G.R. No.

96283 February 25, 1992

CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG KUO-CHANG, HUANG AN-CHUNG, JAMES J.R.
CHEN, TRISTAN A. CATINDIG, VICENTE B. AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and VIRGILIO
M. DEL ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail Court of Makati [Branch 57]) and ROBLECOR
PHILIPPINES, INC., respondents.

ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of Appeals* dated October 22, 1990 and December 3, 1990 upholding
the Orders of July 31, 1990 and August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-1335. Respondent Court of Appeals
affirmed the ruling of the trial court that herein petitioners, after submitting themselves for arbitration and agreeing to the terms and conditions thereof,
providing that the arbitration award shall be final and unappealable, are precluded from seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for brevity) and private respondent Roblecor Philippines, Inc.
(Roblecor for short) forged a construction agreement 1 whereby respondent contractor committed to construct and finish on December 31, 1989, petitioner
corporation's industrial/factory complex in Tanawan, Tanza, Cavite for and in consideration of P42,000,000.00. In the event of disputes arising from the
performance of subject contract, it was stipulated therein that the issue(s) shall be submitted for resolution before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2) other ancillary contracts, to wit: one dated June 23, 1989,
for the construction of a dormitory and support facilities with a contract price of P3,875,285.00, to be completed on or before October 31, 1989; 2 and the
other dated August 12, 1989, for the installation of electrical, water and hydrant systems at the plant site, commanding a price of P12.1 million and requiring
completion thereof one month after civil works have been finished. 3
However, respondent Roblecor failed to complete the work despite the extension of time allowed it by Chung Fu. Subsequently, the latter had to take over
the construction when it had become evident that Roblecor was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of P2,370,179.23, Roblecor on May 18, 1990, filed a petition for
Compulsory Arbitration with prayer for Temporary Restraining Order before respondent Regional Trial Court, pursuant to the arbitration clause in the
construction agreement. Chung Fu moved to dismiss the petition and further prayed for the quashing of the restraining order.
Subsequent negotiations between the parties eventually led to the formulation of an arbitration agreement which, among others, provides:
2. The parties mutually agree that the arbitration shall proceed in accordance with the following terms and conditions: —
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 instead, more specific means have been evolved, such as recourse to the good offices of a
disinterested third party, whether this be a court or a private individual or individuals.
Legal history discloses that "the early judges called upon to solve private conflicts were primarily the arbiters, persons not specially trained but in whose
morality, probity and good sense the parties in conflict reposed full trust. Thus, in Republican Rome, arbiter and judge (judex) were synonymous. The
magistrate or praetor, after noting down the conflicting claims of litigants, and clarifying the issues, referred them for decision to a private person designated
by the parties, by common agreement, or selected by them from an apposite listing (the album judicium) or else by having the arbiter chosen by lot. The
judges proper, as specially trained state officials endowed with own power and jurisdiction, and taking cognizance of litigations from beginning to end,
only appeared under the Empire, by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been an accepted alternative to litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines, it was nonetheless recognized in the Spanish Civil Code;
specifically, the provisions on compromises made applicable to arbitrations under Articles 1820 and 1821.7 Although said provisions were repealed by
implication with the repeal of the Spanish Law of Civil Procedure, 8 these and additional ones were reinstated in the present Civil Code. 9
Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines. Although early on, Commonwealth Act 103 (1936)
provided for compulsory arbitration as the state policy to be administered by the Court of Industrial Relations, in time such a modality gave way to voluntary
arbitration. While not completely supplanting compulsory arbitration which until today is practiced by government officials, the Industrial Peace Act which
was passed in 1953 as Republic Act No. 875, favored the policy of free collective bargaining, in general, and resort to grievance procedure, in particular,
as the preferred mode of settling disputes in industry. It was accepted and enunciated more explicitly in the Labor Code, which was passed on November
1, 1974 as Presidential Decree No. 442, with the amendments later introduced by Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations, arbitration was gaining wide acceptance. A consensual process, it was preferred
to orders imposed by government upon the disputants. Moreover, court litigations tended to be time-consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the courts toward arbitration agreements is slowly crystallizing into definite and workable form. . . . The rule
now is that unless the agreement is such as absolutely to close the doors of the courts against the parties, which agreement would be void, the courts will
look with favor upon such amicable arrangements and will only with great reluctance interfere to anticipate or nullify the action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged when Republic Act No. 876 (1953), otherwise known as the
Arbitration Law, was passed. "Said Act was obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that "the provisions of chapters one and two, Title XIV, Book
IV of the Civil Code shall remain in force." 11
In recognition of the pressing need for an arbitral machinery for the early and expeditious settlement of disputes in the construction industry, a
Construction Industry Arbitration Commission (CIAC) was created by Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes via a particular mode, it is the regular courts that remain the fora to
resolve such matters. However, the parties may opt for recourse to third parties, exercising their basic freedom to "establish such stipulation, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy." 12 In such
a case, resort to the arbitration process may be spelled out by them in a contract in anticipation of disputes that may arise between them. Or this may be
stipulated in a submission agreement when they are actually confronted by a dispute. Whatever be the case, such recourse to an extrajudicial means of
settlement is not intended to completely deprive the courts of jurisdiction. In fact, the early cases on arbitration carefully spelled out the prevailing
doctrine at the time, thus: ". . . a clause in a contract providing that all matters in dispute between the parties shall be referred to arbitrators and to them
alone is contrary to public policy and cannot oust the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing dispute to one is valid. Being part of a contract between
the parties, it is binding and enforceable in court in case one of them neglects, fails or refuses to arbitrate. Going a step further, in the event that they
declare their intention to refer their differences to arbitration first before taking court action, this constitutes a condition precedent, such that where a suit
has been instituted prematurely, the court shall suspend the same and the parties shall be directed forthwith to proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not been selected by the parties. 15
Under present law, may the parties who agree to submit their disputes to arbitration further provide that the arbitrators' award shall be final, unappealable
and executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
Any stipulation that the arbitrators' award or decision shall be final is valid, without prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be final and inappealable except on questions of law which
shall be appealable to the Supreme Court." 16
Under the original Labor Code, voluntary arbitration awards or decisions were final, unappealable and executory. "However, voluntary arbitration awards
or decisions on money claims, involving an amount exceeding One Hundred Thousand Pesos (P100,000.00) or forty-percent (40%) of the paid-up capital
of the respondent employer, whichever is lower, maybe appealed to the National Labor Relations Commission on any of the following grounds: (a) abuse
of discretion; and (b) gross incompetence." 17 It is to be noted that the appeal in the instances cited were to be made to the National Labor Relations
Commission and not to the courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary arbitrator is now mandated to render an award or decision
within twenty (20) calendar days from the date of submission of the dispute and such decision shall be final and executory after ten (10) calendar days
from receipt of the copy of the award or decision by the parties. 18
Where the parties agree that the decision of the arbitrator shall be final and unappealable as in the instant case, the pivotal inquiry is whether subject
arbitration award is indeed beyond the ambit of the court's power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators' award is not absolute and without
exceptions. Where the conditions described in Articles 2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the
arbitrators' award may be annulled or rescinded. 19 Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for vacating,
