Republic of the Philippines However, respondent Roblecor failed to complete the work despite the extension of time allowed
owever, respondent Roblecor failed to complete the work despite the extension of time allowed it by Chung
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 96283 February 25, 1992
CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG KUO-CHANG,
HUANG AN-CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE B. AMADOR, ROCK A.C.
HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and VIRGILIO M. DEL ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail Court of Makati
[Branch 57]) and ROBLECOR PHILIPPINES, INC., respondents.
ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of Appeals* dated
October 22, 1990 and December 3, 1990 upholding the Orders of July 31, 1990 and August 23, 1990 of the
Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-1335. Respondent Court of Appeals affirmed the
ruling of the trial court that herein petitioners, after submitting themselves for arbitration and agreeing to the
terms and conditions thereof, providing that the arbitration award shall be final and unappealable, are
precluded from seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for brevity) and private
respondent Roblecor Philippines, Inc. (Roblecor for short) forged a construction agreement 1 whereby
respondent contractor committed to construct and finish on December 31, 1989, petitioner corporation's
industrial/factory complex in Tanawan, Tanza, Cavite for and in consideration of P42,000,000.00. In the event
of disputes arising from the performance of subject contract, it was stipulated therein that the issue(s) shall be
submitted for resolution before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2) other ancillary
contracts, to wit: one dated June 23, 1989, for the construction of a dormitory and support facilities with a
contract price of P3,875,285.00, to be completed on or before October 31, 1989; 2 and the other dated August
12, 1989, for the installation of electrical, water and hydrant systems at the plant site, commanding a price of
P12.1 million and requiring completion thereof one month after civil works have been finished. 3
1
Fu. Subsequently, the latter had to take over the construction when it had become evident that Roblecor was
not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of P2,370,179.23, Roblecor on
May 18, 1990, filed a petition for Compulsory Arbitration with prayer for Temporary Restraining Order before
respondent Regional Trial Court, pursuant to the arbitration clause in the construction agreement. Chung Fu
moved to dismiss the petition and further prayed for the quashing of the restraining order.
Subsequent negotiations between the parties eventually led to the formulation of an arbitration agreement
which, among others, provides:
2. The parties mutually agree that the arbitration shall proceed in accordance with the
following terms and conditions: —
xxx xxx xxx
d. The parties mutually agree that they will abide by the decision of
the arbitrator including any amount that may be awarded to either
party as compensation, consequential damage and/or interest
thereon;
e. The parties mutually agree that the decision of the arbitrator shall
be final and unappealable. Therefore, there shall be no further judicial
recourse if either party disagrees with the whole or any part of the
arbitrator's award.
f. As an exception to sub-paragraph (e) above, the parties mutually
agree that either party is entitled to seek judicial assistance for
purposes of enforcing the arbitrator's award;
xxx xxx xxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration agreement thru its Order of May 30, 1990.
Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent contractor, the sum
of P16,108,801.00. He further declared the award as final and unappealable, pursuant to the Arbitration
Agreement precluding judicial review of the award.
Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung Fu moved to
remand the case for further hearing and asked for a reconsideration of the judgment award claiming that
Arbitrator Asuncion committed twelve (12) instances of grave error by disregarding the provisions of the
parties' contract.
Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek reconsideration
therefrom but to no avail. The trial court granted Roblecor's Motion for Confirmation of Award and accordingly,
entered judgment in conformity therewith. Moreover, it granted the motion for the issuance of a writ of
execution filed by respondent.
Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On October 22,1990
the assailed resolution was issued. The respondent appellate court concurred with the findings and conclusions
of respondent trial court resolving that Chung Fu and its officers, as signatories to the Arbitration Agreement
are bound to observe the stipulations thereof providing for the finality of the award and precluding any appeal
therefrom.
A motion for reconsideration of said resolution was filed by petitioner, but it was similarly denied by
respondent Court of Appeals thru its questioned resolution of December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
Respondents Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioners, — (a) by refusing to exercise their judicial authority and legal duty to review
the arbitration award, and (b) by declaring that petitioners are estopped from questioning
the arbitration award allegedly in view of the stipulations in the parties' arbitration
agreement that "the decision of the arbitrator shall be final and unappealable" and that
"there shall be no further judicial recourse if either party disagrees with the whole or any
part of the arbitrator's award."
Second
Respondent Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioner, by not vacating and annulling the award dated 30 June 1990 of the Arbitrator,
on the ground that the Arbitrator grossly departed from the terms of the parties' contracts
and misapplied the law, and thereby exceeded the authority and power delegated to him.
(Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of dispute
settlement.
Because conflict is inherent in human society, much effort has been expended by men and institutions in
devising ways of resolving the same. With the progress of civilization, physical combat has been ruled out and
2
instead, more specific means have been evolved, such as recourse to the good offices of a disinterested third
party, whether this be a court or a private individual or individuals.
Legal history discloses that "the early judges called upon to solve private conflicts were primarily the arbiters,
persons not specially trained but in whose morality, probity and good sense the parties in conflict reposed full
trust. Thus, in Republican Rome, arbiter and judge (judex) were synonymous. The magistrate or praetor, after
noting down the conflicting claims of litigants, and clarifying the issues, referred them for decision to a private
person designated by the parties, by common agreement, or selected by them from an apposite listing
(the album judicium) or else by having the arbiter chosen by lot. The judges proper, as specially trained state
officials endowed with own power and jurisdiction, and taking cognizance of litigations from beginning to end,
only appeared under the Empire, by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been an accepted alternative to litigation at
common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines, it was
nonetheless recognized in the Spanish Civil Code; specifically, the provisions on compromises made applicable
to arbitrations under Articles 1820 and 1821.7 Although said provisions were repealed by implication with the
repeal of the Spanish Law of Civil Procedure, 8 these and additional ones were reinstated in the present Civil
Code. 9
Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines. Although
early on, Commonwealth Act 103 (1936) provided for compulsory arbitration as the state policy to be
administered by the Court of Industrial Relations, in time such a modality gave way to voluntary arbitration.
While not completely supplanting compulsory arbitration which until today is practiced by government
officials, the Industrial Peace Act which was passed in 1953 as Republic Act No. 875, favored the policy of free
collective bargaining, in general, and resort to grievance procedure, in particular, as the preferred mode of
settling disputes in industry. It was accepted and enunciated more explicitly in the Labor Code, which was
passed on November 1, 1974 as Presidential Decree No. 442, with the amendments later introduced by
Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations, arbitration was gaining wide
acceptance. A consensual process, it was preferred to orders imposed by government upon the disputants.
Moreover, court litigations tended to be time-consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the courts toward arbitration agreements is
slowly crystallizing into definite and workable form. . . . The rule now is that unless the
agreement is such as absolutely to close the doors of the courts against the parties, which
agreement would be void, the courts will look with favor upon such amicable
arrangements and will only with great reluctance interfere to anticipate or nullify the
action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged when Republic
Act No. 876 (1953), otherwise known as the Arbitration Law, was passed. "Said Act was obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that "the provisions
of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force." 11
In recognition of the pressing need for an arbitral machinery for the early and expeditious settlement of
disputes in the construction industry, a Construction Industry Arbitration Commission (CIAC) was created by
Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes via a particular mode, it is
the regular courts that remain the fora to resolve such matters. However, the parties may opt for recourse to
third parties, exercising their basic freedom to "establish such stipulation, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order or public
policy." 12 In such a case, resort to the arbitration process may be spelled out by them in a contract in
anticipation of disputes that may arise between them. Or this may be stipulated in a submission agreement
when they are actually confronted by a dispute. Whatever be the case, such recourse to an extrajudicial means
of settlement is not intended to completely deprive the courts of jurisdiction. In fact, the early cases on
arbitration carefully spelled out the prevailing doctrine at the time, thus: ". . . a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitrators and to them alone is contrary to
public policy and cannot oust the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing dispute to one
is valid. Being part of a contract between the parties, it is binding and enforceable in court in case one of them
neglects, fails or refuses to arbitrate. Going a step further, in the event that they declare their intention to refer
their differences to arbitration first before taking court action, this constitutes a condition precedent, such that
where a suit has been instituted prematurely, the court shall suspend the same and the parties shall be directed
forthwith to proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not been selected by the parties. 15
Under present law, may the parties who agree to submit their disputes to arbitration further provide that the
arbitrators' award shall be final, unappealable and executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
Any stipulation that the arbitrators' award or decision shall be final is valid, without
prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be final and
inappealable except on questions of law which shall be appealable to the Supreme Court." 16
Under the original Labor Code, voluntary arbitration awards or decisions were final, unappealable and
executory. "However, voluntary arbitration awards or decisions on money claims, involving an amount
exceeding One Hundred Thousand Pesos (P100,000.00) or forty-percent (40%) of the paid-up capital of the
respondent employer, whichever is lower, maybe appealed to the National Labor Relations Commission on
3
any of the following grounds: (a) abuse of discretion; and (b) gross incompetence." 17 It is to be noted that the
appeal in the instances cited were to be made to the National Labor Relations Commission and not to the
courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary arbitrator is
now mandated to render an award or decision within twenty (20) calendar days from the date of submission
of the dispute and such decision shall be final and executory after ten (10) calendar days from receipt of the
copy of the award or decision by the parties. 18
Where the parties agree that the decision of the arbitrator shall be final and unappealable as in the instant
case, the pivotal inquiry is whether subject arbitration award is indeed beyond the ambit of the court's power
of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators'
award is not absolute and without exceptions. Where the conditions described in Articles 2038, 2039 and 2040
applicable to both compromises and arbitrations are obtaining, the arbitrators' award may be annulled or
rescinded. 19 Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award. 20 Thus, if and when the factual circumstances referred to in the
above-cited provisions are present, judicial review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to determine whether
it is in accordance with law or within the scope of his authority? How may the power of judicial review be
invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to be borne in
mind, however, that this action will lie only where a grave abuse of discretion or an act without or in excess of
jurisdiction on the part of the voluntary arbitrator is clearly shown. For "the writ of certiorari is an extra-ordinary
remedy and that certiorari jurisdiction is not to be equated with appellate jurisdiction. In a special civil action
of certiorari, the Court will not engage in a review of the facts found nor even of the law as interpreted or
applied by the arbitrator unless the supposed errors of fact or of law are so patent and gross and prejudicial
as to amount to a grave abuse of discretion or an exces de pouvoir on the part of the arbitrator." 21
Even decisions of administrative agencies which are declared "final" by law are not exempt from judicial review
when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al. v. Flerida Ruth P. Romero, et al., 22 this
Court had occasion to rule that:
. . . Inspite of statutory provisions making "final" the decisions of certain administrative
agencies, we have taken cognizance of petitions questioning these decisions where want of
jurisdiction, grave abuse of discretion, violation of due process, denial of substantial justice
or erroneous interpretation of the lawwere brought to our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity. 24 It stands to reason, therefore, that their decisions should not be beyond the scope of the power of
judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which allege error
on the part of the arbitrator in granting compensation for various items which apparently are disputed by said
petitioners:
1. The Honorable Arbitrator committed grave error in failing to apply the terms and
conditions of the Construction Agreement, Dormitory Contract and Electrical Contract,
and in using instead the "practices" in the construction industry;
2. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss of productivity due to adverse weather conditions;
3. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss due to delayed payment of progress billings;
that petitioners have amply made out a case where the voluntary arbitrator failed to apply the terms and
provisions of the Construction Agreement which forms part of the law applicable as between the parties, thus
committing a grave abuse of discretion. Furthermore, in granting unjustified extra compensation to respondent
for several items, he exceeded his powers — all of which would have constituted ground for vacating the award
under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case, despite prima facie showing of the
existence of grounds warranting judicial review, effectively deprived petitioners of their opportunity to prove
or substantiate their allegations. In so doing, the trial court itself committed grave abuse of discretion. Likewise,
the appellate court, in not giving due course to the petition, committed grave abuse of discretion. Respondent
courts should not shirk from exercising their power to review, where under the applicable laws and
jurisprudence, such power may be rightfully exercised; more so where the objections raised against an
arbitration award may properly constitute grounds for annulling, vacating or modifying said award under the
laws on arbitration.

4. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for loss of productivity due to the cement crisis;
5. The Honorable Arbitrator committed grave error in granting extra compensation to
Roblecor for losses allegedly sustained on account of the failed coup d'état;
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated October 22, 1990 and
December 3, 1990 as well as the Orders of respondent Regional Trial Court dated July 31, 1990 and August 23,
1990, including the writ of execution issued pursuant thereto, are hereby SET ASIDE. Accordingly, this case is
REMANDED to the court of origin for further hearing on this matter. All incidents arising therefrom are reverted
to the status quo ante until such time as the trial court shall have passed upon the merits of this case. No costs.

6. The Honorable Arbitrator committed grave error in granting to Roblecor the amount SO ORDERED.
representing the alleged unpaid billings of Chung Fu;
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
7. The Honorable Arbitrator committed grave error in granting to Roblecor the amount
representing the alleged extended overhead expenses; JORGE GONZALES and G.R. No. 161957
PANEL OF ARBITRATORS,
8. The Honorable Arbitrator committed grave error in granting to Roblecor the amount Petitioners, Present:
representing expenses for change order for site development outside the area of
responsibility of Roblecor; PUNO, C. J.,
Chairperson,
9. The Honorable Arbitrator committed grave error in granting to Roblecor the cost of - versus AUSTRIA-MARTINEZ,
warehouse No. 2; CALLEJO, SR.,
TINGA, and
NAZARIO, JJ.
10. The Honorable Arbitrator committed grave error in granting to Roblecor extra
CLIMAX MINING LTD.,
compensation for airduct change in dimension;
CLIMAX-ARIMCO MINING CORP.,
and AUSTRALASIAN PHILIPPINES Promulgated:
11. The Honorable Arbitrator committed grave error in granting to Roblecor extra MINING INC.,
compensation for airduct plastering; and Respondents. January 22, 2007

12. The Honorable Arbitrator committed grave error in awarding to Roblecor attorney's x--------------------------------------------------------------------------------- x
fees.

JORGE GONZALES, G.R. No. 167994

After closely studying the list of errors, as well as petitioners' discussion of the same in their Motion to Remand
Petitioner,
Case For Further Hearing and Reconsideration and Opposition to Motion for Confirmation of Award, we find
4

