Republic of the Philippines

Supreme Court
Manila
SECOND DIVISION
CARGILL PHILIPPINES, INC.,
Petitioner,

G.R. No. 175404

Present:
CARPIO, J., Chairperson,
NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.

- versus -

SAN FERNANDO REGALA TRADING, INC.,

Respondent.

Promulgated:
January 31, 2011

x--------------------------------------------------x
DECISION

PERALTA, J.:
Before us is a petition for review on certiorari seeking to reverse and set aside the Decision [1] dated July
31, 2006 and the Resolution[2] datedNovember 13, 2006 of the Court of Appeals (CA) in CA G.R. SP No.
50304.
The factual antecedents are as follows:

On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with the Regional Trial Court
(RTC) of Makati City a Complaint for Rescission of Contract with Damages [3] against petitioner Cargill
Philippines, Inc. In its Complaint, respondent alleged that it was engaged in buying and selling of
molasses and petitioner was one of its various sources from whom it purchased molasses. Respondent
alleged that it entered into a contract dated July 11, 1996 with petitioner, wherein it was agreed upon that
respondent would purchase from petitioner 12,000 metric tons of Thailand origin cane blackstrap
molasses at the price of US$192 per metric ton; that the delivery of the molasses was to be made in
January/February 1997 and payment was to be made by means of an Irrevocable Letter of Credit payable

at sight, to be opened by September 15, 1996; that sometime prior to September 15, 1996, the parties
agreed that instead of January/February 1997, the delivery would be made in April/May 1997 and that
payment would be by an Irrevocable Letter of Credit payable at sight, to be opened upon petitioner's
advice. Petitioner, as seller, failed to comply with its obligations under the contract, despite demands from
respondent, thus, the latter prayed for rescission of the contract and payment of damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to
Voluntary Arbitration,[4] wherein it argued that the alleged contract between the parties, dated July 11,
1996, was never consummated because respondent never returned the proposed agreement bearing its
written acceptance or conformity nor did respondent open the Irrevocable Letter of Credit at
sight. Petitioner contended that the controversy between the parties was whether or not the alleged
contract between the parties was legally in existence and the RTC was not the proper forum to ventilate
such issue. It claimed that the contract contained an arbitration clause, to wit:

ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual agreement
shall be settled by arbitration in the City of New York before the American Arbitration
Association. The Arbitration Award shall be final and binding on both parties. [5]
that respondent must first comply with the arbitration clause before resorting to court, thus, the RTC must
either dismiss the case or suspend the proceedings and direct the parties to proceed with arbitration,
pursuant to Sections 6[6] and 7[7] of Republic Act (R.A.) No. 876, or the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has jurisdiction over the action for
rescission of contract and could not be changed by the subject arbitration clause. It cited cases wherein
arbitration clauses, such as the subject clause in the contract, had been struck down as void for being
contrary to public policy since it provided that the arbitration award shall be final and binding on both
parties, thus, ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already inapplicable, having been
rendered prior to the effectivity of the New Civil Code in 1950 and the Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by petitioner is invalid and
unenforceable, considering that the requirements imposed by the provisions of the Arbitration Law had
not been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even clarified that the issue boiled
down to whether the arbitration clause contained in the contract subject of the complaint is valid and
enforceable; that the arbitration clause did not violate any of the cited provisions of the Arbitration Law.
On September 17, 1998, the RTC rendered an Order,[8] the dispositive portion of which reads:
Premises considered, defendant's Motion To Dismiss/Suspend Proceedings and To Refer
Controversy To Voluntary Arbitration is hereby DENIED. Defendant is directed to file its
answer within ten (10) days from receipt of a copy of this order.[9]

In denying the motion, the RTC found that there was no clear basis for petitioner's plea to dismiss the
case, pursuant to Section 7 of the Arbitration Law. The RTC said that the provision directed the court
concerned only to stay the action or proceeding brought upon an issue arising out of an agreement
providing for the arbitration thereof, but did not impose the sanction of dismissal. However, the RTC did
not find the suspension of the proceedings warranted, since the Arbitration Law contemplates an
arbitration proceeding that must be conducted in the Philippines under the jurisdiction and control of the
RTC; and before an arbitrator who resides in the country; and that the arbitral award is subject to court
approval, disapproval and modification, and that there must be an appeal from the judgment of the

RTC. The RTC found that the arbitration clause in question contravened these procedures, i.e., the
arbitration clause contemplated an arbitration proceeding in New York before a non-resident arbitrator
(American Arbitration Association); that the arbitral award shall be final and binding on both parties. The
RTC said that to apply Section 7 of the Arbitration Law to such an agreement would result in disregarding
the other sections of the same law and rendered them useless and mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC denied in an Order [10] dated November 25,
1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that the RTC acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss or at least suspend the proceedings a
quo, despite the fact that the party's agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then required to file their respective
Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition and affirming the RTC
Orders.
In denying the petition, the CA found that stipulation providing for arbitration in contractual obligation is
both valid and constitutional; that arbitration as an alternative mode of dispute resolution has long been
accepted in our jurisdiction and expressly provided for in the Civil Code; that R.A. No. 876 (the
Arbitration Law) also expressly authorized the arbitration of domestic disputes. The CA found error in the
RTC's holding that Section 7 of R.A. No. 876 was inapplicable to arbitration clause simply because the
clause failed to comply with the requirements prescribed by the law. The CA found that there was nothing
in the Civil Code, or R.A. No. 876, that require that arbitration proceedings must be conducted only in
thePhilippines and the arbitrators should be Philippine residents. It also found that the RTC ruling
effectively invalidated not only the disputed arbitration clause, but all other agreements which provide for
foreign arbitration. The CA did not find illegal or against public policy the arbitration clause so as to
render it null and void or ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be brought under the Arbitration
Law for the purpose of suspending the proceedings before the RTC, since in its Motion to
Dismiss/Suspend proceedings, petitioner alleged, as one of the grounds thereof, that the subjectcontract
between the parties did not exist or it was invalid; that the said contract bearing the arbitration clause was
never consummated by the parties, thus, it was proper that such issue be first resolved by the court
through an appropriate trial; that the issue involved a question of fact that the RTC should first
resolve. Arbitration is not proper when one of the parties repudiated the existence or validity of the
contract.
Petitioner's motion for reconsideration was denied in a Resolution dated November 13, 2006.

Hence, this petition.

Petitioner alleges that the CA committed an error of law in ruling that arbitration cannot proceed
despite the fact that: (a) it had ruled, in its assailed decision, that the arbitration clause is valid,
enforceable and binding on the parties; (b) the case of Gonzales v. Climax Mining Ltd.[11] is inapplicable
here; (c) parties are generally allowed, under the Rules of Court, to adopt several defenses, alternatively
or hypothetically, even if such

defenses are inconsistent with each other; and (d) the complaint filed by respondent with the trial court is
premature.
Petitioner alleges that the CA adopted inconsistent positions when it found the arbitration clause between
the parties as valid and enforceable and yet in the same breath decreed that the arbitration cannot proceed
because petitioner assailed the existence of the entire agreement containing the arbitration
clause. Petitioner claims the inapplicability of the cited Gonzales case decided in 2005, because in the
present case, it was respondent who had filed the complaint for rescission and damages with the RTC,
which based its cause of action against petitioner on the alleged agreement dated July 11, 2006 between
the parties; and that the same agreement contained the arbitration clause sought to be enforced by
petitioner in this case. Thus, whether petitioner assails the genuineness and due execution of the
agreement, the fact remains that the agreement sued upon provides for an arbitration clause; that
respondent cannot use the provisions favorable to him and completely disregard those that are
unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two alternative defenses, i.e., the parties
had not entered into any agreement upon which respondent as plaintiff can sue upon; and, assuming that
such agreement existed, there was an arbitration clause that should be enforced, thus, the dispute must
first be submitted to arbitration before an action can be instituted in court. Petitioner argues that under
Section 1(j) of Rule 16 of the Rules of Court, included as a ground to dismiss a complaint is when a
condition precedent for filing the complaint has not been complied with; and that submission to
arbitration when such has been agreed upon is one such condition precedent. Petitioner submits that the
proceedings in the RTC must be dismissed, or at least suspended, and the parties be ordered to proceed
with arbitration.
On March 12, 2007, petitioner filed a Manifestation [12] saying that the CA's rationale in declining to order
arbitration based on the 2005 Gonzalesruling had been modified upon a motion for reconsideration
decided in 2007; that the CA decision lost its legal basis, because it had been ruled that the arbitration
agreement can be implemented notwithstanding that one of the parties thereto repudiated the contract
which contained such agreement based on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the remedy against an
order denying a Motion to Dismiss/Suspend Proceedings and To Refer Controversy to Voluntary
Arbitration. It claims that the Arbitration Law which petitioner invoked as basis for its Motion prescribed,
under its Section 29, a remedy, i.e., appeal by a petition for review on certiorari under Rule
45. Respondent contends that the Gonzalescase, which was decided in 2007, is inapplicable in this case,
especially as to the doctrine of separability enunciated therein. Respondent argues that even if the
existence of the contract and the arbitration clause is conceded, the decisions of the RTC and the CA

declining referral of the dispute between the parties to arbitration would still be correct. This is so because
respondent's complaint filed in Civil Case No. 98-1376 presents the principal issue of whether under the
facts alleged in the complaint, respondent is entitled to rescind its contract with petitioner and for the
latter to pay damages; that such issue constitutes a judicial question or one that requires the exercise of
judicial function and cannot be the subject of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a defendant to adopt in the same
action several defenses, alternatively or hypothetically, even if such defenses are inconsistent with each
other refers to allegations in the pleadings, such as complaint, counterclaim, cross-claim, third-party
complaint, answer, but not to a motion to dismiss. Finally, respondent claims that petitioner's argument is
premised on the existence of a contract with respondent containing a provision for arbitration. However,
its reliance on the contract, which it repudiates, is inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission and damages on the basis of
the contract, thus, respondent admitted the existence of all the provisions contained thereunder, including
the arbitration clause; that if respondent relies on said contract for its cause of action against petitioner, it
must also consider itself bound by the rest of the terms and conditions contained thereunder
notwithstanding that respondent may find some provisions to be adverse to its position; that respondents
citation of the Gonzales case, decided in 2005, to show that the validity of the contract cannot be the
subject of the arbitration proceeding and that it is the RTC which has the jurisdiction to resolve the
situation between the parties herein, is not correct since in the resolution of the Gonzales' motion for
reconsideration in 2007, it had been ruled that an arbitration agreement is effective notwithstanding the
fact that one of the parties thereto repudiated the main contract which contained it.
We first address the procedural issue raised by respondent that petitioners petition for certiorari under
Rule 65 filed in the CA against an RTC Order denying a Motion to Dismiss/Suspend Proceedings and to
Refer Controversy to Voluntary Arbitration was a wrong remedy invoking Section 29 of R.A. No.
876, which provides:
Section 29.
x x x An appeal may be taken from an order made in a proceeding under this Act, or from
a judgment entered upon an award through certiorari proceedings, but such appeals shall
be limited to question of law. x x x.

To support its argument, respondent cites the case of Gonzales v. Climax Mining Ltd.[13] (Gonzales case),
wherein we ruled the impropriety of a petition for certiorari under Rule 65 as a mode of appeal from an
RTC Order directing the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition to compel arbitration
under R.A. No. 876, pursuant to the arbitration clause found in the Addendum Contract it entered with
Gonzales. Judge Oscar Pimentel of the RTC of Makati then directed the parties to arbitration proceedings.
Gonzales filed a petition for certiorari with Us contending that Judge Pimentel acted with grave abuse of
discretion in immediately ordering the parties to proceed with arbitration despite the proper, valid and
timely raised argument in his Answer with counterclaim that the Addendum Contract containing the
arbitration clause was null and void. Climax-Arimco assailed the mode of review availed of by Gonzales,
citing Section 29 of R.A. No. 876 contending that certiorari under Rule 65 can be availed of only if there
was no appeal or any adequate remedy in the ordinary course of law; that R.A. No. 876 provides for an
appeal from such order. We then ruled that Gonzales' petition for certiorari should be dismissed as it was
filed in lieu of an appeal by certiorari which was the prescribed remedy under R.A. No. 876 and the
petition was filed far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question of law, but not a question of jurisdiction;
that Judge Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when he ordered
Gonzales to proceed with arbitration and appointed a sole arbitrator after making the determination that
there was indeed an arbitration agreement. It had been held that as long as a court acts within its
jurisdiction and does not gravely abuse its discretion in the exercise thereof, any supposed error
committed by it will amount to nothing more than an error of judgment reviewable by a timely appeal and
not assailable by a special civil action of certiorari.[14]
In this case, petitioner raises before the CA the issue that the respondent Judge acted in excess of
jurisdiction or with grave abuse of discretion in refusing to dismiss, or at least suspend, the proceedings a
quo, despite the fact that the partys agreement to arbitrate had not been complied with.Notably, the RTC
found the existence of the arbitration clause, since it said in its decision that hardly disputed is the fact
that the arbitration clause in question contravenes several provisions of the Arbitration Law x x x and to
apply Section 7 of the Arbitration Law to such an agreement would result in the disregard of the aforecited sections of the Arbitration Law and render them useless and mere surplusages. However,
notwithstanding the finding that an arbitration agreement existed, the RTC denied petitioner's motion and
directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,[15] it was held that R.A. No. 876 explicitly
confines the courts authority only to the determination of whether or not there is an 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 proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend Proceedings and to
Refer Controversy to Voluntary Arbitration, the RTC went beyond its authority of determining only the
issue of whether or not there is an agreement in writing providing for arbitration by directing petitioner to
file an answer, instead of ordering the parties to proceed to arbitration. In so doing, it acted in excess of its
jurisdiction and since there is no plain, speedy, and adequate remedy in the ordinary course of law,
petitioners resort to a petition for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding that this case cannot
be brought under the arbitration law for the purpose of suspending the proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in
our jurisdiction.[16] R.A. No. 876[17]authorizes arbitration of domestic disputes. Foreign arbitration, as a
system of settling commercial disputes of an international character, is likewise recognized. [18] The
enactment of R.A. No. 9285 on April 2, 2004 further institutionalized the use of alternative dispute
resolution systems, including arbitration, in the settlement of disputes. [19]
A contract is required for arbitration to take place and to be binding. [20] Submission to arbitration
is a contract [21] and a clause in a contract providing that all matters in dispute between the parties shall be
referred to arbitration is a contract. [22] The provision to submit to arbitration any dispute arising therefrom
and the relationship of the parties is part of the contract and is itself a contract. [23]
In this case, the contract sued upon by respondent provides for an arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual agreement
shall be settled by arbitration in the City of New York before the American Arbitration
Association, The Arbitration Award shall be final and binding on both parties.

The CA ruled that arbitration cannot be ordered in this case, since petitioner alleged that the contract
between the parties did not exist or was invalid and arbitration is not proper when one of the parties
repudiates the existence or validity of the contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed arbitration
clause providing for foreign arbitration, it is our considered opinion that the case at bench
still cannot be brought under the Arbitration Law for the purpose of suspending the
proceedings before the trial court. We note that in its Motion to Dismiss/Suspend
Proceedings, etc, petitioner Cargill alleged, as one of the grounds thereof, that the alleged
contract between the parties do not legally exist or is invalid. As posited by petitioner, it is

their contention that the said contract, bearing the arbitration clause, was never
consummated by the parties. That being the case, it is but proper that such issue be first
resolved by the court through an appropriate trial. The issue involves a question of fact
that the trial court should first resolve.
Arbitration is not proper when one of the parties repudiates the existence or validity of
the contract. Apropos is Gonzales v. Climax Mining Ltd., 452 SCRA 607,
(G.R.No.161957), where the Supreme Court held that:
The question of validity of the contract containing the
agreement to submit to arbitration will affect the applicability of the
arbitration clause itself. A party cannot rely on the contract and
claim rights or obligations under it and at the same time impugn its
existence or validity. Indeed, litigants are enjoined from taking
inconsistent positions....
Consequently, the petitioner herein cannot claim that the contract was never
consummated and, at the same time, invokes the arbitration clause provided for under
the contract which it alleges to be non-existent or invalid. Petitioner claims that private
respondent's complaint lacks a cause of action due to the absence of any valid contract
between the parties. Apparently, the arbitration clause is being invoked merely as a
fallback position. The petitioner must first adduce evidence in support of its claim that
there is no valid contract between them and should the court a quo find the claim to be
meritorious, the parties may then be spared the rigors and expenses that arbitration in a
foreign land would surely entail.[24]

However, the Gonzales case,[25] which the CA relied upon for not ordering arbitration, had been modified
upon a motion for reconsideration in this wise:
x x x The adjudication of the petition in G.R. No. 167994 effectively modifies part of
the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now hold that
the validity of the contract containing the agreement to submit to arbitration does not
affect the applicability of the arbitration clause itself. A contrary ruling would
suggest that a party's mere repudiation of the main contract is sufficient to avoid
arbitration. That is exactly the situation that the separability doctrine, as well as
jurisprudence applying it, seeks to avoid. We add that when it was declared in G.R. No.
161957 that the case should not be brought for arbitration, it should be clarified that the
case referred to is the case actually filed by Gonzales before the DENR Panel of
Arbitrators, which was for the nullification of the main contract on the ground of fraud, as
it had already been determined that the case should have been brought before the regular
courts involving as it did judicial issues.[26]
In so ruling that the validity of the contract containing the arbitration agreement does not affect the
applicability of the arbitration clause itself, we then applied the doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it, enunciates that
an arbitration agreement is independent of the main contract. The arbitration agreement is
to be treated as a separate agreement and the arbitration agreement does not automatically
terminate when the contract of which it is a part comes to an end.

The separability of the arbitration agreement is especially significant to the determination

of whether the invalidity of the main contract also nullifies the arbitration clause. Indeed,
the doctrine denotes that the invalidity of the main contract, also referred to as the
"container" contract, does not affect the validity of the arbitration agreement. Irrespective
of the fact that the main contract is invalid, the arbitration clause/agreement still remains
valid and enforceable.[27]

Respondent argues that the separability doctrine is not applicable in petitioner's case, since in
the Gonzales case, Climax-Arimco sought to enforce the arbitration clause of its contract with Gonzales
and the former's move was premised on the existence of a valid contract; while Gonzales, who resisted
the move of Climax-Arimco for arbitration, did not deny the existence of the contract but merely assailed
the validity thereof on the ground of fraud and oppression. Respondent claims that in the case before Us,
petitioner who is the party insistent on arbitration also claimed in their Motion to Dismiss/Suspend
Proceedings that the contract sought by respondent to be rescinded did not exist or was not consummated;
thus, there is no room for the application of the separability doctrine, since there is no container or main
contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of the main contract
shall not be regarded as invalid or non-existent just because the main contract is invalid or did not come
into existence, since the arbitration agreement shall be treated as a separate agreement independent of the
main contract. To reiterate. a contrary ruling would suggest that a party's mere repudiation of the main
contract is sufficient to avoid arbitration and that is exactly the situation that the separability doctrine
sought to avoid. Thus, we find that even the party who has repudiated the main contract is not prevented
from enforcing its arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission of contract and
damages with the RTC. In so doing, respondent alleged that a contract exists between respondent and
petitioner. It is that contract which provides for an arbitration clause which states that any dispute which
the Buyer and Seller may not be able to settle by mutual agreement shall be settled before the City
of New York by the American Arbitration Association. The arbitration agreement clearly expressed the
parties' intention that any dispute between them as buyer and seller should be referred to arbitration. It is
for the arbitrator and not the courts to decide whether a contract between the parties exists or is valid.
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.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of Arbitrators, Region II, Mines and
Geosciences Bureau, of the Department of Environment and Natural Resources (DENR) against
respondents Climax- Mining Ltd, Climax-Arimco and Australasian Philippines Mining Inc, seeking the
declaration of nullity or termination of the addendum contract and the other contracts emanating from it
on the grounds of fraud and oppression. The Panel dismissed the complaint for lack of jurisdiction.
However, the Panel, upon petitioner's motion for reconsideration, ruled that it had jurisdiction over the
dispute maintaining that it was a mining dispute, since the subject complaint arose from a contract
between the parties which involved the exploration and exploitation of minerals over the disputed area.
Respondents assailed the order of the Panel of Arbitrators via a petition for certiorari before the CA. The
CA granted the petition and declared that the Panel of Arbitrators did not have jurisdiction over the
complaint, since its jurisdiction was limited to the resolution of mining disputes, such as those which
raised a question of fact or matter requiring the technical knowledge and experience of mining authorities
and not when the complaint alleged fraud and oppression which called for the interpretation and
application of laws. The CA further ruled that the petition should have been settled through arbitration
under R.A. No. 876 the Arbitration Law as provided under the addendum contract.
On a review on certiorari, we affirmed the CAs finding that the Panel of Arbitrators who, under R.A. No.
7942 of the Philippine Mining Act of 1995, has exclusive and original jurisdiction to hear and decide
mining disputes, such as mining areas, mineral agreements, FTAAs or permits and surface owners,
occupants and claimholders/concessionaires, is bereft of jurisdiction over the complaint for declaration of
nullity of the addendum contract; thus, the Panels' jurisdiction is limited only to those mining disputes
which raised question of facts or matters requiring the technical knowledge and experience of mining
authorities. We then said:
In Pearson v. Intermediate Appellate Court, this Court observed that the trend has
been to make the adjudication of mining cases a purely administrative matter. Decisions of
the Supreme Court on mining disputes have recognized a distinction between (1) the
primary powers granted by pertinent provisions of law to the then Secretary of Agriculture
and Natural Resources (and the bureau directors) of an executive or administrative nature,
such as granting of license, permits, lease and contracts, or approving, rejecting,
reinstating or canceling applications, or deciding conflicting applications, and (2)
controversies or disagreements of civil or contractual nature between litigants which are
questions of a judicial nature that may be adjudicated only by the courts of justice. This
distinction is carried on even in Rep. Act No. 7942.[28]

We found that since the complaint filed before the DENR Panel of Arbitrators charged
respondents with disregarding and ignoring the addendum contract, and acting in a fraudulent and
oppressive manner against petitioner, the complaint filed before the Panel was not a dispute involving
rights to mining areas, or was it a dispute involving claimholders or concessionaires, but essentially
judicial issues. We then said that the Panel of Arbitrators did not have jurisdiction over such issue, since it
does not involve the application of technical knowledge and expertise relating to mining. It is in this
context that we said that:
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.[29]

In fact, We even clarified in our resolution on Gonzales motion for reconsideration that when we declared
that the case should not be brought for arbitration, it should be clarified that the case referred to is the case
actually filed by Gonzales before the DENR Panel of Arbitrators, which was for the nullification of the
main contract on the ground of fraud, as it had already been determined that the case should have been
brought before the regular courts involving as it did judicial issues. We made such clarification in our
resolution of the motion for reconsideration after ruling that the parties in that case can proceed to
arbitration under the Arbitration Law, as provided under the Arbitration Clause in their Addendum
Contract.
WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2006 and the Resolution
dated November 13, 2006 of the Court of Appeals in CA-G.R. SP No. 50304 are REVERSED and SET
ASIDE. The parties are hereby ORDERED to SUBMIT themselves to the arbitration of their dispute,
pursuant to their July 11, 1996 agreement.
SO ORDERED.

SECOND DIVISION
TUNA PROCESSING, INC.,
Petitioner,

G.R. No. 185582

Present:

-versus-

PHILIPPINE KINGFORD, INC.,

Respondent.

CARPIO, J.,
Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:
February 29, 2012

x-----------------------------------------------------------------------------------------x
DECISION
PEREZ, J.:

Can a foreign corporation not licensed to do business in the Philippines, but which collects
royalties from entities in the Philippines, sue here to enforce a foreign arbitral award?
In this Petition for Review on Certiorari under Rule 45,[1] petitioner Tuna Processing, Inc. (TPI), a
foreign corporation not licensed to do business in the Philippines, prays that the Resolution [2] dated 21

November 2008 of the Regional Trial Court (RTC) of Makati City be declared void and the case be
remanded to the RTC for further proceedings. In the assailed Resolution, the RTC dismissed
petitioners Petition for Confirmation, Recognition, and Enforcement of Foreign Arbitral Award [3] against
respondent Philippine Kingford, Inc. (Kingford), a corporation duly organized and existing under the laws
of the Philippines,[4] on the ground that petitioner lacked legal capacity to sue. [5]
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the licensor), co-patentee of
U.S. Patent No. 5,484,619, Philippine Letters Patent No. 31138, and Indonesian Patent No. ID0003911
(collectively referred to as the Yamaoka Patent), [6] and five (5) Philippine tuna processors, namely, Angel
Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc.,
and respondent Kingford (collectively referred to as the sponsors/licensees) [7] entered into a Memorandum
of Agreement (MOA),[8] pertinent provisions of which read:
1.

Background and objectives. The Licensor, co-owner of U.S.Patent No. 5,484,619,

Philippine Patent No. 31138, and Indonesian Patent No. ID0003911 xxx wishes to form
an alliance with Sponsors for purposes of enforcing his three aforementioned patents,
granting licenses under those patents, and collecting royalties.
The Sponsors wish to be licensed under the aforementioned patents in order to practice
the processes claimed in those patents in the United States, the Philippines, and
Indonesia, enforce those patents and collect royalties in conjunction with Licensor.

xxx
4. Establishment of Tuna Processors, Inc. The parties hereto agree to the establishment of
Tuna Processors, Inc. (TPI), a corporation established in the State of California, in
order to implement the objectives of this Agreement.
5. Bank account. TPI shall open and maintain bank accounts in the United States, which
will be used exclusively to deposit funds that it will collect and to disburse cash it will
be obligated to spend in connection with the implementation of this Agreement.
6. Ownership of TPI. TPI shall be owned by the Sponsors and Licensor. Licensor shall be
assigned one share of TPI for the purpose of being elected as member of the board of
directors. The remaining shares of TPI shall be held by the Sponsors according to their
respective equity shares. [9]
xxx
The parties likewise executed a Supplemental Memorandum of Agreement [10] dated 15 January 2003 and
an Agreement to Amend Memorandum of Agreement[11] dated 14 July 2003.

Due to a series of events not mentioned in the petition, the licensees, including respondent
Kingford, withdrew from petitioner TPI and correspondingly reneged on their obligations. [12] Petitioner
submitted the dispute for arbitration before the International Centre for Dispute Resolution in the State of
California, United States and won the case against respondent. [13] Pertinent portions of the award read:
13.1 Within thirty (30) days from the date of transmittal of this Award to the Parties,
pursuant to the terms of this award, the total sum to be paid byRESPONDENT
KINGFORD to CLAIMANT TPI, is the sum of ONE MILLION SEVEN HUNDRED
FIFTY THOUSAND EIGHT HUNDRED FORTY SIX DOLLARS AND TEN
CENTS ($1,750,846.10).
(A) For breach of the MOA by not paying past due assessments, RESPONDENT
KINGFORD shall pay CLAIMANT the total sum of TWO HUNDRED TWENTY
NINE THOUSAND THREE HUNDRED AND FIFTY FIVE DOLLARS AND
NINETY CENTS ($229,355.90) which is 20% of MOA assessments since September 1,
2005[;]
(B) For breach of the MOA in failing to cooperate with CLAIMANT TPI in fulfilling the
objectives of the MOA, RESPONDENT KINGFORD shall payCLAIMANT the total
sum of TWO HUNDRED SEVENTY ONE THOUSAND FOUR HUNDRED
NINETY DOLLARS AND TWENTY CENTS ($271,490.20)[;][14] and
(C) For violation of THE LANHAM ACT and infringement of the YAMAOKA 619
PATENT, RESPONDENT KINGFORD shall pay CLAIMANT the total sum of ONE
MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS
($1,250,000.00). xxx
xxx[15]
To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award before the RTC of Makati City. The petition was
raffled to Branch 150 presided by Judge Elmo M. Alameda.
At Branch 150, respondent Kingford filed a Motion to Dismiss. [16] After the court denied the
motion for lack of merit,[17] respondent sought for the inhibition of Judge Alameda and moved for the
reconsideration of the order denying the motion. [18] Judge Alameda inhibited himself notwithstanding
[t]he unfounded allegations and unsubstantiated assertions in the motion. [19] Judge Cedrick O. Ruiz of
Branch 61, to which the case was re-raffled, in turn, granted respondents Motion for Reconsideration and
dismissed the petition on the ground that the petitioner lacked legal capacity to sue in the Philippines. [20]
Petitioner TPI now seeks to nullify, in this instant Petition for Review on Certiorari under Rule
45, the order of the trial court dismissing its Petition for Confirmation, Recognition, and Enforcement of
Foreign Arbitral Award.