modifying or rescinding an arbitrator's award. 20 Thus, if and when the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to determine whether it is in accordance with law or within the
scope of his authority? How may the power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to be borne in mind, however, that this action will lie only
where a grave abuse of discretion or an act without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown. For "the writ of
certiorari is an extra-ordinary remedy and that certiorari jurisdiction is not to be equated with appellate jurisdiction. In a special civil action of certiorari,
the Court will not engage in a review of the facts found nor even of the law as interpreted or applied by the arbitrator unless the supposed errors of fact or
of law are so patent and gross and prejudicial as to amount to a grave abuse of discretion or an exces de pouvoir on the part of the arbitrator." 21
Even decisions of administrative agencies which are declared "final" by law are not exempt from judicial review when so warranted. Thus, in the case of
Oceanic Bic Division (FFW), et al. v. Flerida Ruth P. Romero, et al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making "final" the decisions of certain administrative agencies, we have taken cognizance of petitions questioning
these decisions where want of jurisdiction, grave abuse of discretion, violation of due process, denial of substantial justice or erroneous interpretation of
the law were brought to our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial capacity. 24 It stands to reason, therefore, that
their decisions should not be beyond the scope of the power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which allege error on the part of the arbitrator in granting
compensation for various items which apparently are disputed by said petitioners:
1. The Honorable Arbitrator committed grave error in failing to apply the terms and conditions of the Construction Agreement, Dormitory Contract and
Electrical Contract, and in using instead the "practices" in the construction industry;
2. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss of productivity due to adverse weather conditions;
3. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss due to delayed payment of progress billings;
4. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for loss of productivity due to the cement crisis;
5. The Honorable Arbitrator committed grave error in granting extra compensation to Roblecor for losses allegedly sustained on account of the failed
coup d'état;
6. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the alleged unpaid billings of Chung Fu;
7. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing the alleged extended overhead expenses;
8. The Honorable Arbitrator committed grave error in granting to Roblecor the amount representing expenses for change order for site development
outside the area of responsibility of Roblecor;
9. The Honorable Arbitrator committed grave error in granting to Roblecor the cost of warehouse No. 2;
10. The Honorable Arbitrator committed grave error in granting to Roblecor extra compensation for airduct change in dimension;
11. The Honorable Arbitrator committed grave error in granting to Roblecor extra compensation for airduct plastering; and
12. The Honorable Arbitrator committed grave error in awarding to Roblecor attorney's fees.
After closely studying the list of errors, as well as petitioners' discussion of the same in their Motion to Remand Case For Further Hearing and
Reconsideration and Opposition to Motion for Confirmation of Award, we find that petitioners have amply made out a case where the voluntary arbitrator
failed to apply the terms and provisions of the Construction Agreement which forms part of the law applicable as between the parties, thus committing a
grave abuse of discretion. Furthermore, in granting unjustified extra compensation to respondent for several items, he exceeded his powers — all of
which would have constituted ground for vacating the award under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case, despite prima facie showing of the existence of grounds warranting judicial
review, effectively deprived petitioners of their opportunity to prove or substantiate their allegations. In so doing, the trial court itself committed grave
abuse of discretion. Likewise, the appellate court, in not giving due course to the petition, committed grave abuse of discretion. Respondent courts should
not shirk from exercising their power to review, where under the applicable laws and jurisprudence, such power may be rightfully exercised; more so
where the objections raised against an arbitration award may properly constitute grounds for annulling, vacating or modifying said award under the laws
on arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated October 22, 1990 and December 3, 1990 as well as the Orders
of respondent Regional Trial Court dated July 31, 1990 and August 23, 1990, including the writ of execution issued pursuant thereto, are hereby SET
ASIDE. Accordingly, this case is REMANDED to the court of origin for further hearing on this matter. All incidents arising therefrom are reverted to the
status quo ante until such time as the trial court shall have passed upon the merits of this case. No costs.SO ORDERED.
G.R. No. 161957 January 22, 2007
JORGE GONZALES and PANEL OF ARBITRATORS, Petitioners,
vs.
CLIMAX MINING LTD., CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING INC., Respondents.
x--------------------------------------------------------------------------------- x
G.R. No. 167994 January 22, 2007
JORGE GONZALES, Petitioner,
vs.
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.
RESOLUTION
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 20051 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 Reconsideration2 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 Panel’s 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 Clarification3 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 jurisprudence5 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 Gonzales’s 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 Gonzales’s having "impugn[ed] the existence or validity" of the addendum
contract. If so, it supposedly conveys the idea that Gonzales’s unilateral repudiation of the contract or mere allegation of its invalidity is all it takes to
avoid arbitration. Hence, respondents submit that the court’s 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.
Both parties were required to file their respective comments to the other party’s 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. 16195710 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 19.111 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-Arimco’s 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.1awphi1.net
On 18 May 2000, the RTC issued an order declaring Gonzales’s 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 Gonzales’s 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.
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 court’s 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. Gonzales’s
proposition contradicts both the trial court’s limited jurisdiction and the summary nature of the proceeding itself.
Climax-Arimco further notes that Gonzales’s 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 Contract—fraud and oppression in the execution thereof—are 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 court’s 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 Law24 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-Arimco’s Motion for Partial Reconsideration and/or Clarification in
G.R. No. 161957 and Gonzales’s 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 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 Gonzales’s 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 Appeals28 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 Corporation’s 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, Gonzales’s 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 arbitrator’s 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 Appeals37 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:
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 Florida42 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 x43
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 & C’s motion, and the U.S. Supreme Court affirmed.
The U.S. Supreme Court did not address Prima Paint’s 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 Act—which 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 thereof"—the 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. Gonzales’s 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, Gonzales’s petition for certiorari should be dismissed.
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 party’s mere repudiation of the main contract is sufficient to avoid
arbitration. That is exactly the situation that the separability doctrine, as well as jurisprudence applying it, seeks to avoid. We add that when it was
declared in G.R. No. 161957 that the case should not be brought for arbitration, it should be clarified that the case referred to is the case actually filed by
Gonzales before the DENR Panel of Arbitrators, which was for the nullification of the main contract on the ground of fraud, as it had already been
determined that the case should have been brought before the regular courts involving as it did judicial issues.
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.1avvphi1.net
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 2003 resolving 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 Gonzales’s 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-
Arimco’s 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, Gonzales’s 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 Gonzales’s 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.
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.

