is
binding and enforceable in court in case one of them
neglects, fails or refuses to arbitrate. Going a step further,
in the event that they declare their intention to refer their
differences to arbitration first before taking court action,
this constitutes a condition precedent, such that where a
suit has been instituted prematurely, the court shall
suspend the same and the parties shall be directed
forthwith to proceed to arbitration. 14
A court action may likewise be proven where the
arbitrator has not been selected by the parties. 15
Under present law, may the parties who agree to submit
their disputes to arbitration further provide that the
arbitrators' award shall be final, unappealable and
executory?
Article 2044 of the Civil Code recognizes the validity of
such stipulation, thus:
Any stipulation that the arbitrators' award
or decision shall be final is valid, without
prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law
provides that the arbitral award "shall be final and
inappealable except on questions of law which shall be
appealable to the Supreme Court." 16
Under the original Labor Code, voluntary arbitration
awards or decisions were final, unappealable and
executory. "However, voluntary arbitration awards or
decisions on money claims, involving an amount
exceeding One Hundred Thousand Pesos (P100,000.00) or
forty-percent (40%) of the paid-up capital of the
respondent employer, whichever is lower, maybe
appealed to the National Labor Relations Commission on
any of the following grounds: (a) abuse of discretion; and
(b) gross incompetence." 17 It is to be noted that the
appeal in the instances cited were to be made to the
National Labor Relations Commission and not to the
courts.
With the subsequent deletion of the above-cited
provision from the Labor Code, the voluntary arbitrator is
now mandated to render an award or decision within
twenty (20) calendar days from the date of submission of
the dispute and such decision shall be final and
executory after ten (10) calendar days from receipt of
the copy of the award or decision by the parties. 18
Where the parties agree that the decision of the
arbitrator shall be final and unappealable as in the
instant case, the pivotal inquiry is whether subject
arbitration award is indeed beyond the ambit of the
court's power of judicial review.
We rule in the negative. It is stated explicitly under Art.
2044 of the Civil Code that the finality of the arbitrators'
award is not absolute and without exceptions. Where the
conditions described in Articles 2038, 2039 and 2040
applicable to both compromises and arbitrations are
obtaining, the arbitrators' award may be annulled or
rescinded. 19 Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award. 20 Thus, if
and when the factual circumstances referred to in the
above-cited provisions are present, judicial review of the
award is properly warranted.
What if courts refuse or neglect to inquire into the factual
milieu of an arbitrator's award to determine whether it is
in accordance with law or within the scope of his
authority? How may the power of judicial review be
invoked?
This is where the proper remedy is certiorari under Rule 65
of the Revised Rules of Court. It is to be borne in mind,
however, that this action will lie only where a grave
abuse of discretion or an act without or in excess of
jurisdiction on the part of the voluntary arbitrator is clearly
shown. For "the writ of certiorari is an extra-ordinary
remedy and that certiorari jurisdiction is not to be
equated with appellate jurisdiction. In a special civil
action of certiorari, the Court will not engage in a review
of the facts found nor even of the law as interpreted or
applied by the arbitrator unless the supposed errors of
fact or of law are so patent and gross and prejudicial as
to amount to a grave abuse of discretion or an exces de
pouvoir on the part of the arbitrator." 21
Even decisions of administrative agencies which are
declared "final" by law are not exempt from judicial
review when so warranted. Thus, in the case of Oceanic
Bic Division (FFW), et al. v. Flerida Ruth P. Romero, et
al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making
"final" the decisions of certain
administrative agencies, we have taken
cognizance of petitions questioning
these decisions where want of
jurisdiction, grave abuse of discretion,
violation of due process, denial of
substantial justice or erroneous
interpretation of the lawwere brought to
our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the
nature of their functions, act in a quasi-judicial
capacity. 24 It stands to reason, therefore, that their
decisions should not be beyond the scope of the power
of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award
on the following grounds, most of which allege error on
the part of the arbitrator in granting compensation for
various items which apparently are disputed by said
petitioners:
1. The Honorable Arbitrator committed
grave error in failing to apply the terms
and conditions of the Construction
Agreement, Dormitory Contract and
Electrical Contract, and in using instead
the "practices" in the construction
industry;
2. The Honorable Arbitrator committed
grave error in granting extra
compensation to Roblecor for loss of
productivity due to adverse weather
conditions;
3. The Honorable Arbitrator committed
grave error in granting extra
compensation to Roblecor for loss due to
delayed payment of progress billings;
4. The Honorable Arbitrator committed
grave error in granting extra
compensation to Roblecor for loss of
productivity due to the cement crisis;
5. The Honorable Arbitrator committed
grave error in granting extra
compensation to Roblecor for losses
allegedly sustained on account of the
failed coup d'état;
6. The Honorable Arbitrator committed
grave error in granting to Roblecor the
amount representing the alleged unpaid
billings of Chung Fu;
7. The Honorable Arbitrator committed
grave error in granting to Roblecor the
amount representing the alleged
extended overhead expenses;
8. The Honorable Arbitrator committed
grave error in granting to Roblecor the
 amount representing expenses for
change order for site development
outside the area of responsibility of
Roblecor;
9. The Honorable Arbitrator committed
grave error in granting to Roblecor the
cost of warehouse No. 2;
10. The Honorable Arbitrator committed
grave error in granting to Roblecor extra
compensation for airduct change in
dimension;
11. The Honorable Arbitrator committed
grave error in granting to Roblecor extra
compensation for airduct plastering; and
12. The Honorable Arbitrator committed
grave error in awarding to Roblecor
attorney's fees.
After closely studying the list of errors, as well as
petitioners' discussion of the same in their Motion to
Remand Case For Further Hearing and Reconsideration
and Opposition to Motion for Confirmation of Award, we
find that petitioners have amply made out a case where
the voluntary arbitrator failed to apply the terms and
provisions of the Construction Agreement which forms
part of the law applicable as between the parties, thus
committing a grave abuse of discretion. Furthermore, in
granting unjustified extra compensation to respondent for
several items, he exceeded his powers — all of which
would have constituted ground for vacating the award
under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the
merits of the case, despite prima facie showing of the
existence of grounds warranting judicial review,
effectively deprived petitioners of their opportunity to
prove or substantiate their allegations. In so doing, the
trial court itself committed grave abuse of discretion.
Likewise, the appellate court, in not giving due course to
the petition, committed grave abuse of discretion.
Respondent courts should not shirk from exercising their
power to review, where under the applicable laws and
jurisprudence, such power may be rightfully exercised;
more so where the objections raised against an
arbitration award may properly constitute grounds for
annulling, vacating or modifying said award under the
laws on arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of
the Court of Appeals dated October 22, 1990 and
December 3, 1990 as well as the Orders of respondent
Regional Trial Court dated July 31, 1990 and August 23,
1990, including the writ of execution issued pursuant
thereto, are hereby SET ASIDE. Accordingly, this case is
REMANDED to the court of origin for further hearing on
this matter. All incidents arising therefrom are reverted to
the status quo ante until such time as the trial court shall
have passed upon the merits of this case. No costs.
SO ORDERED.
G.R. No. L-16398 December 14, 1921
A. CHAN LINTE, plaintiff-appellant,
vs.
LAW UNION AND ROCK INSURANCE CO., LTD., defendant-
appellee.
A. CHAN LINTE, plaintiff-appellant,
vs.
TOKYO MARINE INSURANCE CO., LTD., defendant-
appellee.
A. CHAN LINTE, plaintiff-appellant,
vs.
THE CHINE FIRE INSURANCE CO., LTD., defendant-
appellee.
Crossfield & O'Brien for appellant.
Fisher & DeWitt for appellees.
JOHNS, J.:
The plaintiff is a resident adult of the Philippine Islands,
and the defendants are fire insurance companies duly
licensed to do business here.
Plaintiff alleges that he was the owner of 30,992.50 kilos of
hemp stored in the warehouse in Calbayog, Province of
Samar, Philippine Islands, which on the 25 of March, 1916,
he requested the defendant Law Union and Rock
Insurance Co., Ltd., to insure against loss by fire in the sum
of P5,000, and upon the date it issued its policy No.
1,787,379 in favor of the plaintiff against such loss until 4
o'clock p.m., of the 22nd of March, 1917, and that the
policy was delivered to the plaintiff in consideration of
which he paid the company a premium of P87.50. that in
consideration of other previous payments, the policy was
renewed from time to time and continued in force and
effect to and including March 22, 1919; that during the
life of the policy the hemp was destroyed by fire in the
bodega where it was insured; that its value was
P21,296.27; that he at once notified the defendant of the
loss, and in all other respects complied with the terms and
conditions of the policy, and made a demand for the
payment of the full amount of the insurance. That
defendant refused and still refuses to pay the same or
any part thereof, and plaintiff prays for judgment for
P5,000, with interest and costs.
In his amended complaint he alleges that after the
commencement of the action, the defendant requested
that its liability should be submitted to arbitration, in
accord with the provisions of the policy, and that "plaintiff
acceded to the requirement made by said defendant as
aforesaid, but not that the award of arbitration should be
conclusive or final, or deprive the courts of jurisdiction,
and by agreement of both plaintiff and defendant Frank
B. Ingersoll was named sole arbitrator, and both parties
informally presented evidence before him and he made
return of arbitration to the effect that said plaintiff had
only seven bales of hemp destroyed in the fire of April 10,
1918, as hereinbefore set forth, with which return the said
plaintiff is dissatisfied, and comes to this court for proper
action under this amended complaint."1awphil.net
For answer the defendant alleges that, claiming a loss
under the policy, the plaintiff made a claim against the
defendant for P5,000, that a difference arose between
them as to the amount of the alleged loss, and that,
under the terms of the policy, an arbitrator was agreed
upon and selected by the mutual consent of both
parties, for the purpose of deciding the alleged
difference; that on December 28, 1918, the arbitrator
found that only seven bales of hemp of the grade "ovillo"
were destroyed.
For supplemental answer to the amended complaint, the
defendant further alleges that on July 8, 1919, the
arbitrator filed a supplemental report and award wherein
he finds from the evidence submitted that the local value
of the seven bales of plaintiff's hemp destroyed by fire on
April 10, 1918, was P608.34; that in addition to the
defendant's policy, the same property was covered by
two other fire insurance polices, by each of which the
property in question was insured to the value of P5,000
against the loss; that defendant has offered and is now
willing to pay plaintiff its one-third of the loss in full
satisfaction of its liability.
x xx x xx x xx
The other insurance companies are Tokyo Marine
Insurance Co., Ltd., and the Chine Fire Insurance Co.,
Ltd., defendants and appellees.