Issue
The core issue in this case is whether or not the court a quo was correct in so dismissing the
petition on the ground of petitioners lack of legal capacity to sue.
Our Ruling
The petition is impressed with merit.
The Corporation Code of the Philippines expressly provides:
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be permitted
to maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under
Philippine laws.
It is pursuant to the aforequoted provision that the court a quo dismissed the petition. Thus:
Herein plaintiff TPIs Petition, etc. acknowledges that it is a foreign corporation
established in the State of California and was given the exclusive right to license or
sublicense the Yamaoka Patent and was assigned the exclusive right to enforce the said
patent and collect corresponding royalties in the Philippines. TPI likewise admits that it
does not have a license to do business in the Philippines.
There is no doubt, therefore, in the mind of this Court that TPI has been doing
business in the Philippines, but sans a license to do so issued by the concerned government
agency of the Republic of the Philippines, when it collected royalties from five (5)
Philippine tuna processors[,] namely[,] Angel Seafood Corporation, East Asia Fish Co.,
Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc. and respondent Philippine
Kingford, Inc. This being the real situation, TPI cannot be permitted to maintain or
intervene in any action, suit or proceedings in any court or administrative agency of the
Philippines. A priori, the Petition, etc. extant of the plaintiff TPI should be dismissed for it
does not have the legal personality to sue in the Philippines.[21]
The petitioner counters, however, that it is entitled to seek for the recognition and enforcement of
the subject foreign arbitral award in accordance with Republic Act No. 9285 (Alternative Dispute
Resolution Act of 2004),[22] the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards drafted during the United Nations Conference on International Commercial Arbitration in 1958
(New York Convention), and the UNCITRAL Model Law on International Commercial Arbitration

(Model Law),[23] as none of these specifically requires that the party seeking for the enforcement should
have legal capacity to sue. It anchors its argument on the following:
In the present case, enforcement has been effectively refused on a ground not found in the
[Alternative Dispute Resolution Act of 2004], New York Convention, orModel Law. It is for
this reason that TPI has brought this matter before this most Honorable Court, as it [i]s
imperative to clarify whether the Philippines international obligations and State policy to
strengthen arbitration as a means of dispute resolution may be defeated by misplaced
technical considerations not found in the relevant laws. [24]
Simply put, how do we reconcile the provisions of the Corporation Code of the Philippines on
one hand, and the Alternative Dispute Resolution Act of 2004, the New York Convention and the Model
Law on the other?
In several cases, this Court had the occasion to discuss the nature and applicability of
the Corporation Code of the Philippines, a general law, viz-a-viz other special laws. Thus, in Koruga v.
Arcenas, Jr.,[25] this Court rejected the application of the Corporation Code and applied the New Central
Bank Act. It ratiocinated:
Korugas invocation of the provisions of the Corporation Code is misplaced. In an
earlier case with similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying to all
types of corporations, while the New Central Bank Act regulates specifically
banks and other financial institutions, including the dissolution and
liquidation thereof. As between a general and special law, the latter shall
prevailgeneralia specialibus non derogant. (Emphasis supplied)[26]
Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential Agrarian Reform Council,
[27]

this Court held:

Without doubt, the Corporation Code is the general law providing for the
formation, organization and regulation of private corporations. On the other hand, RA 6657
is the special law on agrarian reform. As between a general and special law, the latter shall
prevailgeneralia specialibus non derogant.[28]

Following the same principle, the Alternative Dispute Resolution Act of 2004 shall apply in this
case as the Act, as its title - An Act to Institutionalize the Use of an Alternative Dispute Resolution System
in the Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other Purposes
- would suggest, is a law especially enacted to actively promote party autonomy in the resolution of
disputes or the freedom of the party to make their own arrangements to resolve their disputes. [29] It

specifically provides exclusive grounds available to the party opposing an application for recognition and
enforcement of the arbitral award.[30]
Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal law, applies in the
instant petition, we do not see the need to discuss compliance with international obligations under
the New York Convention and the Model Law. After all, both already form part of the law.
In particular, the Alternative Dispute Resolution Act of 2004 incorporated the New York
Convention in the Act by specifically providing:
SEC. 42. Application of the New York Convention. - The New York Convention
shall govern the recognition and enforcement of arbitral awards covered by the said
Convention.
xxx
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a foreign arbitration
proceeding may oppose an application for recognition and enforcement of the arbitral
award in accordance with the procedural rules to be promulgated by the Supreme Court
only on those grounds enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the regional trial court.
It also expressly adopted the Model Law, to wit:
Sec. 19. Adoption of the Model Law on International Commercial
Arbitration. International commercial arbitration shall be governed by the Model Law on
International Commercial Arbitration (the Model Law) adopted by the United Nations
Commission on International Trade Law on June 21, 1985 xxx.
Now, does a foreign corporation not licensed to do business in the Philippines have legal capacity
to sue under the provisions of theAlternative Dispute Resolution Act of 2004? We answer in the
affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the opposing party in an
application for recognition and enforcement of the arbitral award may raise only those grounds that were
enumerated under Article V of the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award may be refused, at the request of the party
against whom it is invoked, only if that party furnishes to the competent authority where
the recognition and enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law applicable to
them, under some incapacity, or the said agreement is not valid under the law to which the

parties have subjected it or, failing any indication thereon, under the law of the country
where the award was made; or
(b) The party against whom the award is invoked was not given proper notice of the
appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to
present his case; or
(c) The award deals with a difference not contemplated by or not falling within the terms
of the submission to arbitration, or it contains decisions on matters beyond the scope of the
submission to arbitration, provided that, if the decisions on matters submitted to arbitration
can be separated from those not so submitted, that part of the award which contains
decisions on matters submitted to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was not in
accordance with the agreement of the parties, or, failing such agreement, was not in
accordance with the law of the country where the arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set aside or
suspended by a competent authority of the country in which, or under the law of which,
that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if the competent
authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under
the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the public policy of
that country.
Clearly, not one of these exclusive grounds touched on the capacity to sue of the party seeking the
recognition and enforcement of the award.
Pertinent provisions of the Special Rules of Court on Alternative Dispute Resolution,[31] which
was promulgated by the Supreme Court, likewise support this position.
Rule 13.1 of the Special Rules provides that [a]ny party to a foreign arbitration may petition the
court to recognize and enforce a foreign arbitral award. The contents of such petition are enumerated in
Rule 13.5.[32] Capacity to sue is not included. Oppositely, in the Rule on local arbitral awards or
arbitrations in instances where the place of arbitration is in the Philippines, [33] it is specifically required
that a petition to determine any question concerning the existence, validity and enforceability of such
arbitration agreement[34] available to the parties before the commencement of arbitration and/or a petition
for judicial relief from the ruling of the arbitral tribunal on a preliminary question upholding or declining
its jurisdiction[35] after arbitration has already commenced should state [t]he facts showing that the persons
named as petitioner or respondent have legal capacity to sue or be sued. [36]
Indeed, it is in the best interest of justice that in the enforecement of a foreign arbitral award, we
deny availment by the losing party of the rule that bars foreign corporations not licensed to do business in
the

Philippines from maintaining a suit

in

our

courts. When

party

enters

into acontract containing a foreign arbitration clause and, as in this case, in fact submits itself to
arbitration, it becomes bound by the contract, by the arbitration and by the result of arbitration, conceding
thereby the capacity of the other party to enter into the contract, participate in the arbitration and cause the
implementation of the result. Although not on all fours with the instant case, also worthy to consider is
the
wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting Opinion in Asset
Privatization Trust v. Court of Appeals,[37] to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining adherents in legal
and judicial circles here and abroad. If its tested mechanism can simply be ignored by an
aggrieved party, one who, it must be stressed, voluntarily and actively participated in the
arbitration proceedings from the very beginning, it will destroy the very essence of
mutuality inherent in consensual contracts.[38]
Clearly, on the matter of capacity to sue, a foreign arbitral award should be respected not because
it is favored over domestic laws and procedures, but because Republic Act No. 9285 has certainly erased
any conflict of law question.
Finally, even assuming, only for the sake of argument, that the court a quo correctly observed that
the Model Law, not the New York Convention, governs the subject arbitral award, [39] petitioner may still
seek recognition and enforcement of the award in Philippine court, since the Model Law prescribes
substantially identical exclusive grounds for refusing recognition or enforcement. [40]
Premises considered, petitioner TPI, although not licensed to do business in the Philippines, may
seek recognition and enforcement of the foreign arbitral award in accordance with the provisions of
the Alternative Dispute Resolution Act of 2004.
II
The remaining arguments of respondent Kingford are likewise unmeritorious.
First. There is no need to consider respondents contention that petitioner TPI improperly raised a
question of fact when it posited that its act of entering into a MOA should not be considered doing
business in the Philippines for the purpose of determining capacity to sue. We reiterate that the foreign
corporations capacity to sue in the Philippines is not material insofar as the recognition and enforcement
of a foreign arbitral award is concerned.

Second. Respondent cannot fault petitioner for not filing a motion for reconsideration of the
assailed Resolution dated 21 November 2008dismissing the case. We have, time and again, ruled that the
prior filing of a motion for reconsideration is not required in certiorari under Rule 45.[41]
Third. While we agree that petitioner failed to observe the principle of hierarchy of courts, which,
under ordinary circumstances, warrants the outright dismissal of the case, [42] we opt to relax the rules
following the pronouncement in Chua v. Ang,[43] to wit:
[I]t must be remembered that [the principle of hierarchy of courts] generally
applies to cases involving conflicting factual allegations. Cases which depend on disputed
facts for decision cannot be brought immediately before us as we are not triers of facts.
[44]
A strict application of this rule may be excused when the reason behind the rule is not
present in a case, as in the present case, where the issues are not factual but purely
legal. In these types of questions, this Court has the ultimate say so that we merely
abbreviate the review process if we, because of the unique circumstances of a case, choose
to hear and decide the legal issues outright. [45]
Moreover, the novelty and the paramount importance of the issue herein raised should be seriously
considered.[46] Surely, there is a need to take cognizance of the case not only to guide the bench and the
bar, but if only to strengthen arbitration as a means of dispute resolution, and uphold the policy of the
State embodied in the Alternative Dispute Resolution Act of 2004, to wit:
Sec. 2. Declaration of Policy. - It is hereby declared the policy of the State to
actively promote party autonomy in the resolution of disputes or the freedom of the party
to make their own arrangements to resolve their disputes. Towards this end, the State shall
encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an
important means to achieve speedy and impartial justice and declog court dockets. xxx
Fourth. As regards the issue on the validity and enforceability of the foreign arbitral award, we
leave its determination to the court a quowhere its recognition and enforcement is being sought.
Fifth. Respondent claims that petitioner failed to furnish the court of origin a copy of the motion
for time to file petition for review oncertiorari before the petition was filed with this Court. [47] We,
however, find petitioners reply in order. Thus:
26. Admittedly, reference to Branch 67 in petitioner TPIs Motion for Time to File
a Petition for Review on Certiorari under Rule 45 is a typographical error.As correctly
pointed out by respondent Kingford, the order sought to be assailed originated from
Regional Trial Court, Makati City, Branch 61.

27. xxx Upon confirmation with the Regional Trial Court, Makati City, Branch 61,
a copy of petitioner TPIs motion was received by the Metropolitan Trial Court, Makati
City, Branch 67. On 8 January 2009, the motion was forwarded to the Regional Trial
Court, Makati City, Branch 61.[48]
All considered, petitioner TPI, although a foreign corporation not licensed to do business in the
Philippines, is not, for that reason alone, precluded from filing the Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award before a Philippine court.

WHEREFORE, the Resolution dated 21 November 2008 of the Regional Trial Court, Branch
61, Makati City in Special Proceedings No. M-6533 is hereby REVERSED and SET ASIDE. The case
is REMANDED to Branch 61 for further proceedings.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 198075

September 4, 2013

KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,

vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in
C.A.-G.R. SP No. 116865.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the
registered owner of a parcel of land located at Km. 16, South Superhighway, Paraaque City
(subject land).3 Within the subject land are buildings and other improvements dedicated to the
business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of
herein respondent Makati Rotary Club Foundation, Incorporated by way of a conditional
donation.6 The respondent accepted the donation with all of its conditions.7 On 26 May1975, FKI
and the respondent executed a Deed of Donation8evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease the subject land back to
FKI under terms specified in their Deed of Donation.9 With the respondents acceptance of the
donation, a lease agreement between FKI and the respondent was, therefore, effectively
incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is P40,126.00
per annum .11
The Deed of Donation also stipulated that the lease over the subject property is renewable for
another period of twenty-five (25) years " upon mutual agreement" of FKI and the
respondent.12 In which case, the amount of rent shall be determined in accordance with item
2(g) of the Deed of Donation, viz:

g. The rental for the second 25 years shall be the subject of mutual agreement and in case of
disagreement the matter shall be referred to a Board of three Arbitrators appointed and with
powers in accordance with the Arbitration Law of the Philippines, Republic Act 878, whose
function shall be to decide the current fair market value of the land excluding the improvements,
provided, that, any increase in the fair market value of the land shall not exceed twenty five
percent (25%) of the original value of the land donated as stated in paragraph 2(c) of this Deed.
The rental for the second 25 years shall not exceed three percent (3%) of the fair market value
of the land excluding the improvements as determined by the Board of Arbitrators.13
In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that
reiterated the provisions of the Deed of Donation , including those relating to the lease of the
subject land.
Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed
of Donation , FKI was able to continue in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of
Donation was set to expire, or on 23 May 2000, FKI and respondent executed another contract
of lease ( 2000 Lease Contract )15covering the subject land. In this 2000 Lease Contract, FKI
and respondent agreed on a new five-year lease to take effect on the 26th of May 2000, with
annual rents ranging from P4,000,000 for the first year up to P4,900,000 for the fifth year.16 The
2000 Lease Contract also contained an arbitration clause enforceable in the event the parties
come to disagreement about the" interpretation, application and execution" of the lease, viz :
19. Governing Law The provisions of this 2000 Lease Contract shall be governed, interpreted
and construed in all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract
shall be submitted to a board of three (3) arbitrators constituted in accordance with the
arbitration law of the Philippines. The decision of the majority of the arbitrators shall be binding
upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for
another five (5) years. This new lease (2005 Lease Contract )18 required FKI to pay a fixed
annual rent of P4,200,000.19 In addition to paying the fixed rent, however, the 2005 Lease
Contract also obligated FKI to make a yearly " donation " of money to the respondent.20 Such
donations ranged from P3,000,000 for the first year up to P3,900,000for the fifth year.21 Notably,
the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease
Contract, to wit:
19. Governing Law The provisions of this 2005 Lease Contract shall be governed, interpreted
and construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract
shall be submitted to a board of three (3) arbitrators constituted in accordance with the
arbitration law of the Philippines. The decision of the majority of the arbitrators shall be binding
upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioners 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.
Petitioners refusal to pay such rent and "donation " emanated from its belief that the rental
stipulations of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given
effect because they violated one of the" material conditions " of the donation of the subject land,
as stated in the Deed of Donation and Amended Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually
established not only one but two (2) lease agreements between FKI and respondent, i.e. , one
lease for the first twenty-five (25)years or from 1975 to 2000, and another lease for the next
twenty-five (25)years thereafter or from 2000 to 2025. 27 Both leases are material conditions of
the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year
lease was not fixed in the Deed of Donation and Amended Deed of Donation , both deeds
nevertheless prescribed rules and limitations by which the same may be determined. Such rules
and limitations ought to be observed in any succeeding lease agreements between petitioner
and respondent for they are, in themselves, material conditions of the donation of the subject
land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of
Donation that supposedly limits the amount of rent for the lease over the second twenty-five (25)
years to only " three percent (3%) of the fair market value of the subject land excluding the
improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease
Contract cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation
of the aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of
Donation . Consequently, petitioner insists that the amount of rent it has to pay thereon is and
must still be governed by the limitations prescribed in the Deed of Donation and Amended Deed
of Donation.30

The Demand Letters

On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter
of its default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of
the rent and " donation " due for the year 2009. Respondent, in the same letter, further intimated
of canceling the 2005 Lease Contract should petitioner fail to settle the said
obligations.32 Petitioner received the First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over
the rental stipulations of the 2005 Lease Contract calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals mandated by the Amended Deed
of Donation." In lieu of the amount demanded by the respondent, which purportedly totaled
to P8,394,000.00, exclusive of interests, petitioner offered to pay only P80,502.79,35 in
accordance with the rental provisions of the Deed of Donation and Amended Deed of
Donation.36 Respondent refused this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease
Contract. The Second Demand Letter also contained a demand for petitioner to " immediately
vacate the leased premises " should it fail to pay such obligations within seven (7) days from its
receipt of the letter.39 The respondent warned of taking " legal steps " in the event that petitioner
failed to comply with any of the said demands.40 Petitioner received the Second Demand Letter
on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September
2009, petitioner filed with the Regional Trial Court (RTC) of Paraaque 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 Paraaque 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 respondents 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 respondentanon-stock and non-profit
corporationcould 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
respondents demand and the nullity of the 2005 Lease Contract.54The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement
as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to
Branch 274 of the RTC of Paraaque 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, Paraaque City, is hereby reversed, judgment is thus rendered in favor
of the plaintiff-appellant and against the defendant-appellee, and ordering the latter
(1) to vacate the lease[d] premises made subject of the case and to restore the
possession thereof to the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two
Thousand Four Hundred Thirty Six Pesos (P9,362,436.00), penalties and net of 5%
withholding tax, for the lease period from May 25, 2009 to May 25, 2010 and such
monthly rental as will accrue during the pendency of this case;
(3) to pay attorneys fees in the sum of P100,000.00 plus appearance fee of P3,000.00;

(4) and costs of suit.

As to the existing improvements belonging to the defendant-appellee, as these were built in
good faith, the provisions of Art. 1678of the Civil Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
1. The respondent had adequately complied with the requirement of demand as a
jurisdictional precursor to an unlawful detainer action.58 The First Demand Letter, in
substance, contains a demand for petitioner to vacate when it mentioned that it was a
notice " per Section12 of the 2005 Lease Contract."59 Moreover, the issue of sufficiency
of the respondents 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 contracts 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
Paraaque City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioners prayer for the issuance of a Temporary
Restraining Order68staying the immediate implementation of the decisions adverse to it.
OUR RULING

Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in
overlooking the significance of the arbitration clause incorporated in the 2005 Lease Contract .
As the Court sees it, that is a fatal mistake.
For this reason, We grant the petition.
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner
and respondent emanates from the rental stipulations of the 2005 Lease Contract. The
respondent insists upon the enforce ability and validity of such stipulations, whereas, petitioner,
in substance, repudiates them. It is from petitioners 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 contracts 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 contracts rental stipulations would have to be
determined, the same would not render such disagreement non-arbitrable. The quotation from
Gonzales that was used to justify the contrary position was taken out of context. A rereading of
Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines
and Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance
Agreement and other mining related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud and
unconstitutionality.83 The pivotal issue that confronted the Court then was whether the PA-MGB
has jurisdiction over that particular arbitration complaint. Stated otherwise, the question was
whether the complaint for arbitration raises arbitrable issues that the PA-MGB can take
cognizance of.

Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any
jurisdiction to take cognizance of the complaint for arbitration, this Court pointed out to the
provisions of R.A. No. 7942, or the Mining Act of 1995, which granted the PA-MGB with
exclusive original jurisdiction only over mining disputes, i.e., disputes involving " rights to mining
areas," "mineral agreements or permits," and " surface owners, occupants, claim holders or
concessionaires" requiring the technical knowledge and experience of mining authorities in
order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise
mining disputes as contemplated under R.A. No. 7942 but only issues relating to the validity of
certain mining related agreements, this Court held that such complaint could not be arbitrated
before the PA-MGB.85 It is in this context that we made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between
the parties as to some provisions of the contract between them, which needs the interpretation
and the application of that particular knowledge and expertise possessed by members of that
Panel. It is not proper when one of the parties repudiates the existence or validity of such
contract or agreement on the ground of fraud or oppression as in this case. The validity of the
contract cannot be subject of arbitration proceedings. Allegations of fraud and duress in the
execution of a contract are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function.86 (Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the
ground that the issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The
real consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon
the jurisdiction of the PA-MGB as an arbitral body . Gonzales rejected the complaint for
arbitration because the issue raised therein is not a mining dispute per R.A. No. 7942 and it is
for this reason, and only for this reason, that such issue is rendered non-arbitrable before the
PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB
only to mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill
Philippines, Inc. v. San Fernando Regal Trading, Inc.88 In Cargill , this Court answered the
question of whether issues involving the rescission of a contract are arbitrable. The respondent
in Cargill argued against arbitrability, also citing therein Gonzales . After dissecting Gonzales ,
this Court ruled in favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause
is conceded, the CA's decision declining referral of the parties' dispute to arbitration is still
correct. It claims that its complaint in the RTC presents the issue of whether under the facts
alleged, it is entitled to rescind the contract with damages; and that issue constitutes a judicial
question or one that requires the exercise of judicial function and cannot be the subject of an
arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we held that a panel of
arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of the
subject contracts on the grounds of fraud and oppression attendant to the execution of the
addendum contract and the other contracts emanating from it, and that the complaint should
have been filed with the regular courts as it involved issues which are judicial in nature.

Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract
notwithstanding the fact that it assails the validity of such contract. This is due to the doctrine of
separability.91
Under the doctrine of separability, an arbitration agreement is considered as independent of the
main contract.92Being a separate contract in itself, the arbitration agreement may thus be
invoked regardless of the possible nullity or invalidity of the main contract.93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the
doctrine of separability, even the very party who repudiates the main contract may invoke its
arbitration clause.94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of
the petitioner to file a formal "request" or application therefor with the MeTC. We find that the
filing of a "request" pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an
arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is
the subject matter of an arbitration agreement shall, if at least one party so requests not later
that the pre-trial conference, or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable
of being performed. [Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of
A.M. No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special
ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration
agreement, whether contained in an arbitration clause or in a submission agreement, may
request the court to refer the parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action
is filed . - The request for referral shall be made not later than the pre-trial conference. After the
pre-trial conference, the court will only act upon the request for referral if it is made with the
agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is
filed but the parties subsequently enter into an arbitration agreement, they may request the
court to refer their dispute to arbitration at any time during the proceedings.

Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which
shall state that the dispute is covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the
arbitration agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and
time when it would be heard. The party making the request shall serve it upon the respondent to
give him the opportunity to file a comment or opposition as provided in the immediately
succeeding Rule before the hearing. [Emphasis ours; italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a
pending action filed in violation of the arbitration agreement x x x may request the court to refer
the parties to arbitration in accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No.
9285, the Special ADR Rules clearly did not intend to limit the invocation of an arbitration
agreement in a pending suit solely via such "request." After all, non-compliance with an
arbitration agreement is a valid defense to any offending suit and, as such, may even be raised
in an answer as provided in our ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration
before the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer
with Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in
the 2005 Lease Contract96 and, more significantly, of its desire to have the same enforced in this
case.97 This act of petitioner is enough valid invocation of his right to arbitrate. Fourth . The fact
that the petitioner and respondent already under went through JDR proceedings before the
RTC, will not make the subsequent conduct of arbitration between the parties unnecessary or
circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral
evaluation which entails the submission of a dispute before a " JDR judge " who shall merely "
facilitate settlement " between the parties in conflict or make a " non-binding evaluation or
assessment of the chances of each partys 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 Paraaque 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 Paraaque for its consideration and,
possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby
render a Decision:
1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court,
Branch 77, of Paraaque City in relation to Civil Case No. 2009-307 after the filing by
petitioner of its Answer with Counterclaim ;
2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing
by petitioner of its Answer with Counterclaim;
3. SETTING ASIDE the following:
a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.
116865,
b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of
Paraaque City in Civil Case No. 10-0255,

c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of
Paraaque City in Civil Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to arbitration pursuant to the
arbitration clause of the 2005 Lease Contract, repeatedly included in the 2000 Lease
Contract and in the 1976 Amended Deed of Donation.
Let a copy of this Decision be served to Branch 257 of the RTC of Paraaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.
No costs.
SO ORDERED.

SECOND DIVISION
PHILIPPINE
ECONOMIC
ZONE AUTHORITY,
Petitioner,

- versus -

G.R. No. 179537

Present:
QUISUMBING, J., Chairperson,
CARPIO,*
CARPIO MORALES,
BERSAMIN,** and
ABAD, JJ.

EDISON (BATAAN)
COGENERATION
Promulgated:
CORPORATION,
October 23, 2009
Respondent.
x--------------------------------------------------x

DECISION
CARPIO MORALES, J.:
Petitioner Philippine Economic Zone Authority (PEZA) and Edison (Bataan)
Cogeneration Corporation (respondent) entered into a Power Supply and Purchase
Agreement (PSPA or agreement) for a 10-year period effective October 25, 1997
whereby respondent undertook to construct, operate, and maintain a power plant
which would sell, supply and deliver electricity to PEZA for resale to business
locators in the Bataan Economic Processing Zone.
In the course of the discharge of its obligation, respondent requested from
PEZA a tariff increase with a mechanism for adjustment of the cost of fuel and
lubricating oil, which request it reiterated on March 5, 2004.

PEZA did not respond to both requests, however, drawing respondent to

write PEZA on May 3, 2004. Citing a tariff increase which PEZA granted to the
East Asia Utilities Corporation (EAUC), another supplier of electricity in the
Mactan Economic Zone, respondent informed PEZA of a violation of its obligation
under Clause 4.9 of the PSPA not to give preferential treatment to other power
suppliers.
After the lapse of 90 days, respondent terminated the PSPA, invoking its
right thereunder, and demanded P708,691,543.00 as pre-termination fee. PEZA
disputed respondents right to terminate the agreement and refused to pay the pretermination fee, prompting respondent to request PEZA to submit the dispute to
arbitration pursuant to the arbitration clause of the PSPA.
Petitioner refused to submit to arbitration, however, prompting respondent to
file a Complaint[1] against PEZA for specific performance before the Regional Trial
Court (RTC) of Pasay, alleging that, inter alia:
xxxx
4. Under Clauses 14.1 and 14.2 of the Agreement, the dispute shall
be resolved through arbitration before an Arbitration
Committee composed of one representative of each party and a
third member who shall be mutually acceptable to the parties: x x
x
xxx
5. Conformably with the Agreement, plaintiff notified defendant in
a letter dated September 6, 2004 requesting that the parties
submit their dispute to arbitration. In a letter dated September 8,
2004, which defendant received on the same date, defendant
unjustifiably refused to comply with the request for arbitration,
in violation of its undertaking under the Agreement. Defendant
likewise refused to nominate its representative to the Arbitration
Committee as required by the Agreement.
6. Under Section 8 of Republic Act No. 876 (1953), otherwise
known as the Arbitration Law, (a) if either party to the contract
fails or refuses to name his arbitrator within 15 days after receipt
of the demand for arbitration; or (b) if the arbitrators appointed
by each party to the contract, or appointed by one party to the

contract and by the proper court, shall fail to agree upon or to

select the third arbitrator, then this Honorable Court shall
appoint the arbitrator or arbitrators.[2] (Emphasis and
underscoring supplied)

Respondent accordingly prayed for judgment

x x x (a) designating (i) an arbitrator to represent defendant;
and (ii) the third arbitrator who shall act as Chairman of the
Arbitration Committee; and (b) referring the attached Request for
Arbitration to the Arbitration Committee to commence the arbitration.
[3]

and for other just and equitable reliefs.

In its Answer,[4] PEZA (hereafter petitioner):
1.