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:
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.
 [G.R. No. L-9090. September 10, 1957.]

EASTBOARD NAVIGATION, LTD., Plaintiff-Appellant, v. JUAN YSMAEL and COMPANY, INC., Defendant-Appellant.

Ross, Selph, Carrascoso & Janda and Delfin L. Gonzalez for the plaintiff and Appellant.

Claro M. Recto for the defendant and appellant.

SYLLABUS
1. CHARTER PARTY; COMPULSORY ARBITRATION, WHEN BIDDING UPON THE PARTIES; CASE AT BAR. — The defendant corporation.,
through its president and general manager, chartered plaintiff’s vessel to load a cargo of scrap iron in the Philippines for Buenos Aires. The charter party
agreement contained, besides the regular charter party printed form, a typewritten clause providing a foreign compulsory arbitration in case of any dispute
that may arise out of said agreement. It appears that the defendant corporation, through its said president and general manager, signed not only the printed
portion of the charter party but the typewritten portion as well, which contains the arbitration clause. Moreover, after a dispute as to the liability of the
defendant corporation arose, said president and general manager appointed lawyers in New York to represent defendant corporation in the arbitration
proceedings to be held in that state. Held: If the 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 and general manager, but far from doing so, it approved and ratified it by
subsequent acts which clearly indicate that it was agreeable to said arbitration. Consequently, said arbitration agreement is binding on the defendant
corporation, and the arbitration proceedings as well as the arbitration decision rendered pursuant thereof, as confirmed by the District Court of New York,
are valid; hence enforceable in this jurisdiction.

2. ID.; ARBITRATION AGREEMENT VALID; ARBITRATION LAW IN THIS JURISDICTION STATED. — While there are authorities which hold
that "a clause in a contract providing that all matters in dispute between the parties shall be referred to arbitrators and to them, is contrary to public and
cannot oust the courts of jurisdiction" (Manila Electric Co. v. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which favor"
the more intelligent view that arbitration, as an inexpensive speedy and amicable method of settling disputes, and as a means of avoiding litigation,
should receive every encouragement from the courts which may be extended without contravening sound public policy or settled law" (3 Am. Jur., p.
835). congress has officially adopted this 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.

3. FOREIGN CORPORATIONS; CAPACITY TO SUE EVEN WITHOUT A LICENSED. — A foreign corporation has capacity to sue even without a
license to transact business; if it is not engaged in business in the Philippines. Isolated transactions do not constitute engaging in business within the
purview of Sections 68 and 69 of the Corporation Law so as to bar a foreign corporation from seeking redress in the Philippine courts.

4. Foreign exchange TAX; CIRCUMSTANCES DEFEATING CLAIM FOR PAYMENT; ABOLITION OF TAX. — Considering that the plaintiff failed
to present any evidence that the defendant’s refusal to pay the award is due to fraud or bad faith; that if there is any agreement to pay the instant
obligation in a currency other than the Philippine currency, the same is null and void as contrary to public policy (Republic Act No. 529), and the most
that 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.); that inasmuch as the decree of New York District Court which is now sought to be enforced does not specify the place where
the obligation should be paid, and hence the judgment debtor, herein defendant, may discharge the same here in Manila which is its domicile; Held: There
is no valid reason for upholding the claim that the defendant, should it be ordered to pay the award, the pay the foreign exchange tax required by the law
at the time the obligation fell due.

5. ATTORNEY’S FEES; WHEN THE PLAINTIFF MAY BE ENTITLED TO FEES. — In order that the plaintiff may be entitled to attorney’s fees
under Article 2208, sub-paragraph 5, of the new Civil Code, it is necessary that it be proven that defendant acted "in gross and evident bad faith" in
refusing plaintiff’s claim. Since plaintiff did not present any evidence on this point the lower did not err in denying its claim on this score.

DECISION

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 a
board of arbitrators on June 20, 1950 and confirmed by the District Court of New York, U. S. A. on August 15, 1950, with 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 court in its decision which we find to be
substantially correct. They are: "On July 25, 1949, Atkins, Kroll & Co., Inc., Manila, wrote defendant Juan Ysmael & Co., Inc., (letter Exh. 1) advising
that plaintiff Eastboard Navigation, Ltd., 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 & Company, Inc., Manila, (to load cargo of scrap iron in the Philippines for Buenos Aires) under the following
terms and 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 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 authority, sincerely hope we may be of service
to all 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 date, July 25, 1949, charter party agreement (Exhibit A) was executed containing,
besides the regular charter party printed form, a typewritten clause reading: ‘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.’ Clause No. 29 reads as follows:chanrob1es virtual 1aw library

‘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):chanrob1es virtual 1aw library

‘We are today in receipt of the following cable instructions from our principals the Eastboard Navigation Ltd., regarding the release of your bills of
lading covering balance of your scrap iron loaded at Manila:jgc:chanrobles.com.ph

"Re Yours sixth agree release bladings against full payment of freight and guarantee by Irving Trust Newyork fifteen thousand dollars covering possible
demurrage to be settled in accordance with ruling of arbitration board Newyork please have Ysmael immediately nominate their arbitrator"

‘In order to facilitate your negotiations of your documents 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.’