- versus
HON. OSCAR B. PIMENTEL, in his
capacity as PRESIDING JUDGE of BR. 148
of the REGIONAL TRIAL COURT of
MAKATI CITY, and CLIMAX-ARIMCO
MINING CORPORATION,
Respondents.
x-------------------------- --------------------------------------------------- x
R E S O L U T I ON
TINGA, J.:
This is a consolidation of two petitions rooted in the same disputed Addendum Contract entered into by the
parties. In G.R. No. 161957, the Court in its Decision of 28 February 2005[1] denied the Rule 45 petition of
petitioner Jorge Gonzales (Gonzales). It held that the DENR Panel of Arbitrators had no jurisdiction over the
complaint for the annulment of the Addendum Contract on grounds of fraud and violation of the Constitution
and that the action should have been brought before the regular courts as it involved judicial issues. Both
parties filed separate motions for reconsideration. Gonzales avers in his Motion for Reconsideration[2] that the
Court erred in holding that the DENR Panel of Arbitrators was bereft of jurisdiction, reiterating its argument
that the case involves a mining dispute that properly falls within the ambit of the Panels authority. Gonzales
adds that the Court failed to rule on other issues he raised relating to the sufficiency of his complaint before
the DENR Panel of Arbitrators and the timeliness of its filing.
Respondents Climax Mining Ltd., et al., (respondents) filed their Motion for Partial Reconsideration and/or
Clarification[3] seeking reconsideration of that part of the Decision holding that the case should not be brought
for arbitration under Republic Act (R.A.) No. 876, also known as the Arbitration Law. [4] Respondents, citing
American jurisprudence[5] and the UNCITRAL Model Law,[6] argue that the arbitration clause in the Addendum
Contract should be treated as an agreement independent of the other terms of the contract, and that a claimed
rescission of the main contract does not avoid the duty to arbitrate. Respondents add that Gonzaless argument
relating to the alleged invalidity of the Addendum Contract still has to be proven and adjudicated on in a
proper proceeding; that is, an action separate from the motion to compel arbitration. Pending judgment in
such separate action, the Addendum Contract remains valid and binding and so does the arbitration clause
therein. Respondents add that the holding in the Decision that the case should not be brought under the ambit
of the Arbitration Law appears to be premised on Gonzaless having impugn[ed] the existence or validity of the
addendum contract. If so, it supposedly conveys the idea that Gonzaless unilateral repudiation of the contract
or mere allegation of its invalidity is all it takes to avoid arbitration. Hence, respondents submit that the courts
holding that the case should not be brought under the ambit of the Arbitration Law be understood or clarified
as operative only where the challenge to the arbitration agreement has been sustained by final judgment.
5
Both parties were required to file their respective comments to the other partys motion for
reconsideration/clarification.[7] Respondents filed their Comment on 17 August 2005,[8] while Gonzales filed his
only on 25 July 2006.[9]
On the other hand, G.R. No. 167994 is a Rule 65 petition filed on 6 May 2005, or while the motions for
reconsideration in G.R. No. 161957[10] were pending, wherein Gonzales challenged the orders of the Regional
Trial Court (RTC) requiring him to proceed with the arbitration proceedings as sought by Climax-Arimco Mining
Corporation (Climax-Arimco).
On 5 June 2006, the two cases, G.R. Nos. 161957 and 167994, were consolidated upon the recommendation
of the Assistant Division Clerk of Court since the cases are rooted in the same Addendum Contract.
We first tackle the more recent case which is G.R. No. 167994. It stemmed from the petition to compel
arbitration filed by respondent Climax-Arimco before the RTC of Makati City on 31 March 2000 while the
complaint for the nullification of the Addendum Contract was pending before the DENR Panel of
Arbitrators. On 23 March 2000, Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant to Clause
19.1[11]of the Addendum Contract and also in accordance with Sec. 5 of R.A. No. 876. The petition for arbitration
was subsequently filed and Climax-Arimco sought an order to compel the parties to arbitrate pursuant to the
said arbitration clause. The case, docketed as Civil Case No. 00-444, was initially raffled to Br. 132 of the RTC
of Makati City, with Judge Herminio I. Benito as Presiding Judge. Respondent Climax-Arimco filed on 5 April
2000 a motion to set the application to compel arbitration for hearing.
On 14 April 2000, Gonzales filed a motion to dismiss which he however failed to set for hearing. On 15 May
2000, he filed an Answer with Counterclaim,[12] questioning the validity of the Addendum Contract containing
the arbitration clause. Gonzales alleged that the Addendum Contract containing the arbitration clause is void
in view of Climax-Arimcos acts of fraud, oppression and violation of the Constitution. Thus, the arbitration
clause, Clause 19.1, contained in the Addendum Contract is also null and void ab initio and legally inexistent.
On 18 May 2000, the RTC issued an order declaring Gonzaless motion to dismiss moot and academic in view
of the filing of his Answer with Counterclaim.[13]
On 31 May 2000, Gonzales asked the RTC to set the case for pre-trial.[14] This the RTC denied on 16 June 2000,
holding that the petition for arbitration is a special proceeding that is summary in nature.[15] However, on 7
July 2000, the RTC granted Gonzaless motion for reconsideration of the 16 June 2000 Order and set the case
for pre-trial on 10 August 2000, it being of the view that Gonzales had raised in his answer the issue of the
making of the arbitration agreement.[16]
Climax-Arimco then filed a motion to resolve its pending motion to compel arbitration. The RTC denied the
same in its 24 July 2000 order.
On 28 July 2000, Climax-Arimco filed a Motion to Inhibit Judge Herminio I. Benito for not possessing the cold
neutrality of an impartial judge.[17] On 5 August 2000, Judge Benito issued an Order granting the Motion to
Inhibit and ordered the re-raffling of the petition for arbitration.[18] The case was raffled to the sala of public
respondent Judge Oscar B. Pimentel of Branch 148.
On 23 August 2000, Climax-Arimco filed a motion for reconsideration of the 24 July 2000 Order.[19] Climax-
Arimco argued that R.A. No. 876 does not authorize a pre-trial or trial for a motion to compel arbitration but
directs the court to hear the motion summarily and resolve it within ten days from hearing. Judge Pimentel
granted the motion and directed the parties to arbitration. On 13 February 2001, Judge Pimentel issued the
first assailed order requiring Gonzales to proceed with arbitration proceedings and appointing retired CA
Justice Jorge Coquia as sole arbitrator.[20]
Gonzales moved for reconsideration on 20 March 2001 but this was denied in the Order dated 7 March 2005.[21]
Gonzales thus filed the Rule 65 petition assailing the Orders dated 13 February 2001 and 7 March
2005 of Judge Pimentel. Gonzales contends that public respondent 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, is null and void. Gonzales has also sought a temporary restraining order to prevent the enforcement of
the assailed orders directing the parties to arbitrate, and to direct Judge Pimentel to hold a pre-trial conference
and the necessary hearings on the determination of the nullity of the Addendum Contract.
In support of his argument, Gonzales invokes Sec. 6 of R.A. No. 876:
SEC. 6. Hearing by court.A party aggrieved by the failure, neglect or refusal of
another to perform under an agreement in writing providing for arbitration may petition
the court for an order directing that such arbitration proceed in the manner provided
for in such agreement. Five days notice in writing of the hearing of such application shall
be served either personally or by registered mail upon the party in default. The court
shall hear the parties, and upon being satisfied that the making of the agreement or
such failure to comply therewith is not in issue, shall make an order directing the parties
to proceed to arbitration in accordance with the terms of the agreement. If the making
of the agreement or default be in issue the court shall proceed to summarily hear such
issue. If the finding be that no agreement in writing providing for arbitration was made,
or that there is no default in the proceeding thereunder, the proceeding shall be
dismissed. If the finding be that a written provision for arbitration was made and there
is a default in proceeding thereunder, an order shall be made summarily directing the
parties to proceed with the arbitration in accordance with the terms thereof.
The court shall decide all motions, petitions or applications filed under the
provisions of this Act, within ten (10) days after such motions, petitions, or applications
have been heard by it.
Gonzales also cites Sec. 24 of R.A. No. 9285 or the Alternative Dispute Resolution Act of 2004:
SEC. 24. Referral to Arbitration.A court before which an action is brought in a
matter which is the subject matter of an arbitration agreement shall, if at least one party
so requests not later than the pre-trial conference, or upon the request of both parties
thereafter, refer the parties to arbitration unless it finds that the arbitration agreement
is null and void, inoperative or incapable of being performed.
6
According to Gonzales, the above-quoted provisions of law outline the procedure to be followed in petitions
to compel arbitration, which the RTC did not follow. Thus, referral of the parties to arbitration by Judge
Pimentel despite the timely and properly raised issue of nullity of the Addendum Contract was misplaced and
without legal basis. Both R.A. No. 876 and R.A. No. 9285 mandate that any issue as to the nullity,
inoperativeness, or incapability of performance of the arbitration clause/agreement raised by one of the parties
to the alleged arbitration agreement must be determined by the court prior to referring them to
arbitration.They require that the trial court first determine or resolve the issue of nullity, and there is no other
venue for this determination other than a pre-trial and hearing on the issue by the trial court which has
jurisdiction over the case. Gonzales adds that the assailed 13 February 2001 Order also violated his right to
procedural due process when the trial court erroneously ruled on the existence of the arbitration agreement
despite the absence of a hearing for the presentation of evidence on the nullity of the Addendum Contract.
Respondent Climax-Arimco, on the other hand, assails the mode of review availed of by Gonzales. Climax-
Arimco cites Sec. 29 of R.A. No. 876:
SEC. 29. Appeals.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 questions of law. The proceedings upon such an appeal,
including the judgment thereon shall be governed by the Rules of Court in so far as they
are applicable.
Climax-Arimco mentions that the special civil action for certiorari employed by Gonzales is available only where
there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law against the
challenged orders or acts. Climax-Arimco then points out that R.A. No. 876 provides for an appeal from such
orders, which, under the Rules of Court, must be filed within 15 days from notice of the final order or resolution
appealed from or of the denial of the motion for reconsideration filed in due time. Gonzales has not denied
that the relevant 15-day period for an appeal had elapsed long before he filed this petition for certiorari. He
cannot use the special civil action of certiorari as a remedy for a lost appeal.
Climax-Arimco adds that an application to compel arbitration under Sec. 6 of R.A. No. 876 confers on the trial
court only a limited and special jurisdiction, i.e., a jurisdiction solely to determine (a) whether or not the parties
have a written contract to arbitrate, and (b) if the defendant has failed to comply with that contract. Respondent
cites La Naval Drug Corporation v. Court of Appeals,[22] which holds that in a proceeding to compel arbitration,
[t]he arbitration law explicitly confines the courts authority only to pass upon the issue of whether there is or
there is no agreement in writing providing for arbitration, and [i]n 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.[23] Climax-Arimco argues that R.A. No. 876 gives no room for any other issue to be dealt
with in such a proceeding, and that the court presented with an application to compel arbitration may order
arbitration or dismiss the same, depending solely on its finding as to those two limited issues. If either of these
matters is disputed, the court is required to conduct a summary hearing on it. Gonzaless proposition
contradicts both the trial courts limited jurisdiction and the summary nature of the proceeding itself.
Climax-Arimco further notes that Gonzaless attack on or repudiation of the Addendum Contract also is not a
ground to deny effect to the arbitration clause in the Contract. The arbitration agreement is separate and
severable from the contract evidencing the parties commercial or economic transaction, it stresses. Hence, the
alleged defect or failure of the main contract is not a ground to deny enforcement of the parties arbitration
agreement. Even the party who has repudiated the main contract is not prevented from enforcing its arbitration
provision. R.A. No. 876 itself treats the arbitration clause or agreement as a contract separate from the
commercial, economic or other transaction to be arbitrated. The statute, in particular paragraph 1 of Sec. 2
thereof, considers the arbitration stipulation an independent contract in its own right whose enforcement may
be prevented only on grounds which legally make the arbitration agreement itself revocable, thus:
SEC. 2. Persons and matters subject to arbitration.Two or more persons or parties may
submit to the arbitration of one or more arbitrators any controversy existing, between
them at the time of the submission and which may be the subject of an action, or the
parties to any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them. Such submission or contract shall be valid, enforceable
and irrevocable, save upon such grounds as exist at law for the revocation of any
contract.
xxxx
The grounds Gonzales invokes for the revocation of the Addendum Contractfraud and oppression in the
execution thereofare also not grounds for the revocation of the arbitration clause in the Contract, Climax-
Arimco notes. Such grounds may only be raised by way of defense in the arbitration itself and cannot be used
to frustrate or delay the conduct of arbitration proceedings. Instead, these should be raised in a separate action
for rescission, it continues.
Climax-Arimco emphasizes that the summary proceeding to compel arbitration under Sec. 6 of R.A. No. 876
should not be confused with the procedure in Sec. 24 of R.A. No. 9285. Sec. 6 of R.A. No. 876 refers to an
application to compel arbitration where the courts authority is limited to resolving the issue of whether there
is or there is no agreement in writing providing for arbitration, while Sec. 24 of R.A. No. 9285 refers to an
ordinary action which covers a matter that appears to be arbitrable or subject to arbitration under the
arbitration agreement. In the latter case, the statute is clear that the court, instead of trying the case, may, on
request of either or both parties, refer the parties to arbitration, unless it finds that the arbitration agreement
is null and void, inoperative or incapable of being performed. Arbitration may even be ordered in the same
suit brought upon a matter covered by an arbitration agreement even without waiting for the outcome of the
issue of the validity of the arbitration agreement. Art. 8 of the UNCITRAL Model Law[24] states that where a
court before which an action is brought in a matter which is subject of an arbitration agreement refers the
parties to arbitration, the arbitral proceedings may proceed even while the action is pending.
Thus, the main issue raised in the Petition for Certiorari is whether it was proper for the RTC, in the proceeding
to compel arbitration under R.A. No. 876, to order the parties to arbitrate even though the defendant therein
has raised the twin issues of validity and nullity of the Addendum Contract and, consequently, of the arbitration
clause therein as well. The resolution of both Climax-Arimcos Motion for Partial Reconsideration and/or
Clarification in G.R. No. 161957 and Gonzaless Petition for Certiorari in G.R. No. 167994 essentially turns on
whether the question of validity of the Addendum Contract bears upon the applicability or enforceability of
the arbitration clause contained therein. The two pending matters shall thus be jointly resolved.
We address the Rule 65 petition in G.R. No. 167994 first from the remedial law perspective. It
deserves to be dismissed on procedural grounds, as it was filed in lieu of appeal which is the prescribed remedy
and at that far beyond the reglementary period. It is elementary in remedial law that the use of an erroneous
mode of appeal is cause for dismissal of the petition for certiorari and it has been repeatedly stressed that a
petition for certiorari is not a substitute for a lost appeal. As its nature, a petition for certiorari lies only where
7
there is no appeal, and no plain, speedy and adequate remedy in the ordinary course of law.[25] The Arbitration
Law specifically provides for an appeal by certiorari, i.e., a petition for review under certiorari under Rule 45 of
the Rules of Court that raises pure questions of law.[26] There is no merit to Gonzaless argument that the use
of the permissive term may in Sec. 29, R.A. No. 876 in the filing of appeals does not prohibit nor discount the
filing of a petition for certiorari under Rule 65.[27] Proper interpretation of the aforesaid provision of law shows
that the term may refers only to the filing of an appeal, not to the mode of review to be employed. Indeed, the
use of may merely reiterates the principle that the right to appeal is not part of due process of law but is a
mere statutory privilege to be exercised only in the manner and in accordance with law.
Neither can BF Corporation v. Court of Appeals[28] cited by Gonzales support his theory. Gonzales
argues that said case recognized and allowed a petition for certiorari under Rule 65 appealing the order of the
Regional Trial Court disregarding the arbitration agreement as an acceptable remedy. [29] The BF
Corporation case had its origins in a complaint for collection of sum of money filed by therein petitioner BF
Corporation against Shangri-la Properties, Inc. (SPI). SPI moved to suspend the proceedings alleging that the
construction agreement or the Articles of Agreement between the parties contained a clause requiring prior
resort to arbitration before judicial intervention. The trial court found that an arbitration clause was
incorporated in the Conditions of Contract appended to and deemed an integral part of the Articles of
Agreement. Still, the trial court denied the motion to suspend proceedings upon a finding that the Conditions
of Contract were not duly executed and signed by the parties. The trial court also found that SPI had failed to
file any written notice of demand for arbitration within the period specified in the arbitration clause. The trial
court denied SPI's motion for reconsideration and ordered it to file its responsive pleading. Instead of filing an
answer, SPI filed a petition for certiorari under Rule 65, which the Court of Appeals, favorably acted upon. In a
petition for review before this Court, BF Corporation alleged, among others, that the Court of Appeals should
have dismissed the petition for certiorari since the order of the trial court denying the motion to suspend
proceedings is a resolution of an incident on the merits and upon the continuation of the proceedings, the
trial court would eventually render a decision on the merits, which decision could then be elevated to a higher
court in an ordinary appeal.[30]
The Court did not uphold BF Corporations argument. The issue raised before the Court was whether
SPI had taken the proper mode of appeal before the Court of Appeals. The question before the Court of
Appeals was whether the trial court had prematurely assumed jurisdiction over the controversy. The question
of jurisdiction in turn depended on the question of existence of the arbitration clause which is one of fact. While
on its face the question of existence of the arbitration clause is a question of fact that is not proper in a petition
for certiorari, yet since the determination of the question obliged the Court of Appeals as it did to interpret
the contract documents in accordance with R.A. No. 876 and existing jurisprudence, the question is likewise a
question of law which may be properly taken cognizance of in a petition for certiorari under Rule 65, so the
Court held.[31]
The situation in B.F. Corporation is not availing in the present petition. The disquisition in B.F.
Corporation led to the conclusion that in order that the question of jurisdiction may be resolved, the appellate
court had to deal first with a question of law which could be addressed in a certiorari proceeding. In the present
case, Gonzaless petition raises a question of law, but not a question of jurisdiction. 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 has 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.[32] Even
if we overlook the employment of the wrong remedy in the broader interests of justice, the petition would
nevertheless be dismissed for failure of Gonzalez to show grave abuse of discretion.
Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
jurisdiction. The Civil Code is explicit on the matter.[33] R.A. No. 876 also expressly authorizes arbitration of
domestic disputes. Foreign arbitration, as a system of settling commercial disputes of an international
character, was likewise recognized when the Philippines adhered to the United Nations "Convention on the
Recognition and the Enforcement of Foreign Arbitral Awards of 1958," under the 10 May 1965 Resolution No.
71 of the Philippine Senate, giving reciprocal recognition and allowing enforcement of international arbitration
agreements between parties of different nationalities within a contracting state. [34] The enactment of R.A. No.
9285 on 2 April 2004 further institutionalized the use of alternative dispute resolution systems, including
arbitration, in the settlement of disputes.
Disputes do not go to arbitration unless and until the parties have agreed to abide by the arbitrators
decision. Necessarily, a contract is required for arbitration to take place and to be binding. R.A. No. 876
recognizes the contractual nature of the arbitration agreement, thus:
SEC. 2. Persons and matters subject to arbitration.Two or more persons or parties
may submit to the arbitration of one or more arbitrators any controversy existing,
between them at the time of the submission and which may be the subject of an action,
or the parties to any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or contract shall be
valid, enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals
or other controversies which may be collateral, incidental, precedent or subsequent to
any issue between the parties.
A controversy cannot be arbitrated where one of the parties to the controversy is an
infant, or a person judicially declared to be incompetent, unless the appropriate court
having jurisdiction approve a petition for permission to submit such controversy to
arbitration made by the general guardian or guardian ad litem of the infant or of the
incompetent. [Emphasis added.]
Thus, we held in Manila Electric Co. v. Pasay Transportation Co.[35] that a submission to arbitration is
a contract. A clause in a contract providing that all matters in dispute between the parties shall be referred to
arbitration is a contract,[36] and in Del Monte Corporation-USA v. Court of Appeals[37] 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. As a rule, contracts are respected as the law between the contracting parties and
produce effect as between them, their assigns and heirs.[38]
The special proceeding under Sec. 6 of R.A. No. 876 recognizes the contractual nature of arbitration
clauses or agreements. It provides:
8
SEC. 6. Hearing by court.A party aggrieved by the failure, neglect or refusal of
another to perform under an agreement in writing providing for arbitration may
petition the court for an order directing that such arbitration proceed in the manner
provided for in such agreement. Five days notice in writing of the hearing of such
application shall be served either personally or by registered mail upon the party in
default. The court shall hear the parties, and upon being satisfied that the making of
the agreement or such failure to comply therewith is not in issue, shall make an order
directing the parties to proceed to arbitration in accordance with the terms of the
agreement. If the making of the agreement or default be in issue the court shall proceed
to summarily hear such issue. If the finding be that no agreement in writing providing
for arbitration was made, or that there is no default in the proceeding thereunder, the
proceeding shall be dismissed. If the finding be that a written provision for
arbitration was made and there is a default in proceeding thereunder, an order shall
be made summarily directing the parties to proceed with the arbitration in accordance
with the terms thereof.
The court shall decide all motions, petitions or applications filed under the
provisions of this Act, within ten days after such motions, petitions, or applications have
been heard by it. [Emphasis added.]
This special proceeding is the procedural mechanism for the enforcement of the contract to arbitrate. The
jurisdiction of the courts in relation to Sec. 6 of R.A. No. 876 as well as the nature of the proceedings therein
was expounded upon in La Naval Drug Corporation v. Court of Appeals.[39] There it was held that R.A. No. 876
explicitly confines the court's 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 proceeding shall be dismissed." [40] The
cited case also stressed that the proceedings are summary in nature.[41] The same thrust was made in the earlier
case of Mindanao Portland Cement Corp. v. McDonough Construction Co. of Florida[42] which held, thus:
Since there obtains herein a written provision for arbitration as well as failure
on respondent's part to comply therewith, the court a quo rightly ordered the parties to
proceed to arbitration in accordance with the terms of their agreement (Sec. 6, Republic
Act 876). Respondent's arguments touching upon the merits of the dispute are
improperly raised herein. They should be addressed to the arbitrators. This proceeding
is merely a summary remedy to enforce the agreement to arbitrate. The duty of the
court in this case is not to resolve the merits of the parties' claims but only to determine
if they should proceed to arbitration or not. x x x x[43]
Implicit in the summary nature of the judicial proceedings is the separable or independent character
of the arbitration clause or agreement. This was highlighted in the cases of Manila Electric Co. v. Pasay Trans.
Co.[44] and Del Monte Corporation-USA v. Court of Appeals.[45]
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
part comes to an end.[46]
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.[47]
The separability of the arbitration clause is confirmed in Art. 16(1) of the UNCITRAL Model Law and
Art. 21(2) of the UNCITRAL Arbitration Rules.[48]
The separability doctrine was dwelt upon at length in the U.S. case of Prima Paint Corp. v. Flood &
Conklin Manufacturing Co.[49] In that case, Prima Paint and Flood and Conklin (F & C) entered into a consulting
agreement whereby F & C undertook to act as consultant to Prima Paint for six years, sold to Prima Paint a list
of its customers and promised not to sell paint to these customers during the same period. The consulting
agreement contained an arbitration clause. Prima Paint did not make payments as provided in the consulting
agreement, contending that F & C had fraudulently misrepresented that it was solvent and able for perform
its contract when in fact it was not and had even intended to file for bankruptcy after executing the consultancy
agreement. Thus, F & C served Prima Paint with a notice of intention to arbitrate. Prima Paint sued in court for
rescission of the consulting agreement on the ground of fraudulent misrepresentation and asked for the
issuance of an order enjoining F & C from proceeding with arbitration. F & C moved to stay the suit pending
arbitration. The trial court granted F & Cs motion, and the U.S. Supreme Court affirmed.
The U.S. Supreme Court did not address Prima Paints argument that it had been fraudulently induced
by F & C to sign the consulting agreement and held that no court should address this argument. Relying on
Sec. 4 of the Federal Arbitration Actwhich provides that if a party [claims to be] aggrieved by the alleged failure
x x x of another to arbitrate x x x, [t]he court shall hear the parties, and upon being satisfied that the making
of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order
directing the parties to proceed to arbitration x x x. If the making of the arbitration agreement or the failure,
neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereofthe
U.S. High Court held that the court should not order the parties to arbitrate if the making of the arbitration
agreement is in issue. The parties should be ordered to arbitration if, and only if, they have contracted to
submit to arbitration. Prima Paint was not entitled to trial on the question of whether an arbitration agreement
was made because its allegations of fraudulent inducement were not directed to the arbitration clause itself,
but only to the consulting agreement which contained the arbitration agreement. [50] Prima Paint held that
arbitration clauses are separable from the contracts in which they are embedded, and that where no claim is
made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to
encompass arbitration of the claim that the contract itself was induced by fraud.[51]
There is reason, therefore, to rule against Gonzales when he alleges that Judge Pimentel acted with
grave abuse of discretion in ordering the parties to proceed with arbitration. Gonzaless argument that the
Addendum Contract is null and void and, therefore the arbitration clause therein is void as well, is not
tenable. First, the proceeding in a petition for arbitration under R.A. No. 876 is limited only to the resolution of
the question of whether the arbitration agreement exists. Second, the separability of the arbitration clause
from the Addendum Contract means that validity or invalidity of the Addendum Contract will not affect the
enforceability of the agreement to arbitrate. Thus, Gonzaless petition for certiorari should be dismissed.
9
This brings us back to G.R. No. 161957. 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.
The Motion for Reconsideration of Gonzales in G.R. No. 161957 should also be denied. In the motion,
Gonzales raises the same question of jurisdiction, more particularly that the complaint for nullification of the
Addendum Contract pertained to the DENR Panel of Arbitrators, not the regular courts. He insists that the
subject of his complaint is a mining dispute since it involves a dispute concerning rights to mining areas, the
Financial and Technical Assistance Agreement (FTAA) between the parties, and it also involves claimowners. He
adds that the Court failed to rule on other issues he raised, such as whether he had ceded his claims over the
mineral deposits located within the Addendum Area of Influence; whether the complaint filed before the DENR
Panel of Arbitrators alleged ultimate facts of fraud; and whether the action to declare the nullity of the
Addendum Contract on the ground of fraud has prescribed.
These are the same issues that Gonzales raised in his Rule 45 petition in G.R. No. 161957 which were
resolved against him in the Decision of 28 February 2005. Gonzales does not raise any new argument that
would sway the Court even a bit to alter its holding that the complaint filed before the DENR Panel of
Arbitrators involves judicial issues which should properly be resolved by the regular courts. He alleged fraud
or misrepresentation in the execution of the Addendum Contract which is a ground for the annulment of a
voidable contract. Clearly, such allegations entail legal questions which are within the jurisdiction of the courts.
The question of whether Gonzales had ceded his claims over the mineral deposits in the Addendum
Area of Influence is a factual question which is not proper for determination before this Court. At all events,
moreover, the question is irrelevant to the issue of jurisdiction of the DENR Panel of Arbitrators. It should be
pointed out that the DENR Panel of Arbitrators made a factual finding in its Order dated 18 October 2001,
which it reiterated in its Order dated 25 June 2002, that Gonzales had, through the various agreements,
assigned his interest over the mineral claims all in favor of [Climax-Arimco] as well as that without the
complainant [Gonzales] assigning his interest over the mineral claims in favor of [Climax-Arimco], there would
be no FTAA to speak of.[52] This finding was affirmed by the Court of Appeals in its Decision dated 30 July
2003resolving the petition for certiorari filed by Climax-Arimco in regard to the 18 October 2001 Order of the
DENR Panel.[53]
The Court of Appeals likewise found that Gonzaless complaint alleged fraud but did not provide any
particulars to substantiate it. The complaint repeatedly mentioned fraud, oppression, violation of the
Constitution and similar conclusions but nowhere did it give any ultimate facts or particulars relative to the
allegations.[54]
 Sec. 5, Rule 8 of the Rules of Court specifically provides that in all averments of fraud, the
circumstances constituting fraud must be stated with particularity. This is to enable the opposing party to
controvert the particular facts allegedly constituting the same. Perusal of the complaint indeed shows that it
failed to state with particularity the ultimate facts and circumstances constituting the alleged fraud. It does not
state what particulars about Climax-Arimcos financial or technical capability were misrepresented, or how the
misrepresentation was done. Incorporated in the body of the complaint are verbatim reproductions of the
contracts, correspondence and government issuances that reportedly explain the allegations of fraud and
misrepresentation, but these are, at best, evidentiary matters that should not be included in the pleading.
As to the issue of prescription, Gonzaless claims of fraud and misrepresentation attending the
execution of the Addendum Contract are grounds for the annulment of a voidable contract under the Civil
Code.[55]Under Art. 1391 of the Code, an action for annulment shall be brought within four years, in the case
of fraud, beginning from the time of the discovery of the same. However, the time of the discovery of the
alleged fraud is not clear from the allegations of Gonzaless complaint. That being the situation coupled with
the fact that this Court is not a trier of facts, any ruling on the issue of prescription would be uncalled for or
even unnecessary.
WHEREFORE, the Petition for Certiorari in G.R. No. 167994 is DISMISSED. Such dismissal effectively
renders superfluous formal action on the Motion for Partial Reconsideration and/or Clarification filed by Climax
Mining Ltd., et al. in G.R. No. 161957.
The Motion for Reconsideration filed by Jorge Gonzales in G.R. No. 161957 is DENIED WITH
FINALITY.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37878 November 25, 1932
MANILA ELECTRIC COMPANY, petitioner,
vs.
PASAY TRANSPORTATION COMPANY, INC., ET AL., respondents.
Ross, Lawrence & Selph for petitioner.
Rivera & Francisco for respondent Pasay Transportation Co.
P. A. Remigio for respondent E. B. Gutierrez. A. M. Zarate for respondent Raymundo Transportation Co.
Vicente Ampil for respondent J. Ampil.
10
MALCOLM, J.:
The preliminary and basic question presented by the petition of the Manila Electric Company, requesting the
members of the Supreme Court, sitting as a board of arbitrators, to fix the terms upon which certain
transportation companies shall be permitted to use the Pasig bridge of the Manila Electric Company and the
compensation to be paid to the Manila Electric Company by such transportation companies, relates to the
validity of section 11 of Act No. 1446 and to the legal right of the members of the Supreme Court, sitting as
a board of arbitrators, to act on the petition. Act No. 1446 above referred to is entitled. "An Act granting a
franchise to Charles M. Swift to construct, maintain, and operate an electric railway, and to construct,
maintain, and operate an electric light, heat, and power system from a point in the City of Manila in an
easterly direction to the town of Pasig, in the Province of Rizal." Section 11 of the Act provides: "Whenever
any franchise or right of way is granted to any other person or corporation, now or hereafter in existence,
over portions of the lines and tracks of the grantee herein, the terms on which said other person or
corporation shall use such right of way, and the compensation to be paid to the grantee herein by such other
person or corporation for said use, shall be fixed by the members of the Supreme Court, sitting as a board of
arbitrators, the decision of a majority of whom shall be final."
When the petition of the Manila Electric Company was filed in this court, it was ordered that the petitioner be
required to serve copies on the Attorney-General and the transportation companies affected by the petition.
Thereafter, the Attorney-General disclaimed any interest in the proceedings, and opposition was entered to
the petition by a number of public utility operators. On the submission of memoranda after an oral hearing,
the petition was made ready for resolution.
Examining the statutory provision which is here invoked, it is first noted that power is attempted to be
granted to the members of the Supreme Court sitting as a board of arbitrators and to the Supreme Court as
an entity. It is next seen that the decision of a majority of the members of the Supreme Court is made final.
And it is finally observed that the franchise granted the Manila Electric Company by the Government of the
Philippine Islands, although only a contract between the parties to it, is now made to effect the rights of
persons not signatories to the covenant.
The law calls for arbitration which represents a method of the parties' own choice. A submission to
arbitration is a contract. The parties to an arbitration agreement may not oust the courts of jurisdiction of the
matters submitted to arbitration. These are familiar rules which find support in articles 1820 and 1821 of the
Civil Code. Citation of authority is hardly necessary, except that it should be recalled that in the Philippines,
and in the United States for that matter, it has been held that a clause in a contract, providing that all matters
in dispute between the parties shall be referred to arbitrators and to them alone, is contrary to public policy
and cannot oust the courts of jurisdiction (Wahl and Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301;
Puentebella vs. Negros Coal Co. [1927], 50 Phil., 69; Vega vs. San Carlos Milling Co. [1924], 51 Phil., 908;
District of Columbia vs. Bailey [1897], 171 U. S., 161.)
We would not be understood as extending the principles governing arbitration and award too far. Unless the
arbitration agreement is such as absolutely to close the doors of the courts against the parties, the courts
should look with favor upon such amicable arrangements. We can also perceive a distinction between a
private contract for submission to arbitration and agreements to arbitrate falling within the terms of a statute
enacted for such purpose and affecting others than the parties to a particular franchise. Here, however,
whatever else may be said in extenuation, it remains true that the decision of the board of arbitrators is
made final, which if literally enforced would leave a public utility, not a party to the contract authorized by
Act No. 1446, without recourse to the courts for a judicial determination of the question in dispute.
Counsel for the petitioner rely principally on the case of Tallassee Falls Mfg. Co. vs. Commissioner's
Court [1908], 158 Ala., 263. It was there held that an Act of a state legislature authorizing the commissioners'
court of a certain county to regulate and fix the rate of toll to be charged by the owners of a bridge is not
unconstitutional as delegating legislative power to the courts. But that is not the question before us. Here
the question is not one of whether or not there has been a delegation of legislative authority to a court.
More precisely, the issue concerns the legal right of the members of the Supreme Court, sitting as a board of
arbitrators the decision of a majority of whom shall be final, to act in that capacity.
We run counter to this dilemma. Either the members of the Supreme Court, sitting as a board of arbitrators,
exercise judicial functions, or the members of the Supreme Court, sitting as board of arbitrators, exercise
administrative or quasi judicial functions. The first case would appear not to fall within the jurisdiction
granted the Supreme Court. Even conceding that it does, it would presuppose the right to bring the matter
in dispute before the courts, for any other construction would tend to oust the courts of jurisdiction and
render the award a nullity. But if this be the proper construction, we would then have the anomaly of a
decision by the members of the Supreme Court, sitting as a board of arbitrators, taken therefrom to the
courts and eventually coming before the Supreme Court, where the Supreme Court would review the
decision of its members acting as arbitrators. Or in the second case, if the functions performed by the
members of the Supreme Court, sitting as a board of arbitrators, be considered as administrative
or quasi judicial in nature, that would result in the performance of duties which the members of the Supreme
Court could not lawfully take it upon themselves to perform. The present petition also furnishes an apt
illustration of another anomaly, for we find the Supreme Court as a court asked to determine if the members
of the court may be constituted a board of arbitrators, which is not a court at all.lawphil.net
The Supreme Court of the Philippine Islands represents one of the three divisions of power in our
government. It is judicial power and judicial power only which is exercised by the Supreme Court. Just as the
Supreme Court, as the guardian of constitutional rights, should not sanction usurpations by any other
department of the government, so should it as strictly confine its own sphere of influence to the powers
expressly or by implication conferred on it by the Organic Act. The Supreme Court and its members should
not and cannot be required to exercise any power or to perform any trust or to assume any duty not
pertaining to or connected with the administering of judicial functions.
The Organic Act provides that the Supreme Court of the Philippine Islands shall possess and exercise
jurisdiction as heretofore provided and such additional jurisdiction as shall hereafter be prescribed by law
(sec. 26). When the Organic Act speaks of the exercise of "jurisdiction" by the Supreme Court, it could not
only mean the exercise of "jurisdiction" by the Supreme Court acting as a court, and could hardly mean the
exercise of "jurisdiction" by the members of the Supreme Court, sitting as a board of arbitrators. There is an
important distinction between the Supreme Court as an entity and the members of the Supreme Court. A
board of arbitrators is not a "court" in any proper sense of the term, and possesses none of the jurisdiction
which the Organic Act contemplates shall be exercised by the Supreme Court.lawph!l.net
In the last judicial paper from the pen of Chief Justice Taney, it was said:
11
The power conferred on this court is exclusively judicial, and it cannot be required or authorized to
exercise any other. . . . Its jurisdiction and powers and duties being defined in the organic law of
the government, and being all strictly judicial, Congress cannot require or authorize the court to
exercise any other jurisdiction or power, or perform any other duty. . . . The award of execution is a
part, and an essential part of every judgment passed by a court exercising judicial power. It is no
judgment, in the legal sense of the term, without it. Without such an award the judgment would be
inoperative and nugatory, leaving the aggrieved party without a remedy. It would be merely an
opinion, which would remain a dead letter, and without any operation upon the rights of the
parties, unless Congress should at some future time sanction it, and pass a law authorizing the
court to carry its opinion into effect. Such is not the judicial power confided to this court, in the
exercise of its appellate jurisdiction; yet it is the whole power that the court is allowed to exercise
under this act of Congress. . . . And while it executes firmly all the judicial powers entrusted to it,
the court will carefully abstain from exercising any power that is not strictly judicial in its character,
and which is not clearly confided to it by the Constitution. . . . (Gordon vs. United States [1864], 2
Wall., 561; 117 U. S., 697 Appendix.)
Confirming the decision to the basic question at issue, the Supreme Court holds that section 11 of Act No.
1446 contravenes the maxims which guide the operation of a democratic government constitutionally
established, and that it would be improper and illegal for the members of the Supreme Court, sitting as a
board of arbitrators, the decision of a majority of whom shall be final, to act on the petition of the Manila
Electric Company. As a result, the members of the Supreme Court decline to proceed further in the matter.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9090 September 10, 1957
EASTBOARD NAVIGATION, LTD., plaintiff-appellant,
vs.
JUAN YSMAEL and COMPANY, INC., defendant-appellant.
Ross, Selph, Carrascoso & Janda and Delfin L. Gonzales for the plaintiff and appellant.
Claro M. Recto for the defendant and appellant.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Manila ordering defendant to pay to
plaintiff the sum of $53,037.89 as awarded by board of arbitrators on June 20, 1950 and confirmed by the
District Court of New York, U.S.A. on August 15, 1950, with the legal interest thereon from December 5, 1950
until its payment, and the costs of suit.
The facts involved in this case which are necessary to be considered in this appeal are stated by the trial the relative bills of lading which were surrendered to us by Atkins Kroll & Co., Inc., for account and
court in its decision which we find to be substantially correct. They are: "On July 25, 1949, Atkins, Kroll & Co., by order of Eastboard Navigation, Ltd. of Toronto.
Inc., Manila, wrote defendant Juan Ysmael & Co., Inc., (letter of Toronto, Canada, owners of the S/S Eastwater,
'have accepted your terms of payment and are agreed to charter the S/S Eastwater to Juan Ysmael & Co., "The documents, which were sent for collection, covered the third and last under the assignment
Inc., Manila, (to load cargo of scrap iron in the Philippines for Buenos Aires)under the following terms and made to you by Mr. Hector Corvera under the terms of the subject credit and cover:"1âwphïl.nêt
conditions: . . (10) Clause Paramount: Terms and conditions for this Charter Party not explicitly or otherwise
stated in this letter of confirmation are to be as per general conditions of regular Charter Party form. Will you
kindly signify confirmation of the above terms by signing the original and four copies of this letter? A formal xxx xxx xxx
copy of the Charter Party document will be forwarded to you within a few days. Atkins, Kroll & Co., Inc.,
Manila, acting solely as agents for and in behalf of the owners of the S/S Eastwater by cable or letter to all 'Deposit account Demurrage under Arbitration - $15,000.1âwphïl.nêt
parties concerned and that the cargo will go forward as scheduled in a satisfactory manner,' Defendant
signed said letter thus, 'For Charter Party: Juan Ysmael & Co., Inc., K. H. Hemady, President.' On the same xxx xxx xxx
date, July 25, 1949, charter party agreement (Exhibit A) was executed containing, besides the regular charter
party printed from a typewritten clause reading: 'Clauses Nos. 16 to 31 inclusive and U.S.A. Clause
"We have requested the Irving Trust Company to advise us by cable when the above amounts have
Paramount, war Risks Clauses 1 and 2, Now Jason Clause and Both-to-Blame Collision Clauses, as attached,
been paid. In the event of non-payment, we have requested that they deliver the bills of lading to
to be considered as fully incorporated herein and to form part of this Charter Party.' Clause No. 29 reads as
the Eastboard Navigation Ltd., under advice.
follows:

"It is mutually agreed that should any dispute arise between Owners and Charterers, the matter in
dispute shall be referred to three persons at New York for arbitration, one to be appointed by each
of the parties hereto, and the third by the two so chosen; their decision or that of any two of them,
shall be final, and for the purpose of enforcing any award, this agreement may be made a rule of
the Court. The arbitrators shall be commercial men. should the two so chosen not be able to agree
who the third arbitrator should be, then the New York Produce Exchange is to appoint such third
arbiter, The amount in dispute shall be placed in escrow at New York subject to the decision of the
arbitrators."
On September 8, 1949, Atkins, Kroll & Co., Inc., Manila again wrote defendant company as follows
(letter Exhibit 3):
"We are today in receipt of the following cable instructions from our principals the Eastboard
Navigation Ltd., regarding the release of your scrap iron loaded at Manila;
'Re Yours sixth release bladings against full payment of freight and by Irving Trust New York fifteen
thousand dollars covering possible demurrage to be settled in accordance with the ruling of
arbitration board New York please have Ysmael immediately their arbitrator'
"In order to facilitate your negotiations of your document with the Bank of America we shall
appreciate very much your putting up a guarantee by Irving Trust New York for the sum of US
$15,000.00 and to nominate the name of your arbitrator immediately."
"We expect to be able to report to you on the above-described collection sometime next week."
On December 3, 1949, defendant Company wrote the Bank of America (Manila)(letter Exhibit 3-B)
as follows:
"Please transmit by telegraphic transfer to Irving Trust Company, New York, the amount of Ten
Thousand Dollars ($10,000), for the account of Eastboard Navigation Ltd., Toronto, Canada, to be
held as deposit for demurrage due the SS Eastwater, together with the $15,000 previously remitted
to them. The amount shall be held pending result of the arbitration of the dispute between this
Company and Eastboard Navigation."
The dispute mentioned in its preceding letter having arisen, under date of April 5, 1950, the
defendant cabled Attys. Manning, Harnish and Holinger of New York City as follows: 'Through
recommendation of Mr. Morris Lipsett we request you kindly present our case before Arbitration
Board re charter vessel S/S EastwaterWriting" (Exhibit 2). And in its letter Exhibit 2-B of the same
date to said attorneys, defendant confirmed its request as follows:
"Our good friend, Mr. Morris E. Lipsett Pacific Corporation, 80 Wall Street New York, has highly
recommended your law firm to us to present our case to arbitration in a case we have with the
Eastboard Navigation Co., Inc., in connection with our charter of their vessel the S/S Eastwater. May
we, therefore, request you to act as such attorney for us, and you may bill us accordingly for your
services in matter.