ADMIT[TED] the allegations in paragraphs 1, 2, 3,

4, and 6 of the complaint, with the qualification that
the alleged dispute subject of the plaintiffs Request
for Arbitration dated October 20, 2004 is not an
arbitrable issue, considering that the provision on
pre-termination fee in the Power Sales and Purchase
Agreement
(PSPA),
is gravely
onerous,
unconscionable, greatly disadvantageous to the
government, against public policy and therefore
invalid and unenforceable.

2.

ADMIT[TED] the allegation in paragraph 5 of the

complaint with the qualification that the refusal of the
defendant to arbitrate is justified considering that
the provision on the pre-termination fee subject of
the plaintiffs Request for Arbitration is invalid and
unenforceable.Moreover, the pre-termination of the
PSPA is whimsical, has no valid basis and in violation
of the provisions thereof, constituting breach of
contract on the part of the plaintiff. [5] (Emphasis and
underscoring supplied)

Xxxx
Respondent thereafter filed a Reply and Motion to Render Judgment on the
Pleadings,[6] contending that since petitioner
x x x does not challenge the fact that (a) there is a dispute
between the parties; (b) the dispute must be resolved through
arbitration before a three-member arbitration committee; and (c)
defendant refused to submit the dispute to arbitration by naming its
representative in the arbitration committee,

judgment may be rendered directing the appointment of the two other members to
complete the composition of the arbitration committee that will resolve the dispute
of the parties.[7]
By Order of April 5, 2005, Branch 118 of the Pasay City RTC granted
respondents Motion to Render Judgment on the Pleadings, disposing as follows:
WHEREFORE, all the foregoing considered, this Court
hereby renders judgment in favor of the plaintiff and against the
defendant. Pursuant to Section 8 of RA 876, also known as the
Arbitration Law, and Power Sales and Purchase Agreement, this Court
hereby appoints, subject to their agreement as arbitrators, retired
Supreme Court Chief Justice Andres Narvasa, as chairman of the
committee, and retired Supreme Court Justices Hugo Gutierrez, and
Justice Jose Y. Feria, as defendants and plaintiffs representative,
respectively, to the arbitration committee. Accordingly, let the
Request for Arbitration be immediately referred to the Arbitration
Committee so that it can commence with the arbitration.
SO ORDERED.[8] (Underscoring supplied)

On appeal,[9] the Court of Appeals, by Decision of April 10, 2007, affirmed

the RTC Order.[10] Its Motion for Reconsideration[11] having been denied,

[12]

petitioner filed the present Petition for Review on Certiorari, [13] faulting the
appellate court
I
. . . WHEN IT DISMISSED PETITIONERS APPEAL AND
AFFIRMED THE 05 APRIL 2004 ORDER OF THE TRIAL COURT
WHICH
RENDEREDJUDGMENT ON THE
PLEADINGS, DESPITE THE FACT THAT PETITIONERS
ANSWER TENDERED AN ISSUE.
II
. . . WHEN IT AFFIRMED THE ORDER OF THE TRIAL COURT
WHICH
REFERRED
RESPONDENTS
REQUEST
FOR
ARBITRATION DESPITE THE FACT THAT THE ISSUE
PRESENTED BY THE RESPONDENT IS NOT AN ARBITRABLE
ISSUE.[14] (Underscoring supplied)

The petition fails.

The dispute raised by respondent calls for a proceeding under Section 6 of
Republic Act No. 876, AN ACT TO AUTHORIZE THE MAKING OF
ARBITRATION AND SUBMISSION AGREEMENTS, TO PROVIDE FOR THE
APPOINTMENT OF ARBITRATORS AND THE PROCEDURE FOR
ARBITRATION IN CIVIL CONTROVERSIES, AND FOR OTHER
PURPOSES which reads:
SECTION 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.
x x x x (Underscoring supplied)

R.A. No. 876 explicitly confines the courts authority only to the
determination of whether or not there is an agreement in writing providing for
arbitration.[15] Given petitioners admission of the material allegations of respondents
complaint including the existence of a written agreement to resolve disputes
through arbitration, the assailed appellate courts affirmance of the trial courts grant
of respondents Motion for Judgment on the Pleadings is in order.
Petitioner argues that it tendered an issue in its Answer as it disputed the
legality of the pre-termination fee clause of the PSPA. Even
assuming arguendo that the clause is illegal, it would not affect the agreement
between petitioner and respondent to resolve their dispute by arbitration.
The doctrine of separability, or severability as other writers call
it, enunciates that an arbitration agreement is independent of the main
contract. The arbitration agreement is to be treated as a separate
agreement and the arbitration agreement does not automatically
terminate when the contract of which it is a part comes to an end.
The separability of the arbitration agreement is especially
significant to the determination of whether the invalidity of the main
contract also nullifies the arbitration clause. Indeed, the doctrine
denotes that the invalidity of the main contract, also referred to as the
container contract, does not affect the validity of the arbitration
agreement. Irrespective of the fact that the main contract is invalid,
the arbitration clause/agreement still remains valid and enforceable. [16]
(Emphasis in the original; underscoring supplied)
Petitioner nevertheless contends that the legality of the pre-termination fee
clause is not arbitrable, citing Gonzales v. Climax Mining Ltd.[17] which declared

that the therein complaint should be brought before the regular courts, and not
before an arbitral tribunal, as it involved a judicial issue. Held the Court:
We agree that the case should not be brought under the ambit of
the Arbitration Law xxx. The question of validity of the contract
containing the agreement to submit to arbitration will affect the
applicability of the arbitration clause itself. A party cannot rely on the
contract and claim rights or obligations under it and at the same time
impugn its existence or validity. Indeed, litigants are enjoined from
taking inconsistent positions. As previously discussed, the complaint
should have been filed before the regular courts as it involved issues
which are judicial in nature.[18]

The ruling in Gonzales was, on motion for reconsideration filed by the parties,
modified, however, in this wise:
x x x The adjudication of the petition in G.R. No. 167994
effectively modifies part of the Decision dated 28 February
2005 in G.R. No. 161957. Hence, we now hold that the validity of
the contract containing the agreement to submit to arbitration does
not affect the applicability of the arbitration clause itself. A
contrary ruling would suggest that a partys mere repudiation of the
main contract is sufficient to avoid arbitration. That is exactly the
situation that the separability doctrine, as well as jurisprudence
applying it, seeks to avoid. We add that when it was declared in G.R.
No. 161957 that the case should not be brought for arbitration, it
should be clarified that the case referred to is the case actually filed by
Gonzales before the DENR Panel of Arbitrators, which was for
the nullification of the main contract on the ground of fraud, as it
had already been determined that the case should have been brought
before the regular courts involving as it did judicial issues.
[19]
(Emphasis and underscoring supplied)

It bears noting that respondent does not seek to nullify the main contract. It
merely submits these issues for resolution by the arbitration committee, viz:
a.

Whether or not the interest of Claimant in the project or its

economic return in its investment was materially reduced as a
result of any laws or regulations of the Philippine Government
or any agency or body under its control;

b.

Whether or not the parties failed to reach an agreement on the

amendments to the Agreement within 90 days from notice to
respondent on May 3, 2004 of the material reduction in
claimants economic return under the Agreement;

c.

Whether or not as a result of (a) and (b) above, Claimant is

entitled to terminate the Agreement;

d.

Whether or not Respondent accorded preferential treatment to

EAUC in violation of the Agreement;

e.

Whether or not as a result of (d) above, Claimant is entitled to

terminate the Agreement;

f.

Whether or not Claimant is entitled to a termination fee

equivalent to P708,691,543.00; and

g.

Who between Claimant and Respondent shall bear the cost

and expenses of the arbitration, including arbitrators fees,
administrative expenses and legal fees.[20]

In fine, the issues raised by respondent are subject to arbitration in

accordance with the arbitration clause in the parties agreement.
WHEREFORE, the petition is DENIED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 168612

December 10, 2014

PHILIPPINE ELECTRIC CORPORATION (PHILEC), Petitioner,

vs.
COURT OF APPEALS, NATIONAL CONCILIATION AND MEDIATION BOARD (NCMB),
Department of Labor and Employment, RAMON T. JIMENEZ, in his capacity as Voluntary
Arbitrator, PHILEC WORKERS' UNION (PWU), ELEODORO V. LIPIO, and EMERLITO C.
IGNACIO, Respondents.
DECISION
LEONEN, J.:
An appeal to reverse or modify a Voluntary Arbitrator's award or decision must be filed before the
Court of Appeals within 10 calendar days from receipt of the award or decision.
This is a petition for review on certiorari of the Court of Appeals decision dated May 25, 2004,
dismissing the Philippine Electric Corporations petition for certiorari for lack of merit. Philippine
Electric Corporation (PHILEC) is a domestic corporation "engaged in the manufacture and repairs of
high voltage transformers." Among its rank-and-file employees were Eleodoro V. Lipio (Lipio) and
Emerlito C. Ignacio, Sr. (Ignacio, Sr.), former members of the PHILEC Workers Union (PWU). PWU
is a legitimate labor organization and the exclusive bargaining representative of PHILECs rank-andfile employees.
1

From June 1, 1989 to May 31, 1997, PHILEC and its rank-and-file employees were governed by
collective bargaining agreements providing for the following step increases in an employees basic
salary in case of promotion:
6

Pay
Grade

Rank-and-File (PWU)
June 1, 1989 to
May 31, 1992

June 1, 1992 to
May 31, 1994

June 1, 1994 to
May 31, 1997

I II

50

60

65

II III

60

70

78

III IV

70

80

95

IV V

80

110

120

V- VI

100

140

150

VI VII

120

170

195

VII VIII

170

230

255

VIII IX

220

290

340

IX X

260

350

455

On August 18, 1997 and with the previous collective bargaining agreements already expired,
PHILEC selected Lipio for promotion from Machinist under Pay Grade VIII to Foreman I under Pay
Grade B. PHILEC served Lipio a memorandum, instructing him to undergo training for the position
of Foreman I beginning on August 25, 1997. PHILEC undertook to pay Lipio training allowance as
provided in the memorandum:
7

This will confirm your selection and that you will undergo training for the position of Foreman I (PG
B) of the Tank Finishing Section, Distribution Transformer Manufacturing and Repair effective August
25, 1997.
You will be trained as a Foreman I,and shall receive the following training allowance until you have
completed the training/observation period which shall not exceed four (4) months.
First Month

-----

350.00

Second month

-----

815.00

Third month

-----

815.00

Fourth month

-----

815.00

Please be guided accordingly.

10

Ignacio, Sr., then DT-Assembler with Pay Grade VII, was likewise selected for training for the
position of Foreman I. On August 21, 1997, PHILEC served Ignacio, Sr. a
memorandum, instructing him to undergo training with the following schedule of allowance:
11

12

13

This will confirm your selection and that you will undergo training for the position of Foreman I (PG
B) of the Assembly Section, Distribution Transformer Manufacturing and Repair effective
August 25, 1997.
You will be trained as a Foreman I,and shall receive the following training allowance until you have
completed the training/observation period which shall not exceed four (4) months.
First Month

-----

255.00

Second month

-----

605.00

Third month

-----

1,070.00

Fourth month

-----

1,070.00

Please be guided accordingly.

14

On September 17, 1997, PHILEC and PWU entered into a new collective bargaining agreement,
effective retroactively on June 1, 1997 and expiring on May 31, 1999. Under Article X, Section 4 of
the June 1, 1997 collective bargaining agreement, a rank-and-file employee promoted shall be
entitled to the following step increases in his or her basic salary:
15

16

Section 4. STEP INCREASES. [Philippine Electric Corporation] shall adopt the following step
increases on the basic salary in case of promotion effective June 1, 1997. Such increases shall be
based on the scale below or upon the minimum of the new pay grade to which the employee is
promoted, whichever is higher:
Pay Grade
Step Increase
I - II
P80.00
II - III
P105.00
III - IV
P136.00
IV - V
P175.00
V - VI
P224.00
VI - VII
P285.00
VII - VIII
P361.00
VIII - IX
P456.00
IX - X
P575.00
To be promoted, a rank-and-file employee shall undergo training or observation and shall receive
training allowance as provided in Article IX, Section 1(f) of the June 1, 1997 collective bargaining
agreement:
17

Section 1. JOB POSTING AND BIDDING:

....
(f) Allowance for employees under Training or Observation shall be on a graduated basis as follows:
For the first month of training, the allowance should be equivalent to one step increase of the next
higher grade. Every month thereafter the corresponding increase shall be equivalent to the next
higher grade until the allowance for the grade applied for is attained.
As an example, if a Grade I employee qualifies for a Grade III position, he will receive the training
allowance for Grade I to Grade II for the first month. On the second month, he will receive the
training allowance for Grade I to Grade II plus the allowance for Grade II to Grade III. He will then
continue to receive this amount until he finishes his training or observation period.
18

Claiming that the schedule of training allowance stated in the memoranda served on Lipio and
Ignacio,Sr. did not conform to Article X, Section 4 of the June 1, 1997 collective bargaining
agreement, PWU submitted the grievance to the grievance machinery.
19

PWU and PHILEC failed to amicably settle their grievance. Thus, on December 21, 1998, the parties
filed a submission agreement with the National Conciliation and Mediation Board, submitting the
following issues to voluntary arbitration:
20

WHETHER OR NOT PHILEC VIOLATED SECTION 4 (Step Increases) ARTICLE X (Wage and
Position Standardization) OF THE EXISTING COLLECTIVE BARGAINING AGREEMENT (CBA) IN
IMPLEMENTING THE STEP INCREASES RELATIVE TO THE PROMOTION OF INDIVIDUAL
COMPLAINANTS.
II
WHETHER OR NOT PHILECs MANNER OF IMPLEMENTING THE STEP INCREASES IN
CONNECTION WITH THE PROMOTION OF INDIVIDUAL COMPLAINANTS IN RELATION TO THE
PROVISIONS OF SECTION 4, ARTICLE X OF THE CBA CONSTITUTES UNFAIR LABOR
PRACTICE.
21

In their submission agreement, PWU and PHILEC designated Hon. Ramon T. Jimenez as Voluntary
Arbitrator (Voluntary Arbitrator Jimenez).
22

Voluntary Arbitrator Jimenez, in the order dated January 4, 1999, directed the parties to file their
respective position papers.
23

In its position paper, PWU maintained that PHILEC failed to follow the schedule of step increases
under Article X, Section 4 of the June 1, 1997 collective bargaining agreement. Machinist I, Lipios
position before he underwent training for Foreman I, fell under Pay Grade VIII, while Foreman I fell
under Pay Grade X. Following the schedule under Article X, Section 4 of the June 1, 1997 collective
bargaining agreement and the formula under Article IX, Section 1(f), Lipio should be paid training
allowance equal to the step increase for pay grade bracket VIII-IX for the first month of training. For
the succeeding months, Lipio should be paid an allowance equal to the step increase for pay grade
bracket VIII-IX plus the step increase for pay grade bracket IX-X, thus:
24

25

First Month

-----

P456.00

Second month

-----

P1,031.00

Third month

-----

P1,031.00

Fourth month

-----

P1,031.00.

With respect to Ignacio, Sr., he was holding the position of DTAs sembler under Pay Grade VII when
hewas selected to train for the position of Foreman I under Pay Grade X. Thus, for his first month of
training, Ignacio, Sr. should be paid training allowance equal to the step increase under pay grade
bracket VII-VIII. For the second month, he should be paid an allowance equal to the step increase
under pay grade bracket VIIVIII plus the step increase under pay grade bracket VIII-IX. For the third
and fourth months, Ignacio, Sr. should receive an allowance equal to the amount he received for the
second month plus the amount equal to the step increase under pay grade bracket IX-X, thus:
26

First Month

-----

P361.00

Second month

-----

P817.00

Third month

-----

P1,392.00

Fourth month

-----

P1,392.00.

For PHILECs failure to apply the schedule of step increases under Article X of the June 1, 1997
collective bargaining agreement, PWU argued that PHILEC committed an unfair labor practice under
Article 248 of the Labor Code.
27

28

In its position paper, PHILEC emphasized that it promoted Lipio and Ignacio, Sr. while it was still
negotiating a new collective bargaining agreement with PWU. Since PHILEC and PWU had not yet
negotiated a new collective bargaining agreement when PHILEC selected Lipio and Ignacio, Sr. for
training, PHILEC applied the "Modified SGV" pay grade scale in computing Lipios and Ignacio, Sr.s
training allowance.
29

30

This "Modified SGV" pay grade scale, which PHILEC and PWU allegedly agreed to implement
beginning on May 9, 1997, covered both rank-and-file and supervisory employees. According to
PHILEC, its past collective bargaining agreements withthe rank-and-file and supervisory unions
resulted in an overlap of union membership in Pay Grade IX of the rank-and-file employees and Pay
Grade A of the supervisory employees. Worse, past collective bargaining agreements resulted in
rank-and-file employees under Pay Grades IX and X enjoying higher step increases than
supervisory employees under Pay Grades A and B:
31

32

33

Pay Grade
Scale under the
Rank-and-File
CBA

Step Increase

Pay Grade Scale

under the
Supervisory CBA

Step Increase

VIII-IX

P340.00

P290.00

IX-X

P455.00

A-B

P350.00

To preserve the hierarchical wage structure within PHILECs enterprise, PHILEC and PWU allegedly
agreed to implement the uniform pay grade scale under the "Modified SGV" pay grade system,
thus:
34

Pay Grade
Rank-and-File

Supervisory

Step Increase

I II

P65.00

II-III

P78.00

III-IV

P95.00

IV-V

P120.00

V-VI

P150.00

VI-VII

P195.00

VII-VIII

P255.00

VIII-IX

P350.00

IX-X

A-B

P465.00

X-XI

B-C

P570.00

XI-XII

C-D

P710.00

D-E

P870.00

E-F

P1,055.00

Pay grade bracket IIX covered rank-and-file employees, while pay grade bracket AF covered
supervisory employees.
35

Under the "Modified SGV" pay grade scale, the position of Foreman I fell under Pay Grade B.
PHILEC then computed Lipios and Ignacio, Sr.s training allowance accordingly.
36

PHILEC disputed PWUs claim of unfair labor practice. According to PHILEC, it did not violate its
collective bargaining agreement with PWU when it implemented the "Modified SGV" scale. Even
assuming that it violated the collective bargaining agreement, PHILEC argued that its violation was
not "gross" or a "flagrant and/or malicious refusal to comply with the economic provisions of [the
collective bargaining agreement]." PHILEC, therefore, was not guilty of unfair labor practice.
37

38

Voluntary Arbitrator Jimenez held in the decision dated August 13, 1999, that PHILEC violated its
collective bargaining agreement with PWU. According to Voluntary Arbitrator Jimenez, the June 1,
1997 collective bargaining agreement governed when PHILEC selected Lipio and Ignacio, Sr. for
promotion on August 18 and 21, 1997. The provisions of the collective bargaining agreement being
the law between the parties, PHILEC should have computed Lipios and Ignacio, Sr.s training
allowance based on Article X, Section 4 of the June 1, 1997 collective bargaining agreement.
39

40

41

42

As to PHILECs claim that applying Article X, Section 4 would result in salary distortion within
PHILECs enterprise, Voluntary Arbitrator Jimenez ruled that this was "a concern that PHILEC could
have anticipated and could have taken corrective action" before signing the collective bargaining
agreement.
43

Voluntary Arbitrator Jimenez dismissed PWUs claim of unfair labor practice. According to him,
PHILECs acts "cannot be considered a gross violation of the [collective bargaining agreement]
nor . . . [a] flagrant and/or malicious refusal to comply withthe economic provisions of the
[agreement]."
44

45

Thus, Voluntary Arbitrator Jimenez ordered PHILEC to pay Lipio and Ignacio, Sr. training allowance
based on Article X, Section 4 and Article IX, Section 1 of the June 1, 1997 collective bargaining
agreement.
46

PHILEC received a copy of Voluntary Arbitrator Jimenezs decision on August 16, 1999. On August
26, 1999, PHILEC filed a motion for partial reconsideration of Voluntary Arbitrator Jimenezs
decision.
47

48

In the resolution dated July 7, 2000, Voluntary Arbitrator Jimenez denied PHILECs motion for
partial reconsideration for lack of merit. PHILEC received a copy of the July 7, 2000 resolution on
August 11, 2000.
49

50

On August 29, 2000, PHILEC filed a petition for certiorari before the Court of Appeals, alleging that
Voluntary Arbitrator Jimenez gravely abused his discretion in rendering his decision. PHILEC
maintained that it did not violate the June 1, 1997 collective bargaining agreement. It applied the
"Modified SGV" pay grade rates toavoid salary distortion within its enterprise.
51

52

53

54

In addition, PHILEC argued that Article X, Section 4 of the collective bargaining agreement did not
apply to Lipio and Ignacio, Sr. Considering that Lipio and Ignacio, Sr. were promoted to a
supervisory position, their training allowance should be computed based on the provisions of
PHILECs collective bargaining agreement with ASSET, the exclusive bargaining representative of
PHILECs supervisory employees.
55

The Court of Appeals affirmed Voluntary Arbitrator Jimenezs decision. It agreed that PHILEC was
bound to apply Article X, Section 4 of its June 1, 1997 collective bargaining agreement with PWU in
computing Lipios and Ignacio, Sr.s training allowance. In its decision, the Court of Appeals denied
due course and dismissed PHILECs petition for certiorari for lack of merit.
56

57

58

PHILEC filed a motion for reconsideration, which the Court of Appeals denied in the
resolution dated June 23, 2005.
59

On August 3, 2005, PHILEC filed its petition for review on certiorari before this court, insisting that it
did not violate its collective bargaining agreement with PWU. PHILEC maintains that Lipio and
Ignacio, Sr. were promoted to a position covered by the pay grade scale for supervisory
employees. Consequently, the provisions of PHILECs collective bargaining agreement with its
supervisory employees should apply, not its collective bargaining agreement with PWU. To insist on
applying the pay grade scale in Article X, Section 4, PHILEC argues, would result in a salary
distortion within PHILEC.
60

61

62

63

64

In the resolution dated September 21, 2005,this court ordered PWU to comment on PHILECs
petition for review on certiorari.
65

In its comment, PWU argues that Voluntary Arbitrator Jimenez did not gravely abuse his discretion
in rendering his decision. He correctly applied the provisions of the PWU collective bargaining
agreement, the law between PHILEC and its rank-and-file employees, in computing Lipios and
Ignacio, Sr.s training allowance.
66

67

On September 27, 2006, PHILEC filed its reply, reiterating its arguments in its petition for review on
certiorari.
68

The issue for our resolution is whether Voluntary Arbitrator Jimenez gravely abused his discretion in
directing PHILEC to pay Lipios and Ignacio, Sr.s training allowance based on Article X, Section 4 of
the June 1, 1997 rank-and-file collective bargaining agreement.
This petition should be denied.
I
The Voluntary Arbitrators decision
dated August 13, 1999 is already final and
executory
We note that PHILEC filed before the Court of Appeals a petition for certiorari under Rule 65 of the
Rules ofCourt against Voluntary Arbitrator Jimenezs decision.
69

This was not the proper remedy.

Instead, the proper remedy to reverse or modify a Voluntary Arbitrators or a panel of Voluntary
Arbitrators decision or award is to appeal the award or decision before the Court of Appeals. Rule
43, Sections 1 and 3 of the Rules of Court provide:
Section 1. Scope.
This Rule shall apply to appeals from judgments or final orders of the Court of Tax Appeals and from
awards, judgments, final orders or resolutions of orauthorized by any quasi-judicial agency in the
exercise of its quasi-judicial functions. Among these agencies are the Civil Service Commission,
Central Board of Assessment Appeals, Securities and Exchange Commission, Office of the
President, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau
of Patents, Trademarks and Technology Transfer, National Electrification Administration, Energy
Regulatory Board, National Telecommunications Commission, Department of Agrarian Reform under
Republic Act No. 6657, Government Service Insurance System, Employees Compensation
Commission, Agricultural Inventions Board, Insurance Commission, Philippine Atomic Energy
Commission, Board of Investments, Construction Industry Arbitration Commission, and voluntary
arbitrators authorized by law.
....
Sec. 3. Where to appeal.
An appeal under this Rule may be taken to the Court of Appeals within the period and in the manner
herein provided, whether the appeal involves questions of fact, of law, or mixed questions of fact and
law. (Emphasis supplied)
A Voluntary Arbitrator or a panel of Voluntary Arbitrators has the exclusive original jurisdiction over
grievances arising from the interpretation or implementation of collective bargaining agreements.
Should the parties agree, a Voluntary Arbitrator or a panel of Voluntary Arbitrators shall also resolve
the parties other labor disputes, including unfair labor practices and bargaining deadlocks. Articles
261 and 262 of the Labor Code provide:
ART. 261. JURISDICTION OF VOLUNTARY ARBITRATORS OR PANEL OF VOLUNTARY
ARBITRATORS.
The Voluntary Arbitrator or panel of Voluntary Arbitrators shall have original and exclusive jurisdiction
to hear and decide all unresolved grievances arising from the interpretation or implementation of the
Collective Bargaining Agreement and those arising from the interpretation or enforcement of
company personnel policies referred to in the immediately preceding article. Accordingly, violations
of a Collective Bargaining Agreement, except those which are gross in character, shall no longer be
treated as unfair labor practice and shall be resolved as grievances under the Collective Bargaining
Agreement. For purposes of this article, gross violations of Collective Bargaining Agreement shall
mean flagrant and/or malicious refusal to comply with the economic provisions of such agreement.
The Commission, its Regional Offices and the Regional Directors of the Department of Labor and
Employment shall not entertain disputes, grievances, or matters under the exclusive and original
jurisdiction of the Voluntary Arbitrator orpanel of Voluntary Arbitrators and shall immediately dispose
and refer the same to the Grievance Machinery or Voluntary Arbitration provided in the Collective
Bargaining Agreement.
ART. 262. JURISDICTION OVER OTHER LABOR DISPUTES.

The Voluntary Arbitrator or panel of Voluntary Arbitrators, upon agreement of the parties, shall also
hear and decide all other labor disputes including unfair labor practices and bargaining deadlocks.
In Luzon Development Bank v. Association of Luzon Development Bank Employees, this court ruled
that the proper remedy against the award or decision of the Voluntary Arbitratoris an appeal before
the Court of Appeals. This court first characterized the office ofa Voluntary Arbitrator or a panel of
Voluntary Arbitrators as a quasi-judicial agency, citing Volkschel Labor Union, et al. v. NLRC and
Oceanic Bic Division (FFW) v. Romero:
70

71

72

In Volkschel Labor Union, et al. v. NLRC, et al.,on the settled premise that the judgments of courts
and awards of quasi-judicial agencies must become final at some definite time, this Court ruled that
the awards of voluntary arbitrators determine the rights of parties; hence, their decisions have the
same legal effect as judgments of a court. In Oceanic Bic Division (FFW), et al. v. Romero, et al., this
Court ruled that "a voluntary arbitrator by the nature of her functions acts in a quasi-judicial capacity."
Under these rulings, it follows that the voluntary arbitrator, whether acting solely or in a panel, enjoys
in law the status of a quasijudicial agency but independent of, and apart from, the NLRC since his
decisions are not appealable to the latter. (Citations omitted)
73

This court then stated that the office of a Voluntary Arbitrator or a panel of Voluntary Arbitrators, even
assuming that the office is not strictly a quasi-judicial agency, may be considered an instrumentality,
thus:
Assuming arguendo that the voluntaryarbitrator or the panel of voluntary arbitrators may not strictly
be considered as a quasi-judicial agency, board or commission, still both he and the panel are
comprehended within the concept of a "quasi-judicial instrumentality." It may even be stated that it
was to meet the very situation presented by the quasi-judicial functions of the voluntary arbitrators
here, as well as the subsequent arbitrator/arbitral tribunal operating under the Construction Industry
Arbitration Commission, that the broader term "instrumentalities" was purposely included in the
above-quoted provision.
An "instrumentality" is anything used as a means or agency. Thus, the terms governmental "agency"
or "instrumentality" are synonymous in the sense that either of them is a means by which a
government acts, or by which a certain government act or function is performed. The word
"instrumentality," with respect to a state, contemplates an authority to which the state delegates
governmental power for the performance of a state function. An individual person, like an
administrator or executor, is a judicial instrumentality in the settling of an estate, in the same manner
that a sub-agent appointed by a bankruptcy court is an instrumentality of the court, and a trustee in
bankruptcy of a defunct corporation is an instrumentality of the state.
The voluntary arbitrator no less performs a state function pursuant to a governmental power
delegated to him under the provisions therefor in the Labor Code and he falls, therefore, within the
contemplation of the term "instrumentality" in the aforequoted Sec. 9 of B.P. 129. (Citations omitted)
74

Since the office of a Voluntary Arbitrator or a panel of Voluntary Arbitrators is considered a quasijudicial agency, this court concluded that a decision or award rendered by a Voluntary Arbitrator is
appealable before the Court of Appeals. Under Section 9 of the Judiciary Reorganization Act of
1980, the Court of Appeals has the exclusive original jurisdiction over decisions or awards of quasijudicial agencies and instrumentalities:
Section 9. Jurisdiction. The Court of Appeals shall exercise:
....