"On October 1, 1949, the Bank of America, Manila Office, wrote defendant company (letter Exhibit 3-A) as follows:chanrob1es virtual 1aw library

‘In accordance with verbal instructions of your President, Mr. K. Hemady, your draft for $76,354.55 and attached documents were airmailed this morning
to the above bank together with the relative bills of lading which were surrendered to us by Atkins Kroll & Co., Inc., for account and by order of
Eastboard Navigation, Ltd. of Toronto.

‘The documents, which were sent for collection, cover the third and last shipment under the assignment made to you by Mr. Hector Corvera under the
terms of the subject credit and cover:chanrob1es virtual 1aw library
x x x
‘Deposit account Demurrage under Arbitration — $15,000.
x x x

‘We have requested the Irving Trust Company to advise us by cable when the above amounts have been paid. In the event of non-payment, we have
requested that they deliver the bills of lading to the Eastboard Navigation Ltd., under cable advice.

‘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:chanrob1es virtual 1aw library

‘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, Harnisch and Hollinger 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 Eastwater Writing" (Exhibit 2). And in its letter Exhibit 2-B of the same date to said attorneys, defendant confirmed its request as
follows:chanrob1es virtual 1aw library

‘Our good friend, Mr. Morris E. Lipsett, of the Lipsett Pacific Corporation, 80 Wall Street, New York, has highly recommended your law firm to us to
present our case to the arbitration in a case we have with the Eastboard Navigation Co., Ltd., 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 the matter.

‘We have already spent a considerable sum on this case, not to mention the inconvenience it has caused us, and we are most anxious that the matter be
terminated as soon as possible.

‘Pertinent papers and documents regarding the matter have been turned over to Mr. Lipsett, and we have requested him to turn those over to you for your
purposes. Should you, however, need further information regarding the matter, or should you need our assistance at this end, please feel free to ask us.’

"On May 23, 1959, Messrs, Manning, Harnisch and Hollinger, acting as attorneys for defendant Juan Ysmael & Co., Inc., executed with the attorney for
plaintiff Eastboard Navigation Ltd., arbitration agreement (Exhibit B) which reads:chanrob1es virtual 1aw library
‘We, the undersigned, hereby mutually covenant and agree to submit, and hereby do submit to Charles I. 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 of the United States District Court for the Southern District of New York shall be rendered
upon the award made pursuant to this submission.

‘WITNESS, our hands this 23rd day of May, 1950.’

"Pursuant to said arbitration agreement, the three arbitrators in New York City passed upon the differences between the plaintiff and the defendant ‘after
having heard and received evidence submitted by both sides’, and 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 with the movant’s costs 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 against a person, the 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."cralaw virtua1aw library

Defendant, in its answer, set up the defense that said judgment cannot be enforced in this jurisdiction because (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 that judgment does not come within the purview of Section
48, Rule 39, 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 Kemel Ysmael, 830 shares; Juan Ysmael y Cortes, 1 share; and Gabriel
Ysmael, 1 share or a total of 17,000 shares; that plaintiff, during the 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 one 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 were never ratified nor repudiated 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 to 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 enacted; and
that because of defendant’s undue refusal to pay the same which gave rise 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 evidenced 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 and void as contrary to public
policy (Republic Act No. 529), and the most that 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, inasmuch as the decree of the New York District Court which is 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 it 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
attorneys 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 entitle plaintiff to attorneys’ fees 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 this 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, represented by its
President K. H. Hemady, the former sent a letter advising the latter 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 party not expressly or otherwise stated in this letter 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 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." (Italics 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:jgc:chanrobles.com.ph

"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 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."cralaw virtua1aw library

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 with the understanding that the same would merely supplement with its
"general conditions" the terms and conditions not 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, it is contended, is further 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 his intention to submit his 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 and White Sea Conference in 1922 and one of its standard
clauses is the arbitration clause and as such 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 portion 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 a document involving a very important transaction without knowing its contents and would do so 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 as defendant now contends, why did he appoint Messrs. Manning, Harnisch and Hollinger 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 acts which clearly indicate 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 conducted 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 without his signature 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 undertaken without
defendant’s authority or one that would indicate that defendant did not agree to submit the dispute to arbitration. But there is one circumstance which
justifies the action taken by defendant’s 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 unsigned is of no significance for such is a mere implementation of the
authority already previously given by defendant to its counsel Messrs. Manning, Harnisch and Hollinger "to present our case to the arbitrators in a case
we have with 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 Hollinger to represent
defendant before the arbitration board would be considered as an authority to submit their dispute to arbitration, the decision of the 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 the parties agreed as 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 this 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 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 Hollinger to be his lawyers in the arbitration case in 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
the 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 or approval, or without its lawyer having first submitted 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 claim
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 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 the existence of an arbitration agreement, defendant raises the issue that, even if it be granted that it agreed to
submit its dispute with plaintiff to arbitration, said agreement is void and without effect for it amounts to removing said dispute from the jurisdiction of
the courts in which the parties are domiciled or where the dispute occurred. It is true that there are authorities which hold that "a clause in a contract
providing that all matters in dispute between the parties shall be referred to arbitrators and to them alone, is contrary to public policy and cannot oust the
courts of jurisdiction" (Manila Electric Co. v. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which favor "the more
intelligent view that arbitration, as an inexpensive, speedy and amicable method of settling disputes, and as a means of avoiding litigation, should receive
every encouragement from the courts which may be extended without contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress has
officially adopted this 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:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

Considering this declared policy of Congress in favor 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 settling not only commercial but other kinds of controversies most of
the states of the American Union have adopted statutes providing for arbitration, and American businessmen are reported to have enthusiastically
accepted the innovation because 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. (Italics 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 made of record their 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 court over defendant nor did they 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 not engaged 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. v. Henry
W. Elser & Co. 49 Phil., 70; Pacific Vegetable Oil Corporation v. Angel O. Singson, G. R. No. L- 7917, April 29, 1955.)

Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Labrador, Concepción, Reyes, J. B. L., Endencia and Felix, JJ., concur.

G.R. No. 120105 March 27, 1998

BF CORPORATION, petitioner,
vs.
COURT OF APPEALS, SHANGRI-LA PROPERTIES, INC., RUFO B. COLAYCO, ALFREDO C. RAMOS, MAXIMO G. LICAUCO III and
BENJAMIN C. RAMOS, respondents.

ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction of the EDSA Plaza between petitioner BF
Corporation and respondent Shangri-la Properties, Inc. embodies an arbitration clause in case of disagreement between the parties in the implementation
of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter engaged the former to construct the main
structure of the "EDSA Plaza Project," a shopping mall complex in the City of Mandaluyong. The construction work was in progress when SPI decided to
expand the project by engaging the services of petitioner again. Thus, the parties entered into an agreement for the main contract works after which
construction work began.
However, petitioner incurred delay in the construction work that SPI considered as "serious and substantial."1 On the other hand, according to petitioner,
the construction works "progressed in faithful compliance with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I" of
the Project.2 Hence, SPI proposed the re-negotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as "Agreement for the Execution of Builder's 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 SPI's 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. Calayco, 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 SPI's 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 petitioner's 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 court6 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 Builder's 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." (emphasis 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 BF's 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." (Emphasis supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was "too late in the day for defendants to invoke
arbitration." It quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the contract and a copy filed with the Project Manager.
The demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably have failed; in no case,
however, shall the demand he made be later than the time of final payment except as otherwise expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was to be completed by October 31, 1991.
Thereafter, the contractor would pay P80,000 for each day of delay counted from November 1, 1991 with "liquified (sic) damages up to a maximum of
5% of the total contract price."
The lower court also found that after the project was completed in accordance with the agreement that contained a provision on "progress payment
billing," SPI "took possession and started operations thereof by opening the same to the public in November, 1991." SPI, having failed to pay for the
works, petitioner billed SPI in the total amount of P110,883,101.52, contained in a demand letter sent by it to SPI on February 17, 1993. Instead of paying
the amount demanded, SPI set up its own claim of P220,000,000.00 and scheduled a conference on that claim for July 12, 1993. The conference took
place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required that "Notice of the demand for arbitration of a
dispute shall be filed in writing with the other party . . . . in no case . . . . later than the time of final payment . . . "which apparently, had elapsed, not only
because defendants had taken possession of the finished works and the plaintiff's 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 SPI's 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 Corporation's 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 petitioner's 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 . . . in no case . . . later than the time of final payment," which apparently, had elapsed, not only because defendants had taken possession of the
finished works and the plaintiff's 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, . . . ."
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 (emphasis supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the amount of P110,883,101.52, instead of
paying, petitioners set up its own claim against respondent Corporation in the amount of P220,000,000.00 and set a conference thereon on July 12, 1993.
Said conference proved futile. The next day, July 14, 1993, respondent Corporation filed its complaint against petitioners. On August 13, 1993,
petitioners wrote to respondent Corporation requesting arbitration. Under the circumstances, it cannot be said that petitioners' resort to arbitration was
made beyond reasonable time. Neither can they be considered in default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL
WAS AVAILABLE TO RESPONDENTS.
B
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE FACTUAL FINDINGS OF THE TRIAL COURT
THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO ARBITRATE, RESPONDENTS ARE ALREADY IN DEFAULT
IN INVOKING THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to suspend proceedings "is a resolution of an incident
on the merits." As such, upon the continuation of the proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter
render a decision on the merits that may or may not sustain the existence of an arbitration clause. A decision containing a finding that the contract has no
arbitration clause can then be elevated to a higher court "in an ordinary appeal" where an adequate remedy could be obtained. Hence, to petitioner, the
Court of Appeals should have dismissed the petition for 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 Appeals8 as follows:
. . . . 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. . . . 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 . . . ." That is why they are referred to as "extraordinary." . . . .
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
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
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 Builder's 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 . . . 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:
Sec. 4. Form of arbitration agreement. — A contract to arbitrate a controversy thereafter arising between the parties, as well as a submission to arbitrate
an existing controversy, shall be in writing and subscribed by the party sought to be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for arbitration of any controversy, shall be deemed a
consent of the parties of the province or city where any of the parties resides, to enforce such contract of submission. (Emphasis 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 one's 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 respondent's 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.
Petitioner's 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 petitioner's 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 tinder 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 SPI's 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 SPI's 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
Code's provisions on arbitration. 19 Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted as "the wave of the
future" in international relations, is recognized worldwide. To brush aside a contractual agreement calling for arbitration in case of disagreement between
the parties would therefore be a step backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition for certiorari DENIED. This Decision is
immediately executory. Costs against petitioner.
SO ORDERED.