After the filing of the amended complaint, both parties
agreed upon Frank B. Ingersoll as arbitrator, and
submitted to him the evidence pro and con. His first
finding was made on December 28, 1918, and on July 8,
1919, he filed a supplemental report in which he found
the value of the property destroyed to be P608.34.
It was stipulated "that the arbitration clauses of the
policies of insurance issued by the Law Union and Rock
Insurance Co., Ltd., and the Chine Fire Insurance Co.,
Ltd., are in terms as follows, to wit:
"If any difference arises as to the amount
of any loss or damage, such difference
shall independently of all other questions
be referred to the decision of an
arbitrator, to be appointed in writing by
the parties in difference, or, if they
cannot agree upon a single arbitrator, to
the decision of two disinterested persons
as arbitrators, of whom one shall be
appointed in writing by each of the
parties within two calendar months after
having been required so to do in writing
by the other party. In case either party
shall refuse or fail to appoint an arbitrator
within two calendar months after receipt
of notice in writing requiring
appointment, the other party shall be at
liberty to appoint a sole arbitrator; and in
case of disagreement between the
arbitrators, the difference shall be
referred to the decision of an umpire
who shall have been appointed by them
in writing before entering on the
reference and who shall sit with the
arbitrators and preside at their meetings.
The death of any party shall not revoke
or affect the authority or powers of the
arbitrator, arbitrators or umpire
respectively; and in the event of the
death of an arbitrator or umpire, another
shall in each case be appointed in his
stead by the party or arbitrators (as the
case may be), by whom the arbitrator or
umpire so dying was appointed. The
costs of the reference and of the award
shall be in the discretion of the arbitrator,
arbitrators or umpire making the award.
And it is hereby expressly stipulated and
declared that it shall be a condition
precedent to any right of action or suit
upon this policy that the award by such
arbitrator, arbitrators or umpire of the
amount of the loss or damage if disputed
shall be first obtained."
That the arbitration clause in the policy issued by
the Tokyo Marine Insurance Company, Limited, is
as follows, to wit:
If any difference shall arise with respect to any
claim for loss or damage by fire and no fraud be
suspected, and the Company does not elect to
rebuild, repair, reinstate or replace same, such
difference shall be submitted to arbitrators,
indifferently chosen, whose award, or that of their
umpire, shall be conclusive.
Any liability arising out of the fire should be borne by the
defendants in equal parts; that each of them has offered
in writing to pay the plaintiff its one-third of the amount of
the plaintiff's loss, as ascertained by the arbitrator.
It is understood that in making this stipulation
plaintiff shall not be deemed to have waived his
right to contend, as a matter of law or fact, that
the award of the arbitrator is not conclusive upon
him and that the arbitrator was without authority
to supplement or amend his findings after having
once rendered decision; and that defendants
have not waived their right to contend that such
arbitration is conclusive, and that no evidence of
the amount of the loss alleged to have been
suffered by plaintiff should be considered, but
that his right to recover is limited to the amount
of damage found by the arbitrator to have been
suffered by him.
On November 6, 1919, "it is hereby stipulated and agreed
that the above entitled causes be and they are hereby
submitted to the court upon the evidence taken at the
trial and the depositions taken in Samar before the justice
of the peace of the municipality of Calbayog, and by
him transmitted to the clerk of this court; provided, that
nothing herein contained shall be construed as a waiver
of the contention of defendants that the award of the
arbitrator is conclusive, and that no evidence of the
amount of the loss other than such award should be
considered."
After the testimony was taken, the trial court rendered
judgment against each of the defendants for P202.78,
and that plaintiff should pay the costs of the action, from
which he appealed, claiming that the court erred in
holding that the decision of the arbitrator is conclusive or
in any way binding on the plaintiff; that the arbitrator's
decision is in the main supported by the evidence; and
that it erred in not awarding judgment for the plaintiff, is
prayed for in his complaint.
It will be noted that the policies of the Law Union and
Rock Insurance Co., Ltd., and The Chine Fire Insurance
Co., Ltd., provide for arbitration and expressly stipulated
"that it shall be a condition precedent to any right of
action or suit upon this policy that the award by such
arbitrator, arbitrators or umpire of the amount of the loss
or damage if disputed shall be first obtained," and that
the action was brought without making any effort to
adjust the loss by arbitration. The policy of Tokyo Marine
Insurance Co., Ltd., provides that in the event of a
different it "shall be submitted to arbitrators, indifferently
chosen, whose award, or that of their umpire, shall be
conclusive."1awphil.net
After the action was brought, and upon the request of
the defendant, an arbitrator was chosen to whom the
evidence of the loss was submitted. On December 28,
1918, he found that only seven bales of hemp of the
grade "ovillo" were destroyed, but did not then make any
finding as to its value. July 8, 1919, he made and filed a
supplemental report in which he found that the value of
the hemp destroyed by the fire of April 10, 1918, was
P608.34.
The plaintiff contends; First, that the arbitration clauses
are null and void as against public policy; second, that
the award of the arbitrator of December 28, 1918,
without finding the value of the property destroyed, was
final, and that on July 8, 1919, he had no authority to
make a supplemental finding as to the value of the
property; and, third, that upon the evidence the court
should have found for the plaintiff. Upon the first point he
cites the case of Wahl and Wahl vs. Donaldson, Sims and
Co. (2 Phil., 301), which apparently sustains his
contention. That case holds that "a clause in a contract
providing that all matters in dispute between the parties
shall be referred to arbitrators and to them alone is
contrary to public policy and cannot oust the courts of
jurisdiction."
In Chang vs. Royal Exchange Assurance Corporation of
London (8 Phil., 399), agreement was very similar to the
one here with the two defendants above quoted, and it
was there held that such a condition for arbitration is
valid, and that, unless there was an effort to comply, no
action could be maintained.
In Allen vs. Province of Tayabas (38 Phil., 356), it is said:
. . . It would be highly improper for courts out of
untoward jealousy to annul laws or agreements
which seek to oust the courts of their jurisdiction. .
. . Unless the agreement is such as absolutely to
close the doors of the courts against the parties,
which agreement would be void. (Wahl and
Wahl vs. Donaldson, Sims and Co. [1903], 2 Phil.,
301), courts will look with favor upon such
amicable arrangements and will only with great
reluctance interfere to anticipate or nullify the
action of the arbitrator. . . .
In the instant case, it will be noted that sometime after
the action was commenced and upon the request of the
defendants, the plaintiff agreed to arbitrate under the
terms and provisions of the policies; that the parties
mutually agreed upon an arbitrator; and that each
appeared before him and offered his or its evidence
upon the questions in dispute. There is no claim or
pretense that the proceedings were not honestly and
fairly conducted. Having formally agreed and submitted
to an arbitration after the action was commenced, it
may well be doubted whether the plaintiff can at this
time question the validity of the proceedings, except
upon the ground of fraud or mistake.
Ruling Case Law, vol. 2, p. 359, says that when the
subject-matter of a pending suit is submitted to
arbitration without rule of court "there is a conflict among
the authorities as to whether or not the mere submission
effects a discontinuance of the action. The majority rule is
that the parties themselves show an intent to discontinue
the pending suit by substituting another tribunal, so that a
submission furnishes ground for a discontinuance."
On page 352 of the same volume, it is said:
Arbitration as a method of settling disputes and
controversies is recognized at common law. The
award of the arbitrators is binding on the parties,
but, in the absence of statute, the successful
party can only enforce his rights thereunder by a
suit at law. Thus the only gain by a common law
arbitration is the substitution of the definite
findings of the award as the basis of a suit, in the
place of the former unsettled rights of the parties.
In an action on the award the award itself is
conclusive evidence of all matters therein
contained, provided the arbitrators have not
exceeded the powers delegated to them by the
agreement of submission. The courts regard
matters submitted as concluded by the award,
and in an action thereon they will not review the
merits of the arbitrators' findings.
Corpus Juris, vol. 5, p. 16, says:
The statement of controversies by arbitration is an
ancient practice at common law. In its broad
sense it is a substitution, by consent of parties, of
another tribunal for the tribunals provided by the
ordinary processes of law; a domestic tribunal, as
contradistinguished from a regularly organized
court proceeding according to the course of the
common law, depending upon the voluntary act
of the parties disputant in the selection of judges
of their own choice. Its object is the final
disposition, in a speedy and inexpensive way, of
the matters involved, so that they may not
become the subject of future litigation between
the parties.
On page 20, it is said:
APPROVED METHOD OF SETTLEMENT; FAVORED BY
CONSTRUCTION.
— Although arbitration was recognized at the
common law as a mode of adjusting matters in
dispute, especially such as concerned personal
chattels and personal wrongs, yet, from efforts
perceptible in the earlier cases to construe
arbitration proceedings and awards so as to
defeat them, it would seem that they were not
originally favored by the courts. This hostility,
however, has long since disappeared, and, by
reason of the fact that the proceeding
represents a method of the parties' own choice
and furnishes a more expeditious and less
expensive means of settling controversies than
the ordinary course of regular judicial
proceedings, it is the policy of the law to favor
arbitration. Therefore every reasonable
intendment will be indulged to give effect to
such proceedings, and in favor of the regularity
and integrity of the arbitrators' acts.
On page 43, it is said:
Where a contract contains a stipulation, not that
all questions arising thereunder, whether as to the
validity or effect of such contract, or otherwise,
shall be submitted to arbitration, but that the
decision of arbitrators on a certain question or
questions, such as the quantity, quality, or price
of materials or workmanship, the value of work,
the amount of loss or damage, or the like, shall
be a condition precedent to the right of action
on the contract itself, no fixed sum being stated
in the contract, such stipulation will be enforced,
because the parties to a contract have a right to
adopt whatever method they see fit for
determining such questions, and until the method
adopted has been pursued, or some sufficient
reason given for not pursuing it, no action can be
brought on the contract. "Freedom to contract
for arbitration to this extent," it has been said,
"imports no invasion of the province of the courts,
and there is no ground upon which a right so
essential to the convenient transaction of
modern business affairs can be denied," nor is
such agreement objectionable as being against
public policy. In order to give effect to such an
agreement it must of course appear that the
matter proposed to be referred is a difference,
within the meaning of the agreement.
In the instant case, there was no dispute about the policy
of insurance or the fire. The only real difference was the
amount of the loss which plaintiff sustained, and that was
the only question submitted to arbitration. In December,
the arbitrator found the amount of plaintiff's hemp which
was destroyed, but did not find its value.