3. Exclusive appellate jurisdiction over all final judgements, resolutions, orders or awardsof Regional
Trial Courts and quasijudicial agencies, instrumentalities, boards or commission, including the
Securities and Exchange Commission, the Social Security Commission, the Employees
Compensation Commission and the Civil Service Commission, except those falling within the
appellate jurisdiction of the Supreme Court in accordance with the Constitution, the Labor Code of
the Philippines under Presidential Decree No. 442, as amended, the provisions of this Act, and of
subparagraph (1) of the third paragraph and subparagraph 4 of the fourth paragraph of Section 17 of
the Judiciary Act of 1948. (Emphasis supplied)
Luzon Development Bankwas decided in 1995 but remains "good law." In the 2002 case of
Alcantara, Jr. v. Court of Appeals, this court rejected petitioner Santiago Alcantara, Jr.s argument
that the Rules of Court, specifically Rule 43, Section 2, superseded the Luzon Development Bank
ruling:
75

76

Petitioner argues, however, that Luzon Development Bank is no longer good law because of Section
2, Rule 43 of the Rules of Court, a new provision introduced by the 1997 revision. The provision
reads:
SEC. 2. Cases not covered. -This Rule shall not apply to judgments or final orders issued under the
Labor Code of the Philippines.
The provisions may be new to the Rules of Court but it is far from being a new law. Section 2, Rule
42 of the 1997 Rules of Civil Procedure, as presently worded, is nothing more but a reiteration of the
exception to the exclusive appellate jurisdiction of the Court of Appeals, as provided for in Section 9,
Batas Pambansa Blg. 129, as amended by Republic Act No. 7902:
7

(3) Exclusive appellate jurisdiction over all final judgments, decisions, resolutions, orders or awards
of Regional Trial Courts and quasi-judicial agencies, instrumentalities, boards or commissions,
including the Securities and Exchange Commission, the Employees Compensation Commission and
the Civil Service Commission, except those falling within the appellate jurisdiction of the Supreme
Court in accordance with the Constitution, the Labor Code of the Philippines under Presidential
Decree No. 442, as amended, the provisions of this Act and of subparagraph (1) of the third
paragraph and subparagraph (4) of the fourth paragraph of Section 17 of the Judiciary Act of 1948.
The Court took into account this exception in Luzon Development Bank but, nevertheless, held that
the decisions of voluntary arbitrators issued pursuant to the Labor Codedo not come within its ambit:
x x x. The fact that [the voluntary arbitrators] functions and powers are provided for in the Labor
Code does not place him within the exceptions to said Sec. 9 since he is a quasi-judicial
instrumentality as contemplated therein. It will be noted that, although the Employees Compensation
Commission is also provided for in the Labor Code, Circular No. 1-91, which is the forerunner of the
present Revised Administrative Circular No. 1-95, laid down the procedure for the appealability of its
decisions to the Court of Appeals under the foregoing rationalization, and this was later adopted by
Republic Act No. 7902 in amending Sec. 9 of B.P. 129.
A fortiori, the decision or award of the voluntary arbitrator or panel of arbitrators should likewise be
appealable to the Court of Appeals, in line with the procedure outlined in Revised Administrative
Circular No. 1-95, just like those of the quasi-judicial agencies, boards and commissions enumerated
therein. (Emphases in the original)
77

This court has since reiterated the Luzon Development Bankruling in its decisions.

78

Article 262-A of the Labor Code provides that the award or decision of the Voluntary Arbitrator "shall
befinal and executory after ten (10) calendar days from receipt of the copy of the award or decision
by the parties":
Art. 262-A. PROCEDURES. The Voluntary Arbitrator or panel of Voluntary Arbitrators shall have the
power to hold hearings, receive evidences and take whatever action isnecessary to resolve the issue
or issues subject of the dispute, including efforts to effect a voluntary settlement between parties.
All parties to the dispute shall beentitled to attend the arbitration proceedings. The attendance of any
third party or the exclusion of any witness from the proceedings shall be determined by the Voluntary
Arbitrator or panel of Voluntary Arbitrators. Hearing may be adjourned for cause or upon agreement
by the parties.
Unless the parties agree otherwise, it shall be mandatory for the Voluntary Arbitrator or panel of
Voluntary Arbitrators to render an award or decision within twenty (20) calendar days from the date
of submission of the dispute to voluntary arbitration.
The award or decision of the Voluntary Arbitrator or panel of Voluntary Arbitrators shall contain the
facts and the law on which it is based. It shall be final and executory after ten (10) calendar days
from receipt of the copy of the award or decision by the parties.
Upon motion of any interested party, the Voluntary Arbitrator or panel of Voluntary Arbitrators or the
Labor Arbiter in the region where the movant resides, in case of the absence or incapacity of the
Voluntary Arbitrator or panel of Voluntary Arbitrators, for any reason, may issue a writ of execution
requiring either the sheriff of the Commission or regular courts or any public official whomthe parties
may designate in the submission agreement to execute the final decision, order or award. (Emphasis
supplied)
Thus, in Coca-Cola Bottlers Philippines, Inc. Sales Force UnionPTGWO-BALAIS v. Coca ColaBottlers Philippines, Inc., this court declared that the decision of the Voluntary Arbitrator had
become final and executory because it was appealed beyond the 10-day reglementary period under
Article 262-A of the Labor Code.
79

It is true that Rule 43, Section 4 of the Rules of Court provides for a 15-day reglementary period for
filing an appeal:
Section 4. Period of appeal. The appeal shall be taken within fifteen (15) days from notice of the
award, judgment, final order or resolution, or from the date of its last publication, if publication is
required by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsideration
duly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion for
reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the
docket fee before the expiration of the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the petition for review. No further
extension shall be granted except for the most compelling reason and in no case to exceed fifteen
(15) days. (Emphasis supplied)
The 15-day reglementary period has been upheld by this court in a long line of cases. In AMA
Computer College-Santiago City, Inc. v. Nacino, Nippon Paint Employees Union-OLALIA v. Court of
Appeals, Manila Midtown Hotel v. Borromeo, and Sevilla Trading Company v. Semana, this court
denied petitioners petitions for review on certiorari since petitioners failed to appeal the Voluntary
Arbitrators decision within the 15-day reglementary period under Rule43. In these cases, the Court
of Appeals had no jurisdiction to entertain the appeal assailing the Voluntary Arbitrators decision.
80

81

82

83

84

Despite Rule 43 providing for a 15-day period to appeal, we rule that the Voluntary Arbitrators
decision mustbe appealed before the Court of Appeals within 10 calendar days from receipt of the
decision as provided in the Labor Code.
Appeal is a "statutory privilege," which may be exercised "only in the manner and in accordance
withthe provisions of the law." "Perfection of an appeal within the reglementary period is not only
mandatory but also jurisdictional so that failure to doso rendered the decision final and executory,
and deprives the appellate court of jurisdiction to alter the final judgment much less to entertain the
appeal."
85

86

87

We ruled that Article 262-A of the Labor Code allows the appeal of decisions rendered by Voluntary
Arbitrators. Statute provides that the Voluntary Arbitrators decision "shall befinal and executory after
ten (10) calendar days from receipt of the copy of the award or decision by the parties." Being
provided in the statute,this 10-day period must be complied with; otherwise, no appellate court
willhave jurisdiction over the appeal. This absurd situation occurs whenthe decision is appealed on
the 11th to 15th day from receipt as allowed under the Rules, but which decision, under the law, has
already become final and executory.
88

Furthermore, under Article VIII, Section 5(5) of the Constitution, this court "shall not diminish,
increase, or modify substantive rights" in promulgating rules of procedure in courts. The 10-day
period to appeal under the Labor Code being a substantive right, this period cannot be
89

diminished, increased, or modified through the Rules of Court.

90

In Shioji v. Harvey, this court held that the "rules of court, promulgated by authority of law, have the
force and effect of law, if not in conflict with positive law." Rules of Court are "subordinate to the
statute." In case of conflict between the law and the Rules of Court, "the statute will prevail."
91

92

93

94

The rule, therefore, is that a Voluntary Arbitrators award or decision shall be appealed before the
Court of Appeals within 10 days from receipt of the award or decision. Should the aggrieved party
choose to file a motion for reconsideration with the Voluntary Arbitrator, the motion must be filed
within the same 10-day period since a motion for reconsideration is filed "within the period for taking
an appeal."
95

96

A petition for certiorari is a special civil action "adopted to correct errors of jurisdiction committed by
the lower court or quasi-judicial agency, or when there is grave abuse of discretion on the part of
such court or agency amounting to lack or excess of jurisdiction." An extraordinary remedy, a
petition for certiorari may be filed only if appeal is not available. If appeal is available, an appeal
must be taken even if the ground relied upon is grave abuse of discretion.
97

98

99

100

As an exception to the rule, this court has allowed petitions for certiorari to be filed in lieu of an
appeal "(a) when the public welfare and the advancement of public policy dictate; (b) when the
broader interests of justice so require; (c) when the writs issued are null; and (d) when the
questioned order amounts to an oppressive exercise of judicial authority."
101

In Unicraft Industries International Corporation, et al. v. The Hon. Court of Appeals, petitioners filed
a petition for certiorari against the Voluntary Arbitrators decision. Finding that the Voluntary Arbitrator
rendered an award without giving petitioners an opportunity to present evidence, this court allowed
petitioners petition for certiorari despite being the wrong remedy. The Voluntary Arbitrators award,
thiscourt said, was null and void for violation of petitioners right to due process. This court decided
the case on the merits.
102

In Leyte IV Electric Cooperative, Inc. v. LEYECO IV Employees Union-ALU, petitioner likewise filed
a petition for certiorari against the Voluntary Arbitrators decision, alleging that the decision lacked
basis in fact and in law. Ruling that the petition for certiorari was filed within the reglementary period
for filing an appeal, this court allowed petitioners petition for certiorari in "the broader interests of
justice."
103

104

In Mora v. Avesco Marketing Corporation, this court held that petitioner Noel E. Mora erred in filing
a petition for certiorari against the Voluntary Arbitrators decision. Nevertheless, this court decided
the case on the merits "in the interest of substantial justice to arrive at the proper conclusion that is
conformable to the evidentiary facts."
105

106

None of the circumstances similar to Unicraft, Leyte IV Electric Cooperative, and Moraare present in
this case. PHILEC received Voluntary Arbitrator Jimenezs resolution denying its motion for partial
reconsideration on August 11, 2000. PHILEC filed its petition for certiorari before the Court
ofAppeals on August 29, 2000, which was 18 days after its receipt of Voluntary Arbitrator Jimenezs
resolution. The petition for certiorari was filed beyond the 10-day reglementary period for filing an
appeal. We cannot consider PHILECs petition for certiorari as an appeal.
107

108

There being no appeal seasonably filed in this case, Voluntary Arbitrator Jimenezs decision became
final and executory after 10 calendar days from PHILECs receipt of the resolution denying its motion
for partial reconsideration. Voluntary Arbitrator Jimenezs decision is already "beyond the purview
of this Court to act upon."
109

110

II
PHILEC must pay training allowance
based on the step increases provided in
the June 1, 1997 collective bargaining
agreement
The insurmountable procedural issue notwithstanding, the case will also fail on its merits. Voluntary
Arbitrator Jimenez correctly awarded both Lipio and Ignacio, Sr. training allowances based on the
amounts and formula provided in the June 1, 1997 collective bargaining agreement.
A collective bargaining agreement is "a contract executed upon the request of either the employer or
the exclusive bargaining representative of the employees incorporating the agreement reached after
negotiations with respect to wages, hours of work and all other terms and conditions of employment,
including proposals for adjusting any grievances or questions arising under such agreement." A
collective bargaining agreement being a contract, its provisions "constitute the law between the
parties" and must be complied with in good faith.
111

112

113

PHILEC, as employer, and PWU, as the exclusive bargaining representative of PHILECs rank-andfile employees, entered into a collective bargaining agreement, which the parties agreed to make
effective from June 1, 1997 to May 31, 1999. Being the law between the parties, the June 1, 1997
collective bargaining agreement must govern PHILEC and its rank-and-file employees within the
agreed period.
Lipio and Ignacio, Sr. were rank-and-file employees when PHILEC selected them for training for the
position of Foreman I beginning August 25, 1997. Lipio and Ignacio, Sr. were selected for training
during the effectivity of the June 1, 1997 rank-and-file collective bargaining agreement. Therefore,
Lipios and Ignacio, Sr.s training allowance must be computed based on Article X, Section 4 and
ArticleIX, Section 1(f) of the June 1, 1997 collective bargaining agreement.

Contrary to PHILECs claim, Lipio and Ignacio, Sr. were not transferred out of the bargaining unit
when they were selected for training. Lipio and Ignacio, Sr. remained rank-and-file employees while
they trained for the position of Foreman I. Under Article IX, Section 1(e) of the June 1, 1997
collective bargaining agreement, a trainee who is "unable to demonstrate his ability to perform the
work . . . shall be reverted to his previous assignment. . . ." According to the same provision, the
trainee "shall hold that job on a trial or observation basis and . . . subject to prior approval of the
authorized management official, be appointed to the position in a regular capacity."
114

115

116

Thus, training is a condition precedent for promotion. Selection for training does not mean automatic
transfer out of the bargaining unit of rankand-file employees.
Moreover, the June 1, 1997 collective bargaining agreement states that the training allowance of a
rank-and-file employee "whose application for a posted job is accepted shall [be computed] in
accordance with Section (f) of [Article IX]." Since Lipio and Ignacio, Sr. were rank-and-file
employees when they applied for training for the position of Foreman I, Lipios and Ignacio, Sr.s
training allowance must be computed based on Article IX, Section 1(f) of the June 1, 1997 rank-andfile collective bargaining agreement.
117

PHILEC allegedly applied the "Modified SGV" pay grade scale to prevent any salary distortion within
PHILECs enterprise. This, however, does not justify PHILECs non-compliance with the June 1,
1997 collective bargaining agreement. This pay grade scale is not provided in the collective
bargaining agreement. In Samahang Manggagawa sa Top Form Manufacturing United Workers of
the Philippines (SMTFM-UWP) v. NLRC, this court ruled that "only provisions embodied in the
[collective bargaining agreement] should be so interpreted and complied with. Where a proposal
raised by a contracting party does not find print in the [collective bargaining agreement], it is not part
thereof and the proponent has no claim whatsoever to its implementation."
118

119

Had PHILEC wanted the "Modified SGV" pay grade scale applied within its enterprise, "it could have
requested or demanded that [the Modified SGV scale] be incorporated in the [collective bargaining
agreement]." PHILEC had "the means under the law to compel [PWU] to incorporate this specific
economic proposal in the [collective bargaining agreement]." It "could have invoked Article 252 of
the Labor Code" to incorporate the "Modified SGV" pay grade scale in its collective bargaining
agreement with PWU. But it did not. Since this "Modified SGV" pay grade scale does not appear in
PHILECs collective bargaining agreement with PWU, PHILEC cannot insist on the "Modified SGV"
pay grade scales application. We reiterate Voluntary Arbitrator Jimenezs decision dated August 13,
1999 where he said that:
120

121

122

. . . since the signing of the current CBA took place on September 27, 1997, PHILEC, by oversight,
may have overlooked the possibility of a wage distortion occurring among ASSET-occupied
positions. It is surmised that this matter could have been negotiated and settled with PWU before the
actual signing of the CBA on September 27. Instead, PHILEC, again, allowed the provisions of Art.
X, Sec. 4 of the CBA to remain the way it is and is now suffering the consequences of its
laches. (Emphasis in the original)
123

We note that PHILEC did not dispute PWUs contention that it selected several rank-and-file
employees for training and paid them training allowance based on the schedule provided in the
collective bargaining agreement effective at the time of the trainees selection. PHILEC cannot
choose when and to whom to apply the provisions of its collective bargaining agreement. The
provisions of a collective bargaining agreement must be applied uniformly and complied with in good
faith.
124

Given the foregoing, Lipios and Ignacio, Sr.s training allowance should be computed based on
Article X, Section 4 in relation to Article IX, Section 1(f) of the June 1, 1997 rank-and-file collective
bargaining agreement. Lipio, who held the position of Machinist before selection for training as
Foreman I, should receive training allowance based on the following schedule:
First Month

-----

P456.00

Second month

-----

P1,031.00

Third month

-----

P1,031.00

Fourth month

-----

P1,031.00

Ignacio, Sr., who held the position of DT-Assembler before selection for training as Foreman I,
should receive training allowance based on the following schedule:
First Month

-----

P361.00

Second month

-----

P817.00

Third month

-----

P1,392.00

Fourth month

-----

P1,392.00

Considering that Voluntary Arbitrator Jimenezs decision awarded sums of money, Lipio and Ignacio,
Sr. are entitled to legal interest on their training allowances. Voluntary Arbitrator Jimenezs decision
having become final and executory on August 22, 2000, PHILEC is liable for legal interest equal to
12% per annum from finality of the decision until full payment as this court ruled in Eastern Shipping
Lines, Inc. v. Court of Appeals:
125

When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest. . . shall be 12% per annum from such finality until its satisfaction, this interim period
being deemed to be by then as equivalent to a forbearance of credit.
126

The 6% legal interest under CircularNo. 799, Series of 2013, of the Bangko Sentral ng Pilipinas
Monetary Board shall not apply, Voluntary Arbitrator Jimenezs decision having become final and
executory prior to the effectivity of the circular on July 1, 2013. In Nacar v. Gallery Frames, we
held that:
127

1avvphi1

. . . with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.
128

WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals' decision dated
May 25, 2004 is AFFIRMED.
Petitioner Philippine Electric Corporation is ORDERED to PAY respondent Eleodoro V. Lipio a total
of P3,549.00 for a four (4)-month training for the position of Foreman I with legal interest of 12% per
annum from August 22, 2000 until the amount's full satisfaction.
For respondent Emerlito C. Ignacio, Sr., Philippine Electric Corporation is ORDERED to PAY a total
of P3,962.00 for a four (4)-month training for the position of Foreman I with legal interest of 12% per
annum from August 22, 2000 until the amount's full satisfaction.

SO ORDERED.

Republic of the Philippines

Supreme Court

Manila

SECOND DIVISION

WILLIAM
CONSTRUCTION
CORPORATION,

GOLANGCO

G.R. No. 163582

Present:

Petitioner,

CARPIO, J., Chairperson,

NACHURA,
PERALTA
ABAD, and

- versus

MENDOZA, JJ.
Promulgated:

RAY BURTON DEVELOPMENT

CORPORATION,

August 9, 2010

Respondent.
x----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of

the Rules of Court, praying that the Decision [1] of the Court of
Appeals (CA) dated December 19, 2003, holding that the
Construction Industry Arbitration Commission (CIAC) had no
jurisdiction over the dispute between herein parties, and the CA
Resolution[2] dated May 24, 2004, denying herein petitioner's
motion for reconsideration, be reversed and set aside.

The undisputed facts, as accurately narrated in the CA Decision,

are as follows.
On July 20, 1995, petitioner Ray Burton Development
Corporation [herein respondent] (RBDC for brevity) and
private respondent William Golangco Construction
Corporation [herein petitioner] (WGCC) entered into a
Contract for the construction of the Elizabeth Place
(Office/Residential Condominium).

On March 18, 2002, private respondent WGCC filed a

complaint with a request for arbitration with the
Construction Industry Arbitration Commission (hereinafter
referred to as CIAC). In its complaint, private respondent
prayed that CIAC render judgment ordering petitioner to
pay private respondent the amount of, to wit:

1.
P24,703,132.44 for the unpaid balance
on the contract price;
2.
P10,602,670.25 for the unpaid balance
on the labor cost adjustment;

3.
P9,264,503.70 for the unpaid balance
of additive works;
4.
P2,865,615.10 for extended overhead
expenses;
5.
P1,395,364.01
for
materials
cost
adjustment and trade contractors' utilities
expenses;
6.
P4,835,933.95 for interest charges on
unpaid overdue billings on labor cost
adjustment and change orders.

or for a total of Fifty Three Million Six Hundred Sixty-Seven

Thousand
Two
Hundred
Nineteen
and
45/xx
(P53,667,219.45) and interest charges based on the
prevailing bank rates on the foregoing amount from March
1, 2002 and until such time as the same shall be fully
paid.

On April 12, 2002, petitioner RBDC filed a Motion to

Dismiss the aforesaid complaint on the ground of lack of
jurisdiction. It is petitioner's contention that the CIAC
acquires jurisdiction over disputes arising from or
connected with construction contracts only when the
parties to the contract agree to submit the same to
voluntary arbitration. In the contract between petitioner
and private respondent, petitioner claimed that only
disputes by reason of differences in interpretation of the
contract documents shall be deemed subject to
arbitration.

Private respondent filed a Comment and Opposition to the

aforesaid Motion dated April 15, 2002. Private respondent
averred that the claims set forth in the complaint require

contract interpretation and are thus cognizable by the

CIAC pursuant to the arbitration clause in the construction
contract between the parties.Moreover, even assuming
that the claims do not involve differing contract
interpretation, they are still cognizable by the CIAC as the
arbitration clause mandates their direct filing therewith.

On May 6, 2002, the CIAC rendered an Order the pertinent

portion of which reads as follows:

The Commission has taken note of the foregoing

arguments of the parties. After due deliberations, the
Commission resolved to DENY Respondent's motion on
the following grounds:

[1] Clause 17.2 of Art. XVII of the Contract Agreement

explicitly provides that any dispute arising under the
construction contract shall be submitted to the
Construction Arbitration Authority created by the
Government. Even without this provision, the bare
agreement to submit a construction dispute to arbitration
vests in the Commission original and exclusive jurisdiction
by virtue of Sec. 4 of Executive Order No. 1008, whether
or not a dispute involves a collection of sum of money or
contract interpretation as long as the same arises from, or
in connection with, contracts entered into by the parties
involved.The Supreme Court jurisprudence on Tesco vs.
Vera case referred to by respondent is no longer
controlling as the same was based on the old provision of
Article III, Sec. 1 of the CIAC Rules which has long been
amended.

[2] The issue raised by Respondent in its Motion to

Dismiss is similar to the issue set forth in CA-G.R. Sp. No.
67367, Continental Cement Corporation vs. CIAC and EEI
Corporation, where the appellate court upheld the ruling
of the CIAC thereon that since the parties agreed to
submit to arbitration any dispute, the same does not
exclude disputes relating to claims for payment in as
much as the said dispute originates from execution of the
works. As such, the subject dispute falls within the original
and exclusive jurisdiction of the CIAC.

WHEREFORE, in view of the foregoing, Respondent's

Motion to Dismiss is DENIED for lack of merit. Respondent
is given anew an inextendible period of ten (10) days from
receipt hereof within which to file its Answer and
nominees for the Arbitral Tribunal. If Respondent shall fail
to comply within the prescribed period, the Commission
shall proceed with arbitration in accordance with its Rules.
xxx

Thereafter, petitioner filed a Motion to Suspend

Proceedings praying that the CIAC order a suspension of
the proceedings in Case No. 13-2002 until the resolution of
the negotiations between the parties, and consequently,
that the period to file an Answer be held in abeyance.

Private respondent filed an Opposition to the aforesaid

Motion and a Counter-Motion to Declare respondent to
Have Refused to Arbitrate and to Proceed with
Arbitration Ex Parte.

On May 24, 2002 the CIAC issued an Order, the pertinent

portion of which reads:

In view of the foregoing, Respondent's (petitioner's)

Motion to Suspend Proceedings is DENIED. Accordingly,
respondent is hereby given a non-extendible period of five
(5) days from receipt thereof within which to submit its
Answer and nominees for the Arbitral Tribunal. In default
thereof, claimant's (private respondent's) Counter-Motion
is deemed granted and arbitration shall proceed in
accordance with the CIAC Rules Governing Construction
Arbitration.

SO ORDERED. x x x

On June 3, 2002, petitioner RBDC filed [with the Court

of Appeals (CA)] a petition for Certiorari and Prohibition
with prayer for the issuance of a temporary restraining
order and a writ of preliminary injunction. Petitioner
contended that CIAC acted without or in excess of its
jurisdiction when it issued the questioned order despite
the clear showing that there is lack of jurisdiction on the
issue submitted by private respondent for arbitration.[3]

On December 19, 2003, the CA rendered the assailed Decision

granting the petition for certiorari, ruling that the CIAC had no
jurisdiction over the subject matter of the case because the
parties agreed that only disputes regarding differences in
interpretation of the contract documents shall be submitted for
arbitration, while the allegations in the complaint make out a case

for collection of sum of money. Petitioner moved for

reconsideration of said ruling, but the same was denied in a
Resolution dated May 24, 2004.

Hence, this petition where it is alleged that:

I.
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF
DISCRETION
IN
FAILING
TO
DISMISS
PRIVATE
RESPONDENT RBDC'S PETITION IN CA-G.R. SP NO. 70959
OUTRIGHT IN VIEW OF RBDC'S FAILURE TO FILE A
MOTION FOR RECONSIDERATION OF THE CIAC'S ORDER,
AS WELL AS FOR RBDC'S FAILURE TO ATTACH TO THE
PETITION THE RELEVANT PLEADINGS IN CIAC CASE NO.
13-2002, IN VIOLATION OF THE REQUIREMENT UNDER
RULE 65, SECTIONS 1 AND 2, PARAGRAPH 2 THEREOF,
AND RULE 46, SECTION 3, PARAGRAPH 2 THEREOF.

II.
THE COURT OF APPEALS ERRED GRAVELY IN NOT RULING
THAT THE CIAC HAS JURISDICTION OVER WGCC'S
CLAIMS, WHICH ARE IN THE NATURE OF ARBITRABLE
DISPUTES COVERED BY CLAUSE 17.1 OF ARTICLE XVII
INVOLVING CONTRACT INTERPRETATION.

xxxx

III.
THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO
DISCERN THAT CLAUSE 17.2 OF ARTICLE XVII CANNOT BE

TREATED AS BEING LIMITED TO DISPUTES ARISING FROM

INTERPRETATION OF THE CONTRACT.

xxxx

IV.
THE COURT OF APPEALS ERRED GRAVELY IN NOT RULING
THAT RBDC IS ESTOPPED FROM DISPUTING THE
JURISDICTION OF THE CIAC.

xxxx

V.
FINALLY, THE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION IN REFUSING TO PAY HEED TO
THE DECLARATION IN EXECUTIVE ORDER NO. 1008 THAT
THE POLICY OF THE STATE IS IN FAVOR OF ARBITRATION
OF CONSTRUCTION DISPUTES, WHICH POLICY HAS BEEN
REINFORCED FURTHER BY THE RECENT PASSAGE OF THE
ALTERNATIVE DISPUTE RESOLUTION ACT OF 2004(R.A.
NO. 9285).[4]

The petition is meritorious.

The aforementioned issues boil down to (1) whether the CA acted
with grave abuse of discretion in failing to dismiss the petition
for certiorarifiled by herein respondent, in view of the latter's
failure to file a motion for reconsideration of the assailed CIAC
Order and for failure to attach to the petition the relevant
pleadings in CIAC Case No. 13-2002; and (2) whether the CA
gravely erred in not upholding the jurisdiction of the CIAC over the
subject complaint.