"We have already spent a considerable sum of this case, not to mention the inconvenience it has
On October 1, 1949, the Bank of America, Manila Office wrote defendant company (letter Exhibit 3-
caused us, and we are most anxious to the matter be terminated as soon as possible.
A) as follows:

"Pertinent papers and documents regarding the matter have been turned over to Mr. Lipsett, and
"In accordance with verbal instructions of your President, Mr. K. H. Hemady your draft for
we have requested him to turn those over to you for your purposes. Should you, however, need
$76,354.55 and attached documents were airmailed this morning to the above bank together with
12
 further information regarding the matters, or should you need our assistance at this end, please
fee to ask us."
On May 23, 1959, Messrs, Manning, Harnisch, and Holinger, acting as attorneys for defendant Juan
Ismael & Co., Inc., executed for plaintiff Eastboard Navigation Ltd., arbitration agreement (Exhibit
B) which reads:
"We, the undersigned, hereby mutually covenant and agree to submit, and hereby do submit to
Charles L. Lambert, Richard Nathan and Donald E. Simmons, as Arbitrators, for their adjudication
and award, a controversy existing between us relating to the liability if any, of the undersigned,
Juan Ysmael & Co., Inc., charterers to the undersigned, Eastboard Navigation, Ltd., owners of the
S/S Eastwater , for demurrage, discharging expenses, wharfage, extra meals agency fees, crew
overtime and miscellaneous expenses under charter party of the S/S Eastwater dated July 25th,
1949.
"And we mutually covenant and promise that the award to be made by said Arbitrators or by a
majority of them, shall be well and faithfully kept and observed by us, and by each of us.
"And it is hereby further mutually agreed that a judgment the United States District Court for the
Southern District of New York shall be rendered upon the award made pursuant to this
submission.1âwphïl.nêt
"WITNESS, our hands this 23rd day of May, 1950."1âwphïl.nêt
Pursuant to said arbitration agreement, the three arbitrators in New York City passed upon the
difference between the plaintiff and the defendant after having heard and received evidence
submitted by both sides,' ands rendered their arbitration decision (Exhibit C). This arbitration
decision was presented by plaintiff to the U.S District Court, Southern District of New York, for
confirmation, (Admiralty No. A165-362) and said Court confirmed the said arbitration decision in
its Order and Final Decree of August 15, 1950, (Exhibit D) ordering that the aforesaid award of
arbitrators be and the same hereby is in all respects confirmed', and "that the said movant,
Eastboard Navigation, Ltd., recover of and from the said respondent Juan Ysmael & Company, Inc.,
the sum of $53,037.89, with interest thereon from the 20th day of June, 1950, amounting to
$488.24, together the movant's cost taxed in the sum of $40.00 and amounting in all to the sum of
$53,566.13 with interest thereon until paid.'
Plaintiff brought this action to enforce the aforesaid "Order and Final Decree" pursuant to Section 48, Rule 39
of the Rules of Court which, among others, provides "In case of a judgment is presumptive evidence of a
right as between the parties and their successors in interest by a subsequent title; but the judgment may be
repelled by evidence of a want of jurisdiction, want of notice to the party, collusion, fraud or clear mistake of
law or fact."
Defendant, in its answer, set up the defense that said judgment cannot been forced in this jurisdiction
because.
13
(a) when the New York District Court acted on the case it did not have jurisdiction over the person of
defendant; and (b) the proceeding where said judgment was rendered was summary, there was no trial on
the merits and defendant did not give its consent thereto. Defendant contends that judgment does come
with the purview of Section 48, of the Rules of Court.
During the hearing, the parties agreed as to the following facts. That defendant is a corporation the stock of
which is held as follows: Magdalena Hemady, 8,459 shares; K. H. Hemady, 6,939 shares; Felipe Ysmael, 770
shares; Carlos Komel Ysmael, 830 shares; Juan Ysmael y Cortes, 1 share; and Gabriel Ysmael, 1 share or a total
of 17,000 shares; that plaintiff, during that time material to this case, was not licensed to transact business in
the Philippines; that this is the first business transaction made locally by plaintiff although previously
plaintiff's vessel was chartered by the National Rice and Corn Corporation to carry rice Cargo to the
Philippines, the charter party thereto being dated April 5, 1949; that the charter party Exhibit A is on
approved by the Documentary Council of the Baltic and White Sea Conference and that one of its standard
stipulation is a clause regarding arbitration: that K. H. Hemady, now deceased, as president and general
manager of defendant, for 25, years had entered into numerous other contracts with third parties in
representation of defendant all of which where ratified by its Board of Directors; that one of the arbitrators
Richard Nathan was appointed by defendant corporation, another one Donald E. Simmons was appointed by
plaintiff, and these two appointed a third one Charles P. Lambert; and that the defense that K. H. Hemady
was not authorized by the Board of Directors of defendant corporation to enter into the arbitration
agreement was raised for the first time in these proceedings, which means that it was not raised in the
arbitration proceedings in New York, nor in the proceedings held to confirm the award in the U.S. District
Court of the Southern District of New York. In addition this stipulation of facts, plaintiff and defendant
submitted documentary evidence.
The lower court rendered judgment affirming the decree of the New York District Court and ordering that it
be enforced from which defendant appealed. Plaintiff likewise appealed but only on the score that the court
did not declare defendant liable for the amount of the foreign exchange tax due on the judgment and for
the fees it agreed to pay to its counsel for this litigation. We will discuss separately the issues involved in this
joint appeal.
It is plaintiff-appellant's contention that, if the decision of the lower court is affirmed, it will have to pay the
foreign exchange tax on the amount awarded therein if the same is to be remitted to its home office at
Ontario, Canada; that it should have been exempted from said tax had defendant paid the award
immediately after it had been confirmed by the U.S. New York District Court because at that time Republic
Act No. 601 had not yet been acted; and that because defendant's undue refusal to pay the same which gave
risk to said tax liability, plaintiff will have to shoulder the same. This is a loss which defendant shall pay,
plaintiff contends, under Article 1107 of the Old Civil Code.
In the first place, there is no clear proof on record that defendant's refusal to pay the award is due to fraud or
bad faith. Plaintiff failed to present any evidence in this regard. On the contrary, the stand of defendant does
not seem to be entirely groundless as evidence by the several defenses it set up in its answer which give a
clear perspective of the reasons why it declined to pay the award which plaintiff demands. In the second
place, it would appear that, if there is any agreement to pay the instant obligation in a currency other than
the Philippine currency, the same is null policy (Republic Act No. 529), and the most it could be demanded is
to pay said obligation in Philippine currency to be measured in the prevailing rate of exchange at the time
the obligation was incurred (section 1, Idem.) Finally in as much as the decree of New York District Court
which now sought to be enforced does not specify the place where the obligation should be paid, the
judgment debtor, herein defendant, may discharge the same here in Manila which is its domicile. We find
therefore no valid reason for upholding the claim that defendant, should it be ordered to pay the award, pay
the foreign exchange tax required by law at the time the obligation fell due. At any rate, this question would
appear now to be moot for the reason that said tax has already been abolished (Republic Act No. 1394).
The next issue raised by plaintiff-appellant refers to the failure of the lower court to award to it the fees
which agreed to pay to its counsel in connection with the present litigation under Article 2208, sub-
paragraph 5, of the new Civil Code. The alleged sub-paragraph allows a winning party to recover attorney's
fees "where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim." From this it would appear that to the entitle plaintiff to Attorney's fee on
this ground, it is necessary that it be proven that defendant acted "in gross and evident bad faith" in refusing
plaintiff's claim. Since, as we have already stated, plaintiff did not present any evidence on this point, the
lower court did not err in denying plaintiff's claim on this score.
Coming now to the appeal of defendant, we may restate the main issues raised in its assignment of errors as
follows: (a) whether or not defendant agreed to submit to compulsory arbitration its dispute with plaintiff in
the charter party agreement executed between them, and, in the affirmative, whether such agreement is valid
in the jurisdiction; (b) whether or not the arbitration agreement Exhibit B, is binding on defendant and, in the
affirmative, whether or not the arbitration proceedings as well as the arbitrators' decision, are valid and
binding on defendant; (c) whether or not, on the assumption that said proceedings and decisions are valid,
the decree of the U.S. District Court, Southern District of New York, sitting as Admiralty Court, is valid and
enforceable in this jurisdiction; and (d) whether or not plaintiff, being a foreign corporation without license to
transact business in the Philippines, has capacity to sue in this jurisdiction.
(a) it should be recalled that as a confirmation of the correspondence had between plaintiff's agents in the
Philippines and defendant, prescribed by its President K. H. Hemady, the former sent a letter advising the
letter that plaintiff had accepted its offer to charter plaintiff's vessel S/S Eastwater to load cargo of scrap iron
in the Philippines for Buenos Aires under certain terms and conditions therein enumerated (Exhibit 1). In this
letter it is stated that the terms and conditions for this charter of confirmation are to be as per general
conditions of regular charter party form", a formal copy of which would be forwarded to defendant. This was
done, and the form above referred to is Exhibit A which was duly signed by plaintiff, through its president,
and by defendant, through its president and general manager, K. H. Hemady. This document is in printed in
form with the blanks properly filled out, at the bottom of which appears a typewritten clause which states,
"Clauses Nos. 16 to 31 inclusive and U. S. A. Clause Paramount, War Risks Clauses 1 and 2, Now Jason Clause
and Both-to-Blame Collision Clauses, as attached, to be considered as fully incorporated herein and to form
part of this Charter Party." (Emphasis supplied) Both the printed form and the typewritten sheet containing
Clauses Nos. 16 to 31 inclusive, were signed by the contracting parties. Clause 29 in the typewritten form
refers to the arbitration agreement, and reads as follows:
29. It is mutually agreed that should any dispute arise between Owners and the Charterers, the
matter in dispute shall be referred to three persons at New York for arbitration, one to be
appointed by each of the parties hereto, and the third by the two so chosen; their decision or that
of any two of them shall be final, and for the purpose of enforcing any award, this agreement may
be a rule of the Court. The Arbitrators shall be commercial men. Should the two so chosen not be
able to agree who the third Arbitrator should be, then the New York Produce Exchange is to
appoint such third Arbiter. The amount in dispute shall be placed in escrow New York, subject to
the decision of the arbitrators.1âwphïl.nêt
14
It is now contended that while K. H. Hemady had signed Exhibit A which contains a typewritten clause at the
end of the document, as well as the typewritten sheets attached thereto, wherein is embodied Clause 29
which refers to the arbitration agreement, the fact however is that Hemady signed said papers without
reading the same and solely on the assumption that they merely formalized the terms and conditions already
agreed upon in the letter of confirmation Exhibit 1. It is emphasized that Hemady never intended to submit
any dispute that may arise out of its charter party to compulsory arbitration, much less to recognize the
findings or award of the arbitrators that may be appointed by the parties as final and not subject to review
by our courts. It is further contended that Hemady signed the document Exhibit A that the same would
merely with its "general conditions" the terms and conditions stated in the letter of confirmation Exhibit 1,
and the typewritten clause attached to the document Exhibit A, specially that which provides for foreign
arbitration, refers to special conditions which were not intended by the parties nor included in the
preliminary negotiation conducted between them. This stand of Hemady corroborated by the fact that when
he received from his lawyers the arbitration agreement Exhibit B, he refused to sign it because it was never
dispute with plaintiff to compulsory arbitration.
There are many circumstances on record which discredit this claim Of defendant-appellant. To begin with, it
appears that the charter party agreement Exhibit A is one the original of which was approved by the
Documentary Council of the Baltic Whit Sea Conference in 1922 and one of its standard clauses is the
arbitration clause and as much as the latter, though in typewritten form, is considered as integral part of the
agreement. This fact was admitted by defendant's counsel. In the second place, Hemady as it would appear,
signed not only the printed portion of the charter party agreement, but the typewritten portions as well,
which contains the arbitration clause, and it cannot be believed that a businessman of long experience as he
was, would affix his signature to the document involving a very important transaction without knowing its
contents and would do only on the assumption that it contained mere formalized statements of the terms
and conditions of the letter of confirmation Exhibit 1. Moreover, if Hemady did not intend to submit his
dispute with plaintiff to arbitration Messrs. Manning, Harnisch and Holinger as lawyer to represent defendant
corporation in the arbitration proceedings to be held in New York? (Exhibits 2 and 2-B) Why did he instruct
the Bank of America on two different occasions to transmit to the Irving Trust Company of New York the
total sum of $25,000 to be "held pending result of the arbitration of the dispute between this company
(Ysmael) and Eastboard Navigation, Ltd.?" (Exhibit 3-B) If defendant corporation did not really intend to
submit its dispute with the plaintiff to arbitration the logical step it should have taken would be to repudiate
the act of its President Hemady, but far from doing so, it approved and ratified it by subsequent that it was
agreeable to said arbitration.
b) The claim that the arbitration proceedings conducted in New York as well as the award of the arbitrators
cannot bind defendant corporation for the reason that the same were without its authority or contrary to its
instructions is also untenable. It is true that when defendant's counsel sent the document Exhibit B to its
President K. H. Hemady for his signature, the latter returned it but that defendant's counsel nevertheless
signed the document in behalf of defendant and submitted it to the Board of Arbitrators, and this act is now
alleged as one would indicate that defendant did not agree to submit the dispute to arbitrations. But there is
one circumstance which justifies the action taken by defendants counsel in New York. Note that said
document Exhibit B is mistakenly termed "arbitration agreement", for it is not so. A perusal thereof would
show that it is a mere agreement to submit the dispute to the arbitrators for arbitration and award. Such is
necessary for there could be no valid arbitration and award if the arbitrators would not know what to
arbitrate and decide. The arbitration agreement is Clause 29 of the charter Party Exhibit A. The fact that
Hemady returned said document Exhibit B is of no significance for such is previously given by defendant to
its counsel Messrs. Manning, Harnisch and Holinger "to present our case to the arbitrators in a case we have
the Eastboard Navigation Co., Ltd., in connection with our charter of their vessel the S/S Eastwater."
contained in its letter dated April 5, 1950 (Exhibit 2-B). The signing of said document Exhibit B by defendant's
counsel is therefore perfectly within the scope of the authority given them by defendant corporation.
But defendant insists that the decision of the arbitrators is not binding upon it because (1) none of the
arbitrators who acted thereon in accordance with the arbitration agreement had been appointed by
defendant, and (2) even if the appointment of Attys. Manning, Harnisch and Holinger to represent defendant
before the arbitration boar would be considered as an authority to submit their dispute to arbitration board
is nevertheless void because it was not in accordance with the condition of said submission — that the
arbitrators consider only claims or awards not in excess of $25,000.
The claim that none of the three arbitrators who acted on the dispute was appointed by defendant, or under
its authority, is untenable, for the same is disproved by the evidence. Thus during the trial of this case and
parties agreed say to certain facts which appear to be not disputed among them being that one of the
arbitrators who acted in New York on the case, Richard Nathan, was appointed by authority of defendant
corporation, and his appears to be supported by the decision of the New York District Court. Thus, in said
decision it appears that when the case was called for hearing both parties were represented by counsel who
submitted documentary evidence among which (1) copy of the authorization signed by the defendant
corporation empowering one Morris E, Lipsett to appoint a substitute arbitrator in its behalf, (2) copy of a
letter of said Morris E. Lipsett designating Richard Nathan as arbitrator, and (3) copy of the letter of Richard
Nathan accepting his appointment as arbitrator (Exhibit D). Note that Mr. Morris E. Lipsett is the same person
who, according to K. H. Hemady, recommended Messrs. Manning, Harnisch and Holinger to be his lawyers in
the arbitration casein New York and that because he was his good friend Hemady accepted his
recommendation (Exhibit 2-B). On the strength of this evidence, we cannot therefore take seriously that
contention that the person, Richard Nathan, who acted as arbitrator in behalf of respondent, did so without
the authority of the latter.
Of course, defendant now contends that the decision of the arbitrators can have no binding effect on it
because it was rendered without first obtaining its written conformity of approval, or without its lawyer
having first submitted to the matter to it for consultation, in accordance with the instruction it has given in its
letter dated April 20, 1950 (Exhibit 2-C), but certainly, such instruction, if any, is preposterous under the
circumstances, for to allow that to prevail would be to defeat the very purpose of the arbitration. The
proceeding would be purposeless for no award can be obtained if the same should be made dependent
upon the instruction or approval of any of the parties.
The contention that defendant corporation has limited its agreement to arbitrate to an amount not
exceeding $25,000 cannot also be sustained. Such claims is not borne out by the evidence for neither the
cable nor the letter which defendant sent to its lawyers in New York contains any statement limiting their
authority to represent it to disputes not exceeding $25,000. In other words, there is no evidence whatsoever
in the record showing that Mr. Hemady understood, or was made to understand, that the arbitration
proceeding "would be conducted solely for the purpose of friendly adjustment of disputes limited to and not
exceeding the amount of $25,000." Moreover, the aforesaid deposit merely represents an estimate of the
amounts that may accrue to plaintiff for demurrage pursuant to the charter agreement while the vessel was
in transit from Manila to Buenos Aires and does not include any additional demurrage that may be incurred
while the vessel is docked in Buenos Aires waiting for the unloading of the cargo. To sustain defendant's
contention would be to defeat the purpose of the arbitration which is to settle all disputes that may arise out
15
of the contract in connection with the voyage. It cannot therefore be pretended that the arbitrators acted
beyond the scope of their authority.
As a corollary to the question regarding to the existence of an arbitration agreement, defendant raises the
issue that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said
agreement is void and without effect for it amounts of removing said dispute from the jurisdiction of the
courts in which the parties are domiciled or where the dispute occurred. It is true that there are authorities
which hold that "a clause in contract providing that all maters in dispute between the parties shall be
referred to arbitrators and to them alone, is contrary to public policy and cannot oust the courts of
jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as an expensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every encouragement from
the courts which may be extended without contravening sound public policy or settled law"(3 Am. Jur., p.
835). Congress has officially adopted the modern view when it reproduced in the new Civil Code the
provisions of the old Code on Arbitration. And only recently it approved republic Act No. 876 expressly
authorizing arbitration of future disputes. Thus section 2 of said Act provides:
SEC. 2. Persons and matters subject to arbitration. — Two or more Persons or Parties may submit to
the arbitration of one or more arbitrators any controversy existing between them at the time of the
submission and which may be the subject of an action, or the parties to any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such
submission or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist
at law for the revocation of any contract.".
Considering this declared policy of Congress in favor of arbitration of all kinds of arbitration of all kinds of
disputes, and the fact that, according to the explanatory note of Republic Act No. 876, "to afford the public a
cheap and expeditious procedure of setting not only commercial but other kinds of controversies most of the
states of the American Union have adopted statutes providing for arbitration, and American businessman are
reported to have enthusiastically accepted the innovation of its obvious advantages over the ordinary court
procedure", we find no plausible reason for holding that the arbitration agreement in question, simply
because it refers to a future dispute, is null and void as being against public policy. (Emphasis supplied.)
(c) It is contended that the decision rendered by the U. S. District Court of New York sitting as an Admiralty
Court, which ratified the award made by the arbitrators, has no binding effect on defendant corporation, nor
can it be enforced in this jurisdiction, for the reason that when said court acted on the case it did not acquire
jurisdiction over said defendant. And this claim is predicated on the alleged fact that defendant was never
served with notice, summons, or process relative to the submission of the award of the arbitrators to said
court, invoking in support of this contention the U. S. Arbitration Act of February 12, 1925 under which the
New York District Court confirmed the arbitrators' award. But we find that the law thus invoked does not
sustain defendant's pretense, for the same, in case of a non-resident, does not necessarily require that
service of notice of the application for confirmation be made on the adverse party himself, it being sufficient
that it be made upon his attorney (July 30, 1947, c. 392, section 1, 61 Stat. 669, p. 4 Exhibit E). This is precisely
what was done in this case. Copy of the notice of submission of the award to the District Court of New York
was served upon defendant's counsel who in due time of appearance and actually appeared when the case
was heard. This is clearly stated in the decision of said Court (Exhibit D). It is significant that respondent's
counsel never impugned the jurisdiction of the defendant nor did ever plead before it that they were bereft
of authority to represent defendant. Defendant cannot therefore in this instance defeat the effect of this
decision by alleging want of jurisdiction, or want of notice, as provided for in section 48, Rule 39 of our Rules
of Court.
(d) While plaintiff is a foreign corporation without license to transact business in the Philippines, it does not
follow that it has no capacity to bring the present action. Such license is not necessary because it is in
business in the Philippines. In fact, the transaction herein involved is the first business undertaken by plaintiff
in the Philippines, although on a previous occasion plaintiff's vessel was chartered by the National Rice and
Corn Corporation to carry rice cargo from abroad to the Philippines. These two isolated transactions do not
constitute engaging in business in the Philippines within the purview of Sections 68 and 69 of the
Corporation Law so as to bar plaintiff from seeking redress in our courts. (Marshall-Wells Co. vs. Henry W.
Elser & Co. 49 Phil., 70; Pacific Vegetable Oil Corporation vs. Angel 0. Singson, G. R. No. L-7917, April 29,
1955.)1âwphïl.nêt
Wherefore, the decision appealed from its affirmed, without pronouncement as to costs.1âwphïl.nêt
[G.R. No. 120105. March 27, 1998]
BF CORPORATION, petitioner, vs. COURT OF APPEALS, SHANGRI-LA PROPERTIES, COLAYCO, ALFREDO
C. RAMOS, INC., RUFO B. MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents.
DECISION
ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction
of the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an
arbitration clause in case of disagreement between the parties in the implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter
engaged the former to construct the main structure of the EDSA Plaza Project, a shopping mall complex in the
City of Mandaluyong.
The construction work was in progress when SPI decided to expand the project by engaging the services
of petitioner again. Thus, the parties entered into an agreement for the main contract works after which
construction work began.
However, petitioner incurred delay in the construction work that SPI considered as serious and
substantial.[1] On the other hand, according to petitioner, the construction works progressed in faithful
compliance with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I of the
Project.[2] Hence, SPI proposed the re-negotiation of the agreement between them.
16
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as
Agreement for the Execution of Builders Work for the EDSA Plaza Project. Said agreement would cover the
construction work on said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner failed to complete the construction works and abandoned the project.[3] This
resulted in disagreements between the parties as regards their respective liabilities under the contract. On July
12, 1993, upon SPIs initiative, the parties respective representatives met in conference but they failed to come
to an agreement.[4]
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint
for collection of the balance due under the construction agreement. Named defendants therein were SPI and
members of its board of directors namely, Alfredo C. Ramos, Rufo B. Colayco, Antonio B. Olbes, Gerardo O.
Lanuza, Jr., Maximo G. Licauco III and Benjamin C. Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an
answer. The motion was anchored on defendants allegation that the formal trade contract for the construction
of the project provided for a clause requiring prior resort to arbitration before judicial intervention could be
invoked in any dispute arising from the contract. The following day, SPI submitted a copy of the conditions of
the contract containing the arbitration clause that it failed to append to its motion to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although
they entered into an agreement defining their rights and obligations in undertaking the project. It emphasized
that the agreement did not provide for arbitration and therefore the court could not be deprived of jurisdiction
conferred by law by the mere allegation of the existence of an arbitration clause in the agreement between
the parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract
between petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the court
of its jurisdiction over the case and that arbitration would expedite rather than delay the settlement of the
parties respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that there was no arbitration clause in the contract
between the parties. It averred that granting that such a clause indeed formed part of the contract, suspension
of the proceedings was no longer proper. It added that defendants should be declared in default for failure to
file their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioners admission of the due execution of the
Articles of Agreement. Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani
Fernando, president of petitioner appear, while page D/7 shows that the agreement is a public document duly
notarized on November 15, 1991 by Notary Public Nilberto R. Briones as document No. 345, page 70, book
No. LXX, Series of 1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court [6] denied the motion
to suspend proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C,
Complaint), plaintiff BF and defendant Shangri-La Properties, Inc. agreed upon the terms and
conditions of the Builders Work for the EDSA Plaza Project (Phases I, II and Carpark), subject to
the execution by the parties of a formal trade contract. Defendants have submitted a copy of the
alleged trade contract, which is entitled `Contract Documents For Builders Work Trade Contractor
dated 01 May 1991, page 2 of which is entitled `Contents of Contract Documents with a list of the
 documents therein contained, and Section A thereof consists of the abovementioned Letter-
Agreement dated May 30, 1991. Section C of the said Contract Documents is entitled `Articles of
Agreement and Conditions of Contract which, per its Index, consists of Part A (Articles of
Agreement) and B (Conditions of Contract). The said Articles of Agreement appears to have been
duly signed by President Rufo B. Colayco of Shangri-La Properties, Inc. and President Bayani F.
Fernando of BF and their witnesses, and was thereafter acknowledged before Notary Public
Nilberto R. Briones of Makati, Metro Manila on November 15, 1991. The said Articles of
Agreement also provides that the `Contract Documents' therein listed `shall be deemed an
integral part of this Agreement, and one of the said documents is the `Conditions of Contract
which contains the Arbitration Clause relied upon by the defendants in their Motion to Suspend
Proceedings.
This Court notes, however, that the `Conditions of Contract referred to, contains the following
provisions:
`3. Contract Document.
Three copies of the Contract Documents referred to in the Articles of
Agreement shall be signed by the parties to the contract and distributed
to the Owner and the Contractor for their safe keeping. (underscoring
supplied)
And it is significant to note further that the said `Conditions of Contract is not duly signed by the
parties on any page thereof --- although it bears the initials of BFs representatives (Bayani F.
Fernando and Reynaldo M. de la Cruz) without the initials thereon of any representative of
Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was not duly
executed or signed by the parties, and the failure of the defendants to submit any signed copy of
the said document, this Court entertains serious doubt whether or not the arbitration clause
found in the said Conditions of Contract is binding upon the parties to the Articles of Agreement.
(Underscoring supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was
too late in the day for defendants to invoke arbitration. It quoted the following provision of the arbitration
clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to
the contract and a copy filed with the Project Manager. The demand for arbitration shall be made
within a reasonable time after the dispute has arisen and attempts to settle amicably have failed;
in no case, however, shall the demand he made be later than the time of final payment except as
otherwise expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project
was to be completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay
counted from November 1, 1991 with liquified (sic) damages up to a maximum of 5% of the total contract
price.
The lower court also found that after the project was completed in accordance with the agreement that
contained a provision on progress payment billing, SPI took possession and started operations thereof by
opening the same to the public in November, 1991. SPI, having failed to pay for the works, petitioner billed
17
SPI in the total amount of P110,883,101.52, contained in a demand letter sent by it to SPI on February 17,
1993. Instead of paying the amount demanded, SPI set up its own claim of P220,000,000.00 and scheduled a
conference on that claim for July 12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is
required that `Notice of the demand for arbitration of a dispute shall be filed in writing with the
other party x x x x in no case x x x x later than the time of final payment x x x x which apparently,
had elapsed, not only because defendants had taken possession of the finished works and the
plaintiffs billings for the payment thereof had remained pending since November, 1991 up to the
filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any
written notice of any demand for arbitration during the said long period of one year and eight
months, this Court finds that it cannot stay the proceedings in this case as required by Sec. 7 of
Republic Act No. 876, because defendants are in default in proceeding with such arbitration.
The lower court denied SPIs motion for reconsideration for lack of merit and directed it and the other
defendants to file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules
of Court before the Court of Appeals. Said appellate court granted the petition, annulled and set aside the
orders and stayed the proceedings in the lower court. In so ruling, the Court of Appeals held:
The reasons given by the respondent Court in denying petitioners motion to suspend
proceedings are untenable.
1. The notarized copy of the articles of agreement attached as Annex A to petitioners reply dated August 26,
1993, has been submitted by them to the respondent Court (Annex G, petition). It bears the signature of
petitioner Rufo B. Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani Fernando,
president of respondent Corporation (Annex G-1, petition). At page D/4 of said articles of agreement it is
expressly provided that the conditions of contract are `deemed an integral part thereof (page 188, rollo). And
it is at pages D/42 to D/44 of the conditions of contract that the provisions for arbitration are found
(Annexes G-3 to G-5, petition, pp. 227-229). Clause No. 35 on arbitration specifically provides:
Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager
on his behalf and the Contractor, either during the progress or after the completion or abandonment of the
Works as to the construction of this Contract or as to any matter or thing of whatsoever nature arising
thereunder or in connection therewith (including any matter or being left by this Contract to the discretion of
the Project Manager or the withholding by the Project Manager of any certificate to which the Contractor
may claim to be entitled or the measurement and valuation mentioned in clause 30 (5) (a) of these
Conditions or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the
Owner and the Contractor hereby agree to exert all efforts to settle their differences or dispute amicably.
Failing these efforts then such dispute or difference shall be referred to Arbitration in accordance with the
rules and procedures of the Philippine Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent
Corporations representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of
petitioner Shangri-La Properties, Inc. does not militate against its effectivity. Said petitioner having
categorically admitted that the document, Annex A to its reply dated August 26, 1993 (Annex G, petition), is
the agreement between the parties, the initial or signature of said petitioners representative to signify
conformity to arbitration is no longer necessary. The parties, therefore, should be allowed to submit their
dispute to arbitration in accordance with their agreement.
2. The respondent Court held that petitioners `are in default in proceeding with such arbitration. It took note
of `the fact that under the supposed Arbitration Clause invoked by defendants, it is required that Notice of
the demand for arbitration of a dispute shall be filed in writing with the other party x x x in no case x x x later
than the time of final payment, which apparently, had elapsed, not only because defendants had taken
possession of the finished works and the plaintiffs billings for the payment thereof had remained pending
since November, 1991 up to the filing of this case on July 14, 1993, but also for the reason that defendants
have failed to file any written notice of any demand for arbitration during the said long period of one year
and eight months, x x x.
Respondent Court has overlooked the fact that under the arbitration clause
Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and
a copy filed with the Project Manager. The demand for arbitration shall be made within a reasonable time
after the dispute has arisen and attempts to settle amicably had failed; in no case, however, shall the demand
be made later than the time of final payment except as otherwise expressly stipulated in the contract
(underscoring supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the
amount of P110,883,101.52, instead of paying, petitioners set up its own claim against respondent
Corporation in the amount of P220,000,000.00 and set a conference thereon on July 12, 1993. Said
conference proved futile. The next day, July 14, 1993, respondent Corporation filed its complaint against
petitioners. On August 13, 1993, petitioners wrote to respondent Corporation requesting arbitration. Under
the circumstances, it cannot be said that petitioners resort to arbitration was made beyond reasonable time.
Neither can they be considered in default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A.
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT
OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL WAS AVAILABLE TO RESPONDENTS.
B.
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE
FACTUAL FINDINGS OF THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO
ARBITRATE, RESPONDENTS ARE ALREADY IN DEFAULT IN
INVOKING THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to
suspend proceedings is a resolution of an incident on the merits. As such, upon the continuation of the
18
proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter render a
decision on the merits that may or may not sustain the existence of an arbitration clause. A decision containing
a finding that the contract has no arbitration clause can then be elevated to a higher court in an ordinary
appeal where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals should have
dismissed the petition for certiorari because the remedy of appeal would still be available to private
respondents at the proper time.[7]
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of
appeal is succinctly reiterated in Ongsitco v. Court of Appeals[8] as follows:
x x x. Countless times in the past, this Court has held that `where appeal is the proper remedy, certiorari will
not lie. The writs of certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave
abuse of discretion equivalent to lack of jurisdiction committed by a lower court. `Where the proper remedy
is appeal, the action for certiorari will not be entertained. x x x. Certiorari is not a remedy for errors of
judgment. Errors of judgment are correctible by appeal, errors of jurisdiction are reviewable by certiorari.
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only
when `there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law x x x. That
is why they are referred to as `extraordinary. x x x.
The Court has likewise ruled that certiorari will not be issued to cure errors in proceedings or correct
erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed
in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by
timely appeal and not by a special civil action of certiorari.[9]v. Court of Appeals, 327 Phil. 1, 41-42 (1996).9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the
lower court over the controversy, the issue posed basically is whether the lower court prematurely assumed
jurisdiction over it. If the lower court indeed prematurely assumed jurisdiction over the case, then it becomes
an error of jurisdiction which is a proper subject of a petition for certiorari before the Court of Appeals. And if
the lower court does not have jurisdiction over the controversy, then any decision or order it may render may
be annulled and set aside by the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the
existence of the arbitration clause, which is a question of fact. In the instant case, the lower court found that
there exists an arbitration clause. However, it ruled that in contemplation of law, said arbitration clause does
not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the
Arbitration Clause does not in fact exist. On its face, the question is one of fact which is not proper in a petition
for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of
fact, the Court of Appeals interpreted the construction of the subject contract documents containing the
Arbitration Clause in accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence which
will be extensively discussed hereunder. In effect, the issue posed before the Court of Appeals was likewise a
question of law. Being a question of law, the private respondents rightfully invoked the special civil action
of certiorari.
 It is that mode of appeal taken by private respondents before the Court of Appeals that is being
questioned by the petitioners before this Court. But at the heart of said issue is the question of whether there
exists an Arbitration Clause because if an Arbitration Clause does not exist, then private respondents took the
wrong mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode
of appeal, which, incidentally, is a question of law, then it has to answer the core issue of whether there exists
an Arbitration Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result
in a manifest failure or miscarriage of justice, the provisions of the Rules of Court which are technical rules may
be relaxed.[10] As we shall show hereunder, had the Court of Appeals dismissed the petition for certiorari, the
issue of whether or not an arbitration clause exists in the contract would not have been resolved in accordance
with evidence extant in the record of the case. Consequently, this would have resulted in a judicial rejection of
a contractual provision agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the
contract between petitioner and private respondents is a legal issue that must be determined in this petition
for review on certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts
that in contemplation of law there could not have been one considering the following points. First, the trial
court found that the conditions of contract embodying the arbitration clause is not duly signed by the
parties. Second, private respondents misrepresented before the Court of Appeals that they produced in the
trial court a notarized duplicate original copy of the construction agreement because what were submitted
were mere photocopies thereof. The contract(s) introduced in court by private respondents were therefore of
dubious authenticity because: (a) the Agreement for the Execution of Builders Work for the EDSA Plaza Project
does not contain an arbitration clause, (b) private respondents surreptitiously attached as Annexes `G-3 to `G-
5 to their petition before the Court of Appeals but these documents are not parts of the Agreement of the
parties as there was no formal trade contract executed, (c) if the entire compilation of documents is indeed a
formal trade contract, then it should have been duly notarized, (d) the certification from the Records
Management and Archives Office dated August 26, 1993 merely states that the notarial record of Nilberto
Briones x x x is available in the files of (said) office as Notarial Registry Entry only, (e) the same certification
attests that the document entered in the notarial registry pertains to the Articles of Agreement only without
any other accompanying documents, and therefore, it is not a formal trade contract, and (f) the compilation
submitted by respondents are a mere hodge-podge of documents and do not constitute a single intelligible
agreement.
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the
representatives of the contracting corporations did not sign the Conditions of Contract that contained the said
clause. Its other contentions, specifically that insinuating fraud as regards the alleged insertion of the
arbitration clause, are questions of fact that should have been threshed out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the parties
contract. Republic Act No. 876 provides for the formal requisites of an arbitration agreement as follows:
Section 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the
parties, as well as a submission to arbitrate an existing controversy, shall be in writing and subscribed by the
party sought to be charged, or by his lawful agent.
19
The making of a contract or submission for arbitration described in section two hereof, providing for
arbitration of any controversy, shall be deemed a consent of the parties of the province or city where any of
the parties resides, to enforce such contract of submission. (Underscoring supplied.)
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing
and (b) it must be subscribed by the parties or their representatives. There is no denying that the parties
entered into a written contract that was submitted in evidence before the lower court. To subscribe means to
write underneath, as ones name; to sign at the end of a document.[11] That word may sometimes be construed
to mean to give consent to or to attest.[12]
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in
the contract in question. The Articles of Agreement, which incorporates all the other contracts and agreements
between the parties, was signed by representatives of both parties and duly notarized. The failure of the private
respondents representative to initial the `Conditions of Contract would therefor not affect compliance with the
formal requirements for arbitration agreements because that particular portion of the covenants between the
parties was included by reference in the Articles of Agreement.
Petitioners contention that there was no arbitration clause because the contract incorporating said
provision is part of a hodge-podge document, is therefore untenable. A contract need not be contained in a
single writing. It may be collected from several different writings which do not conflict with each other and
which, when connected, show the parties, subject matter, terms and consideration, as in contracts entered into
by correspondence.[13] A contract may be encompassed in several instruments even though every instrument
is not signed by the parties, since it is sufficient if the unsigned instruments are clearly identified or referred to
and made part of the signed instrument or instruments. Similarly, a written agreement of which there are two
copies, one signed by each of the parties, is binding on both to the same extent as though there had been
only one copy of the agreement and both had signed it.[14]
The flaw in petitioners contentions therefore lies in its having segmented the various components of the
whole contract between the parties into several parts. This notwithstanding, petitioner ironically admits the
execution of the Articles of Agreement. Notably, too, the lower court found that the said Articles of Agreement
also provides that the `Contract Documents therein listed `shall be deemed an integral part of this Agreement,
and one of the said documents is the `Conditions of Contract which contains the Arbitration Clause. It is this
Articles of Agreement that was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani
F. Fernando, president of petitioner corporation. The same agreement was duly subscribed before notary public
Nilberto R. Briones. In other words, the subscription of the principal agreement effectively covered the other
documents incorporated by reference therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were
not in default in invoking the provisions of the arbitration clause which states that (t)he demand for arbitration
shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably had
failed. Under the factual milieu, private respondent SPI should have paid its liabilities under the contract in
accordance with its terms. However, misunderstandings appeared to have cropped up between the parties
ostensibly brought about by either delay in the completion of the construction work or by force majeure or
the fire that partially gutted the project. The almost two-year delay in paying its liabilities may not therefore
be wholly ascribed to private respondent SPI.
Besides, private respondent SPIs initiative in calling for a conference between the parties was a step
towards the agreed resort to arbitration. However, petitioner posthaste filed the complaint before the lower
court. Thus, while private respondent SPIs request for arbitration on August 13, 1993 might appear an
afterthought as it was made after it had filed the motion to suspend proceedings, it was because petitioner
also appeared to act hastily in order to resolve the controversy through the courts.
The arbitration clause provides for a reasonable time within which the parties may avail of the relief
under that clause. Reasonableness is a relative term and the question of whether the time within which an act
has to be done is reasonable depends on attendant circumstances.[15] This Court finds that under the
circumstances obtaining in this case, a one-month period from the time the parties held a conference on July
12, 1993 until private respondent SPI notified petitioner that it was invoking the arbitration clause, is a
reasonable time. Indeed, petitioner may not be faulted for resorting to the court to claim what was due it under
the contract. However, we find its denial of the existence of the arbitration clause as an attempt to cover up its
misstep in hurriedly filing the complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section
7 of Republic Act No. 876 provides that proceedings therein have only been stayed. After the special
proceeding of arbitration[16] has been pursued and completed, then the lower court may confirm the
award[17] made by the arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before
the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration.[18] Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on
arbitration.[19] Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted
as the wave of the future in international relations, is recognized worldwide. To brush aside a contractual
agreement calling for arbitration in case of disagreement between the parties would therefore be a step
backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition
for certiorari DENIED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.
THIRD DIVISION
[G.R. No. 141833. March 26, 2003]
LM POWER ENGINEERING CORPORATION, petitioner, vs. CAPITOL INDUSTRIAL CONSTRUCTION GROUPS,
INC., respondent.
DECISION
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation, negotiation and
conciliation -- are encouraged by the Supreme Court. By enabling parties to resolve their disputes amicably,
they provide solutions that are less time-consuming, less tedious, less confrontational, and more productive
of goodwill and lasting relationships.[1]
20
The Case
Before us is a Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court, seeking to set aside
the January 28, 2000 Decision of the Court of Appeals[3] (CA) in CA-GR CV No. 54232. The dispositive portion
of the Decision reads as follows:
WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are ORDERED to present
their dispute to arbitration in accordance with their Sub-contract Agreement. The surety bond posted by
[respondent] is [d]ischarged.[4]
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol Industrial
Construction Groups Inc. entered into a Subcontract Agreement involving electrical work at the Third Port of
Zamboanga.[5]
On April 25, 1985, respondent took over some of the work contracted to petitioner.[6] Allegedly, the latter
had failed to finish it because of its inability to procure materials.[7]
Upon completing its task under the Contract, petitioner billed respondent in the amount
of P6,711,813.90.[8] Contesting the accuracy of the amount of advances and billable accomplishments listed by
the former, the latter refused to pay. Respondent also took refuge in the termination clause of the
Agreement.[9] That clause allowed it to set off the cost of the work that petitioner had failed to undertake --
due to termination or take-over -- against the amount it owed the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati (Branch 141) a
Complaint[10] for the collection of the amount representing the alleged balance due it under the
Subcontract. Instead of submitting an Answer, respondent filed a Motion to Dismiss,[11] alleging that the
Complaint was premature, because there was no prior recourse to arbitration.
In its Order[12] dated September 15, 1987, the RTC denied the Motion on the ground that the dispute did
not involve the interpretation or the implementation of the Agreement and was, therefore, not covered by the
arbitral clause.[13]
After trial on the merits, the RTC[14] ruled that the take-over of some work items by respondent was not
equivalent to a termination, but a mere modification, of the Subcontract. The latter was ordered to give full
payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The appellate
court held as arbitrable the issue of whether respondents take-over of some work items had been intended to
be a termination of the original contract under Letter K of the Subcontract. It ruled likewise on two other issues:
whether petitioner was liable under the warranty clause of the Agreement, and whether it should reimburse
respondent for the work the latter had taken over.[15]
Hence, this Petition.[16]
The Issues
In its Memorandum, petitioner raises the following issues for the Courts consideration:
A A review of the factual allegations of the parties reveals that they differ on the following questions: (1)
Whether or not there exist[s] a controversy/dispute between petitioner and respondent regarding the
interpretation and implementation of the Sub-Contract Agreement dated February 22, 1983 that requires
prior recourse to voluntary arbitration;
B
In the affirmative, whether or not the requirements provided in Article III [1] of CIAC Arbitration Rules
regarding request for arbitration ha[ve] been complied with[.][17]
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the implementation of the
Agreement. Thus, without having to resort to prior arbitration, it is entitled to collect the value of the services
it rendered through an ordinary action for the collection of a sum of money from respondent. On the other
hand, the latter contends that there is a need for prior arbitration as provided in the Agreement. This is because
there are some disparities between the parties positions regarding the extent of the work done, the amount
of advances and billable accomplishments, and the set off of expenses incurred by respondent in its take-over
of petitioners work.
We side with respondent. Essentially, the dispute arose from the parties ncongruent positions on
whether certain provisions of their Agreement could be applied to the facts. The instant case involves technical
discrepancies that are better left to an arbitral body that has expertise in those areas. In any event, the inclusion
of an arbitration clause in a contract does not ipso facto divest the courts of jurisdiction to pass upon the
findings of arbitral bodies, because the awards are still judicially reviewable under certain conditions.[18]
21
In the case before us, the Subcontract has the following arbitral clause:
6. The Parties hereto agree that any dispute or conflict as regards to interpretation and
implementation of this Agreement which cannot be settled between [respondent] and
[petitioner] amicably shall be settled by means of arbitration x x x.[19]
Clearly, the resolution of the dispute between the parties herein requires a referral to the provisions of
their Agreement. Within the scope of the arbitration clause are discrepancies as to the amount of advances
and billable accomplishments, the application of the provision on termination, and the consequent set-off of
expenses.
Did a take-over/termination occur? (2) May the expenses incurred by respondent in the take-over be set off
against the amounts it owed petitioner? (3) How much were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the provisions of the
Agreement. According to respondent, the take-over was caused by petitioners delay in completing the
work. Such delay was in violation of the provision in the Agreement as to time schedule:
G. TIME SCHEDULE
[Petitioner] shall adhere strictly to the schedule related to the WORK and complete the WORK
within the period set forth in Annex C hereof. NO time extension shall be granted by [respondent]
to [petitioner] unless a corresponding time extension is granted by [the Ministry of Public Works
and Highways] to the CONSORTIUM.[20]
Because of the delay, respondent alleges that it took over some of the work contracted to petitioner,
pursuant to the following provision in the Agreement:
K. TERMINATION OF AGREEMENT
[Respondent] has the right to terminate and/or take over this Agreement for any of the following
causes:
xxxxxxxxx
6. If despite previous warnings by [respondent], [petitioner] does not execute the WORK in
accordance with this Agreement, or persistently or flagrantly neglects to carry out [its]
obligations under this Agreement.[21]
Supposedly, as a result of the take-over, respondent incurred expenses in excess of the contracted
price. It sought to set off those expenses against the amount claimed by petitioner for the work the latter
accomplished, pursuant to the following provision:
If the total direct and indirect cost of completing the remaining part of the WORK exceed the sum which
would have been payable to [petitioner] had it completed the WORK, the amount of such excess [may be]
claimed by [respondent] from either of the following:
1. Any amount due [petitioner] from [respondent] at the time of the termination of this Agreement.[22]
The issue as to the correct amount of petitioners advances and billable accomplishments involves an
evaluation of the manner in which the parties completed the work, the extent to which they did it, and the
expenses each of them incurred in connection therewith. Arbitrators also need to look into the computation
of foreign and local costs of materials, foreign and local advances, retention fees and letters of credit, and taxes
and duties as set forth in the Agreement. These data can be gathered from a review of the Agreement,
pertinent portions of which are reproduced hereunder:
C. CONTRACT PRICE AND TERMS OF PAYMENT
xxxxxxxxx
All progress payments to be made by [respondent] to [petitioner] shall be subject to a retention
sum of ten percent (10%) of the value of the approved quantities. Any claims by [respondent] on
[petitioner] may be deducted by [respondent] from the progress payments and/or retained
amount. Any excess from the retained amount after deducting [respondents] claims shall be
released by [respondent] to [petitioner] after the issuance of [the Ministry of Public Works and
Highways] of the Certificate of Completion and final acceptance of the WORK by [the Ministry of
Public Works and Highways].
xxxxxxxxx
D. IMPORTED MATERIALS AND EQUIPMENT
[Respondent shall open the letters of credit for the importation of equipment and materials
listed in Annex E hereof after the drawings, brochures, and other technical data of each items in
the list have been formally approved by [the Ministry of Public Works and Highways]. However,
petitioner will still be fully responsible for all imported materials and equipment.
All expenses incurred by [respondent], both in foreign and local currencies in connection with
the opening of the letters of credit shall be deducted from the Contract Prices.
xxxxxxxxx
N. OTHER CONDITIONS
xxxxxxxxx
22
2. All customs duties, import duties, contractors taxes, income taxes, and other taxes that may be
required by any government agencies in connection with this Agreement shall be for the sole
account of [petitioner].[23]
Being an inexpensive, speedy and amicable method of settling disputes, [24] arbitration -- along with
mediation, conciliation and negotiation -- is encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. [25] It is thus
regarded as the wave of the future in international civil and commercial disputes.[26] Brushing aside a
contractual agreement calling for arbitration between the parties would be a step backward.[27]
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.[28] Any doubt should be resolved in favor
of arbitration.[29]
Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal
request for arbitration with the Construction Industry Arbitration Commission (CIAC) precluded the latter from
acquiring jurisdiction over the question. To bolster its position, petitioner even cites our ruling in Tesco Services
Incorporated v. Vera.[30] We are not persuaded.
Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration indeed required
the submission of a request for arbitration, as follows:
SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to have recourse to
arbitration by the Construction Industry Arbitration Commission (CIAC) shall submit its Request for
Arbitration in sufficient copies to the Secretariat of the CIAC; PROVIDED, that in the case of government
construction contracts, all administrative remedies available to the parties must have been exhausted within
90 days from the time the dispute arose.
Tesco was promulgated by this Court, using the foregoing provision as reference.
On the other hand, Section 1 of Article III of the new Rules of Procedure Governing Construction
Arbitration has dispensed with this requirement and recourse to the CIAC may now be availed of whenever a
contract contains a clause for the submission of a future controversy to arbitration, in this wise:
SECTION 1. Submission to CIAC Jurisdiction An arbitration clause in a construction contract or a submission to
arbitration of a construction dispute shall be deemed an agreement to submit an existing or future
controversy to CIAC jurisdiction, notwithstanding the reference to a different arbitration institution or arbitral
body in such contract or submission. When a contract contains a clause for the submission of a future
controversy to arbitration, it is not necessary for the parties to enter into a submission agreement before the
claimant may invoke the jurisdiction of CIAC.
 The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91 and 3-93.[31]
The difference in the two provisions was clearly explained in China Chang Jiang Energy Corporation
(Philippines) v. Rosal Infrastructure Builders et al.[32] (an extended unsigned Resolution) and reiterated
in National Irrigation Administration v. Court of Appeals,[33] from which we quote thus:
Under the present Rules of Procedure, for a particular construction contract to fall within the jurisdiction of
CIAC, it is merely required that the parties agree to submit the same to voluntary arbitration Unlike in the
original version of Section 1, as applied in the Tesco case, the law as it now stands does not provide that the
parties should agree to submit disputes arising from their agreement specifically to the CIAC for the latter to
acquire jurisdiction over the same. Rather, it is plain and clear that as long as the parties agree to submit to
voluntary arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties will not be
precluded from electing to submit their dispute before the CIAC because this right has been vested upon
each party by law, i.e., E.O. No. 1008.[34]
Clearly, there is no more need to file a request with the CIAC in order to vest it with jurisdiction to decide
a construction dispute.
The arbitral clause in the Agreement is a commitment on the part of the parties to submit to arbitration
the disputes covered therein. Because that clause is binding, they are expected to abide by it in good
faith.[35] And because it covers the dispute between the parties in the present case, either of them may compel
the other to arbitrate.[36]
Since petitioner has already filed a Complaint with the RTC without prior recourse to arbitration, the proper
procedure to enable the CIAC to decide on the dispute is to request the stay or suspension of such action, as provided
under RA 876 [the Arbitration Law].[37]
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. 146717. November 22, 2004]
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents.
DECISION
TINGA, J.:
23
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device
in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901
entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into
a Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a
seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos
Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.[4]
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000,
or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined
in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for
reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by
LHC itself.[5] Further, in case of dispute, the parties are bound to settle their differences through mediation,
conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.[6]
To secure performance of petitioners obligation on or before the target completion date, or such time
for completion as may be determined by the parties agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to as the Securities), to wit: Standby
Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank
Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion of the Project
on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied
the requests, however. This gave rise to a series of legal actions between the parties which culminated in the
instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request for Arbitration, this
time filed by petitioner before the International Chamber of Commerce (ICC)[11] on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated
events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had
the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,[12] petitionerin two separate letters[13] both dated 10 August 2000advised respondent banks
of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default
in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the
resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to
hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters
of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC
calls on them.[15]
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner
in default/delay in the performance of its obligations under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion
of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it
would call on the securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on the
Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or
any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on
the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of preliminary
injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance
of the writ. Employing the principle of independent contract in letters of credit, the trial court ruled that LHC
should be allowed to draw on the Securities for liquidated damages. It debunked petitioners contention that
the principle of independent contract could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as
long as the latter could submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance
of a temporary restraining order and writ of preliminary injunction. [20] Petitioner submitted to the appellate
court that LHCs call on the Securities was premature considering that the issue of its default had not yet been
resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established,
LHC had no right to draw on the Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call on and use
of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main
contract between them as shown on the face of the two Standby Letters of Credit which both provide that the
banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarants
capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent
banks to cease and desist from transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC
trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ
Bank to US$1,852,814.00.
24
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial courts decision that LHC could call on the Securities pursuant to the first
principle in credit law that the credit itself is independent of the underlying transaction and that as long as the
beneficiary complied with the credit, it was of no moment that he had not complied with the underlying
contract. Further, the appellate court held that even assuming that the trial courts denial of petitioners
application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which
is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY
THEREOF WHERE THE BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF
PETITIONERS AND LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE
SECURITIES DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK
ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR
TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.[21]
Petitioner contends that the courts below improperly relied on the independence principle on letters of
credit when this case falls squarely within the fraud exception rule. Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental
Memorandum,[23] alleging that in the course of the proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through the use of different modes of discovery available in
the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its
knowledge and admission that delays were excused under the Turnkey Contractto be able to draw against the
Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that
this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law
and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed
to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon.
 In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioners Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals.
LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to
restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed
two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro
Corporation, in which the parties made claims and counterclaims arising from petitioners
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332,
entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before Branch 56 of the RTC of Makati, which is
an action to enforce and obtain execution of the ICCs partial award mentioned in petitioners Manifestation of
12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be returned is
outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs partial award is now
fully within the Makati RTCs jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in
forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral
award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was
under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or
into the latters capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner
was already fait accompli and the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under which it
had no obligation to ascertain the truth of LHCs allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioners prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the independence principle and fraud
exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to
simply as credits, would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer
must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying
contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the
customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails
a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable
to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.[29]
25
In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the
goods before paying.[30] The use of credits in commercial transactions serves to reduce the risk of nonpayment
of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale
settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have
come to be known as standby credits.[31]
There are three significant differences between commercial and standby credits. First, commercial credits
involve the payment of money under a contract of sale. Such credits become payable upon the presentation
by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.[32]
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.[33] A letter of credit, however, changes its nature as different transactions occur and
if carried through to completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the parties thereto.[34]
Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the
UCP.[35] First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest
of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the observance
of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by usages and customs
generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,[38] this Court ruled that
there being no specific provisions which govern the legal complexities arising from transactions involving
letters of credit, not only between or among banks themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the
credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing
bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing
between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called independence principle assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle, banks
assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect
of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or for the good
faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers
of the goods, or any other person whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like for
instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial
letter of credit or repayment standby, which is identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment
of the credit would constitute fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is
so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with.[41] Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in
the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit is separate and distinct from
the underlying transaction.
Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke
the independence principle on letters of creditdoes not impress this Court. To say that the independence
principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters
of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both
the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter
of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter
of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On
the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be
rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction
does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary.
Petitioners argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would
convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a
letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite
for the release of funds under a letter of credit. In other words, the argument is incompatible with the very
nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract
entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of
credit in commercial transactions.
26
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits
are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts,
which tend to generate higher costs than credits do and are usually triggered by a factual determination
rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand
and the standby credit on the other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both ensure against the obligors
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually
by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining
whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost
of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety,
often an insurance company, is a strong financial institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the
obligor (the applicant) over the nature of the applicants performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes
the fact of the obligors performance. The beneficiary may have to establish that fact in litigation. During the
litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed
and that the beneficiarys presentation of those documents is not rightful. In that case, the applicant may sue
the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether
the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the
money. Parties that use a standby credit and courts construing such a credit should understand this
allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety
contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioners posture
that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court
rules that the respondent banks were left with little or no alternative but to honor the credit and both of them
in fact submitted that it was ministerial for them to honor the call for payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of
the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall
on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed
standby letters of credit (the Securities), each in the amount of US$8,988,907, issued and confirmed by banks
or financial institutions acceptable to the Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages (Liquidated Damages for Delay) the amount of US$75,000 for each and every day or part
of a day that shall elapse between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of
such damages from any monies due, or to become due to the Contractor and/or by drawing on the
Security.[45]
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with good faith,
usage, and law.[46]A careful perusal of the Turnkey Contract reveals the intention of the parties to make the
Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even
without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call
on the Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey
Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the fraud
exception exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the
confirming bank, documents that contain, expressly or by implication, material representations of fact that to
his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available
to it.
Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not
without limits and it is important to fashion those limits in light of the principles purpose, which is to serve the
commercial function of the credit. If it does not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was
27
in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called
upon to rule upon the issue of defaultsuch issue having been submitted by the parties to the jurisdiction of
the arbitral tribunals pursuant to the terms embodied in their agreement.[47]
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes
fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It argued that
if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any
liquidated damages.[50]
Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it
is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the
writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending
case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that
this discretion should be exercised based upon the grounds and in the manner provided by law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are violative
of the said right.[52] It must be shown that the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage.[53] Moreover, an injunctive remedy may only be resorted to
when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs
call on the Securities which would justify the issuance of preliminary injunction. By petitioners own admission,
the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the
Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the
right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities, stating
the nature of the default for which the claim on any of the Securities is to be made, provided that no notice
will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for
Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.[57]
 The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended
that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to
call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. [58] What petitioner
did assert before the courts below was the fact that LHCs draws on the Securities would be premature and
without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance
to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters,
theories or arguments not brought out in the proceedings below will ordinarily not be considered by a
reviewing court as they cannot be raised for the first time on appeal. [59] The lower courts could thus not be
faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner
never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did
not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.[60]More importantly, pursuant to the principle of autonomy of contracts embodied
in Article 1306 of the Civil Code,[61] petitioner could have incorporated in its Contract with LHC, a proviso that
only the final determination by the arbitral tribunals that default had occurred would justify the enforcement
of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due
under the Securities, this Court reiterates that pursuant to the independence principle the banks were under
no obligation to determine the veracity of LHCs certification that default has occurred. Neither were they
bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks
undertaking was simply to pay once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon
the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification
for damages it suffered would not normally be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters
of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this
Court ruled that where the period within which the former employees were prohibited from engaging in or
working for an enterprise that competed with their former employerthe very purpose of the preliminary
injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there
would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant
petition mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive
relief could have no practical effect on the existing controversy.[65] The other issues raised by petitioner
28
particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to
it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions.
First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this Court
the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and
Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioners acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioners
Motion for Leave to File Addendum to Petitioners Memorandum dated 8 October 2004, LHC alleges that by
maintaining the present appeal and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed
for judgment on the issue of whether the funds LHC drew on the Securities should be returnedpetitioner
resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to
the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same transactions
and the same essential facts and circumstances, and all raising substantially the same issues either pending in,
or already resolved adversely, by some other court.[67] It may also consist in the act of a party against whom an
adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in
another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions
or proceedings grounded on the same cause on the supposition that one or the other court might look with
favor upon the other party.[68] To determine whether a party violated the rule against forum-shopping, the test
applied is whether the elements of litis pendentia are present or whether a final judgment in one case will
amount to res judicata in another.[69] Forum-shopping constitutes improper conduct and may be punished with
summary dismissal of the multiple petitions and direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been
given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from
notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.
SECOND DIVISION
[G.R. No. 136154. February 7, 2001]
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS HIDALGO, petitioners,
vs. COURT OF APPEALS, JUDGE BIENVENIDO L. REYES in his capacity as Presiding Judge, RTC-
 Br. 74, Malabon, Metro Manila, MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and
SABROSA FOODS, INC., respondents.
DECISION
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July 1998 Decision[1] of the Court of Appeals affirming
the 11 November 1997 Order[2] of the Regional Trial Court which denied petitioners Motion to Suspend
Proceedings in Civil Case No. 2637-MN. It also questions the appellate courts Resolution[3] of 30 October 1998
which denied petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)
appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive distributor of its
Del Monte products in the Philippines for a period of five (5) years, renewable for two (2) consecutive five (5)
year periods with the consent of the parties. The Agreement provided, among others, for an arbitration clause
which states -
12. GOVERNING LAW AND ARBITRATION[4]
This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United States
of America. All disputes arising out of or relating to this Agreement or the parties relationship, including the
termination thereof, shall be resolved by arbitration in the City of San Francisco, State of California, under the
Rules of the American Arbitration Association. The arbitration panel shall consist of three members, one of
whom shall be selected by DMC-USA, one of whom shall be selected by MMI, and third of whom shall be
selected by the other two members and shall have relevant experience in the industry x x x x
In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country. Immediately after its
appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of petitioner
DMC-USA, as MMIs marketing arm to concentrate on its marketing and selling function as well as to manage
its critical relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director Liong Liong C. Sy (LILY
SY) filed a Complaint[5] against petitioners DMC-USA, Paul E. Derby, Jr.,[6] Daniel Collins[7] and Luis
Hidalgo,[8] and Dewey Ltd.[9] before the Regional Trial Court of Malabon, Metro Manila. Private respondents
predicated their complaint on the alleged violations by petitioners of Arts. 20,[10] 21[11] and 23[12] of the Civil
Code. According to private respondents, DMC-USA products continued to be brought into the country by
parallel importers despite the appointment of private respondent MMI as the sole and exclusive distributor of
Del Monte products thereby causing them great embarrassment and substantial damage. They alleged that
the products brought into the country by these importers were aged, damaged, fake or counterfeit, so that in
March 1995 they had to cause, after prior consultation with Antonio Ongpin, Market Director for Special
Markets of Del Monte Philippines, Inc., the publication of a "warning to the trade" paid advertisement in leading