Hence the award on the question submitted was not
complete or final. In the finding of the actual value of the
hemp, there was no change or revision of any previous
finding. It was simply the completion by the arbitrator of
an unfinished work. No formal notice was served on the
arbitrator, and he was not removed or discharged, and
until such time as his duties were fully performed, or he
was discharged, he would have the legal right to
complete his award. The plaintiff, having agreed to
arbitration after the action was commenced and
submitted his proof to the arbitrator, in the absence of
fraud or mistake, is estopped and bound by the award.
Where a plaintiff has commenced an action to recover
upon an insurance policy, and then voluntarily submits
the amount of his loss to arbitration, he cannot ignore or
nullify the award and treat it as void upon the ground
that he is dissatisfied with the decision.
Judgment is affirmed, with costs to the appellee. So
ordered.
BF CORPORATION, petitioner, vs. COURT OF APPEALS,
SHANGRI-LA PROPERTIES, COLAYCO, ALFREDO C.
RAMOS, INC., RUFO B.
MAXIMO G. LICAUCO III and BENJAMIN C.
RAMOS, respondents.
DECISION
ROMERO, J.:
The basic issue in this petition for review
on certiorari is whether or not the contract for the
construction of the EDSA Plaza between petitioner BF
Corporation and respondent Shangri-la Properties, Inc.
embodies an arbitration clause in case of disagreement
between the parties in the implementation of contractual
provisions.
Petitioner and respondent Shangri-la Properties, Inc.
(SPI) entered into an agreement whereby the latter
engaged the former to construct the main structure of
the EDSA Plaza Project, a shopping mall complex in the
City of Mandaluyong.
The construction work was in progress when SPI
decided to expand the project by engaging the services
of petitioner again. Thus, the parties entered into an
agreement for the main contract works after which
construction work began.
However, petitioner incurred delay in the
construction work that SPI considered as serious and
substantial.[1] On the other hand, according to petitioner,
the construction works progressed in faithful compliance
with the First Agreement until a fire broke out on
November 30, 1990 damaging Phase I of the
Project.[2] Hence, SPI proposed the re-negotiation of the
agreement between them.
Consequently, on May 30, 1991, petitioner and SPI
entered into a written agreement denominated as
Agreement for the Execution of Builders Work for the
EDSA Plaza Project. Said agreement would cover the
construction work on said project as of May 1, 1991 until
its eventual completion.
According to SPI, petitioner failed to complete the
construction works and abandoned the project.[3] This
resulted in disagreements between the parties as regards
their respective liabilities under the contract. On July 12,
1993, upon SPIs initiative, the parties respective
representatives met in conference but they failed to
come to an agreement.[4]
Barely two days later or on July 14, 1993, petitioner
filed with the Regional Trial Court of Pasig a complaint for
collection of the balance due under the construction
agreement. Named defendants therein were SPI and
members of its board of directors namely, Alfredo C.
Ramos, Rufo B. Colayco, Antonio B. Olbes, Gerardo O.
Lanuza, Jr., Maximo G. Licauco III and Benjamin C.
Ramos.
On August 3, 1993, SPI and its co-defendants filed a
motion to suspend proceedings instead of filing an
answer. The motion was anchored on defendants
allegation that the formal trade contract for the
construction of the project provided for a clause
requiring prior resort to arbitration before judicial
intervention could be invoked in any dispute arising from
the contract. The following day, SPI submitted a copy of
the conditions of the contract containing the arbitration
clause that it failed to append to its motion to suspend
proceedings.
Petitioner opposed said motion claiming that there
was no formal contract between the parties although
they entered into an agreement defining their rights and
obligations in undertaking the project. It emphasized that
the agreement did not provide for arbitration and
therefore the court could not be deprived of jurisdiction
conferred by law by the mere allegation of the existence
of an arbitration clause in the agreement between the
parties.
In reply to said opposition, SPI insisted that there was
such an arbitration clause in the existing contract
between petitioner and SPI. It alleged that suspension of
proceedings would not necessarily deprive the court of its
jurisdiction over the case and that arbitration would
expedite rather than delay the settlement of the parties
respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that
there was no arbitration clause in the contract between
the parties. It averred that granting that such a clause
indeed formed part of the contract, suspension of the
proceedings was no longer proper. It added that
defendants should be declared in default for failure to file
their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of
petitioners admission of the due execution of the Articles
of Agreement. Thus, on page D/6 thereof, the signatures
of Rufo B. Colayco, SPI president, and Bayani Fernando,
president of petitioner appear, while page D/7 shows
that the agreement is a public document duly notarized
on November 15, 1991 by Notary Public Nilberto R. Briones
as document No. 345, page 70, book No. LXX, Series of
1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause
indeed exists, the lower court[6] denied the motion to
suspend proceedings, thus:
It appears from the said document that in the
letter-agreement dated May 30, 1991 (Annex C,
Complaint), plaintiff BF and defendant Shangri-
La Properties, Inc. agreed upon the terms and
conditions of the Builders Work for the EDSA
Plaza Project (Phases I, II and Carpark), subject
to the execution by the parties of a formal trade
contract. Defendants have submitted a copy of
the alleged trade contract, which is entitled
`Contract Documents For Builders Work Trade
Contractor dated 01 May 1991, page 2 of
which is entitled `Contents of Contract
Documents with a list of the documents therein
contained, and Section A thereof consists of the
abovementioned Letter-Agreement dated May
30, 1991. Section C of the said Contract
 Documents is entitled `Articles of Agreement
and Conditions of Contract which, per its Index,
consists of Part A (Articles of Agreement) and B
(Conditions of Contract). The said Articles of
Agreement appears to have been duly signed
by President Rufo B. Colayco of Shangri-La
Properties, Inc. and President Bayani F.
Fernando of BF and their witnesses, and was
thereafter acknowledged before Notary Public
Nilberto R. Briones of Makati, Metro Manila on
November 15, 1991. The said Articles of
Agreement also provides that the `Contract
Documents' therein listed `shall be deemed an
integral part of this Agreement, and one of the
said documents is the `Conditions of Contract
which contains the Arbitration Clause relied
upon by the defendants in their Motion to
Suspend Proceedings.
This Court notes, however, that the `Conditions
of Contract referred to, contains the following
provisions:
`3. Contract Document.
Three copies of the Contract
Documents referred to in the
Articles of Agreement shall
be signed by the parties to
the contract and distributed
to the Owner and the
Contractor for their safe
keeping. (underscoring
supplied)
And it is significant to note further that the said
`Conditions of Contract is not duly signed by the
parties on any page thereof --- although it bears
the initials of BFs representatives (Bayani F.
Fernando and Reynaldo M. de la Cruz) without
the initials thereon of any representative of
Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that
the said Conditions of Contract was not duly
executed or signed by the parties, and the
failure of the defendants to submit any signed
copy of the said document, this Court entertains
serious doubt whether or not the arbitration
clause found in the said Conditions of Contract
is binding upon the parties to the Articles of
Agreement. (Underscoring supplied.)
The lower court then ruled that, assuming that the
arbitration clause was valid and binding, still, it was too
late in the day for defendants to invoke arbitration. It
quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a
dispute shall be filed in writing with the other
party to the contract and a copy filed with the
Project Manager. The demand for arbitration
shall be made within a reasonable time after
the dispute has arisen and attempts to settle
amicably have failed; in no case, however, shall
the demand he made be later than the time of
final payment except as otherwise expressly
stipulated in the contract.
Against the above backdrop, the lower court found
that per the May 30, 1991 agreement, the project was to
be completed by October 31, 1991. Thereafter, the
contractor would pay P80,000 for each day of delay
counted from November 1, 1991 with liquified (sic)
damages up to a maximum of 5% of the total contract
price.
The lower court also found that after the project was
completed in accordance with the agreement that
contained a provision on progress payment billing, SPI
took possession and started operations thereof by
opening the same to the public in November, 1991. SPI,
having failed to pay for the works, petitioner billed SPI in
the total amount of P110,883,101.52, contained in a
demand letter sent by it to SPI on February 17,
1993. Instead of paying the amount demanded, SPI set
up its own claim of P220,000,000.00 and scheduled a
conference on that claim for July 12, 1993. The
conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed
Arbitration Clause invoked by defendants, it is
required that `Notice of the demand for
arbitration of a dispute shall be filed in writing
with the other party x xxx in no case x xxx later
than the time of final payment x xxx which
apparently, had elapsed, not only because
defendants had taken possession of the finished
works and the plaintiffs billings for the payment
thereof had remained pending since
November, 1991 up to the filing of this case on
July 14, 1993, but also for the reason that
defendants have failed to file any written notice
of any demand for arbitration during the said
long period of one year and eight months, this
Court finds that it cannot stay the proceedings
in this case as required by Sec. 7 of Republic
Act No. 876, because defendants are in default
in proceeding with such arbitration.
The lower court denied SPIs motion for
reconsideration for lack of merit and directed it and the
other defendants to file their responsive pleading or
answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed
a petition for certiorari under Rule 65 of the Rules of Court
before the Court of Appeals. Said appellate court
granted the petition, annulled and set aside the orders
and stayed the proceedings in the lower court. In so
ruling, the Court of Appeals held:
The reasons given by the respondent Court in
denying petitioners motion to suspend
proceedings are untenable.
1. The notarized copy of the articles of agreement
attached as Annex A to petitioners reply dated August
26, 1993, has been submitted by them to the respondent
Court (Annex G, petition). It bears the signature of
petitioner Rufo B. Colayco, president of petitioner
Shangri-La Properties, Inc., and of Bayani Fernando,
president of respondent Corporation (Annex G-1,
petition). At page D/4 of said articles of agreement it is
expressly provided that the conditions of contract are
`deemed an integral part thereof (page 188, rollo). And it
is at pages D/42 to D/44 of the conditions of contract
that the provisions for arbitration are found (Annexes G-3
to G-5, petition, pp. 227-229). Clause No. 35 on arbitration
specifically provides:
Provided always that in case any dispute or difference
shall arise between the Owner or the Project Manager on
his behalf and the Contractor, either during the progress
or after the completion or abandonment of the Works as
to the construction of this Contract or as to any matter or
thing of whatsoever nature arising thereunder or in
connection therewith (including any matter or being 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.
The fact that said conditions of contract containing the
arbitration clause bear only the initials of respondent
Corporations representatives, Bayani Fernando and
Reynaldo de la Cruz, without that of the representative of
petitioner Shangri-La Properties, Inc. does not militate
against its effectivity. Said petitioner having categorically
admitted that the document, Annex A to its reply dated
August 26, 1993 (Annex G, petition), is the agreement
between the parties, the initial or signature of said
petitioners representative to signify conformity to
arbitration is no longer necessary. The parties, therefore,
should be allowed to submit their dispute to arbitration in
accordance with their agreement.