Petitioner is correct that it was grave error for the CA to have

given due course to respondent's petition for certiorari despite its
failure to attach copies of relevant pleadings in CIAC Case No. 132002. In Tagle v. Equitable PCI Bank,[5] the party filing the petition
for certiorari before the CA failed to attach the Motion to Stop
Writ of Possession and the Order denying the same. On the
ground of non-compliance with the rules, the CA dismissed said
petition for certiorari. When the case was elevated to this
Court via a petition for certiorari, the same was likewise
dismissed.In said case, the Court emphasized the importance of
complying with the formal requirements for filing a petition
for certiorari and held as follows:
x x x Sec. 1, Rule 65, in relation to Sec. 3, Rule 46, of
the Revised Rules of Court. Sec. 1 of Rule 65 reads:

SECTION 1. Petition for certiorari. When any tribunal,

board or officer exercising judicial or quasi-judicial functions
has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of [its
or his] jurisdiction, and there is no appeal, or any plain,
speedy, and adequate remedy in the ordinary course of law,
a person aggrieved thereby may file a verified petition in the
proper court, alleging the facts with certainty and praying
that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting
such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true

copy of the judgment, order or resolution subject thereof,
copies of all pleadings and documents relevant and pertinent
thereto, and a sworn certification of non-forum shopping as
provided in the third paragraph of Section 3, Rule 46.
(Emphasis supplied.)

And Sec. 3 of Rule 46 provides:

SEC. 3. Contents and filing of petition; effect of noncompliance with requirements. The petition shall contain the
full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved,
the factual background of the case, and the grounds relied
upon for the relief prayed for.

In actions filed under Rule 65, the petition shall further

indicate the material dates showing when notice of the
judgment or final order or resolution subject thereof was
received, when a motion for new trial or reconsideration, if
any, was filed and when notice of the denial thereof was
received.

It shall be filed in seven (7) clearly legible copies

together with proof of service thereof on the respondent with
the original copy intended for the court indicated as such by
the petitioner and shall be accompanied by a clearly legible
duplicate original or certified true copy of the judgment,
order, resolution, or ruling subject thereof, such material
portions of the record as are referred to therein, and other
documents relevant or pertinent thereto. The certification
shall be accomplished by the proper clerk of court or by his
duly-authorized representative, or by the proper officer of the
court, tribunal, agency or office involved or by his duly
authorized representative. The other requisite number of
copies of the petition shall be accompanied by clearly legible
plain copies of all documents attached to the original.

xxxx

The failure of the petitioner to comply with any of the

foregoing requirements shall be sufficient ground for the
dismissal of the petition. (Emphasis supplied.)

The afore-quoted
provisions are
plain
and
unmistakable. Failure to comply with the requirement
that the petition be accompanied by a duplicate original
or certified true copy of the judgment, order, resolution or
ruling being challenged is sufficient ground for the
dismissal of said petition. Consequently, it cannot be
said that the Court of Appeals acted with grave
abuse of discretion amounting to lack or excess of
jurisdiction in dismissing the petition x x x for noncompliance with Sec. 1, Rule 65, in relation to Sec.
3, Rule 46, of the Revised Rules of Court.[6]

In the present case, herein petitioner (private respondent

below) strongly argued against the CA's granting due course to
the petition, pointing out that pertinent pleadings such as
the Complaint before the CIAC, herein respondent's Motion to
Dismiss, herein petitioner's Comment and Opposition (Re: Motion
to Dismiss), and the Motion to Suspend Proceedings, have not
been attached to the petition. Herein respondent (petitioner
before the CA) argued in its Reply [7] before the CA that it did not
deem such pleadings or documents germane to the
petition. However, in the CA Resolution[8] dated July 4, 2002, the
appellate court itself revealed the necessity of such documents by
ordering the submission of copies of pleadings relevant to the
petition. Indeed, such pleadings are necessary for a judicious
resolution of the issues raised in the petition and should have
been attached thereto. As mandated by the rules, the failure to do

so is sufficient ground for the dismissal of the petition. The CA did

not give any convincing reason why the rule regarding
requirements for filing a petition should be relaxed in favor of
herein respondent. Therefore, it was error for the CA to have
given due course to the petition for certiorari despite herein
respondent's failure to comply with the requirements set forth
in Section 1, Rule 65, in relation to Section 3, Rule 46, of the
Revised Rules of Court.
Even on the main issue regarding the CIAC's jurisdiction, the
CA erred in ruling that said arbitration body had no jurisdiction
over the complaint filed by herein petitioner. There is no question
that, as provided under Section 4 of Executive Order No. 1008,
also known as the Construction Industry Arbitration Law, the CIAC
has original and exclusive jurisdiction over disputes arising from,
or connected with, contracts entered into by parties involved in
construction in the Philippines and all that is needed for the CIAC
to acquire jurisdiction is for the parties to agree to submit the
same to voluntary arbitration. Nevertheless, respondent insists
that the only disputes it agreed to submit to voluntary arbitration
are those arising from interpretation of contract documents. It
argued that the claims alleged in petitioner's complaint are not
disputes arising from interpretation of contract documents;
hence, the CIAC cannot assume jurisdiction over the case.

Respondent's contention is tenuous.

The contract between herein parties contained an arbitration
clause which reads as follows:
17.1.1. Any dispute arising in the course of the execution
of this Contract by reason of differences in interpretation
of the Contract Documents which the OWNER and the
CONTRACTOR are unable to resolve between themselves,
shall be submitted by either party for resolution or

decision, x x x to a Board of Arbitrators composed of

three (3) members, to be chosen as follows:

One (1) member each shall be chosen by the

OWNER and the CONTRACTOR. The said two (2)
members, in turn, shall select a third member
acceptable to both of them. The decision of the
Board of Arbitrators shall be rendered within
fifteen (15) days from the first meeting of the
Board.The decision of the Board of Arbitrators
when reached through the affirmative vote of
at least two (2) of its members shall be final
and binding upon the OWNER and the
CONTRACTOR.

17.2 Matters not otherwise provided for in this Contract

or by special agreement of the parties shall be governed
by the provisions of the Construction Arbitration Law of
the Philippines. As a last resort, any dispute which is not
resolved by the Board of Arbitrators shall be submitted to
the Construction Arbitration Authority created by the
government.[9]

In gist, the foregoing provisions mean that herein parties

agreed to submit disputes arising by reason of differences in
interpretation of the contract to a Board of Arbitrators the
composition of which is mutually agreed upon by the parties, and,
as a last resort, any other dispute which had not been resolved
by the Board of Arbitrators shall be submitted to the Construction
Arbitration Authority created by the government, which is no
other than the CIAC. Moreover, other matters not dealt with by
provisions of the contract or by special agreements shall be

governed by provisions of the Construction Industry Arbitration

Law, or Executive Order No. 1008.
The Court finds that petitioner's claims that it is entitled to
payment for several items under their contract, which claims are,
in turn, refuted by respondent, involves a dispute arising from
differences in interpretation of the contract. Verily, the matter of
ascertaining the duties and obligations of the parties under their
contract all involve interpretation of the provisions of the
contract. Therefore, if the parties cannot see eye to eye regarding
each others obligations, i.e., the extent of work to be expected
from each of the parties and the valuation thereof, this is properly
a dispute arising from differences in the interpretation of the
contract.

Note, further, that in respondent's letter [10] dated February

14, 2000, it stated that disputed items of work such as Labor Cost
Adjustment and interest charges, retention, processing of
payment on Cost Retained by WGCC, Determination of Cost of
Deletion for miscellaneous Finishing Works, are considered
unresolved dispute[s] as to the proper interpretation of our
respective obligations under the Contract, which should be
referred to the Board of Arbitrators. Even if the dispute subject
matter of said letter had been satisfactorily settled by herein
parties, the contents of the letter evinces respondent's frame of
mind that the claims being made by petitioner in the complaint
subject of this petition, are indeed matters involving disputes
arising from differences in interpretation.
Clearly, the subject matter of petitioner's claims arose from
differences in interpretation of the contract, and under the terms
thereof, such disputes are subject to voluntary arbitration. Since,
under Section 4 of Executive Order No. 1008 the CIAC shall have
original and exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties involved in
construction in the Philippines and all that is needed for the CIAC

to acquire jurisdiction is for the parties to agree to submit the

same to voluntary arbitration, there can be no other conclusion
but that the CIAC had jurisdiction over petitioner's
complaint. Furthermore, Section 1, Article III of the CIAC Rules of
Procedure Governing Construction Arbitration (CIAC Rules) further
provide that [a]n arbitration clause in a construction contract or a
submission to arbitration of a construction dispute shall be
deemed an agreement to submit an existing or future controversy
to CIAC jurisdiction, notwithstanding the reference to a different
arbitration institution or arbitral body in such contract or
submission. Thus, even if there is no showing that petitioner
previously brought its claims before a Board of Arbitrators
constituted under the terms of the contract, this circumstance
would not divest the CIAC of jurisdiction. In HUTAMA-RSEA Joint
Operations, Inc. v. Citra Metro Manila Tollways Corporation,[11] the
Court held that:

Under Section 1, Article III of the CIAC Rules, an

arbitration clause in a construction contract shall be
deemed as an agreement to submit an existing or future
controversy to CIAC jurisdiction, notwithstanding the
reference to a different arbitration institution or arbitral
body in such contract x x x. Elementary is the rule that
when laws or rules are clear, it is incumbent on the court
to apply them. When the law (or rule) is unambiguous
and unequivocal, application, not interpretation thereof,
is imperative.

Hence, the bare fact that the parties herein

incorporated an arbitration clause in the EPCC is
sufficient to vest the CIAC with jurisdiction over any
construction controversy or claim between the

parties. The arbitration clause in the construction

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

xxxx

It bears to emphasize that the mere existence of

an arbitration clause in the construction contract is
considered by law as an agreement by the parties
to submit existing or future controversies between
them to CIAC jurisdiction, without any qualification
or condition precedent. To affirm a condition precedent
in the construction contract, which would effectively
suspend the jurisdiction of the CIAC until compliance
therewith, would be in conflictwith the recognized
intention of the law and rules to automatically
vest CIAC with jurisdiction over a dispute should the
construction contract contain an arbitration clause.
Moreover, the CIAC was created in recognition of the
contribution of the construction industry to national

development goals. Realizing that delays in the resolution

of construction industry disputes would also hold up the
development of the country, Executive Order No. 1008
expressly mandates the CIAC toexpeditiously settle
construction industry disputes and, for this purpose, vests
in the CIAC original and exclusive jurisdiction over
disputes arising from, or connected with, contracts
entered into by the parties involved in construction in the
Philippines.[12]

Thus, there is no question that in this case, the CIAC properly

took cognizance of petitioner's complaint as it had jurisdiction
over the same.

IN VIEW OF THE FOREGOING, the Petition is GRANTED. The

Decision of the Court of Appeals, dated December 19, 2003, and
its Resolution dated May 24, 2004 in CA-G.R. SP No. 70959
are REVERSED and SET ASIDE. The Order of the Construction
Industry Arbitration Commission is REINSTATED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
KOREA TECHNOLOGIES CO., G.R. No. 143581
LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of resolving disputes,
particularly in civil and commercial disputes. Arbitration along with mediation,
conciliation, and negotiation, being inexpensive, speedy and less hostile methods
have long been favored by this Court. The petition before us puts at issue an
arbitration clause in a contract mutually agreed upon by the parties stipulating that
they would submit themselves to arbitration in a foreign country. Regrettably,
instead of hastening the resolution of their dispute, the parties wittingly or
unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation
which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG)
Cylinder manufacturing plants, while private respondent Pacific General Steel
Manufacturing Corp. (PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a Contract [1] whereby

KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997,
the parties executed, in Korea, an Amendment for Contract No. KLP-970301
dated March 5, 1997[2] amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD
1,224,000. KOGIES would install and initiate the operation of the plant for which
PGSMC bound itself to pay USD 306,000 upon the plants production of the 11-kg.
LPG cylinder samples. Thus, the total contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease [3] with Worth
Properties, Inc. (Worth) for use of Worths 5,079-square meter property with a
4,032-square meter warehouse building to house the LPG manufacturing
plant. The monthly rental was PhP 322,560 commencing on January 1, 1998 with a
10% annual increment clause. Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped, delivered, and
installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January
22, 1998, after the installation of the plant, the initial operation could not be
conducted as PGSMC encountered financial difficulties affecting the supply of
materials, thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial
operation of the plant, PGSMC issued two postdated checks: (1)BPI Check No.
0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI Check No.
0316413 dated March 30, 1998 for PhP 4,500,000.[5]
When KOGIES deposited the checks, these were dishonored for the
reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand
letter[6] to PGSMC threatening criminal action for violation of Batas Pambansa
Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President
faxed a letter dated May 7, 1998 to KOGIES President who was then staying at

a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES
were fully funded but the payments were stopped for reasons previously made
known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling
their Contract dated March 5, 1997 on the ground that KOGIES had altered the
quantity and lowered the quality of the machineries and equipment it delivered to
PGSMC, and that PGSMC would dismantle and transfer the machineries,
equipment, and facilities installed in the Carmona plant. Five days later, PGSMC
filed before the Office of the Public Prosecutor an Affidavit-Complaint
for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of
KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It also
insisted that their disputes should be settled by arbitration as agreed upon in Article
15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of
its June 1, 1998 letter threatening that the machineries, equipment, and facilities
installed in the plant would be dismantled and transferred on July 4, 1998. Thus,
on July 1, 1998, KOGIES instituted an Application for Arbitration before the
Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15
of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance,
docketed as Civil Case No. 98-117[8] against PGSMC before the Muntinlupa City
Regional Trial Court (RTC). The RTC granted a temporary restraining order (TRO)
on July 4, 1998, which was subsequently extended until July 22, 1998. In its
complaint, KOGIES alleged that PGSMC had initially admitted that the checks
that were stopped were not funded but later on claimed that it stopped payment of

the checks for the reason that their value was not received as the former allegedly
breached their contract by altering the quantity and lowering the quality of the
machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22,
1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their
Contract, as amended, by unilaterally rescinding the contract without resorting to
arbitration. KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant which the latter
threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that
KOGIES was not entitled to the TRO since Art. 15, the arbitration clause, was null
and void for being against public policy as it ousts the local courts of jurisdiction
over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim[9] asserting that it had the full right to dismantle and transfer the
machineries and equipment because it had paid for them in full as stipulated in the
contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the
checks for failing to completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for altering the
quantity and lowering the quality of the machineries and equipment. Moreover,
PGSMC averred that it has already paid PhP 2,257,920 in rent (covering January to
July 1998) to Worth and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder manufacturing plant
never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC
issued an Order denying the application for a writ of preliminary injunction,
reasoning that PGSMC had paid KOGIES USD 1,224,000, the value of the
machineries and equipment as shown in the contract such that KOGIES no longer
had proprietary rights over them. And finally, the RTC held that Art. 15 of the
Contract as amended was invalid as it tended to oust the trial court or any other
court jurisdiction over any dispute that may arise between the parties. KOGIES
prayer for an injunctive writ was denied.[10] The dispositive portion of the Order
stated:

WHEREFORE, in view of the foregoing consideration, this Court

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

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the
quality of the machinery, equipment, and facilities it delivered to the plant. It
claimed that it had performed all the undertakings under the contract and had
already produced certified samples of LPG cylinders. It averred that whatever was
unfinished was PGSMCs fault since it failed to procure raw materials due to lack
of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of
Appeals,[12] insisted that the arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking
dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998, filed its Motion
for Reconsideration[14] of the July 23, 1998 Order denying its application for
an injunctive writ claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an LPG manufacturing plant
consisting of supply of all the machinery and facilities and transfer of technology
for a total contract price of USD 1,530,000 such that the dismantling and transfer
of the machinery and facilities would result in the dismantling and transfer of the
very plant itself to the great prejudice of KOGIES as the still unpaid owner/seller
of the plant. Moreover, KOGIES points out that the arbitration clause under Art. 15
of the Contract as amended was a valid arbitration stipulation under Art. 2044 of
the Civil Code and as held by this Court inChung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things [16] to
determine whether there was indeed alteration of the quantity and lowering of

quality of the machineries and equipment, and whether these were properly
installed. KOGIES opposed the motion positing that the queries and issues raised
in the motion for inspection fell under the coverage of the arbitration clause in their
contract.
On September 21, 1998, the trial court issued an Order (1) granting
PGSMCs motion for inspection; (2) denying KOGIES motion for reconsideration
of the July 23, 1998 RTC Order; and (3) denying KOGIES motion to dismiss
PGSMCs compulsory counterclaims as these counterclaims fell within the
requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration[17] of the September 21, 1998 RTC Order granting inspection of
the plant and denying dismissal of PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court
of Appeals (CA) a petition for certiorari[18] docketed as CA-G.R. SP No. 49249,
seeking annulment of the July 23, 1998 and September 21, 1998 RTC Orders and
praying for the issuance of writs of prohibition, mandamus, and preliminary
injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and
transferring the machineries and equipment in the Carmona plant, and to direct the
RTC to enforce the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent
motion for reconsideration and directed the Branch Sheriff to proceed with the
inspection of the machineries and equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition [20] in CA-G.R. SP
No. 49249 informing the CA about the October 19, 1998 RTC Order. It also
reiterated its prayer for the issuance of the writs of prohibition, mandamus and
preliminary injunction which was not acted upon by the CA. KOGIES asserted that
the Branch Sheriff did not have the technical expertise to ascertain whether or not
the machineries and equipment conformed to the specifications in the contract and
were properly installed.

On November 11, 1998, the Branch Sheriff filed his Sheriffs

Report[21] finding that the enumerated machineries and equipment were not fully
and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the
RTC Orders and dismissing the petition for certiorari filed by KOGIES. The CA
found that the RTC did not gravely abuse its discretion in issuing the assailed July
23, 1998 and September 21, 1998 Orders.Moreover, the CA reasoned that KOGIES
contention that the total contract price for USD 1,530,000 was for the whole plant
and had not been fully paid was contrary to the finding of the RTC that PGSMC
fully paid the price of USD 1,224,000, which was for all the machineries and
equipment.According to the CA, this determination by the RTC was a factual
finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the
lower court that an arbitration clause which provided for a final determination of
the legal rights of the parties to the contract by arbitration was against public
policy.
On the issue of nonpayment of docket fees and non-attachment of a
certificate of non-forum shopping by PGSMC, the CA held that the counterclaims
of PGSMC were compulsory ones and payment of docket fees was not required
since the Answer with counterclaim was not an initiatory pleading. For the same
reason, the CA said a certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed
prematurely since KOGIES did not wait for the resolution of its urgent motion for
reconsideration of the September 21, 1998 RTC Order which was the plain, speedy,
and adequate remedy available. According to the CA, the RTC must be given the
opportunity to correct any alleged error it has committed, and that since the
assailed orders were interlocutory, these cannot be the subject of a petition for
certiorari.

Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT
BEYOND THE AMBIT OF A PETITION FOR CERTIORARI
INTENDED ONLY FOR CORRECTION OF ERRORS OF
JURISDICTION OR GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION,
AND CONCLUDING THAT THE TRIAL COURTS FINDING ON
THE SAME QUESTION WAS IMPROPERLY RAISED IN THE
PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION
CLAUSE IN ARTICLE 15 OF THE CONTRACT BETWEEN THE
PARTIES FOR BEING CONTRARY TO PUBLIC POLICY AND FOR
OUSTING THE COURTS OF JURISDICTION;
c.
DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS
TO BE ALL COMPULSORY NOT NECESSITATING PAYMENT OF
DOCKET FEES AND CERTIFICATION OF NON-FORUM
SHOPPING;
d.
RULING
THAT
THE
PETITION
WAS
FILED
PREMATURELY WITHOUT WAITING FOR THE RESOLUTION OF
THE MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT
AN OPPORTUNITY TO CORRECT ITSELF;
e.
PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY
IN NATURE;
f.
NOT GRANTING THE RELIEFS AND REMEDIES PRAYED
FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE
SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling

The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the
procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it
should have paid docket fees and filed a certificate of non-forum shopping, and
that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated
in its Answer with Compulsory Counterclaim dated July 17, 1998in accordance
with Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure, the rule that
was effective at the time the Answer with Counterclaim was filed. Sec. 8
on existing counterclaim or cross-claim states, A compulsory counterclaim or a
cross-claim that a defending party has at the time he files his answer shall be
contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said
counterclaims being compulsory in nature. We stress, however, that
effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-204-SC, docket fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer
is not an initiatory pleading which requires a certification against forum shopping

under Sec. 5[24] of Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive
pleading, hence, the courts a quo did not commit reversible error in denying
KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and
Prohibition are neither the remedies to question the propriety of an interlocutory
order
of
the
trial
court.[26] The
CA
erred
on
its
reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case
which was not assailable in an action for certiorari since the denial of a motion to
quash required the accused to plead and to continue with the trial, and whatever
objections the accused had in his motion to quash can then be used as part of his
defense and subsequently can be raised as errors on his appeal if the judgment of
the trial court is adverse to him. The general rule is that interlocutory orders cannot
be challenged by an appeal.[27]Thus, in Yamaoka v. Pescarich Manufacturing
Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the grounds
for assailing the interlocutory orders. Allowing appeals from
interlocutory orders would result in the sorry spectacle of a case being
subject of a counterproductive ping-pong to and from the appellate court
as often as a trial court is perceived to have made an error in any of its
interlocutory rulings. However, where the assailed interlocutory order
was issued with grave abuse of discretion or patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief, the
Court allows certiorari as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus, where the interlocutory order was issued
without or in excess of jurisdiction or with grave abuse of discretion, the remedy is
certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to
lack of jurisdiction in the issuance of the two assailed orders coupled with the fact

that there is no plain, speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition for certiorari under
Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the
petition for certiorari. Note that KOGIES motion for reconsideration of the July 23,
1998 RTC Order which denied the issuance of the injunctive writ had already been
denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory order via
a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the
September 21, 1998 RTC Order relating to the inspection of things, and the
allowance of the compulsory counterclaims has not yet been resolved, the
circumstances in this case would allow an exception to the rule that before
certiorari may be availed of, the petitioner must have filed a motion for
reconsideration and said motion should have been first resolved by the court a
quo. The reason behind the rule is to enable the lower court, in the first instance, to
pass upon and correct its mistakes without the intervention of the higher court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect
the plant, equipment, and facilities when he is not competent and knowledgeable
on said matters is evidently flawed and devoid of any legal support. Moreover,
there is an urgent necessity to resolve the issue on the dismantling of the facilities
and any further delay would prejudice the interests of KOGIES. Indeed, there is
real and imminent threat of irreparable destruction or substantial damage to
KOGIES equipment and machineries. We find the resort to certiorari based on the
gravely abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:

Article 15. Arbitration.All disputes, controversies, or differences

which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall finally be
settled by arbitration in Seoul, Korea in accordance with the Commercial
Arbitration Rules of the Korean Commercial Arbitration Board. The
award rendered by the arbitration(s) shall be final and binding upon
both parties concerned. (Emphasis supplied.)

Petitioner claims the RTC and the CA erred in ruling that the arbitration
clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case was
perfected here in the Philippines. Therefore, our laws ought to
govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually
agreed arbitral clause or the finality and binding effect of an arbitral award. Art.
2044 provides, Any stipulation that the arbitrators award or decision shall be
final, is valid, without prejudice to Articles 2038, 2039 and 2040. (Emphasis
supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043,
[34]
may be voided, rescinded, or annulled, but these would not denigrate the finality
of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against morals, good
customs, public order, or public policy. There has been no showing that the parties
have not dealt with each other on equal footing. We find no reason why the
arbitration clause should not be respected and complied with by both
parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to
arbitration is a contract and that a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitration is a contract. [36] Again
in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he

provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the
KCAB, and that the arbitral award is final and binding, is not contrary to public
policy. This Court has sanctioned the validity of arbitration clauses in a catena of
cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,
[38]
this Court had occasion to rule that an arbitration clause to resolve differences
and breaches of mutually agreed contractual terms is valid. In BF Corporation v.
Court of Appeals, we held that [i]n this jurisdiction, arbitration has been held valid
and constitutional. Even before the approval on June 19, 1953 of Republic Act No.
876, this Court has countenanced the settlement of disputes through
arbitration. Republic Act No. 876 was adopted to supplement the New Civil Codes
provisions on arbitration.[39] And in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong with mediation, conciliation and negotiationis
encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially of
the commercial kind. It is thus regarded as the wave of the future in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally construe
arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of arbitration.
[40]

Having said that the instant arbitration clause is not against public policy, we
come to the question on what governs an arbitration clause specifying that in case

of any dispute arising from the contract, an arbitral panel will be constituted in a
foreign country and the arbitration rules of the foreign country would govern and
its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to
arbitrate disputes arising from contractual relations. In case a foreign arbitral body
is chosen by the parties, the arbitration rules of our domestic arbitration bodies
would not be applied. As signatory to the Arbitration Rules of the UNCITRAL
Model Law on International Commercial Arbitration[41] of the United Nations
Commission on International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippines committed itself to be bound by the
Model Law. We have even incorporated the Model Law in Republic Act No. (RA)
9285, otherwise known as the Alternative Dispute Resolution Act of
2004 entitled An Act to Institutionalize the Use of an Alternative Dispute
Resolution System in the Philippines and to Establish the Office for Alternative
Dispute Resolution, and for Other Purposes, promulgated on April 2, 2004. Secs.
19 and 20 of Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International
Commercial Arbitration.International commercial arbitration shall be
governed by the Model Law on International Commercial Arbitration
(the Model Law) adopted by the United Nations Commission on
International Trade Law on June 21, 1985 (United Nations Document
A/40/17) and recommended for enactment by the General Assembly in
Resolution No. 40/72 approved on December 11, 1985, copy of which is
hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model
Law, regard shall be had to its international origin and to the need for
uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United
Nations Commission on International Trade Law dated March 25, 1985

entitled, International Commercial Arbitration: Analytical Commentary

on Draft Trade identified by reference number A/CN. 9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in the instant
case since it is a procedural law which has a retroactive effect.Likewise, KOGIES
filed its application for arbitration before the KCAB on July 1, 1998 and it is still
pending because no arbitral award has yet been rendered. Thus, RA 9285 is
applicable to the instant case. Well-settled is the rule that procedural laws are
construed to be applicable to actions pending and undetermined at the time of their
passage, and are deemed retroactive in that sense and to that extent. As a general
rule, theretroactive application of procedural laws does not violate any personal
rights because no vested right has yet attached nor arisen from them.[42]
Among the pertinent features of RA 9285 applying and incorporating the
UNCITRAL Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are
properly the subject of arbitration pursuant to an arbitration clause, and mandates
the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an action is
brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the pretrial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the
arbitration clause to be final and binding are not immediately enforceable or cannot

be implemented immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates

the requirement for the arbitral award to be recognized by a competent court for
enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285 incorporated
these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is not
made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral
Awards Not Covered by the New York Convention.The recognition and
enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, on grounds of
comity and reciprocity, recognize and enforce a non-convention award as
a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign
arbitral award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and executory
decisions of courts of law of the Philippines

xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside,
correction or modification of an arbitral award, and any application with
a court for arbitration assistance and supervision shall be deemed as
special proceedings and shall be filed with the Regional Trial Court (i)
where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the
applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding
for recognition and enforcement of an arbitral award, the Court shall
send notice to the parties at their address of record in the arbitration, or if
any part cannot be served notice at such address, at such partys last
known address. The notice shall be sent al least fifteen (15) days before
the date set for the initial hearing of the application.