newspapers. Petitioners DMC-USA and Paul E. Derby, Jr., apparently upset with the publication, instructed
private respondent MMI to stop coordinating with Antonio Ongpin and to communicate directly instead with
petitioner DMC-USA through Paul E. Derby, Jr.
29
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal with
the former in bad faith by involving disinterested third parties and by proposing solutions which were entirely
out of their control. Private respondents claimed that they had exhausted all possible avenues for an amicable
resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice and wanton attitude
of petitioners, they should be held responsible for all the actual expenses incurred by private respondents in
the delayed shipment of orders which resulted in the extra handling thereof, the actual expenses and cost of
money for the unused Letters of Credit (LCs) and the substantial opportunity losses due to created out-of-
stock situations and unauthorized shipments of Del Monte-USA products to the Philippine Duty Free Area and
Economic Zone; that the bad faith, fraudulent acts and willful negligence of petitioners, motivated by their
determination to squeeze private respondents out of the outstanding and ongoing Distributorship Agreement
in favor of another party, had placed private respondent LILY SY on tenterhooks since then; and, that the
shrewd and subtle manner with which petitioners concocted imaginary violations by private respondent MMI
of the Distributorship Agreement in order to justify the untimely termination thereof was a subterfuge. For the
foregoing, private respondents claimed, among other reliefs, the payment of actual damages, exemplary
damages, attorneys fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking the arbitration clause
in their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of petitioners Motion
to Suspend Proceedings as the grounds alleged therein did not constitute the suspension of the proceedings
considering that the action was for damages with prayer for the issuance of Writ of Preliminary Attachment and
not on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which private respondents filed
their Comment/Opposition. On 31 January 1997 petitioners filed their Reply. Subsequently, private
respondents filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This Motion
was admitted, over petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the ground
that it "will not serve the ends of justice and to allow said suspension will only delay the determination of the
issues, frustrate the quest of the parties for a judicious determination of their respective claims, and/or deprive
and delay their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners causes of action, required the interpretation of Art. 21 of
the Civil Code[16] and that in determining whether petitioners had violated it "would require a full blown trial"
making arbitration "out of the question."[17] Petitioners Motion for Reconsideration of the affirmation was
denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties warrants an order
compelling them to submit to arbitration.
Petitioners contend that the subject matter of private respondents causes of action arises out of or
relates to the Agreement between petitioners and private respondents. Thus, considering that the arbitration
clause of the Agreement provides that all disputes arising out of or relating to the Agreement or the parties
relationship, including the termination thereof, shall be resolved by arbitration, they insist on the suspension
of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876[18] -
Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an agreement
providing for arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until
an arbitration has been had in accordance with the terms of the agreement. Provided, That the applicant for
the stay is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and
23 of the Civil Code,[19] the determination of which demands a full blown trial, as correctly held by the Court of
Appeals. Moreover, they claim that the issues before the trial court were not joined so that the Honorable
Judge was not given the opportunity to satisfy himself that the issue involved in the case was referable to
arbitration. They submit that, apparently, petitioners filed a motion to suspend proceedings instead of sending
a written demand to private respondents to arbitrate because petitioners were not sure whether the case could
be a subject of arbitration. They maintain that had petitioners done so and private respondents failed to answer
the demand, petitioners could have filed with the trial court their demand for arbitration that would warrant a
determination by the judge whether to refer the case to arbitration. Accordingly, private respondents assert
that arbitration is out of the question.
Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition on
the same date[20] petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate before
the United States District Court in Northern California, docketed as Case No. C-98-4446. They insist that the
filing of the petition to compel arbitration in the United States made the petition filed before this Court an
alternative remedy and, in a way, an abandonment of the cause they are fighting for here in the Philippines,
thus warranting the dismissal of the present petition before this Court.
There is no doubt that arbitration is valid and constitutional in our jurisdiction. [21] Even before the
enactment of RA 876, this Court has countenanced the settlement of disputes through arbitration. Unless the
agreement is such as absolutely to close the doors of the courts against the parties, which agreement would
be void, the courts will look with favor upon such amicable arrangement and will only interfere with great
reluctance to anticipate or nullify the action of the arbitrator.[22] Moreover, as RA 876 expressly authorizes
arbitration of domestic disputes, foreign arbitration as a system of settling commercial disputes was likewise
recognized when the Philippines adhered to the United Nations "Convention on the Recognition and the
Enforcement of Foreign Arbitral Awards of 1958" under the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing enforcement of international arbitration agreements
between parties of different nationalities within a contracting state.[23]
A careful examination of the instant case shows that the arbitration clause in the Distributorship
Agreement between petitioner DMC-USA and private respondent MMI is valid and the dispute between the
parties is arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision
to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that contract
and is itself a contract. As a rule, contracts are respected as the law between the contracting parties and
produce effect as between them, their assigns and heirs.[24] Clearly, only parties to the Agreement, i.e.,
petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr., and private respondents
MMI and its Managing Director LILY SY are bound by the Agreement and its arbitration clause as they are the
30
only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and private respondent SFI, not parties to
the Agreement and cannot even be considered assigns or heirs of the parties, are not bound by the Agreement
and the arbitration clause therein. Consequently, referral to arbitration in the State of California pursuant to
the arbitration clause and the suspension of the proceedings in Civil Case No. 2637-MN pending the return of
the arbitral award could be called for[25] but only as to petitioners DMC-USA and Paul E. Derby, Jr., and private
respondents MMI and LILY SY, and not as to the other parties in this case, in accordance with the recent case
of Heirs of Augusto L. Salas, Jr. v. Laperal Realty Corporation,[26] which superseded that of Toyota Motor
Philippines Corp. v. Court of Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become dysfunctional
because of the presence of third parties is untenable ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"[28] and that "[a]s such, the parties are thereby expected to abide with good
faith in their contractual commitments."[29] However, in Salas, Jr., only parties to the Agreement, their assigns
or heirs have the right to arbitrate or could be compelled to arbitrate. The Court went further by declaring that
in recognizing the right of the contracting parties to arbitrate or to compel arbitration, the splitting of the
proceedings to arbitration as to some of the parties on one hand and trial for the others on the other
hand, or the suspension of trial pending arbitration between some of the parties, should not be allowed as it
would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary delay.[30]
The object of arbitration is to allow the expeditious determination of a dispute. [31] Clearly, the issue
before us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration
proceedings and trial, or suspension of trial pending arbitration. Accordingly, the interest of justice would only
be served if the trial court hears and adjudicates the case in a single and complete proceeding.[32]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the Order of the
Regional Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied petitioners Motion to
Suspend Proceedings, is AFFIRMED. The Regional Trial Court concerned is directed to proceed with the hearing
of Civil Case No. 2637-MN with dispatch. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 91228. March 22, 1993.
PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC, INC., respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND DELIVERY. — We agree
with the court a quo that the sales contract is comprehensive enough to include claims for damages arising
from carriage and delivery of the goods. As a general rule, the seller has the obligation to transmit the goods
to the buyer, and concomitant thereto, the contracting of a carrier to deliver the same.
2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER PARTIES,
CONSTRUED. — American jurisprudence defines charter party as a contract by which an entire ship or some
principal part thereof is let by the owner to another person for a specified time or use. Charter or charter
parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.
3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. — Under the demise or bareboat charter of the
vessel, the charterer will generally be considered as owner for the voyage or service stipulated. The charterer
mans the vessel with his own people and becomes, in effect, the owner pro hac vice, subject to liability to
others for damages caused by negligence. To create a demise the owner of a vessel must completely and
exclusively relinquish possession, anything short of such a complete transfer is a contract of affreightment
(time or voyage charter party) or not a charter party at all.
4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. — A contract of affreightment is in
which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for a
special service to be rendered by the owner of the vessel and under such contract the general owner retains
the possession, command and navigation of the ship, the charterer or freighter merely having use of the
space in the vessel in return for his payment of the charter hire. If the charter is a contract of affreightment,
which leaves the general owner in possession of the ship as owner for the voyage, the rights, responsibilities
of ownership rest on the owner and the charterer is usually free from liability to third persons in respect of
the ship.
5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A VESSEL. —
Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and
employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and not the
owner, is liable as carrier on the contract of affreightment made by himself or by the master with third
persons, and is answerable for loss, damage or non-delivery of goods received for transportation. An owner
who retains possession of the ship, though the hold is the property of the charterer, remains liable as carrier
and must answer for any breach of duty as to the care, loading or unloading of the cargo.
6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED AND RESPECTED. —
Whether the liability of respondent should be based on the same contract or that of the bill of lading, the
parties are nevertheless obligated to respect the arbitration provisions on the sales contract and/or the bill of
lading. Petitioner being a signatory and party to the sales contract cannot escape from his obligation under
the arbitration clause as stated therein. Arbitration has been held valid and constitutional. Even before the
enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes through
arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of the courts
against the parties, which agreement would be void, the courts will look with favor upon such amicable
arrangements and will only interfere with great reluctance to anticipate or nullify the action of the arbitrator.
As pointed out in the case of Mindanao Portland Cement Corp. v. McDough Construction Company of
Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said: "Since
there obtains herein a written provision for arbitration as well as failure on respondent's part to comply
31
therewith, the court a quo rightly ordered the parties to proceed to their arbitration in accordance with the
terms of their agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the merits of the
dispute are improperly raised herein. They should be addressed to the arbitrators. This proceeding is merely
a summary remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to resolve
the merits of the parties' claims but only to determine if they should proceed to arbitration or not. And
although it has been ruled that a privolous or patently baseless claim should not be ordered to arbitration it
is also recognized that the mere fact that a defense exist against a claim does not make it frivolous or
baseless."
7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED THEREOF, PART OF
THE RECORD. — Petitioner contend that the arbitration provision in the bills of lading should not have been
discussed as an issue in the decision of the Court of Appeals since it was not raised as a special or affirmative
defense. The three bills of lading were attached to the complaint as Annexes "A," "B," and "C," and are
therefore parts thereof and may be considered as evidence although not introduced as such. Hence, it was
then proper for the court a quo to discuss the contents of the bills of lading, having been made part of the
record.
DECISION
NOCON, J p:
This is a special civil action for certiorari and prohibition to annul and set aside the Decision of the
respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial court and
dismissing petitioner's compliant in Civil Case No. 89-47403, entitled Puromines, Inc. v. Maritime Factors, Inc.
and Philipp Brothers Oceanic, Inc.
Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines for brevity)
and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with private respondents
Philipp Brothers Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales Contract No. S151.8.01018
provided, among others an arbitration clause which states, thus:
"9. Arbitration
"Any disputes arising under this contract shall be settled by arbitration in London in accordance with the
Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is to appoint an
Arbitrator, and should they be unable to agree, the decision of an Umpire appointed by them to be final. The
Arbitrators and Umpire are all to be commercial men and resident in London. This submission may be made
a rule of the High Court of Justice in England by either party." 2
On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny, USSR a shipment
of 15,500 metric tons prilled Urea in bulk complete and in good order and condition for transport to Iloilo
and Manila, to be delivered to petitioner. Three bills of lading were issued by the ship-agent in the
Philippines, Maritime Factors Inc., namely: Bill of Lading No. dated May 12, 1988 covering 10,000 metric tons
for discharge Manila; Bill of Lading No. 2 of even date covering 4,000 metric tons for unloading in Iloilo City;
and Bill of Lading No. 3, also dated May 12, 1988, covering 1,500 metric tons likewise for discharged in
Manila
The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good order and
condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were discharged in Manila in bad
order and condition, caked, hardened and lumpy, discolored and contaminated with rust and dirt. Damages
were valued at P683, 056. 29 including additional discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of carriage against
Maritime Factors Inc. (which was not included as respondent in this petition) as ship-agent in the Philippines
for the owners of the vessel MV "Liliana Dimitrova," while private respondent, Philipp Brothers Oceanic Inc.,
was impleaded as charterer of the said vessel and proper party to accord petitioner complete relief. Maritime
Factors, Inc. filed its Answer 5 to the complaint, while private respondent filed a motion to dismiss, dated
February 9, 1989, on the grounds that the complaint states no cause of action; that it was prematurely filed;
and that petitioner should comply with the arbitration clause in the sales contract. 6
The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration clause
inasmuch as the cause of action did not arise from a violation of the terms of the sales contract but rather for
claims of cargo damages where there is no arbitration agreement. On April 26, 1989, the trial court denied
respondent's motion to dismiss in this wise:
"The sales contract in question states in part:
'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)
"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the cause of action
of the complaint arose from a breach of contract of carriage by the vessel chartered by the defendant Philipp
Brothers Oceanic, Inc. Thus, the aforementioned arbitration clause cannot apply to the dispute in the present
action which concerns plaintiff's claim for cargo loss/damage arising from breach of contract of carriage.
"That the defendant is not the ship owner or common carrier and therefore plaintiff does not have legal right
against it since every action must be brought against the real party in interest has no merit either for by the
allegations in the complaint the defendant herein has been impleaded as charterer of the vessel, hence, a
proper party." 7
Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The appellate court found
that the arbitration provision in the sales contract and/or the bills of lading is applicable in the present case.
Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to include the claim
for damages arising from the carriage and delivery of the goods subject-matter thereof.
"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state, in part, 'any
dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime Arbitration
32
Commission at the USSR Chamber of Commerce and Industry, 6 Kuibyshevskaia Str., Moscow, USSR, in
accordance with the rules of procedure of said commission.'
Considering that the private respondent was one of the signatories to the sales contract . . . all parties are
obliged o respect the terms and conditions of the said sales contract, including the provision thereof on
'arbitration.' "
Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this contract" in the
arbitration clause of the sales contract covers a cargo claim against the vessel (owner and/or charterers) for
breach of contract of carriage.
Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV 'Liliana
Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner further alleged that the
caking and hardening, wetting and melting, and contamination by rust and dirt of the damaged portions of
the shipment were due to the improper ventilation and inadequate storage facilities of the vessel; that the
wetting of the cargo was attributable to the failure of the crew to close the hatches before and when it
rained while the shipment was being unloaded in the Port of Manila; and that as a direct and natural
consequence of the unseaworthiness and negligence of the vessel (sic), petitioner suffered damages in the
total amount of P683, 056.29 Philippine currency." 8 (Emphasis supplied)
Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of the
complaint arose from breach of contract of carriage by the vessel that was chartered by defendant Philipp
Brothers." 9
In the present petition, petitioner argues that the sales contract does not include the contract of carriage
which is a different contract entered into by the carrier with the cargo owners. That it was an error for the
respondent court to touch upon the arbitration provision of the bills lading in its decision inasmuch as the
same was not raised as an issue by private respondent who was not a party in the bills of lading (emphasis
Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is comprehensive enough to include claims for
damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation to
transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the same.
Art. 1523 of the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send the goods to
the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, except in the cases provided
for in article 1503, first, second and third paragraphs, or unless a contrary intent appear.
"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on behalf of
the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of
the case. If the seller omit so to do, and the goods are lost or damaged in course of transit, the buyer may
decline to treat the delivery to the carrier as a delivery to himself,, or may hold the seller responsible in
damages."
xxx xxx xxx
The disputed sales contact provides for conditions relative to the delivery of goods, such as date of
shipment, demurrage, weight as determined by the bill of lading at load port and more particularly the
following provisions:
"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and approximately
15,000 metric tons to Makati Agro. However, Sellers to have right to ship material as partial shipment or co-
shipment in addition to above. In the event of co-shipment to a third party within Philippines same to be
discussed with and acceptable to both Puromines and Makati Agro.
"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first discharge port
and final survey at last discharge port. Surveyors results to be binding and final. In the event draft survey
results show a quantity less than the combined Bills of Lading quantity for both Puromines and Makati Agro,
Sellers to refund the difference. In the event that draft survey results show a quantity in excess of combined
Bills of Lading of quantity of both Puromines and Makati Agro then Buyers to refund the difference.
"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability to separate
cargo or to deliver cargo separately or to deliver minimum/maximum quantities stated on individual Bills of
Lading. At each port vessel is to discharge in accordance with Buyers local requirements and it is Buyer's
responsibility to separate individual quantities required by each of them at each port during or after
discharged."
As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo from the bill
of lading which is the contract of affreightment together with the sales contract. Consequently, the
(petitioner) is bound by the provisions and terms of said bill of lading and of the arbitration clause
incorporated in the sales contract."
Assuming arguendo that the liability of respondent is not based on the sales contract, but rather on the
contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would, therefore, be material
to show what kind of charter party the respondent had with the shipowner to determine respondent's
liability.
American jurisprudence defines charter party as a contract by which an entire ship or some principal part
thereof is let by the owner to another person for a specified time or use. 10 Charter or charter parties are of
two kinds. Charter of demise or bareboat and contracts of affreightment.
Under the demise or bareboat charter of the vessel, the charterer will generally be considered as owner for
the voyage or service stipulated. The charterer mans the vessel with his own people and becomes, in effect,
the owner pro hac vice, subject to liability to others for damages caused by negligence. 11 To create a
demise the owner of a vessel must completely and exclusively relinquish possession, anything short of such a
complete transfer is a contract of affreightment (time or voyage charter party) or not a charter party at all.
On the other hand, a contract of affreightment is in which the owner of the vessel leases part or all of its
space to haul goods for others. It is a contract for a special service to be rendered by the owner of the vessel
33
12 and under such contract the general owner retains the possession, command and navigation of the ship,
the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter
hire. 13 If the charter is a contract of affreightment, which leaves the general owner in possession of the ship
as owner for the voyage, the rights, responsibilities of ownership rest on the owner and the charterer is
usually free from liability to third persons in respect of the ship. 14
Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and
employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and not the
owner, is liable as carrier on the contract of affreightment made by himself or by the master with third
persons, and is answerable for loss, damage or non-delivery of goods received for transportation. An owner
who retains possession of the ship, though the hold is the property of the charterer, remains liable as carrier
and must answer for any breach of duty as to the care, loading or unloading of the cargo. 15
Assuming that in the present case, the charter party is a demise or bareboat charter, then Philipp Brothers is
liable to Puromines, Inc., subject to the terms and conditions of the sales contract. On the other hand, if the
contract between respondent and the owner of the vessel MV "Liliana Dimitrova" was merely that of
affreightment, then it cannot be held liable for the damages caused by the breach of contract of carriage, the
evidence of which is the bills of lading
In any case, whether the liability of respondent should be based on the same contract or that of the bill of
lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales contract
and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot escape from his
obligation under the arbitration clause as stated therein.
Neither can petitioner contend that the arbitration provision in the bills of lading should not have been
discussed as an issue in the decision of the Court of Appeals since it was not raised as a special or affirmative
defense. The three bills of lading were attached to the complaint as Annexes "A," "B," and "C," and are
therefore parts thereof and may be considered as evidence although not introduced as such. 16 Hence, it
was then proper for the court a quo to discuss the contents of the bills of lading, having been made part of
the record.
Going back to the main subject of this case, arbitration has been held valid and constitutional. Even before
the enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes through
arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of the courts
against the parties, which agreement would be void, the courts will look with favor upon such amicable
arrangements and will only interfere with great reluctance to anticipate or nullify the action of the arbitrator.
17
As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction Company of
Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said:
"Since there obtains herein a written provision for arbitration as well as failure on respondent's part to
comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration in accordance
with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the
merits of the dispute are improperly raised herein. They should be addressed to the arbitrators. This
proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in this
case is not to resolve the merits of the parties' claims but only to determine if they should proceed to Branch 256 of Regional Trial
arbitration or not. And although it has been ruled that a frivolous or patently baseless claim should not be
ordered to arbitration it is also recognized that the mere fact that a defense exist against a claim does not Court of Muntinlupa City, and
make it frivolous or baseless." 19
PACIFIC GENERAL STEEL Promulgated:
In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the parties to
MANUFACTURING
submit their disputes to arbitration and We held as follows:
CORPORATION,
"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended complaint are
based upon the supposed violations committed by the defendants of the 'Contract of Construction of a Respondents. January 7, 2008
Building' and that 'the provisions of paragraph 15 hereof leave a very little room for doubt that the said
causes of action are embraced within the phrase 'any and all questions, disputes or differences between the x-----------------------------------------------------------------------------------------x
parties hereto relative to the construction of the building,' which must be determined by arbitration of two
persons and such determination by the arbitrators shall be 'final, conclusive and binding upon both parties
unless they to court, in which the case the determination by arbitration is a condition precedent 'for taking
any court action." DECISION