2. The respondent Court held that petitioners `are in
default in proceeding with such arbitration. It took note of
`the fact that under the supposed Arbitration Clause
invoked by defendants, it is required that Notice of the
demand for arbitration of a dispute shall be filed in writing
with the other party x xx in no case x xx later than the
time of final payment, which apparently, had elapsed,
not only because defendants had taken possession of
the finished works and the plaintiffs billings for the
payment thereof had remained pending since
November, 1991 up to the filing of this case on July 14,
1993, but also for the reason that defendants have failed
to file any written notice of any demand for arbitration
during the said long period of one year and eight
months, x xx.
Respondent Court has overlooked the fact that under the
arbitration clause
Notice of the demand for arbitration dispute shall be filed
in writing with the other party to the contract and a copy
filed with the Project Manager. The demand for
arbitration shall be made within a reasonable time after
the dispute has arisen and attempts to settle amicably
had failed; in no case, however, shall the demand be
made later than the time of final payment except as
otherwise expressly stipulated in the contract
(underscoring supplied)
quoted in its order (Annex A, petition). As the respondent
Court there said, after the final demand to pay the
amount of P110,883,101.52, instead of paying, petitioners
set up its own claim against respondent Corporation in
the amount of P220,000,000.00 and set a conference
thereon on July 12, 1993. Said conference proved futile.
The next day, July 14, 1993, respondent Corporation filed
its complaint against petitioners. On August 13, 1993,
petitioners wrote to respondent Corporation requesting
arbitration. Under the circumstances, it cannot be said
that petitioners resort to arbitration was made beyond
reasonable time. Neither can they be considered in
default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner
assigns the following errors:
A.
THE COURT OF APPEALS ERRED IN ISSUING
THE EXTRAORDINARY WRIT
OF CERTIORARI ALTHOUGH THE REMEDY OF
APPEAL WAS AVAILABLE TO RESPONDENTS.
B.
THE COURT OF APPEALS ERRED IN FINDING
GRAVE ABUSE OF DISCRETION IN THE
FACTUAL FINDINGS OF THE TRIAL COURT
THAT:
(i) THE PARTIES DID NOT ENTER
INTO AN AGREEMENT
TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES
DID ENTER INTO THE
AGREEMENT TO
ARBITRATE,
RESPONDENTS ARE
ALREADY IN DEFAULT IN
INVOKING THE
AGREEMENT TO
ARBITRATE.
On the first assigned error, petitioner contends that
the Order of the lower court denying the motion to
suspend proceedings is a resolution of an incident on the
merits. As such, upon the continuation of the
proceedings, the lower court would appreciate the
evidence adduced in their totality and thereafter render
a decision on the merits that may or may not sustain the
existence of an arbitration clause. A decision containing
a finding that the contract has no arbitration clause can
then be elevated to a higher court in an ordinary appeal
where an adequate remedy could be obtained. Hence,
to petitioner, the Court of Appeals should have dismissed
the petition for certioraribecause the remedy of appeal
would still be available to private respondents at the
proper time.[7]
The above contention is without merit.
The rule that the special civil action of certiorari may
not be invoked as a substitute for the remedy of appeal is
succinctly reiterated in Ongsitco v. Court of Appeals[8]as
follows:
x xx. Countless times in the past, this Court has held that
`where appeal is the proper remedy, certiorari will not lie.
The writs of certiorari and prohibition are remedies to
correct lack or excess of jurisdiction or grave abuse of
discretion equivalent to lack of jurisdiction committed by
a lower court. `Where the proper remedy is appeal, the
action for certiorari will not be entertained. x
xx. Certiorari is not a remedy for errors of judgment. Errors
of judgment are correctible by appeal, errors of
jurisdiction are reviewable by certiorari.
Rule 65 is very clear. The extraordinary remedies
of certiorari, prohibition and mandamus are available
only when `there is no appeal or any plain, speedy and
adequate remedy in the ordinary course of law x xx. That
is why they are referred to as `extraordinary. x xx.
The Court has likewise ruled that certiorari will not be
issued to cure errors in proceedings or correct erroneous
conclusions of law or fact. As long as a court acts within
its jurisdiction, any alleged errors committed in the
exercise of its jurisdiction will amount to nothing more
than errors of judgment which are reviewable by timely
appeal and not by a special civil action of certiorari.[9]v.
Court of Appeals, 327 Phil. 1, 41-42 (1996).9
This is not exactly so in the instant case. While this
Court does not deny the eventual jurisdiction of the lower
court over the controversy, the issue posed basically is
whether the lower court prematurely assumed jurisdiction
over it. If the lower court indeed prematurely assumed
jurisdiction over the case, then it becomes an error of
jurisdiction which is a proper subject of a petition
for certiorari before the Court of Appeals. And if the lower
court does not have jurisdiction over the controversy,
then any decision or order it may render may be
annulled and set aside by the appellate court.
However, the question of jurisdiction, which is a
question of law depends on the determination of the
existence of the arbitration clause, which is a question of
fact. In the instant case, the lower court found that there
exists an arbitration clause. However, it ruled that in
contemplation of law, said arbitration clause does not
exist.
The issue, therefore, posed before the Court of
Appeals in a petition for certiorari is whether the
Arbitration Clause does not in fact exist. On its face, the
question is one of fact which is not proper in a petition
for certiorari.
The Court of Appeals found that an Arbitration
Clause does in fact exist. In resolving said question of fact,
the Court of Appeals interpreted the construction of the
subject contract documents containing the Arbitration
Clause in accordance with Republic Act No. 876
(Arbitration Law) and existing jurisprudence which will be
extensively discussed hereunder. In effect, the issue
posed before the Court of Appeals was likewise a
question of law. Being a question of law, the private
respondents rightfully invoked the special civil action
of certiorari.
It is that mode of appeal taken by private
respondents before the Court of Appeals that is being
questioned by the petitioners before this Court. But at the
heart of said issue is the question of whether there exists
an Arbitration Clause because if an Arbitration Clause
does not exist, then private respondents took the wrong
mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of
whether private respondents took the proper mode of
appeal, which, incidentally, is a question of law, then it
has to answer the core issue of whether there exists an
Arbitration Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule
that certiorari cannot be a substitute for appeal will result
in a manifest failure or miscarriage of justice, the
provisions of the Rules of Court which are technical rules
may be relaxed.[10] As we shall show hereunder, had the
Court of Appeals dismissed the petition for certiorari, the
issue of whether or not an arbitration clause exists in the
contract would not have been resolved in accordance
with evidence extant in the record of the case.
Consequently, this would have resulted in a judicial
rejection of a contractual provision agreed by the parties
to the contract.
In the same vein, this Court holds that the question
of the existence of the arbitration clause in the contract
between petitioner and private respondents is a legal
issue that must be determined in this petition for review
on certiorari.
Petitioner, while not denying that there exists an
arbitration clause in the contract in question, asserts
that in contemplation of law there could not have been
one considering the following points. First, the trial court
found that the conditions of contract embodying the
arbitration clause is not duly signed by the
parties. Second, private respondents misrepresented
before the Court of Appeals that they produced in the
trial court a notarized duplicate original copy of the
construction agreement because what were submitted
were mere photocopies thereof. The contract(s)
introduced in court by private respondents were
therefore of dubious authenticity because: (a) the
Agreement for the Execution of Builders Work for the
EDSA Plaza Project does not contain an arbitration
clause, (b) private respondents surreptitiously attached
as Annexes `G-3 to `G-5 to their petition before the Court
of Appeals but these documents are not parts of the
Agreement of the parties as there was no formal trade
contract executed, (c) if the entire compilation of
documents is indeed a formal trade contract, then it
should have been duly notarized, (d) the certification
from the Records Management and Archives Office
dated August 26, 1993 merely states that the notarial
record of Nilberto Briones x xx is available in the files of
(said) office as Notarial Registry Entry only, (e) the same
certification attests that the document entered in the
notarial registry pertains to the Articles of Agreement only
without any other accompanying documents, and
therefore, it is not a formal trade contract, and (f) the
compilation submitted by respondents are a mere
hodge-podge of documents and do not constitute a
single intelligible agreement.
In other words, petitioner denies the existence of the
arbitration clause primarily on the ground that the
representatives of the contracting corporations did not
sign the Conditions of Contract that contained the said
clause. Its other contentions, specifically that insinuating
fraud as regards the alleged insertion of the arbitration
clause, are questions of fact that should have been
threshed out below.
This Court may as well proceed to determine
whether the arbitration clause does exist in the parties
contract. Republic Act No. 876 provides for the formal
requisites of an arbitration agreement as follows:
Section 4. Form of arbitration agreement. A contract to
arbitrate a controversy thereafter arising between the
parties, as well as a submission to arbitrate an existing
controversy, shall be in writing and subscribed by the
party sought to be charged, or by his lawful agent.
The making of a contract or submission for arbitration
described in section two hereof, providing for arbitration
of any controversy, shall be deemed a consent of the
parties of the province or city where any of the parties
resides, to enforce such contract of submission.
(Underscoring supplied.)
The formal requirements of an agreement to
arbitrate are therefore the following: (a) it must be in
writing and (b) it must be subscribed by the parties or
their representatives. There is no denying that the parties
entered into a written contract that was submitted in
evidence before the lower court. To subscribe means to
write underneath, as ones name; to sign at the end of a
document.[11] That word may sometimes be construed to
mean to give consent to or to attest.[12]
The Court finds that, upon a scrutiny of the records
of this case, these requisites were complied with in the
contract in question. The Articles of Agreement, which
incorporates all the other contracts and agreements
between the parties, was signed by representatives of
both parties and duly notarized. The failure of the private
respondents representative to initial the `Conditions of
Contract would therefor not affect compliance with the
formal requirements for arbitration agreements because
that particular portion of the covenants between the
parties was included by reference in the Articles of
Agreement.