It is now clear that foreign arbitral awards when confirmed by the RTC are
deemed not as a judgment of a foreign court but as a foreign arbitral award, and
when confirmed, are enforced as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award
is similar to judgments or awards given by some of our quasi-judicial bodies, like
the National Labor Relations Commission and Mines Adjudication Board, whose
final judgments are stipulated to be final and binding, but not immediately
executory in the sense that they may still be judicially reviewed, upon the instance
of any party. Therefore, the final foreign arbitral awards are similarly situated in
that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC
with specific authority and jurisdiction to set aside, reject, or vacate a foreign
arbitral award on grounds provided under Art. 34(2) of the UNCITRAL Model
Law. Secs. 42 and 45 provide:

SEC. 42. Application of the New York Convention.The New York

Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is not
made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an
award has been made, the Regional Trial Court may, if it considers it
proper, vacate its decision and may also, on the application of the party
claiming recognition or enforcement of the award, order the party to
provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a
foreign arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the procedures
and rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral award is
subject to judicial review by the RTC which can set aside, reject, or vacate it. In
this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by
KOGIES is applicable insofar as the foreign arbitral awards, while final and
binding, do not oust courts of jurisdiction since these arbitral awards are not

absolute and without exceptions as they are still judicially reviewable. Chapter 7 of
RA 9285 has made it clear that all arbitral awards, whether domestic or foreign, are
subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral
awards
The differences between a final arbitral award from an international or
foreign arbitral tribunal and an award given by a local arbitral tribunal are the
specific grounds or conditions that vest jurisdiction over our courts to review the
awards.
For foreign or international arbitral awards which must first be confirmed by
the RTC, the grounds for setting aside, rejecting or vacating the award by the RTC
are provided under Art. 34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC
pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and executory
decisions of the RTC,[45] they may only be assailed before the RTC and vacated on
the grounds provided under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of
an aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or
corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A
decision of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules and procedure to be promulgated
by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to
post a counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed before this

Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to
the foreign arbitration as it bound itself through the subject contract. While it may
have misgivings on the foreign arbitration done in Korea by the KCAB, it has
available remedies under RA 9285. Its interests are duly protected by the law
which requires that the arbitral award that may be rendered by KCAB must be
confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an
arbitration clause, stipulating that the arbitral award is final and binding, does not
oust our courts of jurisdiction as the international arbitral award, the award of
which is not absolute and without exceptions, is still judicially reviewable under
certain conditions provided for by the UNCITRAL Model Law on ICA as applied
and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and
binding on the parties, and not contrary to public policy; consequently, being
bound to the contract of arbitration, a party may not unilaterally rescind or
terminate the contract for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles[47] and reiterated in succeeding cases,[48] that the act of treating a contract as
rescinded on account of infractions by the other contracting party is valid albeit
provisional as it can be judicially assailed, is not applicable to the instant case on
account of a valid stipulation on arbitration. Where an arbitration clause in a
contract is availing, neither of the parties can unilaterally treat the contract as
rescinded since whatever infractions or breaches by a party or differences arising

from the contract must be brought first and resolved by arbitration, and not through
an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on
whether the equipment and machineries delivered and installed were properly
installed and operational in the plant in Carmona, Cavite; the ownership of
equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact
that PGSMC could not supply the raw materials required to produce the sample
LPG cylinders, are matters proper for arbitration. Indeed, we note that on July 1,
1998, KOGIES instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs
Motion for Inspection of Things on September 21, 1998, as the subject matter of
the motion is under the primary jurisdiction of the mutually agreed arbitral body,
the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch
Sheriff from the inspection made on October 28, 1998, as ordered by the trial court
on October 19, 1998, is of no worth as said Sheriff is not technically competent to
ascertain the actual status of the equipment and machineries as installed in the
plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC
Orders pertaining to the grant of the inspection of the equipment and machineries
have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the
total contract price of USD 1,530,000 was for the whole plant and its installation is
beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.

It is settled that questions of fact cannot be raised in an original action for

certiorari.[49] Whether or not there was full payment for the machineries and
equipment and installation is indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the
RTC in resolving the issue on the ownership of the plant when it is the arbitral
body (KCAB) and not the RTC which has jurisdiction and authority over the said
issue. The RTCs determination of such factual issue constitutes grave abuse of
discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ
paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the instant
case.
Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral body to
decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant
interim measures to protect vested rights of the parties.Sec. 28 pertinently
provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not
incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent that
the arbitral tribunal has no power to act or is unable to act
effectivity, the request may be made with the Court. The arbitral
tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and
written communication of said nomination and acceptance has been
received by the party making the request.

(b) The following rules on interim or provisional relief shall be

observed:
Any party may request that provisional relief be granted against
the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon
the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal as the
case may be and the party against whom the relief is sought, describing
in appropriate detail the precise relief, the party against whom the relief
is requested, the grounds for the relief, and the evidence supporting the
request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral
tribunal.
(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim

measure of protection as:
Article 17. Power of arbitral tribunal to order interim measures

xxx xxx xxx

(2) An interim measure is any temporary measure, whether in the form
of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the arbitral
tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the
dispute;
(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;
(c) Provide a means of preserving assets out of which a subsequent
award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution
of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and
jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure
in relation to arbitration proceedings, irrespective of whether their place
is in the territory of this State, as it has in relation to proceedings in
courts. The court shall exercise such power in accordance with its own
procedures in consideration of the specific features of international
arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro

Corporation, we were explicit that even the pendency of an arbitral proceeding
does not foreclose resort to the courts for provisional reliefs. We explicated this
way:

As a fundamental point, the pendency of arbitral proceedings does not

foreclose resort to the courts for provisional reliefs. The Rules of the
ICC, which governs the parties arbitral dispute, allows the application of
a party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004, allows the
filing of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction to grant
interim measures of protection.
Secondly, considering that the equipment and machineries are in the
possession of PGSMC, it has the right to protect and preserve the equipment and
machineries in the best way it can. Considering that the LPG plant was nonoperational, PGSMC has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the better way to
make good use of them which is ineluctably within the management discretion of
PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment
and machineries in Worths property is not to the best interest of PGSMC due to the
prohibitive rent while the LPG plant as set-up is not operational. PGSMC was
losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without
considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions
relating to the preservation or transfer of the equipment and machineries as an
interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-recognition by the lower
courts of the arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been

paid a substantial amount based on the contract. Moreover, KOGIES is amply
protected by the arbitral action it has instituted before the KCAB, the award of
which can be enforced in our jurisdiction through the RTC. Besides, by our
decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and
transfer the subject equipment and machineries, it does not have the right to
convey or dispose of the same considering the pending arbitral proceedings to
settle the differences of the parties. PGSMC therefore must preserve and maintain
the subject equipment and machineries with the diligence of a good father of a
family[51] until final resolution of the arbitral proceedings and enforcement of the
award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249
is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case
No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the
arbitration of their dispute and differences arising from the subject Contract before
the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment
and machineries, if it had not done so, and ORDERED to preserve and maintain
them until the finality of whatever arbitral award is given in the arbitration
proceedings.

No pronouncement as to costs.
SO ORDERED.

EN BANC

[G.R. No. 155001. May 5, 2003]

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B.

REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA,
REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G.
DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO,
BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE
AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC.,
MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT
OF
TRANSPORTATION
AND
COMMUNICATIONS
and
SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of
the
Department
of
Transportation
and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS
AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST
SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES
CORPORATION,
MIASCOR
CATERING
SERVICES
CORPORATION,
MIASCOR
AIRCRAFT
MAINTENANCE
CORPORATION,
and
MIASCOR
LOGISTICS
CORPORATION,petitioners-in-intervention,

[G.R. No. 155547. May 5, 2003]

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO

G. JARAULA, petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his
capacity as Head of the Department of Transportation and
Communications, and SECRETARY SIMEON A. DATUMANONG,
in his capacity as Head of the Department of Public Works and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA,
WILLY BUYSON VILLARAMA, PROSPERO C. NOGRALES,
PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and
BENASING O. MACARANBON, respondents-intervenors,

[G.R. No. 155661. May 5, 2003]

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA,

MA. TERESA V. GAERLAN, LEONARDO DE LA ROSA, DINA C.
DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO
SANTOS, MA. LUISA M. PALCON and SAMAHANG
MANGGAGAWA
SA
PALIPARAN
NG
PILIPINAS
(SMPP), petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in
his capacity as Head of the Department of Transportation and
Communications,respondents.
DECISION
PUNO, J.:

Petitioners and petitioners-in-intervention filed the instant petitions for

prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the
Manila International Airport Authority (MIAA) and the Department of
Transportation and Communications (DOTC) and its Secretary from
implementing the following agreements executed by the Philippine

Government through the DOTC and the MIAA and the Philippine International
Air Terminals Co., Inc. (PIATCO):(1) the Concession Agreement signed on
July 12, 1997, (2) the Amended and Restated Concession Agreement dated
November 26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second Supplement to
the Amended and Restated Concession Agreement dated September 4, 2000,
and (5) the Third Supplement to the Amended and Restated Concession
Agreement dated June 22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris
(ADP) to conduct a comprehensive study of the Ninoy Aquino International
Airport (NAIA) and determine whether the present airport can cope with the
traffic development up to the year 2010. The study consisted of two parts: first,
traffic forecasts, capacity of existing facilities, NAIA future requirements,
proposed master plans and development plans; and second, presentation of
the preliminary design of the passenger terminal building. The ADP submitted
a Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei,
Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso
Yuchengco met with then President Fidel V. Ramos to explore the possibility
of investing in the construction and operation of a new international airport
terminal. To signify their commitment to pursue the project, they formed the
Asias Emerging Dragon Corp. (AEDC) which was registered with the
Securities and Exchange Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the
Government through the DOTC/MIAA for the development of NAIA
International Passenger Terminal III (NAIA IPT III) under a build-operate-andtransfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT
Law).
[1]

On December 2, 1994, the DOTC issued Dept. Order No. 94-832

constituting the Prequalification Bids and Awards Committee (PBAC) for the
implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the
proposal of AEDC to the National Economic and Development Authority
(NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA
on December 13, 1995. On January 5, 1996, the NEDA Investment
Coordinating Council(NEDA ICC) Technical Board favorably endorsed the
project to the ICC Cabinet Committee which approved the same, subject to

certain conditions, on January 19, 1996. On February 13, 1996, the NEDA
passed Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two
daily newspapers of an invitation for competitive or comparative proposals on
AEDCs unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as
amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope
should contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of the
proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the
availment of the Bid Documents and the submission of the comparative bid
proposals.Interested firms were permitted to obtain the Request for Proposal
Documents beginning June 28, 1996, upon submission of a written application
and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the
proponent must have adequate capability to sustain the financing requirement
for the detailed engineering, design, construction, operation, and maintenance
phases of the project. The proponent would be evaluated based on its ability
to provide a minimum amount of equity to the project, and its capacity to
secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all
bidders to a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the
Bid Documents. The following amendments were made on the Bid
Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its
financial proposal an additional percentage of gross revenue share of the Government,
as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of
equal amount, but payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, and/or operation and
maintenance phases of the project as the case may be. For purposes of prequalification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide
the minimum amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or
the members of the consortium are banking with them, that the project proponent
and/or the members are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents compliance with the
minimum technical and financial requirements provided in the Bid Documents and the
IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project
Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to
time. Said amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where
certain clarifications were made. Upon the request of prospective bidder
Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted
that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations
of the BOT Law, only the proposed Annual Guaranteed Payment submitted by
the challengers would be revealed to AEDC, and that the challengers
technical and financial proposals would remain confidential. The PBAC also
clarified that the list of revenue sources contained in Annex 4.2a of the Bid
Documents was merely indicative and that other revenue sources may be
included by the proponent, subject to approval by DOTC/MIAA. Furthermore,
the PBAC clarified that only those fees and charges denominated as Public
Utility Fees would be subject to regulation, and those charges which would be
actually deemed Public Utility Fees could still be revised, depending on the
outcome of PBACs query on the matter with the Department of Justice.

In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers
to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10,
1996.Paircargos queries and the PBACs responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity
requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the
capitalization of each member company is so structured to meet the requirements and
needs of their current respective business undertaking/activities. In order to comply
with this equity requirement, Paircargo is requesting PBAC to just allow each
member of (sic) corporation of the Joint Venture to just execute an agreement that
embodies a commitment to infuse the required capital in case the project is awarded
to the Joint Venture instead of increasing each corporations current authorized
capital stock just for prequalification purposes.
In prequalification, the agency is interested in ones financial capability at the time of
prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish
that present financial capability. However, total financial capability of all member
companies of the Consortium, to be established by submitting the respective
companies audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the
extension of a Performance Security to the joint venture in the event that the
Concessions Agreement (sic) is awarded to them. However, Paircargo is being
required to submit a copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of
the approved negotiated agreement between the PBAC and the AEDC at the soonest
possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any
material changes would be made known to prospective challengers through bid
bulletins.However, a final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of
the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin
Project) and to submit the same with the required Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo
and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc.
(PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium) submitted their competitive proposal to the PBAC. On September

23, 1996, the PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day, September 24,
1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its
reservations as regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the
amount that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for
prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine
requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents
submitted by Paircargo and the established prequalification criteria, the PBAC
had found that the challenger, Paircargo, had prequalified to undertake the
project. The Secretary of the DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second envelope of the
Paircargo Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with
respect to Paircargos financial capability, in view of the restrictions imposed by
Section 21-B of the General Banking Act and Sections 1380 and 1381 of the
Manual Regulations for Banks and Other Financial Intermediaries. On
October 7, 1996, AEDC again manifested its objections and requested that it
be furnished with excerpts of the PBAC meeting and the accompanying
technical evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by
AEDC and the Paircargo Consortium containing their respective financial
proposals. Both proponents offered to build the NAIA Passenger Terminal III
for at least $350 million at no cost to the government and to pay the
government:5% share in gross revenues for the first five years of operation,
7.5% share in gross revenues for the next ten years of operation, and 10%

share in gross revenues for the last ten years of operation, in accordance with
the Bid Documents. However, in addition to the foregoing, AEDC offered to
pay the government a total of P135 million as guaranteed payment for 27
years while Paircargo Consortium offered to pay the government a total
of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price
proposal submitted by the Paircargo Consortium, and gave AEDC 30 working
days or until November 28, 1996 within which to match the said bid,
otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then
DOTC Secretary Amado Lagdameo, on December 11, 1996, issued a notice
to Paircargo Consortium regarding AEDCs failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine
International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to
PIATCO and reiterated its objections as regards the prequalification of
PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the
second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a
Petition for Declaration of Nullity of the Proceedings, Mandamus and
Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the
voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as
Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate
the approval, on a no-objection basis, of the BOT agreement between the
DOTC and PIATCO. As the ad referendum gathered only four (4) of the
required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to
PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo
T. Enrile, and PIATCO, through its President, Henry T. Go, signed the
Concession Agreement for the Build-Operate-and-Transfer Arrangement of
the Ninoy Aquino International Airport Passenger Terminal III (1997
Concession Agreement).The Government granted PIATCO the franchise to
operate and maintain the said terminal during the concession period and to
collect the fees, rentals and other charges in accordance with the rates or

schedules stipulated in the 1997 Concession Agreement. The Agreement

provided that the concession period shall be for twenty-five (25) years
commencing from the in-service date, and may be renewed at the option of
the Government for a period not exceeding twenty-five (25) years. At the end
of the concession period, PIATCO shall transfer the development facility to
MIAA.
On November 26, 1998, the Government and PIATCO signed an
Amended and Restated Concession Agreement (ARCA). Among the
provisions of the 1997 Concession Agreement that were amended by the
ARCA were: Sec. 1.11 pertaining to the definition of certificate of completion;
Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing
with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04
concerning the assignment by Concessionaire of its interest in the
Development Facility; Sec. 5.08 (c) dealing with the proceeds of
Concessionaires insurance; Sec. 5.10 with respect to the temporary take-over
of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other
imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the
periodic adjustment of public utility fees and charges; the entire Article VIII
concerning the provisions on the termination of the contract; and Sec. 10.02
providing for the venue of the arbitration proceedings in case a dispute or
controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to
the ARCA. The First Supplement was signed on August 27, 1999; the Second
Supplement on September 4, 2000; and the Third Supplement on June 22,
2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA
defining Revenues or Gross Revenues; Sec. 2.05 (d) of the ARCA referring to
the obligation of MIAA to provide sufficient funds for the upkeep, maintenance,
repair and/or replacement of all airport facilities and equipment which are
owned or operated by MIAA; and further providing additional special
obligations on the part of GRP aside from those already enumerated in Sec.
2.05 of the ARCA. The First Supplement also provided a stipulation as
regards the construction of a surface road to connect NAIA Terminal II and
Terminal III in lieu of the proposed access tunnel crossing Runway 13/31; the
swapping of obligations between GRP and PIATCO regarding the
improvement of Sales Road; and the changes in the timetable. It also
amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal
Fees; Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec.
6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in
Gross Revenues.

The Second Supplement to the ARCA contained provisions concerning the

clearing, removal, demolition or disposal of subterranean structures
uncovered or discovered at the site of the construction of the terminal by the
Concessionaire. It defined the scope of works; it provided for the procedure
for the demolition of the said structures and the consideration for the same
which the GRP shall pay PIATCO; it provided for time extensions, incremental
and consequential costs and losses consequent to the existence of such
structures; and it provided for some additional obligations on the part of
PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the
Concessionaire as regards the construction of the surface road connecting
Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and
operation of the NAIA Terminals I and II, had existing concession contracts
with various service providers to offer international airline airport services,
such as in-flight catering, passenger handling, ramp and ground support,
aircraft maintenance and provisions, cargo handling and warehousing, and
other services, to several international airlines at the NAIA. Some of these
service providers are the Miascor Group, DNATA-Wings Aviation Systems
Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together
with Philippine Airlines (PAL), are the dominant players in the industry with an
aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service
providers, claiming that they stand to lose their employment upon the
implementation of the questioned agreements, filed before this Court a
petition for prohibition to enjoin the enforcement of said agreements.
[2]

On October 15, 2002, the service providers, joining the cause of the
petitioning workers, filed a motion for intervention and a petition-inintervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez
and Constantino Jaraula filed a similar petition with this Court.
[3]

On November 6, 2002, several employees of the MIAA likewise filed a

petition assailing the legality of the various agreements.
[4]

On December 11, 2002. another group of Congressmen, Hon. Jacinto V.

Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C.
Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O.
Macaranbon, moved to intervene in the case as Respondents-

Intervenors. They filed their Comment-In-Intervention defending the validity of

the assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria
Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden
Shell Export Awards at Malacaang Palace, stated that she will not honor
(PIATCO) contracts which the Executive Branchs legal offices have concluded
(as) null and void.
[5]

Respondent PIATCO filed its Comments to the present petitions on

November 7 and 27, 2002. The Office of the Solicitor General and the Office
of the Government Corporate Counsel filed their respective Comments in
behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After
the oral argument, the Court then resolved in open court to require the parties
to file simultaneously their respective Memoranda in amplification of the
issues heard in the oral arguments within 30 days and to explore the
possibility of arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and
the Office of the Government Corporate Counsel prayed that the present
petitions be given due course and that judgment be rendered declaring the
1997 Concession Agreement, the ARCA and the Supplements thereto void for
being contrary to the Constitution, the BOT Law and its Implementing Rules
and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March
4, 2003 PIATCO commenced arbitration proceedings before the International
Chamber of Commerce, International Court of Arbitration (ICC) by filing a
Request for Arbitration with the Secretariat of the ICC against the Government
of the Republic of the Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of resolving
complicated issues made difficult by their intersecting legal and economic
implications. The Court is aware of the far reaching fall out effects of the ruling
which it makes today. For more than a century and whenever the exigencies
of the times demand it, this Court has never shirked from its solemn duty to
dispense justice and resolve actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there
has been grave abuse of discretion amounting to lack or excess of jurisdiction.
To be sure, this Court will not begin to do otherwise today.
[6]

We shall first dispose of the procedural issues raised by respondent

PIATCO which they allege will bar the resolution of the instant controversy.

Petitioners Legal Standing to File

the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service
providers having separate concession contracts with MIAA and continuing
service agreements with various international airlines to provide in-flight
catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing and other services. Also
included as petitioners are labor unions MIASCOR Workers Union-National
Labor Union and Philippine Airlines Employees Association. These petitioners
filed the instant action for prohibition as taxpayers and as parties whose rights
and interests stand to be violated by the implementation of the PIATCO
Contracts.
[7]

Petitioners-Intervenors in the same case are all corporations organized

and existing under Philippine laws engaged in the business of providing inflight catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing and other
services to several international airlines at the Ninoy Aquino International
Airport. Petitioners-Intervenors allege that as tax-paying international airline
and airport-related service operators, each one of them stands to be
irreparably injured by the implementation of the PIATCO Contracts. Each of
the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they allege
are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and
Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union
and accredited as the sole and exclusive bargaining agent of all the
employees in MIAA. Petitioners anchor their petition for prohibition on the
nullity of the contracts entered into by the Government and PIATCO regarding
the build-operate-and-transfer of the NAIA IPT III. They filed the petition as
taxpayers and persons who have a legitimate interest to protect in the
implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts
contain stipulations which directly contravene numerous provisions of the
Constitution, specific provisions of the BOT Law and its Implementing Rules
and Regulations, and public policy. Petitioners contend that the DOTC and the
MIAA, by entering into said contracts, have committed grave abuse of
discretion amounting to lack or excess of jurisdiction which can be remedied

only by a writ of prohibition, there being no plain, speedy or adequate remedy

in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession
Agreement and the ARCA which grant PIATCO the exclusive right to operate a
commercial international passenger terminal within the Island of Luzon,
except those international airports already existing at the time of the execution
of the agreement. The contracts further provide that upon the commencement
of operations at the NAIA IPT III, the Government shall cause the closure of
Ninoy Aquino International Airport Passenger Terminals I and II as
international passenger terminals. With respect to existing concession
agreements between MIAA and international airport service providers
regarding certain services or operations, the 1997 Concession Agreement and
the ARCA uniformly provide that such services or operations will not be
carried over to the NAIA IPT III and PIATCO is under no obligation to permit
such carry over except through a separate agreement duly entered into with
PIATCO.
[8]

With respect to the petitioning service providers and their employees,

upon the commencement of operations of the NAIA IPT III, they allege that
they will be effectively barred from providing international airline airport
services at the NAIA Terminals I and II as all international airlines and
passengers will be diverted to the NAIA IPT III. The petitioning service
providers will thus be compelled to contract with PIATCO alone for such
services, with no assurance that subsisting contracts with MIAA and other
international airlines will be respected. Petitioning service providers stress that
despite the very competitive market, the substantial capital investments
required and the high rate of fees, they entered into their respective contracts
with the MIAA with the understanding that the said contracts will be in force for
the stipulated period, and thereafter, renewed so as to allow each of the
petitioning service providers to recoup their investments and obtain a
reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I
and II and of MIAA on the other hand allege that with the closure of the NAIA
Terminals I and II as international passenger terminals under the PIATCO
Contracts, they stand to lose employment.
The question on legal standing is whether such parties have alleged such
a personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the court
so largely depends for illumination of difficult constitutional questions.
Accordingly, it has been held that the interest of a person assailing the
[9]

constitutionality of a statute must be direct and personal. He must be able to

show, not only that the law or any government act is invalid, but also that he
sustained or is in imminent danger of sustaining some direct injury as a result
of its enforcement, and not merely that he suffers thereby in some indefinite
way. It must appear that the person complaining has been or is about to be
denied some right or privilege to which he is lawfully entitled or that he is
about to be subjected to some burdens or penalties by reason of the statute or
act complained of.
[10]

We hold that petitioners have the requisite standing. In the abovementioned cases, petitioners have a direct and substantial interest to protect
by reason of the implementation of the PIATCO Contracts. They stand to lose
their source of livelihood, a property right which is zealously protected by the
Constitution. Moreover, subsisting concession agreements between MIAA and
petitioners-intervenors and service contracts between international airlines
and petitioners-intervenors stand to be nullified or terminated by the operation
of the NAIA IPT III under the PIATCO Contracts. The financial prejudice
brought about by the PIATCO Contracts on petitioners and petitionersintervenors in these cases are legitimate interests sufficient to confer on them
the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as
members of the House of Representatives, citizens and taxpayers. They
allege that as members of the House of Representatives, they are especially
interested in the PIATCO Contracts, because the contracts compel the
Government and/or the House of Representatives to appropriate funds
necessary to comply with the provisions therein. They cite provisions of the
PIATCO Contracts which require disbursement of unappropriated amounts in
compliance with the contractual obligations of the Government. They allege
that the Government obligations in the PIATCO Contracts which compel
government expenditure without appropriation is a curtailment of their
prerogatives as legislators, contrary to the mandate of the Constitution that
[n]o money shall be paid out of the treasury except in pursuance of an
appropriation made by law.
[11]

[12]

Standing is a peculiar concept in constitutional law because in some

cases, suits are not brought by parties who have been personally injured by
the operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Although we are
not unmindful of the cases of Imus Electric Co. v. Municipality of
Imus and Gonzales v. Raquiza wherein this Court held that appropriation
[13]

[14]

must be made only on amounts immediately demandable, public interest

demands that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus
standi to file the instant petition. In Kilosbayan, Inc. v. Guingona, this
Court held [i]n line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and nonprofit civic organizations were allowed to initiate and prosecute actions before
this Court to question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or instrumentalities.
Further, insofar as taxpayers' suits are concerned . . . (this Court) is not
devoid of discretionas to whether or not it should be entertained. As
such . . . even if, strictly speaking, they [the petitioners] are not covered by the
definition, it is still within the wide discretion of the Court to waive the
requirement and so remove the impediment to its addressing and resolving
the serious constitutional questions raised. In view of the serious legal
questions involved and their impact on public interest, we resolve to grant
standing to the petitioners.
[15]

[16]

[17]

[18]

Other Procedural Matters

Respondent PIATCO further alleges that this Court is without jurisdiction to
review the instant cases as factual issues are involved which this Court is illequipped to resolve. Moreover, PIATCO alleges that submission of this
controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent jurisdiction
with this Court with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had before the
trial courts.
After a thorough study and careful evaluation of the issues involved, this
Court is of the view that the crux of the instant controversy involves
significantlegal questions. The facts necessary to resolve these legal
questions are well established and, hence, need not be determined by a trial
court.
The rule on hierarchy of courts will not also prevent this Court from
assuming jurisdiction over the cases at bar. The said rule may be
relaxed when the redress desired cannot be obtained in the appropriate
courts or where exceptional and compelling circumstances justify
availment of a remedy within and calling for the exercise of this Courts
primary jurisdiction.
[19]

It is easy to discern that exceptional circumstances exist in the cases at

bar that call for the relaxation of the rule. Both petitioners and respondents

agree that these cases are of transcendental importance as they involve the
construction and operation of the countrys premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression
and they entail the proper legal interpretation of key provisions of the
Constitution, the BOT Law and its Implementing Rules and Regulations. Thus,
considering the nature of the controversy before the Court, procedural bars
may be lowered to give way for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The
Court is aware that arbitration proceedings pursuant to Section 10.02 of the
ARCA have been filed at the instance of respondent PIATCO. Again, we hold
that the arbitration step taken by PIATCO will not oust this Court of its
jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals, even after finding
that the arbitration clause in the Distributorship Agreement in question is valid
and the dispute between the parties is arbitrable, this Court affirmed the trial
courts decision denying petitioners Motion to Suspend Proceedings pursuant
to the arbitration clause under the contract. In so ruling, this Court held that as
contracts produce legal effect between the parties, their assigns and heirs,
only the parties to the Distributorship Agreement are bound by its terms,
including the arbitration clause stipulated therein. This Court ruled that
arbitration proceedings could be called for but only with respect to the parties
to the contract in question. Considering that there are parties to the case who
are neither parties to the Distributorship Agreement nor heirs or assigns of the
parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal
Realty Corporation, held that to tolerate the splitting of proceedings by
allowing arbitration as to some of the parties on the one hand and trial for the
others on the other hand would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay. Thus, we ruled that
the interest of justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
[20]

[21]

[22]

It is established that petitioners in the present cases who have

presented legitimate interests in the resolution of the controversy are not
parties to the PIATCO Contracts. Accordingly, they cannot be bound by the
arbitration clause provided for in the ARCA and hence, cannot be compelled
to submit to arbitration proceedings. A speedy and decisive resolution of all
the critical issues in the present controversy, including those raised by

petitioners, cannot be made before an arbitral tribunal. The object of

arbitration is precisely to allow an expeditious determination of a dispute. This
objective would not be met if this Court were to allow the parties to settle the
cases by arbitration as there are certain issues involving non-parties to the
PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I

Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCOs
predecessor, was not a duly pre-qualified bidder on the unsolicited proposal
submitted by AEDC as the Paircargo Consortium failed to meet the financial
capability required under the BOT Law and the Bid Documents. They allege
that in computing the ability of the Paircargo Consortium to meet the minimum
equity requirements for the project, the entire net worth of Security Bank, a
member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum
dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal
stating that the Paircargo Consortium is found to have a combined net worth
of P3,900,000,000.00, sufficient to meet the equity requirements of the
project. The said Memorandum was in response to a letter from Mr. Antonio
Henson of AEDC to President Fidel V. Ramos questioning the financial
capability of the Paircargo Consortium on the ground that it does not have the
financial resources to put up the required minimum equity
of P2,700,000,000.00. This contention is based on the restriction under R.A.
No. 337, as amended or the General Banking Act that a commercial bank
cannot invest in any single enterprise in an amount more than 15% of its net
worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that
financial capability will be evaluated based on total financial capability of all the
member companies of the [Paircargo] Consortium. In this connection, the Challenger
was found to have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To impose that as a
requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial
capability. As stated in Bid Bulletin No. 3, financial capability may also be established

by testimonial letters issued by reputable banks. The Challenger has complied with
this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the
amount of the money to be used to answer the required thirty percent (30%) equity of
the challenger but rather to be used in establishing if there is enough basis to believe
that the challenger can comply with the required 30% equity. In fact, proof of
sufficient equity is required as one of the conditions for award of contract (Section
12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same
document).
[23]

Under the BOT Law, in case of a build-operate-and-transfer arrangement,

the contract shall be awarded to the bidder who, having satisfied
the minimum
financial,
technical,
organizational
and
legal
standards required by the law, has submitted the lowest bid and most
favorable terms of the project. Further, the 1994 Implementing Rules and
Regulations of the BOT Law provide:
[24]

Section 5.4 Pre-qualification Requirements.