xxx xxx xxx

"We hold that the terms of paragraph 15 clearly express the intention of the parties that all disputes between
them should first be arbitrated before court action can be taken by the aggrieved party." 21 VELASCO, JR., J.:

Premises considered, We uphold the validity and applicability of the arbitration clause as stated in Sales
Contract No. S151.8.01018 to the present dispute.
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,
WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED. 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
SO ORDERED. themselves to arbitration in a foreign country. Regrettably, instead of hastening the resolution of their dispute,
the parties wittingly or unwittingly prolonged the controversy.
KOREA TECHNOLOGIES CO., G.R. No. 143581

LTD.,
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in the
Petitioner, supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants, while private
respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a domestic corporation.
Present:
On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby KOGIES would set up an LPG
- versus - QUISUMBING, J., Chairperson, 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,
CARPIO, 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
CARPIO MORALES, 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
HON. ALBERTO A. LERMA, in TINGA, and amounted to USD 1,530,000.

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

34
 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 against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted a temporary
[8]
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
35
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 in Chung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things[16] to determine whether there was
indeed alteration of the quantity and lowering of quality of the machineries and equipment, and whether these
were properly installed. KOGIES opposed the motion positing that the queries and issues raised in the motion
for inspection fell under the coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion for inspection;
(2) denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order; and (3) denying KOGIES motion
to dismiss PGSMCs compulsory counterclaims as these counterclaims fell within the requisites of compulsory
counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration[17] of the September 21,
1998 RTC Order granting inspection of the plant and denying dismissal of PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998 urgent
motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for certiorari[18]docketed
as CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and September 21, 1998 RTC Orders and
praying for the issuance of writs of prohibition, mandamus, and preliminary injunction to enjoin the RTC and
PGSMC from inspecting, dismantling, and transferring the machineries and equipment in the Carmona
plant, and to direct the RTC to enforce the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for reconsideration
and directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant
on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249 informing the CA
about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the writs of prohibition,
mandamus and preliminary injunction which was not acted upon by the CA. KOGIES asserted that the Branch
Sheriff did not have the technical expertise to ascertain whether or not the machineries and equipment
conformed to the specifications in the contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report[21] finding that the enumerated
machineries and equipment were not fully and properly installed.
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
36
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, 1998 in accordance with Section 8 of Rule 11, 1997 Revised Rules of
Civil Procedure, the rule that was effective at the time the Answer with Counterclaim was filed. Sec. 8 on existing
counterclaim or cross-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. 04-2-04-SC, docket fees are now
required to be paid in compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an initiatory
pleading which requires a certification against forum shopping under Sec. 5[24] of Rule 7, 1997 Revised Rules
of Civil Procedure. It is a responsive pleading, hence, the courts a quo did not commit reversible error in
denying KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition are neither the
remedies to question the propriety of an interlocutory order of the trial court. [26] The CA erred on its reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case which was not assailable in
an action for certiorari since the denial of a motion to quash required the accused to plead and to continue
with the trial, and whatever objections the accused had in his motion to quash can then be used as part of his
defense and subsequently can be raised as errors on his appeal if the judgment of the trial court is adverse to
him.The general rule is that interlocutory orders cannot be challenged by an appeal.[27] Thus, in Yamaoka v.
Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse
judgment on the merits, incorporating in said appeal the grounds for assailing the
37
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.
38
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, the retroactive 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 pre-trial conference, or upon the request of both parties
thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is
null and void, inoperative or incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final
and binding are not immediately enforceable or cannot be implemented immediately. Sec. 35[43] of the
UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a competent court
for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or
enforcement on the grounds provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and 44 relative
to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York Convention shall
govern the recognition and enforcement of arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed with
the Regional Trial Court in accordance with the rules of procedure to be promulgated
by the Supreme Court. Said procedural rules shall provide that the party relying on the
award or applying for its enforcement shall file with the court the original or authenticated
copy of the award and the arbitration agreement. If the award or agreement is not made
in any of the official languages, the party shall supply a duly certified translation thereof
into any of such languages.
39
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
40
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, Koreapursuant
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
41
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: 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

Any party may request that provisional relief be granted against the adverse
party.
xxx xxx xxx

Such relief may be granted:

(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:
(i) to prevent irreparable loss or injury;

(ii) to provide security for the performance of any obligation;

(a) Maintain or restore the status quo pending determination of the dispute;
(iii) to produce or preserve any evidence; or

(iv) to compel any other appropriate act or omission.

(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) The order granting provisional relief may be conditioned upon the provision
of security or any act or omission specified in the order.
(c) Provide a means of preserving assets out of which a subsequent award may be
satisfied; or

(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 (d) Preserve evidence that may be relevant and material to the resolution of the dispute.
party against whom the relief is requested, the grounds for the relief, and the evidence
supporting the request.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim
measures:
(e) The order shall be binding upon the parties.
Article 17 J. Court-ordered interim measures

(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.)
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.

42
 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:
WHEREFORE, this petition is PARTLY GRANTED, in that:
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) (1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET ASIDE;
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 (2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117
tribunal has no power to act or to act effectively.[50] are REVERSED and SET ASIDE;

It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of (3) The parties are hereby ORDERED to submit themselves to the arbitration of their dispute and
protection. differences arising from the subject Contract before the KCAB; and

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
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and machineries, if it had
LPG plant was non-operational, PGSMC has the right to dismantle and transfer the equipment and machineries
not done so, and ORDERED to preserve and maintain them until the finality of whatever arbitral award is given
either for their protection and preservation or for the better way to make good use of them which is ineluctably
in the arbitration proceedings.
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
No pronouncement as to costs.
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 SO ORDERED.
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.

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