Petitioners contention that there was no arbitration
clause because the contract incorporating said provision
is part of a hodge-podge document, is therefore
untenable.A contract need not be contained in a single
writing. It may be collected from several different writings
which do not conflict with each other and which, when
connected, show the parties, subject matter, terms and
consideration, as in contracts entered into by
correspondence.[13] A contract may be encompassed in
several instruments even though every instrument is not
signed by the parties, since it is sufficient if the unsigned
instruments are clearly identified or referred to and made
part of the signed instrument or instruments. Similarly, a
written agreement of which there are two copies, one
signed by each of the parties, is binding on both to the
same extent as though there had been only one copy of
the agreement and both had signed it.[14]
The flaw in petitioners contentions therefore lies in its
having segmented the various components of the whole
contract between the parties into several parts. This
notwithstanding, petitioner ironically admits the execution
of the Articles of Agreement. Notably, too, the lower
court found that the said Articles of Agreement also
provides that the `Contract Documents therein listed
`shall be deemed an integral part of this Agreement, and
one of the said documents is the `Conditions of Contract
which contains the Arbitration Clause. It is this Articles of
Agreement that was duly signed by Rufo B. Colayco,
president of private respondent SPI, and Bayani F.
Fernando, president of petitioner corporation. The same
agreement was duly subscribed before notary public
Nilberto R. Briones. In other words, the subscription of the
principal agreement effectively covered the other
documents incorporated by reference therein.
This Court likewise does not find that the Court of
Appeals erred in ruling that private respondents were not
in default in invoking the provisions of the arbitration
clause which states that (t)he demand for arbitration shall
be made within a reasonable time after the dispute has
arisen and attempts to settle amicably had failed. Under
the factual milieu, private respondent SPI should have
paid its liabilities under the contract in accordance with
its terms. However, misunderstandings appeared to have
cropped up between the parties ostensibly brought
about by either delay in the completion of the
construction work or by force majeure or the fire that
partially gutted the project. The almost two-year delay in
paying its liabilities may not therefore be wholly ascribed
to private respondent SPI.
Besides, private respondent SPIs initiative in calling
for a conference between the parties was a step towards
the agreed resort to arbitration. However, petitioner
posthaste filed the complaint before the lower
court. Thus, while private respondent SPIs request for
arbitration on August 13, 1993 might appear an
afterthought as it was made after it had filed the motion
to suspend proceedings, it was because petitioner also
appeared to act hastily in order to resolve the
controversy through the courts.
The arbitration clause provides for a reasonable time
within which the parties may avail of the relief under that
clause. Reasonableness is a relative term and the
question of whether the time within which an act has to
be done is reasonable depends on attendant
circumstances.[15] This Court finds that under the
circumstances obtaining in this case, a one-month period
from the time the parties held a conference on July 12,
1993 until private respondent SPI notified petitioner that it
was invoking the arbitration clause, is a reasonable time.
Indeed, petitioner may not be faulted for resorting to the
court to claim what was due it under the
contract. However, we find its denial of the existence of
the arbitration clause as an attempt to cover up its
misstep in hurriedly filing the complaint before the lower
court.
In this connection, it bears stressing that the lower
court has not lost its jurisdiction over the case. Section 7 of
Republic Act No. 876 provides that proceedings therein
have only been stayed. After the special proceeding of
arbitration[16] has been pursued and completed, then the
lower court may confirm the award[17] made by the
arbitrator.
It should be noted that in this jurisdiction, arbitration
has been held valid and constitutional. Even before the
approval on June 19, 1953 of Republic Act No. 876, this
Court has countenanced the settlement of disputes
through arbitration.[18] Republic Act No. 876 was adopted
to supplement the New Civil Codes provisions on
arbitration.[19] Its potentials as one of the alternative
dispute resolution methods that are now rightfully
vaunted as the wave of the future in international
relations, is recognized worldwide. To brush aside a
contractual agreement calling for arbitration in case of
disagreement between the parties would therefore be a
step backward.
WHEREFORE, the questioned Decision of the Court of
Appeals is hereby AFFIRMED and the petition
for certiorari DENIED. This Decision is immediately
executory.Costs against petitioner.
SO ORDERED.
G.R. No. 103200 August 31, 1994
LA NAVAL DRUG CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WILSON C.
YAO, respondents.
Jerome T. Paras for petitioner.
Quasha, Asperilla, Ancheta, Peña &Nolasco for private
respondent.
VITUG, J.:
In an effort to declog the courts of an increasing volume
of work load and, most importantly, in order to accord
contending parties with expenditious alternatives for
settling disputes, the law authorities, indeed encourages,
out of court settlements or adjudications. Compromises
and arbitration are widely known and used as such
acceptable methods of resolving adversarial claims.
Arbitrations, in particular, is governed by a special law,
Republic Act 876, suppletory to which are laws and rules
of general application. This case before us concerns the
jurisdiction of courts, in relation to the provisions of Section
6 of Republic Act No. 876, and, in that respect, the
applicability of the doctrine of estoppel. The law (R.A.
876), specifically Section 6 thereof, provides:
Sec. 6. Hearing by court. — A party
aggrieved by the failure, neglect or
refusal of another to perform under an
agreement in writing providing for
arbitration may petition the court for an
order directing that such arbitration
proceed in the manner provided for in
such agreement. Five days notice in
writing of the hearing of such application
shall be served either personally or by
registered mail upon the party in default.
The court shall hear the parties, and
upon being satisfied that the making of
the agreement or such failure to comply
therewith is not in issue, shall make an
order directing the parties to proceed to
arbitration in accordance with the terms
of the agreement. If the making of the
agreement or default be in issue the
court shall proceed to summarily hear
such issue. If the finding be that no
agreement in writing providing for
arbitration was made, or that there is no
default in the proceeding thereunder,
the proceeding shall be dismissed. If the
finding be that a written provision for
arbitration was made and there is a
default in proceeding thereunder, an
order shall be made summarily directing
the parties to proceed with the
arbitration in accordance with the terms
thereof.
 The court shall decide all motions,
petitions or application filed under the
provisions of this Act, within ten days
after such motions, petitions, or
applications have been heard by it.
In chronology, the events that have led to the case at
bench are detailed in the appealed decision of
respondent appellate court, which we here reproduce in
toto.
Original action for Certiorari and
Prohibition for Annulment of the Orders,
dated April 26, 1990 and June 22, 1990,
respectively, of Branch LXI, Regional Trial
Court, Angeles City, in Special Case No.
6024 for Enforcement of ARBITRATION
Agreement with Damages. Petitioner
assails that portion of subject Order of
April 26, 1990, stating as follows:
(1) Petitioner's claim for
damages predicated
on alleged tortuous acts
of respondents La Naval
Drug corporation such
as their alleged
interference and
dilatory tactics, etc. in
the implementation of
the Arbitration
Agreement in the
Contract of Lease,
thereby compelling
among others the
petitioner to go to Court
for redress; and
respondent La Naval
Drug Corporation's
counterclaim for
damages may be
entertained by this
Court in a hearing — not
summary — for the
purpose, under the Rules
of Court.
(2) A preliminary hearing
of the special and
affirmative defense to
show that Petitioner has
not cause of action
against respondent's
claim for damages is
denied; a resolution on
this issue is deferred after
the trial of the case on
the merits.
And challenges the Order of June 22,
1990 denying its motion for
reconsideration of the said earlier Order.
From the petition below of respondent
Yao, it appears that he is the present
owner of a commercial building a
portion of which is leased to petitioner
under a contract of lease executed on
December 23, 1993 with the former
owner thereof, La Proveedora, Inc.,
which contract expired on April 30, 1989.
However, petitioner exercised its option
to lease the same building for another
five years. But petitioner and respondent
Yao disagreed on the rental rate, and to
resolve the controversy, the latter, thru
written notices to the former, expressed
his intention to submit their disagreement
to arbitration, in accordance with
Republic Act 876, otherwise known as
the Arbitration Law, and paragraph 7 of
their lease contract, providing that:
7. . . . Should the parties
fail to agree on the rate
of rentals, the same shall
be submitted to a group
of Arbitrators composed
of three (3) members,
one to be appointed by
LESSOR, another by
LESSEE and the third one
to be agreed upon by
the two arbitrators
previously chosen and
the parties hereto shall
submit to the decision of
the arbitrators.
Thus, on May 6, 1989, respondent Yao
appointed Domingo Alamarez, Jr. as his
arbitrator, while on June 5, 1989,
petitioner chose Atty. CasianoSabile as
its arbitrator. The confirmation of the
appointment of Aurelio Tupang, as third
arbitrator, was held in abeyance
because petitioner instructed Atty. Sabile
to defer the same until its Board of
Directors could convene and approve
Tupang's appointment. Respondent Yao
theorizes that this was petitioner's design
to delay the arbitration proceedings, in
violation of the Arbitration Law, and the
governing stipulation of their contract of
lease.
On the basis of the aforesaid allegations,
respondent Yao prayed that after
summary hearing pursuant to Section 6
of the Arbitration Law, Atty.
CasianoSabile and Domingo Alamarez
be directed to proceed with the
arbitration in accordance with Section 7
of subject Contract of Lease and the
applicable provisions of the Arbitration
law, by appointing and confirming the
appointment of the Third Arbitrator; and
that the Board of Three Arbitrators be
ordered to immediately convene and
resolve the controversy before it,
pursuant to Section 12 and the
succeeding sections of the Arbitration
Law. (Annex "A," Petition.)
In its Answer with Counterclaim (Annex
"C," Petition), petitioner here specifically
denied the averments of the petition
below; theorizing that such petition is
premature since respondent Yao has not
yet formally required arbitrators
Alamarez and Sabile to agree on the
third arbitrator, within ten (10) days from
notice, and that the delay in the
arbitration was due to respondent Yao's
failure to perform what is incumbent
upon him, of notifying and thereafter,
requiring both arbitrators to appoint the
third member of the Board of Arbitrators.
According to petitioner, it actually gave
arbitrators Sabile and Alamarez a free
hand in choosing the third arbitrator;
and, therefore, respondent Yao has no
cause of action against it (petitioner). By
 way of Counterclaim, petitioner alleged
that it suffered actual damages of
P100,000.00; and incurred attorney's fees
of P50,000.00, plus P500.00 for every court
appearance of its counsel.
On October 20, 1989, respondent Yao
filed an amended petition for
"Enforcement of Arbitration Agreement
with Damages;" praying that petitioner
be ordered to pay interest on the unpaid
rents, at the prevailing rate of interest in
commercial banks, and exemplary
damages of at least P250,000.00.
On October 24, 1989, despite petitioner's
opposition to the motion to admit the
amended petition, the respondent court
admitted the same.
On October 31, 1989, petitioner
answered the amended petition;
contending, among others, that the
amended petition should be dismissed
on the ground of non-payment of the
requisite filing fees therefor; and it being
in the nature of an ordinary civil action, a
full blown and regular trial, is necessary;
so that respondent Yao's proposition for
a summary hearing of the arbitration
issue and separate trial for his claim for
damages is procedurally untenable and
implausible.