.
c. Financial Capability: The project proponent must have adequate capability to
sustain the financing requirements for the detailed engineering design, construction
and/or operation and maintenance phases of the project, as the case may be. For
purposes of pre-qualification, this capability shall be measured in terms of (i) proof of
the ability of the project proponent and/or the consortium to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are
banking with them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall determine on a
project-to-project basis and before pre-qualification, the minimum amount of equity
needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated
August 16, 1996 amending the financial capability requirements for prequalification of the project proponent as follows:
6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the
minimum technical and financial requirements provided in the Bid Documents and in
the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be
based shall be thirty percent (30%) of the project cost instead of the twenty
percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate
with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.
Accordingly, based on the above provisions of law, the Paircargo
Consortium or any challenger to the unsolicited proposal of AEDC has to
show that it possesses the requisite financial capability to undertake the
project in the minimum amount of 30% of the project cost through (i)
proof of the ability to provide a minimum amount of equity to the project, and
(ii) a letter testimonial from reputable banks attesting that the project
proponent or members of the consortium are banking with them, that they are
in good financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00, the Paircargo Consortium had to show to the
satisfaction of the PBAC that it had the ability to provide the minimum equity
for the project in the amount of at least P2,755,095,000.00.
[25]

Paircargos Audited Financial Statements as of 1993 and 1994 indicated

that it had a net worth of P2,783,592.00 and P3,123,515.00 respectively.
PAGS Audited Financial Statements as of 1995 indicate that it has
approximately P26,735,700.00 to invest as its equity for the project. Security
Banks Audited Financial Statements as of 1995 show that it has a net worth
equivalent to its capital funds in the amount of P3,523,504,377.00.
[26]

[27]

[28]

We agree with public respondents that with respect to Security Bank,

the entire amount of its net worth could not be invested in a single
undertaking or enterprise, whether allied or non-allied in accordance with the
provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding,
the Monetary Board, whenever it shall deem appropriate and necessary to further
national development objectives or support national priority projects, may authorize
a commercial bank, a bank authorized to provide commercial banking services,
as well as a government-owned and controlled bank, to operate under an
expanded commercial banking authority and by virtue thereof exercise, in

addition to powers authorized for commercial banks, the powers of

an Investment House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the equity in a
financial intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the total investment in
equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the
equity investment in any one enterprise whether allied or non-allied shall not
exceed fifteen percent (15%) of the net worth of the bank; (c) the equity
investment of the bank, or of its wholly or majority-owned subsidiary, in a single nonallied undertaking shall not exceed thirty-five percent (35%) of the total equity in the
enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in
thatenterprise; and (d) the equity investment in other banks shall be deducted from the
investing bank's net worth for purposes of computing the prescribed ratio of net worth
to risk assets.
.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and
restrictions shall also apply regarding equity investments of banks.
a. In any single enterprise. The equity investments of banks in any single enterprise
shall not exceed at any time fifteen percent (15%) of the net worth of the investing
bank as defined in Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the
Paircargo Consortium is only P528,525,656.55, representing 15% of its entire
net worth. The total net worth therefore of the Paircargo Consortium, after
considering the maximum amounts that may be validly invested by each of
its members is P558,384,871.55 or only 6.08% of the project cost, an
amount substantially less than the prescribed minimum equity investment
required for the project in the amount of P2,755,095,000.00 or 30% of the
project cost.
[29]

The purpose of pre-qualification in any public bidding is to determine, at

the earliest opportunity, the ability of the bidder to undertake the project. Thus,
with respect to the bidders financial capacity at the pre-qualification stage, the
law requires the government agency to examine and determine the ability of
the bidder to fund the entire cost of the project by considering the maximum
amounts that each bidder may invest in the project at the time of prequalification.

The PBAC has determined that any prospective bidder for the
construction, operation and maintenance of the NAIA IPT III project should
prove that it has the ability to provide equity in the minimum amount of 30% of
the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed
in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC
should determine the maximum amounts that each member of the
consortium may commit for the construction, operation and maintenance of
the NAIA IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amount which may be invested by it would only
be 15% of its net worth in view of the restrictions imposed by the General
Banking Act. Disregarding the investment ceilings provided by applicable law
would not result in a proper evaluation of whether or not a bidder is prequalified to undertake the project as for all intents and purposes, such ceiling
or legal restriction determines the true maximum amount which a bidder
may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to
undertake the project requires an evaluation of the financial capacity of the
said bidder at the time the bid is submitted based on the required
documents presented by the bidder. The PBAC should not be allowed to
speculate on thefuture financial ability of the bidder to undertake the project
on the basis of documents submitted. This would open doors to abuse and
defeat the very purpose of a public bidding. This is especially true in the case
at bar which involves the investment of billions of pesos by the project
proponent. The relevant government authority is duty-bound to ensure that the
awardee of the contract possesses the minimum required financial capability
to complete the project. To allow the PBAC to estimate the bidders future
financial capability would not secure the viability and integrity of the project.
A restrictive and conservative application of the rules and procedures of public
bidding is necessary not only to protect the impartiality and regularity of the
proceedings but also to ensure the financial and technical reliability of the
project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the
foundation of a fair and competitive public bidding would be defeated. Strict
observance of the rules, regulations, and guidelines of the bidding process is the
only safeguard to a fair, honest and competitive public bidding.
[30]

Thus, if the maximum amount of equity that a bidder may invest in the
project at the time the bids are submitted falls short of the minimum
amounts required to be put up by the bidder, said bidder should be properly

disqualified. Considering that at the pre-qualification stage, the maximum

amounts which the Paircargo Consortium may invest in the project fell short of
the minimum amounts prescribed by the PBAC, we hold that Paircargo
Consortium was not a qualified bidder. Thus the award of the contract by the
PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant
controversy, as the legal effects of the disqualification of respondent PIATCOs
predecessor would come into play and necessarily result in the nullity of all
the subsequent contracts entered by it in pursuance of the project, the Court
feels that it is necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II

Is the 1997 Concession Agreement valid?

Petitioners and public respondents contend that the 1997 Concession
Agreement is invalid as it contains provisions that substantially depart from
the draft Concession Agreement included in the Bid Documents. They
maintain that a substantial departure from the draft Concession Agreement is
a violation of public policy and renders the 1997 Concession Agreement null
and void.
PIATCO maintains, however, that the Concession Agreement attached to
the Bid Documents is intended to be a draft, i.e., subject to change, alteration
or modification, and that this intention was clear to all participants, including
AEDC, and DOTC/MIAA. It argued further that said intention is expressed in
Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time.
Said amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.
By its very nature, public bidding aims to protect the public interest by
giving the public the best possible advantages through open competition.
Thus:
Competition must be legitimate, fair and honest. In the field of government contract
law, competition requires, not only `bidding upon a common standard, a common
basis, upon the same thing, the same subject matter, the same undertaking,' but also

that it be legitimate, fair and honest; and not designed to injure or defraud the
government.
[31]

An essential element of a publicly bidded contract is that all bidders must

be on equal footing. Not simply in terms of application of the procedural rules
and regulations imposed by the relevant government agency, but more
importantly, on the contract bidded upon. Each bidder must be able to
bid on the same thing. The rationale is obvious. If the winning bidder is
allowed to later include or modify certain provisions in the contract awarded
such that the contract is altered in any material respect, then the essence of
fair competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may
modify the contract and include provisions which are favorable to it that were
not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the
bidders. The specifications in such biddings provide the common ground or basis for
the bidders. The specifications should, accordingly, operate equally or
indiscriminately upon all bidders.
[32]

The same rule was restated by Chief Justice Stuart of the Supreme Court
of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a
contract for public work to the lowest responsible bidder, the proposals and
specifications therefore must be so framed as to permit free and full competition. Nor
can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and
specifications upon which the bids were invited.
[33]

In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its
argument that the draft concession agreement is subject to amendment, the
pertinent portion of which was quoted above, the PBAC also clarified
that [s]aid amendments shall only cover items that would not materially
affect the preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon, such changes must
not constitute substantial or material amendments that would alter the
basic parameters of the contract and would constitute a denial to the
other bidders of the opportunity to bid on the same terms. Hence, the
determination of whether or not a modification or amendment of a contract

bidded out constitutes a substantial amendment rests on whether the contract,

when taken as a whole, would contain substantially different terms and
conditions that would have the effect of altering the technical and/or financial
proposals previously submitted by other bidders. The alterations and
modifications in the contract executed between the government and the
winning bidder must be such as to render such executed contract to be an
entirely different contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc., this
Court quoted with approval the ruling of the trial court that an amendment to a
contract awarded through public bidding, when such subsequent amendment
was made without a new public bidding, is null and void:
[34]

The Court agrees with the contention of counsel for the plaintiffs that the due
execution of a contract after public bidding is a limitation upon the right of the
contracting parties to alter or amend it without another public bidding, for
otherwise what would a public bidding be good for if after the execution of a
contract after public bidding, the contracting parties may alter or amend the
contract, or even cancel it, at their will? Public biddings are held for the protection
of the public, and to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the best terms is awarded
the contract subject of the bid, and it is obvious that such protection and best
possible advantages to the public will disappear if the parties to a contract
executed after public bidding may alter or amend it without another previous
public bidding.
[35]

Hence, the question that comes to fore is this: is the 1997 Concession
Agreement the same agreement that was offered for public bidding, i.e.,
the draft Concession Agreement attached to the Bid Documents? A close
comparison of the draft Concession Agreement attached to the Bid
Documents and the 1997 Concession Agreement reveals that the documents
differ in at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft
Concession Agreement and the 1997 Concession Agreement may be
classified into three distinct categories: (1) fees which are subject to periodic
adjustment of once every two years in accordance with a prescribed
parametric formula and adjustments are made effective only upon written

approval by MIAA; (2) fees other than those included in the first category
which maybe adjusted by PIATCO whenever it deems necessary without need
for consent of DOTC/MIAA; and (3) new fees and charges that may be
imposed by PIATCO which have not been previously imposed or collected at
the Ninoy Aquino International Airport Passenger Terminal I, pursuant to
Administrative Order No. 1, Series of 1993, as amended. The glaring
distinctions between the draft Concession Agreement and the 1997
Concession Agreement lie in the types of fees included in each category and
the extent of the supervision and regulation which MIAA is allowed to exercise
in relation thereto.
For fees under the first category, i.e., those which are subject to periodic
adjustment in accordance with a prescribed parametric formula and effective
only upon written approval by MIAA, the draft Concession
Agreement includes the following:
[36]

(1) aircraft parking fees;

(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to
adjustment and effective upon MIAA approval are classified as Public Utility
Revenues and include:
[37]

(1) aircraft parking fees;

(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA
approval is best appreciated in relation to fees included in the second
categoryidentified above. Under the 1997 Concession Agreement, fees

which PIATCO may adjust whenever it deems necessary without need for
consent of DOTC/MIAA are Non-Public Utility Revenues and is defined as all
other income not classified as Public Utility Revenues derived from operations
of the Terminal and the Terminal Complex. Thus, under the 1997 Concession
Agreement, groundhandling fees, rentals from airline offices and porterage
fees are no longer subject to MIAA regulation.
[38]

Further, under Section 6.03 of the draft Concession Agreement, MIAA

reserves the right to regulate (1) lobby and vehicular parking fees and (2)
other new fees and charges that may be imposed by PIATCO. Such
regulation may be made by periodic adjustment and is effective only upon
written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft
parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices,
check-in-counter rentals and porterage fees shall be allowed only once every two
years and in accordance with the Parametric Formula attached hereto as Annex F.
Provided that adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the MIAA, shall be
contingent only on the conformity of the adjustments with the above said parametric
formula. The first adjustment shall be made prior to the In-Service Date of the
Terminal.
The MIAA reserves the right to regulate under the foregoing terms and
conditions the lobby and vehicular parking fees and other new fees and charges
as contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the
airport shall be deprived of a free option for the services they cover.
[39]

On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and charges
constituting Non-Public Utility Revenues in order to ensure that End Users are not
unreasonably deprived of services. While the vehicular parking fee, porterage fee
and greeter/well wisher fee constitute Non-Public Utility Revenues of
Concessionaire, GRP may intervene and require Concessionaire to explain and
justify the fee it may set from time to time, if in the reasonable opinion of GRP the
said fees have become exorbitant resulting in the unreasonable deprivation of End
Users of such services.
[40]

Thus, under the 1997 Concession Agreement, with respect to (1)

vehicular parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that
MIAA can do is to require PIATCO to explain and justify the fees set by
PIATCO. In the draft Concession Agreement, vehicular parking fee is
subject to MIAA regulation and approval under the second paragraph of
Section 6.03 thereof while porterage fee is covered by the first paragraph of
the same provision. There is an obvious relaxation of the extent of control and
regulation by MIAA with respect to the particular fees that may be charged by
PIATCO.
Moreover, with respect to the third category of fees that may be imposed
and collected by PIATCO, i.e., new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the Ninoy
Aquino International Airport Passenger Terminal I, under Section 6.03 of
the draft Concession Agreement MIAA has reserved the right to regulate the
same under the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in accordance with
a prescribed parametric formula and effective only upon written approval by
MIAA. However, under the 1997 Concession Agreement, adjustment of fees
under the third category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO, as
shown earlier, this was included within the category of Public Utility Revenues
under the 1997 Concession Agreement. This classification is significant
because under the 1997 Concession Agreement, Public Utility Revenues are
subject to an Interim Adjustment of fees upon the occurrence of certain
extraordinary events specified in the agreement. However, under the draft
Concession Agreement, terminal fees are not included in the types of fees
that may be subject to Interim Adjustment.
[41]

[42]

[43]

Finally, under the 1997 Concession Agreement, Public Utility Revenues,

except terminal fees, are denominated in US Dollars while payments to the
Government are in Philippine Pesos. In the draft Concession Agreement, no
such stipulation was included. By stipulating that Public Utility Revenues will
be paid to PIATCO in US Dollars while payments by PIATCO to the
Government are in Philippine currency under the 1997 Concession
Agreement, PIATCO is able to enjoy the benefits of depreciations of the
Philippine Peso, while being effectively insulated from the detrimental effects
of exchange rate fluctuations.
[44]

When taken as a whole, the changes under the 1997 Concession

Agreement with respect to reduction in the types of fees that are subject to
MIAA regulation and the relaxation of such regulation with respect to other

fees are significant amendments that substantially distinguish the draft

Concession Agreement from the 1997 Concession Agreement. The 1997
Concession Agreement, in this respect, clearly gives PIATCO more
favorable terms than what was available to other bidders at the time the
contract was bidded out. It is not very difficult to see that the changes in the
1997 Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the contract
was offered for bidding. It cannot be denied that under the 1997 Concession
Agreement only Public Utility Revenues are subject to MIAA regulation.
Adjustments of all other fees imposed and collected by PIATCO are
entirely within its control. Moreover, with respect to terminal fees, under the
1997 Concession Agreement, the same is further subject to Interim
Adjustments not previously stipulated in the draft Concession Agreement.
Finally, the change in the currency stipulated for Public Utility Revenues under
the 1997 Concession Agreement, except terminal fees, gives PIATCO an
added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its
obligations to creditors who have provided, loaned or advanced funds for the
NAIA IPT III project does not result in the assumption by the Government of
these liabilities. In fact, nowhere in the said contract does default of PIATCOs
loans figure in the agreement. Such default does not directly result in any
concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
.
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default has resulted in the acceleration of the payment due date of
the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall,
within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to
be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator

acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development Facility
with the concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
take over the operation of the Development Facility. If the concession company
should elect to designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator acceptable to
GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end of
the 180-day period take over the Development Facility and assume Attendant
Liabilities.
The term Attendant Liabilities under the 1997 Concession Agreement is
defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding
in the books of the Concessionaire as owing to Unpaid Creditors who have
provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by Concessionaire to
its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the
definition of Attendant Liabilities, default by PIATCO of its loans used to
finance the NAIA IPT III project triggers the occurrence of certain events
that leads to the assumption by the Government of the liability for the
loans. Only in one instance may the Government escape the assumption of
PIATCOs liabilities, i.e., when the Government so elects and allows a qualified
operator to take over as Concessionaire. However, this circumstance is
dependent on the existence and availability of a qualified operator who
is willing to take over the rights and obligations of PIATCO under the
contract, a circumstance that is not entirely within the control of the
Government.
Without going into the validity of this provision at this juncture, suffice it to
state that Section 4.04 of the 1997 Concession Agreement may be considered
a form of security for the loans PIATCO has obtained to finance the project, an

option that was not made available in the draft Concession Agreement.
Section 4.04 is an important amendment to the 1997 Concession Agreement
because it grants PIATCO a financial advantage or benefit which was not
previously made available during the bidding process. This financial
advantage is a significant modification that translates to better terms and
conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure
acknowledge that the draft Concession Agreement is subject to amendment
because the Bid Documents permit financing or borrowing. They claim that it
was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the
BOT Law to allow the project proponent or the winning bidder to obtain
financing for the project, especially in this case which involves the
construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would involve
a substantial amount of investment. It is therefore inevitable for the awardee
of the contract to seek alternate sources of funds to support the project. Be
that as it may, this Court maintains that amendments to the contract bidded
upon should always conform to the general policy on public bidding if such
procedure is to be faithful to its real nature and purpose. By its very nature
and characteristic, competitive public bidding aims to protect the public
interest by giving the public the best possible advantages through open
competition. It has been held that the three principles in public bidding are
(1) the offer to the public; (2) opportunity for competition; and (3) a basis for
the exact comparison of bids. A regulation of the matter which excludes any of
these factors destroys the distinctive character of the system and thwarts the
purpose of its adoption. These are the basic parameters which every
awardee of a contract bidded out must conform to, requirements of financing
and borrowing notwithstanding. Thus, upon a concrete showing that, as in this
case, the contract signed by the government and the contract-awardee is an
entirely different contract from the contract bidded, courts should not hesitate
to strike down said contract in its entirety for violation of public policy on public
bidding. A strict adherence on the principles, rules and regulations on public
bidding must be sustained if only to preserve the integrity and the faith of the
general public on the procedure.
[45]

[46]

Public bidding is a standard practice for procuring government contracts

for public service and for furnishing supplies and other materials. It aims to
secure for the government the lowest possible price under the most favorable
terms and conditions, to curtail favoritism in the award of government

contracts and avoid suspicion of anomalies and it places all bidders in equal
footing. Any government action which permits any substantial variance
between the conditions under which the bids are invited and the
contract executed after the award thereof is a grave abuse of discretion
amounting to lack or excess of jurisdiction which warrants proper
judicial action.
[47]

In view of the above discussion, the fact that the foregoing substantial
amendments were made on the 1997 Concession Agreement renders the
same null and void for being contrary to public policy. These amendments
convert the 1997 Concession Agreement to an entirely different
agreement from the contract bidded out or the draft Concession Agreement. It
is not difficult to see that the amendments on (1) the types of fees or charges
that are subject to MIAA regulation or control and the extent thereof and (2)
the assumption by the Government, under certain conditions, of the liabilities
of PIATCO directly translates concrete financial advantages to PIATCO
that were previously not available during the bidding process. These
amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions which
provide financial benefit to PIATCO which may have altered the technical and
financial parameters of other bidders had they known that such terms were
available.
III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997
Concession Agreement provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default resulted in the acceleration of the payment due date of the
Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall
within one hundred eighty (180) days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified
to be substituted as concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a qualified operator
acceptable to GRP to operate the Development Facility, likewise under the terms and

conditions of this Agreement; Provided, that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development
Facility with the concomitant assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
takeover the operation of the Development Facility. If the concession company should
elect to designate an operator for the Development Facility, the concession company
shall in good faith identify and designate a qualified operator acceptable to GRP
within one hundred eighty (180) days from receipt of GRPs written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end
of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid Creditors who
have provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed
by Concessionaire to its suppliers, contractors and sub-contractors.
[48]

It is clear from the above-quoted provisions that Government, in the

event that PIATCO defaults in its loan obligations, is obligated to pay all
amounts recorded and from time to time outstanding from the books of
PIATCO which the latter owes to its creditors. These amounts include all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses. This obligation of the
Government to pay PIATCOs creditors upon PIATCOs default would arise if
the Government opts to take over NAIA IPT III. It should be noted, however,
that even if the Government chooses the second option, which is to allow
PIATCOs unpaid creditors operate NAIA IPT III, the Government is still at a
risk of being liable to PIATCOs creditors should the latter be unable to
designate a qualified operator within the prescribed period. In
effect, whatever option the Government chooses to take in the event of
PIATCOs failure to fulfill its loan obligations, the Government is still at a
risk of assuming PIATCOs outstanding loans. This is due to the fact that
[49]

[50]

[51]

the Government would only be free from assuming PIATCOs debts if the
unpaid creditors would be able to designate a qualified operator within the
period provided for in the contract. Thus, the Governments assumption of
liability is virtually out of its control. The Government under the
circumstances provided for in the 1997 Concession Agreement is at the mercy
of the existence, availability and willingness of a qualified operator. The above
contractual provisions constitute a direct government guarantee which is
prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of
government funds to construct the infrastructure and development projects
necessary for economic growth and development. This is why private sector
resources are being tapped in order to finance these projects. The BOT law
allows the private sector to participate, and is in fact encouraged to do so by
way of incentives, such as minimizing the unstable flow of returns, provided
that the government would not have to unnecessarily expend scarcely
available funds for the project itself. As such, direct guarantee, subsidy and
equity by the government in these projects are strictly prohibited. This is but
logical for if the government would in the end still be at a risk of paying
the debts incurred by the private entity in the BOT projects, then the
purpose of the law is subverted.
[52]

[53]

Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee An agreement whereby the government or any of its
agencies or local government units assume responsibility for the repayment of debt
directly incurred by the project proponent in implementing the project in case of a
loan default.
Clearly by providing that the Government assumes the attendant liabilities,
which consists of PIATCOs unpaid debts, the 1997 Concession Agreement
provided for a direct government guarantee for the debts incurred by PIATCO
in the implementation of the NAIA IPT III project. It is of no moment that the
relevant sections are subsumed under the title of assignment. The provisions
providing for direct government guarantee which is prohibited by law is clear
from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did
not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I,
Section 1.06, of the ARCA provides:
Section 4.04 Security
.