G.R. No. 141833 March 26, 2003

LM POWER ENGINEERING CORPORATION, petitioner,
vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS, INC., respondent.
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
The Case
Before us is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court, seeking to set aside the January 28, 2000 Decision of the Court of
Appeals3 (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 Complaint10 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 Order12 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 RTC14 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
respondent’s 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 Court’s consideration:
"A
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 Court’s 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 petitioner’s 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
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.
A review of the factual allegations of the parties reveals that they differ on the following questions: (1) 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
petitioner’s 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:
xxx xxx xxx
‘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 petitioner’s 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
xxx xxx xxx
"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 [respondent’s] 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].
xxx xxx xxx
"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.
xxx xxx xxx
"N. OTHER CONDITIONS
xxx xxx xxx
"2. All customs duties, import duties, contractor’s 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.
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.:
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 Decision1 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 Contract3 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 petitioner's 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 petitioner—in two separate
letters13 both dated 10 August 2000—advised 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 8.214 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 Order19 dated 24 November 2000, denied petitioner's 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 petitioner's 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 court's 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 LHC's 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 petitioner's 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 declarant's 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.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial court's 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 court's denial of petitioner's 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 BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S
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 LHC'S 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 Petition22 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 Contract—to 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 petitioner's 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 petitioner's 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 petitioner's 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 ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's 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 ICC's partial
award is now fully within the Makati RTC's 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 200327 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 latter's 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 200328 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 LHC's 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, petitioner's 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 bank's 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
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 principle's
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, petitioner's argument—that it is only the issuing bank that may invoke the independence principle on letters of
credit—does 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."
Petitioner's 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.
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
obligor's nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's 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 surety's 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 applicant's 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 obligor's 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 beneficiary's 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 petitioner's 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 LHC's 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 Dolan's 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 principle's 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 LHC's 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 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 default—such 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 one's 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 LHC's call on the Securities which would justify the
issuance of preliminary injunction. By petitioner's 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 LHC's 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 LHC's 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 LHC's 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 LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's 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 LHC's 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 employer—the 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 moot—for 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 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
200466 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 petitioner's acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332—wherein
petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities should be returned—petitioner 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.

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.
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July 1998 Decision1 of the Court of Appeals affirming the 11 November 1997 Order2 of the Regional
Trial Court which denied petitioners' Motion to Suspend Proceedings in Civil Case No. 2637-MN. It also questions the appellate court's Resolution3 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 ARBITRATION4
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 MMI's 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 MMI's Managing Director Liong Liong C. Sy (LILY SY) filed a Complaint5 against petitioners
DMC-USA, Paul E. Derby, Jr.,6 Daniel Collins7 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 2111 and 2312 of the Civil Code. According to private
respondents, DMC-USA products continued to be brought into the country by parallel importers despite the appointment of private respondent MMI as the
sole and exclusive distributor of Del Monte products thereby causing them great embarrassment and substantial damage. They alleged that the products
brought into the country by these importers were aged, damaged, fake or counterfeit, so that in March 1995 they had to cause, after prior consultation with
Antonio Ongpin, Market Director for Special Markets of Del Monte Philippines, Inc., the publication of a "warning to the trade" paid advertisement in
leading newspapers. Petitioners DMC-USA and Paul E. Derby, Jr., apparently upset with the publication, instructed private respondent MMI to stop
coordinating with Antonio Ongpin and to communicate directly instead with petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal with the former in bad faith by involving disinterested
third parties and by proposing solutions which were entirely out of their control. Private respondents claimed that they had exhausted all possible avenues
for an amicable resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice and wanton attitude of petitioners, they should
be held responsible for all the actual expenses incurred by private respondents in the delayed shipment of orders which resulted in the extra handling thereof,
the actual expenses and cost of money for the unused Letters of Credit (LCs) and the substantial opportunity losses due to created out-of-stock situations
and unauthorized shipments of Del Monte-USA products to the Philippine Duty Free Area and Economic zone; that the bad faith, fraudulent acts and willful
negligence of petitioners, motivated by their determination to squeeze private respondents out of the outstanding and ongoing Distributorship Agreement
in favor of another party, had placed private respondent LILY SY on tenterhooks since then; and, that the shrewd and subtle manner with which petitioners
concocted imaginary violations by private respondent MMI of the Distributorship Agreement in order to justify the untimely termination thereof was a
subterfuge. For the foregoing, private respondents claimed, among other reliefs, the payment of actual damages, exemplary damages, attorney's fees and
litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings13 invoking the arbitration clause in their Agreement with private
respondents.1âwphi1.nêt
In a Resolution14 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 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 Code16 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 87618 –
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 date20 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 her in the Philippines, thus warranting the dismissal of the present petition before this Court.
There is no doubt that arbitration is valid and constitutional in our jurisdiction.21 Even before the enactment of RA 876, this Court has countenanced the
settlement of disputes through arbitration. Unless the agreement is such as absolutely to close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable arrangement and will only interfere with great reluctance to anticipate or nullify the
action of the arbitrator.22 Moreover, as RA 876 expressly authorizes arbitration of domestic disputes, foreign arbitration as a system of settling commercial
disputes was likewise recognized when the Philippines adhered to the United Nations "Convention on the Recognition and the Enforcement of Foreign
Arbitral Awards of 1958" under the 10 May 1965 Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing enforcement of
international arbitration agreements between parties of different nationalities within a contracting state.23
A careful examination of the instant case shows that the arbitration clause in the Distributorship Agreement between petitioner DMC-USA and private
respondent MMI is valid and the dispute between the parties is arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision to submit to arbitration any dispute arising
therefrom and the relationship of the parties is part of that contract and is itself a contract. As a rule, contracts are respected as the law between the
contracting parties and produce effect as between them, their assigns and heirs.24 Clearly, only parties to the Agreement, i.e., petitioners DMC-USA and its
Managing Director for Export Sales Paul E. Derby, Jr., and private respondents MMI and its Managing Director LILY SY are bound by the Agreement and
its arbitration clause as they are the only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and private respondent SFI, not parties to the
Agreement and cannot even be considered assigns or heirs of the parties, are not bound by the Agreement and the arbitration clause therein. Consequently,
referral to arbitration in the State of California pursuant to the arbitration clause and the suspension of the proceedings in Civil Case No. 2637-MN pending
the return of the arbitral award could be called for25 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. This is consistent 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.

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 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 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 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 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 make it frivolous or baseless." 19
In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the parties to submit their disputes to arbitration and We held as
follows:
"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 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 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."
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
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.
WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.
SO ORDERED.