Invoking Section 5, Rule 16 of the Rules of
Court, petitioner presented a "Motion to
Set Case for Preliminary Hearing" of its
special and affirmative defenses, which
are grounds fro a motion to dismiss.
In its Order of November 14, 1989, the
respondent court announced that the
two arbitrators chose Mrs. Eloisa R.
Narciso as the third arbitrator. And on
November 21, 1989, it ordered the
parties to submit their position papers on
the issue as to whether or not respondent
Yao's claim for damages may be
litigated upon in the summary
proceeding for enforcement of
arbitration agreement. It likewise
informed the parties that petitioner's
Motion to Set Case for Preliminary
Hearing" of Special and Affirmative
Defenses would be resolved together
with the question of damages.
On April 26, 1990, the aforequoted
assailed Order issued. In moving for
reconsideration of the said Order,
petitioner argued that in Special Case
No. 6024, the respondent court sits as a
special court exercising limited
jurisdiction and is not competent to act
on respondent Yao's claim for damages,
which poses an issue litigable in an
ordinary civil action. But the respondent
court was not persuaded by petitioner's
submission. On June 22, 1990, it denied
the motion for reconsideration. (Rollo,
pp. 89-93).
While the appellate court has agreed with petitioner that,
under Section 6 of Republic Act No. 876, a court, acting
within the limits of its special jurisdiction, may in this case
solely determine the issue of whether the litigants should
proceed or not to arbitration, it, however, considered
petitioner in estoppel from questioning the competence
of the court to additionally hear and decide in the
summary proceedings private respondent's claim for
damages, it (petitioner) having itself filed similarly its own
counterclaim with the court a quo.
It is hardly disputable that when a court is called upon to
exercise limited and special jurisdiction, that court cannot
stray to matters outside the area of its declared authority
or beyond what has been expressly invested by law
(Elumbaring vs. Elumbaring, 12 Phil. 384, 387), particularly,
such as in this instance, where the proceedings are
summary in nature.
Prefatorily, recalling the distinctions, pertinent to the case,
between the court's lack of jurisdiction over the person of
the defendant, on the one hand, and its lack of
jurisdiction over the subject matter or the nature of the
action, upon the other hand, should be useful.
The lack of jurisdiction over the person of the defendant
may be waived either expressly or impliedly. When a
defendant voluntarily appears, he is deemed to have
submitted himself to the jurisdiction of the court. If he so
wishes not to waive this defense, he must do so
seasonably by motion for the purpose of objecting to the
jurisdiction of the court; otherwise, he shall be deemed to
have submitted himself to that jurisdiction. The decisions
promulgated heretofore by this Court would likewise
seemingly apply estoppel to bar the defendant from
pursuing that defense by alleging in his answer any other
issue for dismissing the action.
A citation of a few of our decisions might be apropos.
In Wang Laboratories, Inc., vs. Mendoza (156 SCRA 44),
this Court has ruled that if the defendant, besides setting
up in a motion to dismiss his objection to the jurisdiction of
the court, alleges at the same time any other ground for
dismissing the action, he is deemed to have submitted
himself to the jurisdiction of the court. In the process, it
has equated the matter to a situation where, such as
in Immaculata vs. Judge Navarro, et al. (146 SCRA 5), the
defendant invokes an affirmative relief against his
opponent.
In De Midgely vs. Judge Ferandos (64 SCRA 23, 31), the
Court elaborated thusly:
We are of the opinion that the lower
court has acquired jurisdiction over the
person of Mrs. Midgely by reason of her
voluntary appearance. The reservation in
her motion to dismiss that she was
making a special appearance to
contest the court's jurisdiction over her
person may be disregarded.
It may be disregarded because it was
nullified by the fact that in her motion to
dismiss she relied not only on the ground
of lack of jurisdiction over her person but
also on the ground that there was no
showing that earnest efforts were
exerted to compromise the case and
because she prayed "for such other relief
as" may be deemed "appropriate and
proper."
xxxxxxxxx
When the appearance is by motion for
the purpose of objecting to the
jurisdiction of the court over the person, it
 must be for the sole and separate
purpose of objecting to the jurisdiction of
the court. If his motion is for any other
purpose than to object to the jurisdiction
of the court over his person, he thereby
submits himself to the jurisdiction of the
court. A special appearance by motion
made for the purpose of objecting to the
jurisdiction of the court over the person
will be held to be a general
appearance, if the party in said motion
should, for example, ask for a dismissal of
the action upon the further ground that
the court had no jurisdiction over the
subject matter. (Syllabus, Flores vs.
Zurbito, supra, at page 751. That rule was
followed in Ocampo vs. Mina and
Arejola, 41 Phil. 308).
The justification for the rule was expressed in Republic vs.
Ker and Companry, Ltd. (18 SCRA 207, 213-214), in this
wise:
We observed that the motion to dismiss
filed on April 14, 1962, aside from
disputing the lower court's jurisdiction
over defendant's person, prayed for
dismissal of the complaint on the ground
that plaintiff's cause of action had
prescribed. By interposing such second
ground in its motion to dismiss, Ker & Co.,
Ltd. availed of an affirmative defense on
the basis of which it prayed the court to
resolve controversy in its favor. For the
court to validly decide the said plea of
defendant Ker & Co., Ltd., it necessarily
had to acquire jurisdiction upon the
latter's person, who, being the
proponent of the affirmative defense,
should be deemed to have abandoned
its special appearance and voluntarily
submitted itself to the jurisdiction of the
court.
Voluntary appearance cures defects of
summons, if any, Such defect, if any, was
further cured when defendant filed its
answer to the complaint. A defendant
can not be permitted to speculate upon
the judgment of the court by objecting
to the court's jurisdiction over its person if
the judgment is adverse to it, and
acceding to jurisdiction over its person if
and when the judgment sustains its
defenses.
The doctrine of estoppel is predicated on, and has its
origin in, equity which, broadly defined, is justice
according to natural law and right. It is a principle
intended to avoid a clear case of injustice. The term is
hardly distinguishable from a waiver of right. Estoppel, like
its said counterpart, must be unequivocal and intentional
for, when misapplied, it can easily become a most
convenient and effective means of injustice. Estoppel is
not understood to be a principle that, as a rule, should
prevalently apply but, such as it concededly is, as a mere
exception from the standard legal norms of general
application that can be invoked only in highly
exceptional and justifiable cases.
Tested by the above criteria, the Court sees it propitious
to re-examine specifically the question of whether or not
the submission of other issues in a motion to dismiss, or of
an affirmative defense (as distinguished from an
affirmative relief) in an answer, would necessarily
foreclose, and have the effect of a waiver of, the right of
a defendant to set up the court's lack of jurisdiction over
the person of the defendant.
Not inevitably.
Section 1, Rule 16, of the Rules of Court, provides that a
motion to dismiss may be made on the following grounds:
(a) That the court has no jurisdiction over
the person of the defendant or over the
subject of the action or suit;
(b) That the court has no jurisdiction over
the nature of the action or suit;
(c) The venue is improperly laid;
(d) That the plaintiff has no legal
capacity to sue;
(e) That there is another action pending
between the same parties for the same
cause;
(f) That the cause of action is barred by
a prior judgment or by statute of
limitations;
(g) That the complaint states no cause of
action;
(h) That the claim or demand set forth in
the plaintiff's pleading has been paid,
waived, abandoned, or otherwise
extinguished;
( i ) That the claim on which the action or
suit is founded is unenforceable under
the provisions of the statute of frauds;
( j ) That the suit is between members of
the same family and no earnest efforts
towards a compromise have been
made.
Any ground for dismissal in a motion to dismiss, except
improper venue, may, as further set forth in Section 5 of
the same rule, be pleaded as an affirmative defense and
a preliminary hearing may be had thereon as if a motion
to dismiss had been filed. An answer itself contains the
negative, as well as affirmative, defenses upon which the
defendant may rely (Section 4, Rule 6, Rules of Court). A
negative defense denies the material facts averred in the
complaint essential to establish the plaintiff's cause of
action, while an affirmative defense in an allegation of a
new matter which, while admitting the material
allegations of the complaint, would, nevertheless,
prevent or bar recovery by the plaintiff. Inclusive of these
defenses are those mentioned in Rule 16 of the Rules of
Court which would permit the filing of a motion to dismiss.
In the same manner that the plaintiff may assert two or
more causes of action in a court suit, a defendant is
likewise expressly allowed, under Section 2, Rule 8, of the
Rules of Court, to put up his own defenses alternatively or
even hypothetically. Indeed, under Section 2, Rule 9, of
the Rules of Court, defenses and objections not pleaded
either in a motion to dismiss or in an answer, except for
the failure to state a cause of action, are deemed
waived. We take this to mean that a defendant may, in
fact, feel enjoined to set up, along with his objection to
the court's jurisdiction over his person, all other possible
defenses. It thus appears that it is not the invocation of
any of such defenses, but the failure to so raise them, that
can result in waiver or estoppel. By defenses, of course,
we refer to the grounds provided for in Rule 16 of the
Rules of Court that must be asserted in a motion to dismiss
or by way of affirmative defenses in an answer.
Mindful of the foregoing, in Signetics Corporation vs.
Court of Appeals and Freuhauf Electronics Phils., Inc. (225
SCRA 737, 738), we lately ruled:
This is not to say, however, that the
petitioner's right to question the
jurisdiction of the court over its person is
now to be deemed a foreclosed matter.
If it is true, as Signetics claims, that its only
involvement in the Philippines was
through a passive investment in Sigfil,
which it even later disposed of, and that
TEAM Pacific is not its agent, then it
cannot really be said to be doing
business in the Philippines. It is a defense,
however, that requires the contravention
of the allegations of the complaint, as
well as full ventilation, in effect, of the
main merits of the case, which should
not thus be within the province of a mere
motion to dismiss. So, also, the issue
posed by the petitioner as to whether a
foreign corporation which has done
business in the country, but which has
ceased to do business at the time of the
filing of a complaint, can still be made to
answer for a cause of action which
accrued while it was doing business, is
another matter that would yet have to
await the reception and admission of
evidence. Since these points have
seasonably been raised by
petitioner, there should be no real cause
for what may understandably be its
apprehension, i.e., that by
participation during the trial on the
merits, it may, absent an invocation of
separate or independent reliefs of its
own, be considered to have voluntarily
submitted itself to the court's jurisdiction.