(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith
and enter into direct agreement with the Senior Lenders, or with an agent of such
Senior Lenders (which agreement shall be subject to the approval of the Bangko
Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and
Senior Lenders, with regard, inter alia, to the following parameters:
.
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation
owed to the Senior Lenders, and as a result thereof the Senior Lenders have become
entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to
notify GRP of the same, and without prejudice to any other rights of the Senior
Lenders or any Senior Lenders agent may have (including without limitation under
security interests granted in favor of the Senior Lenders), to either in good faith
identify and designate a nominee which is qualified under sub-clause (viii)(y) below
to operate the Development Facility [NAIA Terminal 3] or transfer the
Concessionaires [PIATCO] rights and obligations under this Agreement to a transferee
which is qualified under sub-clause (viii) below;
.
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable
to designate a nominee or effect a transfer in terms and conditions satisfactory to the
Senior Lenders within one hundred eighty (180) days after giving GRP notice as
referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall
endeavor in good faith to enter into any other arrangement relating to the
Development Facility [NAIA Terminal 3] (other than a turnover of the Development
Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180)
days. If no agreement relating to the Development Facility [NAIA Terminal 3] is
arrived at by GRP and the Senior Lenders within the said 180-day period, then at the
end thereof the Development Facility [NAIA Terminal 3] shall be transferred by
the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a
termination payment to Concessionaire [PIATCO] equal to the Appraised Value
(as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the
sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof,
this Agreement shall be deemed terminated upon the transfer of the Development
Facility [NAIA Terminal 3] to GRP pursuant hereto;
.
Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable

evidence from time to time owed or which may become owing by Concessionaire
[PIATCO] to Senior Lenders or any other persons or entities who have provided,
loaned, or advanced funds or provided financial facilities to Concessionaire
[PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or trustees of such
persons or entities), whether payable at maturity, by acceleration or otherwise, and
further including amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-contractors.
[54]

It is clear from the foregoing contractual provisions that in the event that
PIATCO fails to fulfill its loan obligations to its Senior Lenders, the
Government is obligated to directly negotiate and enter into an agreement
relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint
a qualified nominee or transferee who will take the place of PIATCO. If the
Senior Lenders and the Government are unable to enter into an agreement
after the prescribed period, the Government must then pay PIATCO, upon
transfer of NAIA IPT III to the Government, termination payment equal to the
appraised value of the project or the value of the attendant liabilities
whichever is greater. Attendant liabilities as defined in the ARCA includes all
amounts owed or thereafter may be owed by PIATCO not only to the Senior
Lenders with whom PIATCO has defaulted in its loan obligations but to all
other persons who may have loaned, advanced funds or provided any other
type of financial facilities to PIATCO for NAIA IPT III. The amount of PIATCOs
debt that the Government would have to pay as a result of PIATCOs default in
its loan obligations -- in case no qualified nominee or transferee is appointed
by the Senior Lenders and no other agreement relating to NAIA IPT III has
been reached between the Government and the Senior Lenders -- includes,
but is not limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at maturity,
by acceleration or otherwise.
[55]

It is clear from the foregoing that the ARCA provides for a direct
guarantee by the government to pay PIATCOs loans not only to its
Senior Lenders but all other entities who provided PIATCO funds or
services upon PIATCOs default in its loan obligation with its Senior
Lenders. The fact that the Governments obligation to pay PIATCOs lenders
for the latters obligation would only arise after the Senior Lenders fail to
appoint a qualified nominee or transferee does not detract from the fact that,
should the conditions as stated in the contract occur, the ARCA still obligates
the Government to pay any and all amounts owed by PIATCO to its lenders in

connection with NAIA IPT III. Worse, the conditions that would make the
Government liable for PIATCOs debts is triggered by PIATCOs own default of
its loan obligations to its Senior Lenders to which loan contracts the
Government was never a party to. The Government was not even given an
option as to what course of action it should take in case PIATCO defaulted in
the payment of its senior loans. The Government, upon PIATCOs default,
would be merely notified by the Senior Lenders of the same and it is the
Senior Lenders who are authorized to appoint a qualified nominee or
transferee. Should the Senior Lenders fail to make such an appointment, the
Government is then automatically obligated to directly deal and negotiate with
the Senior Lenders regarding NAIA IPT III. The only way the Government
would not be liable for PIATCOs debt is for a qualified nominee or transferee
to be appointed in place of PIATCO to continue the construction, operation
and maintenance of NAIA IPT III. This pre-condition, however, will not take the
contract out of the ambit of a direct guarantee by the government as the
existence, availability and willingness of a qualified nominee or transferee is
totally out of the governments control. As such the Government is virtually
at the mercy of PIATCO (that it would not default on its loan obligations to its
Senior Lenders), the Senior Lenders (that they would appoint a qualified
nominee or transferee or agree to some other arrangement with the
Government) and the existence of a qualified nominee or transferee who is
able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of
the policy considerations behind the BOT Law. Clearly, in the present
case, the ARCA obligates the Government to pay for all loans, advances and
obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan
obligations to its Senior Lenders and the latter fails to appoint a qualified
nominee or transferee. This in effect would make the Government liable for
PIATCOs loans should the conditions as set forth in the ARCA arise. This is a
form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an
unsolicited proposal for a BOT project may be accepted, the following
conditions must first be met: (1) the project involves a new concept in
technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by publication other
interested parties to a public bidding and conducted the same. The failure to
meet any of the above conditions will result in the denial of the proposal. It is
further provided that the presence of direct government guarantee, subsidy or
[56]

equity will necessarily disqualify a proposal from being treated and accepted
as an unsolicited proposal. The BOT Law clearly and strictly prohibits direct
government guarantee, subsidy and equity in unsolicited proposals that the
mere inclusion of a provision to that effect is fatal and is sufficient to deny the
proposal. It stands to reason therefore that if a proposal can be denied by
reason of the existence of direct government guarantee, then its inclusion in
the contract executed after the said proposal has been accepted is likewise
sufficient to invalidate the contract itself. A prohibited provision, the inclusion
of which would result in the denial of a proposal cannot, and should not, be
allowed to later on be inserted in the contract resulting from the said
proposal. The basic rules of justice and fair play alone militate against such an
occurrence and must not, therefore, be countenanced particularly in this
instance where the government is exposed to the risk of shouldering hundreds
of million of dollars in debt.
[57]

This Court has long and consistently adhered to the legal maxim that
those that cannot be done directly cannot be done indirectly. To declare the
PIATCO contracts valid despite the clear statutory prohibition against a
direct government guarantee would not only make a mockery of what
the BOT Law seeks to prevent -- which is to expose the government to
the risk of incurring a monetary obligation resulting from a contract of
loan between the project proponent and its lenders and to which the
Government is not a party to -- but would also render the BOT Law
useless for what it seeks to achieve - to make use of the resources of
the private sector in the financing, operation and maintenance of
infrastructure and development projects which are necessary for
national growth and development but which the government,
unfortunately, could ill-afford to finance at this point in time.
[58]

[59]

IV

Temporary takeover of business affected with public interest

Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the
State may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately owned public utility or
business affected with public interest.
The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over
the operation of any business affected with public interest. In the 1986

Constitutional Commission, the term national emergency was defined to

include threat from external aggression, calamities or national disasters, but
not strikes unless it is of such proportion that would paralyze government
service. The duration of the emergency itself is the determining factor as to
how long the temporary takeover by the government would last. The
temporary takeover by the government extends only to the operation of the
business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as
there is no transfer of ownership, whether permanent or temporary. The
private entity-owner affected by the temporary takeover cannot, likewise, claim
just compensation for the use of the said business and its properties as the
temporary takeover by the government is in exercise of its police power and
not of its power of eminent domain.
[60]

[61]

Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:

Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any
notice, notification, or declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP shall, by written
notice to Concessionaire, immediately take over the operations of the Terminal and/or
the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency,
the operations shall be returned to Concessionaire, at which time, the Concession
period shall commence to run again. Concessionaire shall be entitled to reasonable
compensation for the duration of the temporary take over by GRP, which
compensation shall take into account the reasonable cost for the use of the
Terminal and/or Terminal Complex, (which is in the amount at least equal to the
debt service requirements of Concessionaire, if the temporary take over should
occur at the time when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other consequential damages. If
the parties cannot agree on the reasonable compensation of Concessionaire, or on the
liability of GRP as aforesaid, the matter shall be resolved in accordance with Section
10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire
shall be offset from the amount next payable by Concessionaire to GRP.
[62]

PIATCO cannot, by mere contractual stipulation, contravene the

Constitutional provision on temporary government takeover and
obligate the government to pay reasonable cost for the use of the

Terminal and/or Terminal Complex. Article XII, section 17 of the 1987

Constitution envisions a situation wherein the exigencies of the times
necessitate the government to temporarily take over or direct the operation of
any privately ownedpublic utility or business affected with public interest. It is
the welfare and interest of the public which is the paramount consideration in
determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising
its police power. Police power is the most essential, insistent, and illimitable of
powers. Its exercise therefore must not be unreasonably hampered nor its
exercise be a source of obligation by the government in the absence of
damage due to arbitrariness of its exercise. Thus, requiring the government
to pay reasonable compensation for the reasonable use of the property
pursuant to the operation of the business contravenes the Constitution.
[63]

[64]

[65]

Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more
persons or companies, consisting in the exclusive right (or power) to carry on
a particular business or trade, manufacture a particular article, or control the
sale of a particular commodity. The 1987 Constitution strictly regulates
monopolies, whether private or public, and even provides for their prohibition
if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:
[66]

Sec. 19. The state shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may
be permitted to exist to aid the government in carrying on an enterprise or to
aid in the performance of various services and functions in the interest of the
public. Nonetheless, a determination must first be made as to whether
public interest requires a monopoly. As monopolies are subject to abuses that
can inflict severe prejudice to the public, they are subject to a higher level of
State regulation than an ordinary business undertaking.
[67]

In the cases at bar, PIATCO, under the 1997 Concession Agreement and
the ARCA, is granted the exclusive right to operate a commercial
international passenger terminal within the Island of Luzon at the NAIA IPT III.
This is with the exception of already existing international airports in Luzon
such as those located in the Subic Bay Freeport Special Economic Zone
(SBFSEZ), Clark Special Economic Zone (CSEZ) and in Laoag City. As
such, upon commencement of PIATCOs operation of NAIA IPT III, Terminals 1
[68]

[69]

and 2 of NAIA would cease to function as international passenger

terminals. This, however, does not prevent MIAA to use Terminals 1 and 2 as
domestic passenger terminals or in any other manner as it may deem
appropriate except those activities that would compete with NAIA IPT III in the
latters operation as an international passenger terminal. The right granted to
PIATCO to exclusively operate NAIA IPT III would be for a period of twentyfive (25) years from the In-Service Date and renewable for another twentyfive (25) years at the option of the government. Both the 1997 Concession
Agreement and the ARCA further provide that, in view of the exclusive
right granted to PIATCO, the concession contracts of the service
providers currently servicing Terminals 1 and 2 would no longer be
renewed and those concession contracts whose expiration are
subsequent to the In-Service Date would cease to be effective on the
said date.
[70]

[71]

[72]

[73]

The operation of an international passenger airport terminal is no doubt an

undertaking imbued with public interest. In entering into a BuildOperate-andTransfer contract for the construction, operation and maintenance of NAIA IPT
III, the government has determined that public interest would be served better
if private sector resources were used in its construction and an exclusive right
to operate be granted to the private entity undertaking the said project, in this
case PIATCO. Nonetheless, the privilege given to PIATCO is subject to
reasonable regulation and supervision by the Government through the MIAA,
which is the government agency authorized to operate the NAIA complex, as
well as DOTC, the department to which MIAA is attached.
[74]

This is in accord with the Constitutional mandate that a monopoly which is

not prohibited must be regulated. While it is the declared policy of the BOT
Law to encourage private sector participation by providing a climate of
minimum government regulations, the same does not mean that Government
must completely surrender its sovereign power to protect public interest in the
operation of a public utility as a monopoly. The operation of said public utility
can not be done in an arbitrary manner to the detriment of the public which it
seeks to serve. The right granted to the public utility may be exclusive but the
exercise of the right cannot run riot. Thus, while PIATCO may be authorized to
exclusively operate NAIA IPT III as an international passenger terminal, the
Government, through the MIAA, has the right and the duty to ensure that it is
done in accord with public interest. PIATCOs right to operate NAIA IPT III
cannot also violate the rights of third parties.
[75]

[76]

Section 3.01(e) of the 1997 Concession Agreement and the ARCA

provide:

3.01 Concession Period

.
(e) GRP confirms that certain concession agreements relative to certain services
and operations currently being undertaken at the Ninoy Aquino International Airport
passenger Terminal I have a validity period extending beyond the In-Service
Date. GRP through DOTC/MIAA, confirms that these services and operations shall
not be carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in
any litigation initiated by any such concessionaire or operator, GRP undertakes and
hereby holds Concessionaire free and harmless on full indemnity basis from and
against any loss and/or any liability resulting from any such litigation, including the
cost of litigation and the reasonable fees paid or payable to Concessionaires counsel
of choice, all such amounts shall be fully deductible by way of an offset from any
amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the
petitioners-in-intervention for G.R. No. 155001 stated that there are two
service providers whose contracts are still existing and whose validity extends
beyond the In-Service Date. One contract remains valid until 2008 and the
other until 2010.
[77]

We hold that while the service providers presently operating at NAIA

Terminal 1 do not have an absolute right for the renewal or the extension of
their respective contracts, those contracts whose duration extends beyond
NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These
contracts must be respected not just by the parties thereto but also by third
parties. PIATCO cannot, by law and certainly not by contract, render a valid
and binding contract nugatory. PIATCO, by the mere expedient of claiming an
exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre and
stevedoring service providers in the case of Anglo-Fil Trading
Corporation v. Lazaro whose contracts consist of temporary hold-over
permits, the affected service providers in the cases at bar, have a valid and
binding contract with the Government, through MIAA, whose period of
effectivity, as well as the other terms and conditions thereof, cannot be
violated.
[78]

In fine, the efficient functioning of NAIA IPT III is imbued with public
interest. The provisions of the 1997 Concession Agreement and the ARCA did
not strip government, thru the MIAA, of its right to supervise the operation of

the whole NAIA complex, including NAIA IPT III. As the primary government
agency tasked with the job, it is MIAAs responsibility to ensure that whoever
by contract is given the right to operate NAIA IPT III will do so within the
bounds of the law andwith due regard to the rights of third parties and above
all, the interest of the public.
[79]

VI

CONCLUSION
In sum, this Court rules that in view of the absence of the requisite
financial capacity of the Paircargo Consortium, predecessor of respondent
PIATCO, the award by the PBAC of the contract for the construction,
operation and maintenance of the NAIA IPT III is null and void. Further,
considering that the 1997 Concession Agreement contains material and
substantial amendments, which amendments had the effect of converting the
1997 Concession Agreement into an entirely different agreement from the
contract bidded upon, the 1997 Concession Agreement is similarly null and
void for being contrary to public policy. The provisions under Sections 4.04(b)
and (c) in relation to Section 1.06 of the 1997 Concession Agreement and
Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a
direct government guarantee expressly prohibited by, among others, the BOT
Law and its Implementing Rules and Regulations are also null and void. The
Supplements, being accessory contracts to the ARCA, are likewise null and
void.
WHEREFORE, the 1997 Concession Agreement, the Amended and
Restated Concession Agreement and the Supplements thereto are set aside
for being null and void.

FIRST DIVISION
ABS-CBN BROADCASTING G.R. No. 169332

CORPORATION,
Petitioner, Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
WORLD INTERACTIVE
NETWORK SYSTEMS (WINS)
JAPAN CO., LTD.,
Respondent. Promulgated:
February 11, 2008
x--------------------------------------------------x
DECISION
CORONA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to
set aside the February 16, 2005 decision [1] and August 16, 2005 resolution[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 81940.
On September 27, 1999, petitioner ABS-CBN Broadcasting Corporation entered
into a licensing agreement with respondent World Interactive Network Systems
(WINS) Japan Co., Ltd., a foreign corporation licensed under the laws of
Japan. Under the agreement, respondent was granted the exclusive license to
distribute and sublicense the distribution of the television service known as The
Filipino Channel (TFC) in Japan. By virtue thereof, petitioner undertook to
transmit the TFC programming signals to respondent which the latter received
through its decoders and distributed to its subscribers.

A dispute arose between the parties when petitioner accused respondent of

inserting nine episodes of WINS WEEKLY, a weekly 35-minute community news
program for Filipinos in Japan, into the TFC programming from March to May
2002.[3] Petitioner claimed that these were unauthorized insertions constituting a
material breach of their agreement. Consequently, on May 9, 2002, [4] petitioner
notified respondent of its intention to terminate the agreement effective June 10,
2002.
Thereafter, respondent filed an arbitration suit pursuant to the arbitration clause of
its agreement with petitioner. It contended that the airing of WINS WEEKLY was
made with petitioner's prior approval. It also alleged that petitioner only threatened
to terminate their agreement because it wanted to renegotiate the terms thereof to
allow it to demand higher fees. Respondent also prayed for damages for petitioner's
alleged grant of an exclusive distribution license to another entity, NHK (Japan
Broadcasting Corporation).[5]
The parties appointed Professor Alfredo F. Tadiar to act as sole arbitrator. They
stipulated on the following issues in their terms of reference (TOR)[6]:
1. Was the broadcast of WINS WEEKLY by the claimant duly
authorized by the respondent [herein petitioner]?
2. Did such broadcast constitute a material breach of the agreement
that is a ground for termination of the agreement in accordance
with Section 13 (a) thereof?
3. If so, was the breach seasonably cured under the same contractual
provision of Section 13 (a)?
4. Which party is entitled to the payment of damages they claim and
to the other reliefs prayed for?

xxx xxx xxx

The arbitrator found in favor of respondent. [7] He held that petitioner gave its
approval to respondent for the airing of WINS WEEKLY as shown by a series of
written exchanges between the parties. He also ruled that, had there really been a
material breach of the agreement, petitioner should have terminated the same
instead of sending a mere notice to terminate said agreement. The arbitrator found
that petitioner threatened to terminate the agreement due to its desire to compel
respondent to re-negotiate the terms thereof for higher fees. He further stated that
even if respondent committed a breach of the agreement, the same was seasonably
cured. He then allowed respondent to recover temperate damages, attorney's fees
and one-half of the amount it paid as arbitrator's fee.
Petitioner filed in the CA a petition for review under Rule 43 of the Rules of Court
or, in the alternative, a petition for certiorari under Rule 65 of the same Rules, with
application for temporary restraining order and writ of preliminary injunction. It
was docketed as CA-G.R. SP No. 81940. It alleged serious errors of fact and law
and/or grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the arbitrator.
Respondent, on the other hand, filed a petition for confirmation of arbitral award
before the Regional Trial Court (RTC) of Quezon City, Branch 93, docketed as
Civil Case No. Q-04-51822.
Consequently, petitioner filed a supplemental petition in the CA seeking to enjoin
the RTC of Quezon City from further proceeding with the hearing of respondent's
petition for confirmation of arbitral award. After the petition was admitted by the

appellate court, the RTC of Quezon City issued an order holding in abeyance any
further action on respondent's petition as the assailed decision of the arbitrator had
already become the subject of an appeal in the CA. Respondent filed a motion for
reconsideration but no resolution has been issued by the lower court to date.[8]
On February 16, 2005, the CA rendered the assailed decision dismissing ABSCBNs petition for lack of jurisdiction. It stated that as the TOR itself provided that
the arbitrator's decision shall be final and unappealable and that no motion for
reconsideration shall be filed, then the petition for review must fail. It ruled that it
is the RTC which has jurisdiction over questions relating to arbitration. It held that
the only instance it can exercise jurisdiction over an arbitral award is an appeal
from the trial court's decision confirming, vacating or modifying the arbitral award.
It further stated that a petition for certiorari under Rule 65 of the Rules of Court is
proper in arbitration cases only if the courts refuse or neglect to inquire into the
facts of an arbitrator's award. The dispositive portion of the CA decision read:
WHEREFORE, the instant petition is hereby DISMISSED for lack of
jurisdiction. The application for a writ of injunction and temporary
restraining order is likewise DENIED. The Regional Trial Court of
Quezon City Branch 93 is directed to proceed with the trial for the
Petition for Confirmation of Arbitral Award.
SO ORDERED.

Petitioner moved for reconsideration. The same was denied. Hence, this petition.
Petitioner contends that the CA, in effect, ruled that: (a) it should have first filed a
petition to vacate the award in the RTC and only in case of denial could it elevate
the matter to the CA via a petition for review under Rule 43 and (b) the assailed

decision implied that an aggrieved party to an arbitral award does not have the
option of directly filing a petition for review under Rule 43 or a petition for
certiorari under Rule 65 with the CA even if the issues raised pertain to errors of
fact and law or grave abuse of discretion, as the case may be, and not dependent
upon such grounds as enumerated under Section 24 (petition to vacate an arbitral
award) of RA 876 (the Arbitration Law). Petitioner alleged serious error on the
part of the CA.
The issue before us is whether or not an aggrieved party in a voluntary
arbitration dispute may avail of, directly in the CA, a petition for review under
Rule 43 or a petition for certiorari under Rule 65 of the Rules of Court, instead of
filing a petition to vacate the award in the RTC when the grounds invoked to
overturn the arbitrators decision are other than those for a petition to vacate an
arbitral award enumerated under RA 876.
RA 876 itself mandates that it is the Court of First Instance, now the RTC,
which has jurisdiction over questions relating to arbitration,[9]such as a petition to
vacate an arbitral award.
Section 24 of RA 876 provides for the specific grounds for a petition to vacate an
award made by an arbitrator:
Sec. 24. Grounds for vacating award. - In any one of the following
cases, the court must make an order vacating the award upon the
petition of any party to the controversy when such party proves
affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means;
or

(b) That there was evident partiality or corruption in the arbitrators or

any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone
the hearing upon sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; that one or more of the
arbitrators was disqualified to act as such under section nine hereof, and
willfully refrained from disclosing such disqualifications or of any other
misbehavior by which the rights of any party have been materially
prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly
executed them, that a mutual, final and definite award upon the subject
matter submitted to them was not made.

Based on the foregoing provisions, the law itself clearly provides that the
RTC must issue an order vacating an arbitral award only in any one of the . . . cases
enumerated therein. Under the legal maxim in statutory construction expressio
unius est exclusio alterius, the explicit mention of one thing in a statute means the
elimination of others not specifically mentioned. As RA 876 did not expressly
provide for errors of fact and/or law and grave abuse of discretion (proper grounds
for a petition for review under Rule 43 and a petition for certiorari under Rule 65,
respectively) as grounds for maintaining a petition to vacate an arbitral award in
the RTC, it necessarily follows that a party may not avail of the latter remedy on
the grounds of errors of fact and/or law or grave abuse of discretion to overturn an
arbitral award.
Adamson v. Court of Appeals[10] gave ample warning that a petition to vacate filed
in the RTC which is not based on the grounds enumerated in Section 24 of RA 876
should be dismissed. In that case, the trial court vacated the arbitral award
seemingly based on grounds included in Section 24 of RA 876 but a closer reading

thereof revealed otherwise. On appeal, the CA reversed the decision of the trial
court and affirmed the arbitral award. In affirming the CA, we held:
The Court of Appeals, in reversing the trial court's decision held that the
nullification of the decision of the Arbitration Committee was not based
on the grounds provided by the Arbitration Law and that xxx private
respondents (petitioners herein) have failed to substantiate with any
evidence their claim of partiality. Significantly, even as respondent judge
ruled against the arbitrator's award, he could not find fault with their
impartiality and integrity. Evidently, the nullification of the award
rendered at the case at bar was not made on the basis of any of the
grounds provided by law.
xxx xxx xxx
It is clear, therefore, that the award was vacated not because of
evident partiality of the arbitrators but because the latter interpreted the
contract in a way which was not favorable to herein petitioners and
because it considered that herein private respondents, by submitting the
controversy to arbitration, was seeking to renege on its obligations under
the contract.
xxx xxx xxx
It is clear then that the Court of Appeals reversed the trial court not
because the latter reviewed the arbitration award involved herein,
but because the respondent appellate court found that the trial court
had no legal basis for vacating the award. (Emphasis supplied).

In cases not falling under any of the aforementioned grounds to vacate an award,
the Court has already made several pronouncements that a petition for review
under Rule 43 or a petition for certiorari under Rule 65 may be availed of in the
CA. Which one would depend on the grounds relied upon by petitioner.
In Luzon Development Bank v. Association of Luzon Development Bank
Employees,[11] the Court held that a voluntary arbitrator is properly classified as a
quasi-judicial instrumentality and is, thus, within the ambit of Section 9 (3) of the

Judiciary Reorganization Act, as amended. Under this section, the Court of

Appeals shall exercise:
xxx xxx xxx
(3) Exclusive appellate jurisdiction over all final judgments, decisions,
resolutions, orders or awards of Regional Trial Courts and quasi-judicial
agencies,instrumentalities, boards or commissions, including the Securities and
Exchange Commission, the Employees Compensation Commission and the Civil
Service Commission, except those falling within the appellate jurisdiction of the
Supreme Court in accordance with the Constitution, the Labor Code of the
Philippines under Presidential Decree No. 442, as amended, the provisions of this
Act and of subparagraph (1) of the third paragraph and subparagraph (4) of the
fourth paragraph of Section 17 of the Judiciary Act of 1948. (Emphasis supplied)

As such, decisions handed down by voluntary arbitrators fall within the exclusive
appellate jurisdiction of the CA. This decision was taken into consideration in
approving Section 1 of Rule 43 of the Rules of Court.[12] Thus:
SECTION 1. Scope. - This Rule shall apply to appeals from judgments
or final orders of the Court of Tax Appeals and from awards, judgments,
final orders or resolutions of or authorized by any quasi-judicial agency
in the exercise of its quasi-judicial functions. Among these agencies are
the Civil Service Commission, Central Board of Assessment Appeals,
Securities and Exchange Commission, Office of the President, Land
Registration Authority, Social Security Commission, Civil Aeronautics
Board, Bureau of Patents, Trademarks and Technology Transfer,
National Electrification Administration, Energy Regulatory Board,
National Telecommunications Commission, Department of Agrarian
Reform under Republic Act Number 6657, Government Service
Insurance System, Employees Compensation Commission, Agricultural
Inventions Board, Insurance Commission, Philippine Atomic Energy
Commission, Board of Investments, Construction Industry Arbitration
Commission, and voluntary arbitrators authorized by law. (Emphasis
supplied)

This rule was cited in Sevilla Trading Company v. Semana,[13] Manila Midtown
Hotel v. Borromeo,[14] and Nippon Paint Employees Union-Olalia v. Court of
Appeals.[15] These cases held that the proper remedy from the adverse decision of a
voluntary arbitrator, if errors of fact and/or law are raised, is a petition for review
under Rule 43 of the Rules of Court. Thus, petitioner's contention that it may avail
of a petition for review under Rule 43 under the circumstances of this case is
correct.
As to petitioner's arguments that a petition for certiorari under Rule 65 may also be
resorted to, we hold the same to be in accordance with the Constitution and
jurisprudence.
Section 1 of Article VIII of the 1987 Constitution provides that:
SECTION 1. The judicial power shall be vested in one Supreme Court
and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the Government. (Emphasis
supplied)

As may be gleaned from the above stated provision, it is well within the power and
jurisdiction of the Court to inquire whether any instrumentality of the Government,
such as a voluntary arbitrator, has gravely abused its discretion in the exercise of
its functions and prerogatives. Any agreement stipulating that the decision of the
arbitrator shall be final and unappealable and that no further judicial recourse if
either party disagrees with the whole or any part of the arbitrator's award may be
availed of cannot be held to preclude in proper cases the power of judicial review
which is inherent in courts.[16] We will not hesitate to review a voluntary arbitrator's

award where there is a showing of grave abuse of authority or discretion and such
is properly raised in a petition for certiorari[17] and there is no appeal, nor any plain,
speedy remedy in the course of law.[18]
Significantly, Insular Savings Bank v. Far East Bank and Trust
Company[19] definitively outlined several judicial remedies an aggrieved party to an
arbitral award may undertake:
(1)
(2)
(3)

a petition in the proper RTC to issue an order to vacate the award

on the grounds provided for in Section 24 of RA 876;
a petition for review in the CA under Rule 43 of the Rules of
Court on questions of fact, of law, or mixed questions of fact and
law; and
a petition for certiorari under Rule 65 of the Rules of Court
should the arbitrator have acted without or in excess of his
jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction.

Nevertheless, although petitioners position on the judicial remedies available to it

was correct, we sustain the dismissal of its petition by the CA. The remedy
petitioner availed of, entitled alternative petition for review under Rule 43 or
petition for certiorari under Rule 65, was wrong.
Time and again, we have ruled that the remedies of appeal and certiorari are
mutually exclusive and not alternative or successive.[20]
Proper issues that may be raised in a petition for review under Rule 43 pertain to
errors of fact, law or mixed questions of fact and law.[21] While a petition for
certiorari under Rule 65 should only limit itself to errors of jurisdiction, that is,
grave abuse of discretion amounting to a lack or excess of jurisdiction.
[22]

Moreover, it cannot be availed of where appeal is the proper remedy or as a

substitute for a lapsed appeal.[23]

In the case at bar, the questions raised by petitioner in its alternative petition before
the CA were the following:
A. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR
AND/OR GRAVELY ABUSED HIS DISCRETION IN RULING THAT
THE BROADCAST OF WINS WEEKLY WAS DULY AUTHORIZED
BY ABS-CBN.
B. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR
AND/OR GRAVELY ABUSED HIS DISCRETION IN RULING THAT
THE UNAUTHORIZED BROADCAST DID NOT CONSTITUTE
MATERIAL BREACH OF THE AGREEMENT.
C. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR
AND/OR GRAVELY ABUSED HIS DISCRETION IN RULING THAT
WINS SEASONABLY CURED THE BREACH.
D. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR
AND/OR GRAVELY ABUSED HIS DISCRETION IN RULING THAT
TEMPERATE DAMAGES IN THE AMOUNT OF P1,166,955.00 MAY
BE AWARDED TO WINS.
E. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR
AND/OR GRAVELY ABUSED HIS DISCRETION IN AWARDING
ATTORNEY'S FEES IN THE UNREASONABLE AMOUNT AND
UNCONSCIONABLE AMOUNT OF P850,000.00.
F. THE ERROR COMMITTED BY THE SOLE ARBITRATOR IS NOT
A SIMPLE ERROR OF JUDGMENT OR ABUSE OF DISCRETION.
IT IS GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK
OR EXCESS OF JURISDICTION.

A careful reading of the assigned errors reveals that the real issues calling for the
CA's resolution were less the alleged grave abuse of discretion exercised by the
arbitrator and more about the arbitrators appreciation of the issues and evidence
presented by the parties. Therefore, the issues clearly fall under the classification

of errors of fact and law questions which may be passed upon by the CA via a
petition for review under Rule 43. Petitioner cleverly crafted its assignment of
errors in such a way as to straddle both judicial remedies, that is, by alleging
serious errors of fact and law (in which case a petition for review under Rule 43
would be proper) and grave abuse of discretion (because of which a petition for
certiorari under Rule 65 would be permissible).
It must be emphasized that every lawyer should be familiar with the distinctions
between the two remedies for it is not the duty of the courts to determine under
which

rule

the

petition should fall.[24] Petitioner's ploy was fatal to its

cause. An appeal taken either to this Court or the CA by the

wrong

or

inappropriate mode shall be dismissed.[25] Thus, the alternative petition filed in the
CA, being an inappropriate mode of appeal, should have been dismissed outright
by the CA.
WHEREFORE, the petition is hereby DENIED. The February 16, 2005 decision
and August 16, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 81940
directing the Regional Trial Court of Quezon City, Branch 93 to proceed with the
trial of the petition for confirmation of arbitral award is AFFIRMED.
Costs against petitioner.
SO ORDERED.