[G.R. NO. 143581 - January 7, 2008]

KOREA TECHNOLOGIES CO., LTD., Petitioner, v. HON. ALBERTO A. LERMA, in his capacity as Presiding Judge of Branch 256 of Regional Trial
Court of Muntinlupa City, and PACIFIC GENERAL STEEL MANUFACTURING CORPORATION, Respondents.
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in civil and commercial disputes. Arbitration along with
mediation, conciliation, and negotiation, being inexpensive, speedy and less hostile methods have long been favored by this Court. The petition before us
puts at issue an arbitration clause in a contract mutually agreed upon by the parties stipulating that they would submit themselves to arbitration in a
foreign country. Regrettably, instead of hastening the resolution of their dispute, the parties wittingly or unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in the supply and installation of Liquefied Petroleum Gas
(LPG) Cylinder manufacturing plants, while private respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract1 whereby KOGIES would set up an LPG Cylinder Manufacturing Plant in Carmona,
Cavite. The contract was executed in the Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment for Contract No. KLP-970301
dated March 5, 19972 amending the terms of payment. The contract and its amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD 1,224,000. KOGIES would install and initiate the operation of the plant
for which PGSMC bound itself to pay USD 306,000 upon the plant's production of the 11-kg. LPG cylinder samples. Thus, the total contract price
amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease3 with Worth Properties, Inc. (Worth) for use of Worth's 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 Certificate4 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
letter6 to PGSMC threatening criminal action for violation of Batas Pambansa Blg. 22 in case of nonpayment. On the same date, the wife of PGSMC's
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. 98-1178 against PGSMC before the Muntinlupa City
Regional Trial Court (RTC). The RTC granted a temporary restraining order (TRO) on July 4, 1998, which was subsequently extended until July 22,
1998. In its complaint, KOGIES alleged that PGSMC had initially admitted that the checks that were stopped were not funded but later on claimed that it
stopped payment of the checks for the reason that "their value was not received" as the former allegedly breached their contract by "altering the quantity
and lowering the quality of the machinery and equipment" installed in the plant and failed to make the plant operational although it earlier certified to the
contrary as shown in a January 22, 1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as amended, by
unilaterally rescinding the contract without resorting to arbitration. KOGIES also asked that PGSMC be restrained from dismantling and transferring the
machinery and equipment installed in the plant which the latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not entitled to the TRO since Art. 15, the arbitration clause, was null
and void for being against public policy as it ousts the local courts of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim9 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 plaintiff's 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 PGSMC's 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 Dismiss13 answering PGSMC's memorandum of July 22, 1998 and seeking dismissal
of PGSMC's counterclaims, KOGIES, on August 4, 1998, filed its Motion for Reconsideration14 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 Things16 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 PGSMC's motion for inspection; (2) denying KOGIES' motion for reconsideration of
the July 23, 1998 RTC Order; and (3) denying KOGIES' motion to dismiss PGSMC's compulsory counterclaims as these counterclaims fell within the
requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration17 of the September 21, 1998 RTC Order granting inspection of the plant and
denying dismissal of PGSMC's 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 Petition20 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 Sheriff's Report21 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 Decision22 affirming the RTC Orders and dismissing the petition for certiorari filed by KOGIES. The CA
found that the RTC did not gravely abuse its discretion in issuing the assailed July 23, 1998 and September 21, 1998 Orders. Moreover, the CA reasoned
that KOGIES' contention that the total contract price for USD 1,530,000 was for the whole plant and had not been fully paid was contrary to the finding
of the RTC that PGSMC fully paid the price of USD 1,224,000, which was for all the machineries and equipment. According to the CA, this
determination by the RTC was a factual finding beyond the ambit of a petition for certiorari .
On the issue of the validity of the arbitration clause, the CA agreed with the lower court that an arbitration clause which provided for a final
determination of the legal rights of the parties to the contract by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum shopping by PGSMC, the CA held that the counterclaims of
PGSMC were compulsory ones and payment of docket fees was not required since the Answer with counterclaim was not an initiatory pleading. For the
same reason, the CA said a certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since KOGIES did not wait for the resolution of its urgent motion for
reconsideration of the September 21, 1998 RTC Order which was the plain, speedy, and adequate remedy available. According to the CA, the RTC must
be given the opportunity to correct any alleged error it has committed, and that since the assailed orders were interlocutory, these cannot be the subject of
a petition for certiorari .
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
A. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY AND FACILITIES AS "A QUESTION OF FACT" "BEYOND
THE AMBIT OF A PETITION FOR CERTIORARI" INTENDED ONLY FOR CORRECTION OF ERRORS OF JURISDICTION OR GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION, AND CONCLUDING THAT THE TRIAL COURT'S
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 RESPONDENT'S 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 Court's 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, PGSMC's Answer is not an initiatory pleading which requires a certification against forum
shopping under Sec. 524 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 PGSMC's compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,25 the CA also pronounced that "certiorari and Prohibition are neither the remedies to question the propriety of an interlocutory
order of the trial court."26 The CA erred on its reliance on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case which was not
assailable in an action for certiorari since the denial of a motion to quash required the accused to plead and to continue with the trial, and whatever
objections the accused had in his motion to quash can then be used as part of his defense and subsequently can be raised as errors on his appeal if the
judgment of the trial court is adverse to him. The general rule is that interlocutory orders cannot be challenged by an appeal.27 Thus, in Yamaoka v.
Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse judgment on the merits, incorporating in said appeal the grounds for assailing the
interlocutory orders. Allowing appeals from interlocutory orders would result in the 'sorry spectacle' of a case being subject of a counterproductive ping-
pong to and from the appellate court as often as a trial court is perceived to have made an error in any of its interlocutory rulings. However, where the
assailed interlocutory order was issued with grave abuse of discretion or patently erroneous and the remedy of appeal would not afford adequate and
expeditious relief, the Court allows certiorari as a mode of redress.28
 Also, appeals from interlocutory orders would open the floodgates to endless occasions for dilatory motions. Thus, where the interlocutory order was
issued without or in excess of jurisdiction or with grave abuse of discretion, the remedy is certiorari .29
The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction in the issuance of the two assailed orders coupled with the
fact that there is no plain, speedy, and adequate remedy in the ordinary course of law amply provides the basis for allowing the resort to a petition for
certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition for certiorari . Note that KOGIES' motion for reconsideration of the
July 23, 1998 RTC Order which denied the issuance of the injunctive writ had already been denied. Thus, KOGIES' only remedy was to assail the RTC's
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 204033 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 Code's 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,arbitration along with mediation, conciliation and negotiation is encouraged by
the Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It is
thus regarded as the "wave of the future" in international civil and commercial disputes. Brushing aside a contractual agreement calling for arbitration
between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts should liberally construe arbitration clauses.