Lack of jurisdiction over the subject matter of the suit is
yet another matter. Whenever it appears that the court
has no jurisdiction over the subject matter, the action
shall be dismissed (Section 2, Rule 9, Rules of Court). This
defense may be interposed at any time, during appeal
(Roxas vs. Rafferty, 37 Phil. 957) or even after final
judgment (Cruzcosa vs. Judge Concepcion, et al., 101
Phil. 146). Such is understandable, as this kind of
jurisdiction is conferred by law and not within the courts,
let alone the parties, to themselves determine or
conveniently set aside. In People vs. Casiano (111 Phil. 73
93-94), this Court, on the issue of estoppel, held:
The operation of the principle of
estoppel on the question of jurisdiction
seemingly depends upon whether the
lower court actually had jurisdiction or
not. If it had no jurisdiction, but the case
was tried and decided upon the theory
that it had jurisdiction, the parties are not
barred, on appeal, from assailing such
jurisdiction, for the same "must exist as a
matter of law, and may not be
conferred by consent of the parties or by
estoppel" (5 C.J.S., 861-863). However, if
the lower court had jurisdiction, and the
case was heard and decided upon a
given theory, such, for instance, as that
the court had no jurisdiction, the party
who induced it to adopt such theory will
not be permitted, on appeal, to assume
an inconsistent position — that the lower
court had jurisdiction. Here, the principle
of estoppel applies. The rule that
jurisdiction is conferred by law, and does
not depend upon the will of the parties,
has not bearing thereon.
The rule was reiterated in Calimlim vs. Ramirez (118 SCRA
399, 406), and quite recently, in Southeast Asian Fisheries
Development Center-Aquaculture Department vs.
National Labor Relations Commission (206 SCRA 283).
Jurisdiction over the nature of the action, in concept,
differs from jurisdiction over the subject matter. Illustrated,
lack of jurisdiction over the nature of the action is the
situation that arises when a court, which ordinarily would
have the authority and competence to take a case, is
rendered without it either because a special law has
limited the exercise of its normal jurisdiction on a
particular matter or because the type of action has been
reposed by law in certain other courts or quasi-judicial
agencies for determination. Nevertheless, it can hardly
be questioned that the rules relating to the effects of
want of jurisdiction over the subject matter should apply
with equal vigor to cases where the court is similarly
bereft of jurisdiction over the nature of the action.
In summary, it is our considered view, as we now so
hereby express,
that —
(1) Jurisdiction over the person must be seasonably
raised, i.e., that it is pleaded in a motion to dismiss or by
way of an affirmative defense in an answer. Voluntary
appearance shall be deemed a waiver of this defense.
The assertion, however, of affirmative defenses shall not
the
be constructed as an estoppel or as a waiver of such
defense.
its
(2) Where the court itself clearly has no jurisdiction over
the subject matter or the nature of the action, the
invocation of this defense may be done at any time. It is
neither for the courts nor the parties to violate or
disregard that rule, let alone to confer that jurisdiction,
this matter being legislative in character. Barring highly
meritorious and exceptional circumstances, such as
hereinbefore exemplified, neither estoppel nor waiver
shall apply.
In the case at bench, the want of jurisdiction by the court
is indisputable, given the nature of the controversy. The
arbitration law explicitly confines the court's authority only
to pass upon the issue of whether there is or there is no
agreement in writing 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." If
the court, upon the other hand, finds that no such
agreement exists, "the proceeding shall be dismissed."
The proceedings are summary in nature.
All considered, the court a quo must then refrain from
taking up the claims of the contending parties for
damages, which, upon the other hand, may be
ventilated in separate regular proceedings at an
opportune time and venue. The circumstances obtaining
in this case are far, we hold, from justifying the
application of estoppel against either party.
WHEREFORE, the decision of the Court of Appeals and
the orders of the trial court in question are SET ASIDE. The
court a quo, in the instant proceedings, is ordered to
DESIST from further hearing private respondent's claim, as
well as petitioner's counterclaim, for damages. No costs.
SO ORDERED.
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR.,
DANIEL COLLINS and LUIS HIDALGO, petitioners,
vs. COURT OF APPEALS, JUDGE BIENVENIDO L.
REYES in his capacity as Presiding Judge, RTC-Br.
74, Malabon, Metro Manila, MONTEBUENO
MARKETING, INC., LIONG LIONG C. SY and
SABROSA FOODS, INC., respondents.
DECISION
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July
1998 Decision[1] of the Court of Appeals affirming the 11
November 1997 Order[2] of the Regional Trial Court which
denied petitioners Motion to Suspend Proceedings in Civil
Case No. 2637-MN. It also questions the appellate
courts Resolution[3] of 30 October 1998 which denied
petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement,
petitioner Del Monte Corporation-USA (DMC-USA)
appointed private respondent Montebueno Marketing,
Inc. (MMI) as the sole and exclusive distributor of its Del
Monte products in the Philippines for a period of five (5)
years, renewable for two (2) consecutive five (5) year
periods with the consent of the parties. The Agreement
provided, among others, for an arbitration clause which
states -
12. GOVERNING LAW AND ARBITRATION[4]
This Agreement shall be governed by the laws of the
State of California and/or, if applicable, the United States
of America. All disputes arising out of or relating to this
Agreement or the parties relationship, including the
termination thereof, shall be resolved by arbitration in the
City of San Francisco, State of California, under the Rules
of the American Arbitration Association. The arbitration
panel shall consist of three members, one of whom shall
be selected by DMC-USA, one of whom shall be selected
by MMI, and third of whom shall be selected by the other
two members and shall have relevant experience in the
industry x xxx
In October 1994 the appointment of private
respondent MMI as the sole and exclusive distributor of
Del Monte products in the Philippines was published in
several newspapers in the country. Immediately after its
appointment, private respondent MMI appointed
Sabrosa Foods, Inc. (SFI), with the approval of petitioner
DMC-USA, as MMIs marketing arm to concentrate on its
marketing and selling function as well as to manage its
critical relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and
MMIs Managing Director LiongLiong C. Sy (LILY SY) filed a
Complaint[5] against petitioners DMC-USA, Paul E. Derby,
Jr.,[6] Daniel Collins[7] and Luis Hidalgo,[8] and Dewey
Ltd.[9] before the Regional Trial Court of Malabon, Metro
Manila. Private respondents predicated their complaint
on the alleged violations by petitioners of Arts.
20,[10] 21[11] and 23[12] of the Civil Code. According to
private respondents, DMC-USA products continued to be
brought into the country by parallel importers despite the
appointment of private respondent MMI as the sole and
exclusive distributor of Del Monte products thereby
causing them great embarrassment and substantial
damage. They alleged that the products brought into the
country by these importers were aged, damaged, fake or
counterfeit, so that in March 1995 they had to cause,
after prior consultation with Antonio Ongpin, Market
Director for Special Markets of Del Monte Philippines, Inc.,
the publication of a "warning to the trade" paid
advertisement in leading newspapers. Petitioners DMC-
USA and Paul E. Derby, Jr., apparently upset with the
publication, instructed private respondent MMI to stop
coordinating with Antonio Ongpin and to communicate
directly instead with petitioner DMC-USA through Paul E.
Derby, Jr.
Private respondents further averred that petitioners
knowingly and surreptitiously continued to deal with the
former in bad faith by involving disinterested third parties
and by proposing solutions which were entirely out of
their control. Private respondents claimed that they had
exhausted all possible avenues for an amicable resolution
and settlement of their grievances; that as a result of the
fraud, bad faith, malice and wanton attitude of
petitioners, they should be held responsible for all the
actual expenses incurred by private respondents in the
delayed shipment of orders which resulted in the extra
handling thereof, the actual expenses and cost of money
for the unused Letters of Credit (LCs) and the substantial
opportunity losses due to created out-of-stock situations
and unauthorized shipments of Del Monte-USA products
to the Philippine Duty Free Area and Economic Zone; that
the bad faith, fraudulent acts and willful negligence of
petitioners, motivated by their determination to squeeze
private respondents out of the outstanding and ongoing
Distributorship Agreement in favor of another party, had
placed private respondent LILY SY on tenterhooks since
then; and, that the shrewd and subtle manner with which
petitioners concocted imaginary violations by private
respondent MMI of the Distributorship Agreement in order
to justify the untimely termination thereof was a
subterfuge. For the foregoing, private respondents
claimed, among other reliefs, the payment of actual
damages, exemplary damages, attorneys fees and
litigation expenses.
On 21 October 1996 petitioners filed a Motion to
Suspend Proceedings[13] invoking the arbitration clause in
their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial
court deferred consideration of petitioners Motion to
Suspend Proceedings as the grounds alleged therein did
not constitute the suspension of the proceedings
considering that the action was for damages with prayer
for the issuance of Writ of Preliminary Attachment and not
on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for
Reconsideration to which private respondents filed
their Comment/Opposition. On 31 January 1997
petitioners filed their Reply.Subsequently, private
respondents filed an Urgent Motion for Leave to Admit
Supplemental Pleading dated 2 April 1997. This Motion
was admitted, over petitioners opposition, in an Order of
the trial court dated 27 June 1997.
As a result of the admission of the Supplemental
Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend
Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend
Proceedings was denied by the trial court on the ground
that it "will not serve the ends of justice and to allow said
suspension will only delay the determination of the issues,
frustrate the quest of the parties for a judicious
determination of their respective claims, and/or deprive
and delay their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the
decision of the trial court. It held that the alleged
damaging acts recited in the Complaint, constituting
petitioners causes of action, required the interpretation of
Art. 21 of the Civil Code[16] and that in determining
whether petitioners had violated it "would require a full
blown trial" making arbitration "out of the
question."[17] Petitioners Motion for Reconsideration of the
affirmation was denied. Hence, this Petition for Review.
 The crux of the controversy boils down to whether
the dispute between the parties warrants an order
compelling them to submit to arbitration.
Petitioners contend that the subject matter of
private respondents causes of action arises out of or
relates to the Agreement between petitioners and
private respondents. Thus, considering that the arbitration
clause of the Agreement provides that all disputes arising
out of or relating to the Agreement or the parties
relationship, including the termination thereof, shall be
resolved by arbitration, they insist on the suspension of the
proceedings in Civil Case No. 2637-MN as mandated by
Sec. 7 of RA 876[18] -
Sec. 7. Stay of Civil Action. If any suit or proceeding be
brought upon an issue arising out of an agreement
providing for arbitration thereof, the court in which such
suit or proceeding is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable
to arbitration, shall stay the action or proceeding until an
arbitration has been had in accordance with the terms of
the agreement. Provided, That the applicant for the stay
is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that
their causes of action are rooted in Arts. 20, 21 and 23 of
the Civil Code,[19] the determination of which demands a
full blown trial, as correctly held by the Court of
Appeals. Moreover, they claim that the issues before the
trial court were not joined so that the Honorable Judge
was not given the opportunity to satisfy himself that the
issue involved in the case was referable to
arbitration. They submit that, apparently, petitioners filed
a motion to suspend proceedings instead of sending a
written demand to private respondents to arbitrate
because petitioners were not sure whether the case
could be a subject of arbitration. They maintain that had
petitioners done so and private respondents failed to
answer the demand, petitioners could have filed with the
trial court their demand for arbitration that would warrant
a determination by the judge whether to refer the case
to arbitration.Accordingly, private respondents assert that
arbitration is out of the question.