Provided such clause is susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt should be
resolved in favor of arbitration.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 Arbitration41 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. 3543 of the UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a competent
court for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement on the grounds provided for. RA
9285 incorporated these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention. The New York Convention shall govern the recognition and enforcement of arbitral awards covered
by said Convention.
The recognition and enforcement of such arbitral awards shall be filed with the Regional Trial Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide that the party relying on the award or applying for its enforcement shall file with
the court the original or authenticated copy of the award and the arbitration agreement. If the award or agreement is not made in any of the official languages,
the party shall supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration award was made in party to the New York Convention.
xxx
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
xxx
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 party's 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.
xxx
SEC. 45. Rejection of a Foreign Arbitral Award. A party to a foreign arbitration proceeding may oppose an application for recognition and enforcement of
the arbitral award in accordance with the 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 87644 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 Angeles47 and reiterated in succeeding cases,48 that the act of treating a contract as
rescinded on account of infractions by the other contracting party is valid albeit provisional as it can be judicially assailed, is not applicable to the instant
case on account of a valid stipulation on arbitration. Where an arbitration clause in a contract is availing, neither of the parties can unilaterally treat the
contract as rescinded since whatever infractions or breaches by a party or differences arising from the contract must be brought first and resolved by
arbitration, and not through an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on whether the equipment and machineries delivered and installed were properly
installed and operational in the plant in Carmona, Cavite; the ownership of equipment and payment of the contract price; and whether there was
substantial compliance by KOGIES in the production of the samples, given the alleged fact that PGSMC could not supply the raw materials required to
produce the sample LPG cylinders, are matters proper for arbitration. Indeed, we note that on July 1, 1998, KOGIES instituted an Application for
Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is incumbent upon PGSMC to abide by its
commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMC's Motion for Inspection of Things on September 21, 1998, as the subject
matter of the motion is under the primary jurisdiction of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the inspection made on October 28, 1998, as ordered by the trial
court on October 19, 1998, is of no worth as said Sheriff is not technically competent to ascertain the actual status of the equipment and machineries as
installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the grant of the inspection of the equipment and machineries
have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price of USD 1,530,000 was for the whole plant and its
installation is beyond the ambit of a Petition for Certiorari.
Petitioner's 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 RTC's determination of such factual issue constitutes
grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries might well be under the primary jurisdiction of the arbitral body to
decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant interim measures to protect vested rights of the parties. Sec. 28 pertinently
provides:
SEC. 28. Grant of interim Measure of Protection. - (a) It is not incompatible with an arbitration agreement for a party to request, before constitution of the
tribunal, from a Court to grant such measure. After constitution of the arbitral tribunal and during arbitral proceedings, a request for an interim measure of
protection, or modification thereof, may be made with the arbitral or to the extent that the arbitral tribunal has no power to act or is unable to act effectivity,
the request may be made with the Court. The arbitral tribunal is deemed constituted when the sole arbitrator or the third arbitrator, who has been nominated,
has accepted the nomination and written communication of said nomination and acceptance has been received by the party making the request.
(b) The following rules on interim or provisional relief shall be observed:
Any party may request that provisional relief be granted against the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application transmitted by reasonable means to the Court or arbitral tribunal as the case may be and
the party against whom the relief is sought, describing in appropriate detail the precise relief, the party against whom the relief is requested, the grounds
for the relief, and the evidence supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in implementing or enforcing an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for all damages resulting from noncompliance, including all expenses, and reasonable
attorney's fees, paid in obtaining the order's judicial enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an "interim measure" of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the
award by which the dispute is finally decided, the arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself;
(c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution of the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the
territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in
consideration of the specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were explicit that even "the pendency of an arbitral proceeding
does not foreclose resort to the courts for provisional reliefs." We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for provisional reliefs. The Rules of the ICC, which
governs the parties' arbitral dispute, allows the application of a party to a judicial authority for interim or conservatory measures. Likewise, Section 14 of
Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the rights of any party to petition the court to take measures to safeguard and/or conserve
any matter which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known as the "Alternative Dispute Resolution Act of
2004," allows the filing of provisional or interim measures with the regular courts whenever the arbitral tribunal has no power to act or to act
effectively.50
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of protection.
Secondly, considering that the equipment and machineries are in the possession of PGSMC, it has the right to protect and preserve the equipment and
machineries in the best way it can. Considering that the LPG plant was non-operational, PGSMC has the right to dismantle and transfer the equipment
and machineries either for their protection and preservation or for the better way to make good use of them which is ineluctably within the management
discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment and machineries in Worth's property is not to the best interest of PGSMC due
to the prohibitive rent while the LPG plant as set-up is not operational. PGSMC was losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone
without considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the preservation or transfer of the equipment and machineries as an
interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the transfer of the equipment and machineries given the non-recognition
by the lower courts of the arbitral clause, has accorded an interim measure of protection to PGSMC which would otherwise been irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount based on the contract. Moreover, KOGIES is amply protected
by the arbitral action it has instituted before the KCAB, the award of which can be enforced in our jurisdiction through the RTC. Besides, by our
decision, PGSMC is compelled to submit to arbitration pursuant to the valid arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and transfer the subject equipment and machineries, it does not have the right to
convey or dispose of the same considering the pending arbitral proceedings to settle the differences of the parties. PGSMC therefore must preserve and
maintain the subject equipment and machineries with the diligence of a good father of a family51 until final resolution of the arbitral proceedings and
enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the arbitration of their dispute and differences arising from the subject Contract before the
KCAB; andcralawlibrary
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and machineries, if it had not done so, and ORDERED to preserve and maintain
them until the finality of whatever arbitral award is given in the arbitration proceedings.
No pronouncement as to costs.
SO ORDERED.