Private respondents further contend that the
arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their
motion for extension of time to file this petition on the
same date[20] petitioner DMC-USA filed a petition to
compel private respondent MMI to arbitrate before the
United States District Court in Northern California,
docketed as Case No. C-98-4446. They insist that the filing
of the petition to compel arbitration in the United States
made the petition filed before this Court an alternative
remedy and, in a way, an abandonment of the cause
they are fighting for here in the Philippines, thus
warranting the dismissal of the present petition before this
Court.
There is no doubt that arbitration is valid and
constitutional in our jurisdiction.[21] Even before the
enactment of RA 876, this Court has countenanced the
settlement of disputes through arbitration. Unless the
agreement is such as absolutely to close the doors of the
courts against the parties, which agreement would be
void, the courts will look with favor upon such amicable
arrangement and will only interfere with great reluctance
to anticipate or nullify the action of the
arbitrator.[22] Moreover, as RA 876 expressly authorizes
arbitration of domestic disputes, foreign arbitration as a
system of settling commercial disputes was likewise
recognized when the Philippines adhered to the United
Nations "Convention on the Recognition and the
Enforcement of Foreign Arbitral Awards of 1958" under
the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing
enforcement of international arbitration agreements
between parties of different nationalities within a
contracting state.[23]
A careful examination of the instant case shows that
the arbitration clause in the Distributorship Agreement
between petitioner DMC-USA and private respondent
MMI is valid and the dispute between the parties is
arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and
private respondent MMI is a contract. The provision to
submit to arbitration any dispute arising therefrom and
the relationship of the parties is part of that contract and
is itself a contract. As a rule, contracts are respected as
the law between the contracting parties and produce
effect as between them, their assigns and
heirs.[24] Clearly, only parties to the Agreement, i.e.,
petitioners DMC-USA and its Managing Director for Export
Sales Paul E. Derby, Jr., and private respondents MMI and
its Managing Director LILY SY are bound by the
Agreement and its arbitration clause as they are the only
signatories thereto. Petitioners Daniel Collins and Luis
Hidalgo, and private respondent SFI, not parties to the
Agreement and cannot even be considered assigns or
heirs of the parties, are not bound by the Agreement and
the arbitration clause therein. Consequently, referral to
arbitration in the State of California pursuant to the
arbitration clause and the suspension of the proceedings
in Civil Case No. 2637-MN pending the return of the
arbitral award could be called for[25] but only as to
petitioners DMC-USA and Paul E. Derby, Jr., and private
respondents MMI and LILY SY, and not as to the other
parties in this case, in accordance with the recent case
of Heirs of Augusto L. Salas, Jr. v. Laperal Realty
Corporation,[26] which superseded that of Toyota Motor
Philippines Corp. v. Court of Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that
the arbitration clause has become dysfunctional
because of the presence of third parties is untenable
ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"[28] and that "[a]s such,
the parties are thereby expected to abide with good
faith in their contractual commitments."[29] However,
in Salas, Jr., only parties to the Agreement, their assigns or
heirs have the right to arbitrate or could be compelled to
arbitrate. The Court went further by declaring that in
recognizing the right of the contracting parties to
arbitrate or to compel arbitration, the splitting of the
proceedings to arbitration as to some of the parties on
one hand and trial for the others on the other hand, orthe
suspension of trial pending arbitration between some of
the parties, should not be allowed as it would, in effect,
result in multiplicity of suits, duplicitous procedure and
unnecessary delay.[30]
The object of arbitration is to allow the expeditious
determination of a dispute.[31] Clearly, the issue before us
could not be speedily and efficiently resolved in its
entirety if we allow simultaneous arbitration proceedings
and trial, or suspension of trial pending
arbitration. Accordingly, the interest of justice would only
be served if the trial court hears and adjudicates the
case in a single and complete proceeding.[32]
WHEREFORE, the petition is DENIED. The Decision of
the Court of Appeals affirming the Order of the Regional
Trial Court of Malabon, Metro Manila, in Civil Case No.
2637-MN, which denied petitioners Motion to Suspend
Proceedings, is AFFIRMED. The Regional Trial Court
concerned is directed to proceed with the hearing of
Civil Case No. 2637-MN with dispatch. No costs.
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 partiestothe 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,
RufoB.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.
x xx x xx x xx
(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.19On 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.46 Since the
contract was executed only by BF Corporation and
Shangri-La, only they should be affected by the
contract’s stipulation.47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that
should make them 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.50Section 31 makes
directorssolidarily liable for fraud, gross negligence, and
bad faith.51 Petitioners are not really third parties to the
agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation
Code.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 abundanteadcautela,
as manifested therein on several occasions."58 Petitioners
informed the court that they already manifested with the
trial court that "any action taken on [the Arbitral Tribunal’s
decision] should be without prejudice to the resolution of
[this] case."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 and
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 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
directorssolidarily 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, FKI 5 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 Donation14 that reiterated the
provisions of the Deed of Donation , including those
relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the
Deed of Donation and Amended Deed of Donation , FKI
was able to continue in its possession and use of the
subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed
of Donation and Amended Deed of Donation was set to
expire, or on 23 May 2000, FKI and respondent executed
another contract of lease ( 2000 Lease Contract
)15covering the subject land. In this 2000 Lease Contract,
FKI and respondent agreed on a new five-year lease to
take effect on the 26th of May 2000, with annual rents
ranging from ₱4,000,000 for the first year up to ₱4,900,000
for the fifth year.16 The 2000 Lease Contract also
contained an arbitration clause enforceable in the event
the parties come to disagreement about the"
interpretation, application and execution" of the lease,
viz :
19. Governing Law – The provisions of this 2000 Lease
Contract shall be governed, interpreted and construed in
all aspects in accordance with the laws of the Republic
of the Philippines.
Any disagreement as to the interpretation, application or
execution of this 2000 Lease Contract shall be submitted
to a board of three (3) arbitrators constituted in
accordance with the arbitration law of the Philippines.
The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and
respondent agreed to renew their lease for another five
(5) years. This new lease (2005 Lease Contract )18 required
FKI to pay a fixed annual rent of ₱4,200,000.19 In addition
to paying the fixed rent, however, the 2005 Lease
Contract also obligated FKI to make a yearly " donation "
of money to the respondent.20 Such donations ranged
from ₱3,000,000 for the first year up to ₱3,900,000for the
fifth year.21Notably, the 2005 Lease Contract contained
an arbitration clause similar to that in the 2000 Lease
Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease
Contract shall be governed, interpreted and construed in
all aspects in accordance with the laws of the Republic
of the Philippines.
Any disagreement as to the interpretation, application or
execution of this 2005 Lease Contract shall be submitted
to a board of three (3) arbitrators constituted in
accordance with the arbitration law of the Philippines.
The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and "
donations "due it per the 2005 Lease Contract.23 But in
June of 2008, FKI sold all its rights and properties relative
to its business in favor of herein petitioner Koppel,
Incorporated.24 On 29 August 2008, FKI and petitioner
executed an Assignment and Assumption of Lease and
Donation25 —wherein FKI, with the conformity of the
respondent, formally assigned all of its interests and
obligations under the Amended Deed of Donation and
the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment
of the rent and " donation " under the 2005 Lease
Contract.
Petitioner’s refusal to pay such rent and "donation "
emanated from its belief that the rental stipulations of the
2005 Lease Contract, and even of the 2000 Lease
Contract, cannot be given effect because they violated
one of the" material conditions " of the donation of the
subject land, as stated in the Deed of Donation and
Amended Deed of Donation.26
According to petitioner, the Deed of Donation and
Amended Deed of Donation actually established not
only one but two (2) lease agreements between FKI and
respondent, i.e. , one lease for the first twenty-five
(25)years or from 1975 to 2000, and another lease for the
next twenty-five (25)years thereafter or from 2000 to 2025.
27 Both leases are material conditions of the donation of
the subject land.
Petitioner points out that while a definite amount of rent
for the second twenty-five (25) year lease was not fixed in
the Deed of Donation and Amended Deed of Donation ,
both deeds nevertheless prescribed rules and limitations
by which the same may be determined. Such rules and
limitations ought to be observed in any succeeding lease
agreements between petitioner and respondent for they
are, in themselves, material conditions of the donation of
the subject land.28
In this connection, petitioner cites item 2(g) of the Deed
of Donation and Amended Deed of Donation that
supposedly limits the amount of rent for the lease over
the second twenty-five (25) years to only " three percent
(3%) of the fair market value of the subject land
excluding the improvements.29
For petitioner then, the rental stipulations of both the 2000
Lease Contract and 2005 Lease Contract cannot be
enforced as they are clearly, in view of their exorbitant
exactions, in violation of the aforementioned threshold in
item 2(g) of the Deed of Donation and Amended Deed
of Donation . Consequently, petitioner insists that the
amount of rent it has to pay thereon is and must still be
governed by the limitations prescribed in the Deed of
Donation and Amended Deed of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand
Letter)31 to petitioner notifying the latter of its default " per
Section 12 of the 2005 Lease Contract " and demanding
for the settlement of the rent and " donation " due for the
year 2009. Respondent, in the same letter, further
intimated of canceling the 2005 Lease Contract should
petitioner fail to settle the said obligations.32 Petitioner
received the First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to
respondent expressing its disagreement over the rental
stipulations of the 2005 Lease Contract — calling them "
severely disproportionate," "unconscionable" and "in clear
violation to the nominal rentals mandated by the
Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled
to ₱8,394,000.00, exclusive of interests, petitioner offered
to pay only ₱80,502.79,35 in accordance with the rental
provisions of the Deed of Donation and Amended Deed
of Donation.36Respondent refused this offer.37
On 25 September 2009, respondent sent another letter
(Second Demand Letter)38 to petitioner, reiterating its
demand for the payment of the obligations already due
under the 2005 Lease Contract. The Second 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 xx, 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.
x xxx
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 ArbitrableUnder 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 xx 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 .