Jurisprudence: Koppel, Inc. vs. Makati Rotary Club Foundation, Inc. [2013]

Will the disagreement between parties to a contract be rendered non-arbitrable if, in the arbitration thereof, the validity of the contract itself will have to be determined?May a party to a contract invoke the arbitration clause thereof and,

at the same time, impugn the validity of the contract itself?Is it necessary for a party seeking arbitration to first file a “request”

or an application therefor with the court to render an arbitration clause operational?

If parties to a contract already underwent Judicial Dispute Resolution (JDR) proceedings before the court, may they still refer their dispute to arbitration?

G.R. No. 198075 (September 04, 2013)PEREZ, J.:

FACTS:

In 1975, Fedders Koppel, Incorporated (FKI) bequeathed a parcel of land exclusive of improvements thereon in favor of Respondent Makati Rotary Club Foundation, Inc. by way of aconditional donation. Respondent accepted the donation with all of its conditions. On 26 May 1975, FKI and the Respondent executed a Deed of Donation evidencing their consensus.

One of the conditions of the donation required the Respondent to lease the subject land back to FKI under terms specified in their Deed of Donation. With the Respondent’s acceptance of the donation, a lease agreement between them was, therefore, effectively incorporated in the Deed of Donation.

Pertinent terms of such lease agreement, as provided in the Deed of Donation, were as follows:

1. The period of the lease is for twenty-five (25) years, or until the 25th of May 2000;2. The amount of rent to be paid by FKI for the first twenty-five (25) years is P40,126.00 perannum.

The Deed of Donation also stipulated that the lease over the subject property is renewable for another period of twenty-five (25) years “upon mutual agreement” of FKI and the Respondent. In which case, the amount of rent shall be determined in accordance with item 2(g) of the Deed of Donation.

In October 1976, FKI and the Respondent executed an Amended Deed of Donation that reiterated the provisions of the Deed of Donation, including those relating to the lease of the subject land.

Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of Donation, FKI was able to continue in its possession and use of the subject land.

Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation was set to expire, or on 23 May 2000, FKI and Respondent executed another contract of lease (2000 Lease Contract) covering the subject land. In this 2000 Lease Contract, FKI and Respondent agreed on a new five-year lease to take effect on the 26th of May 2000, with annual rents ranging from P4M for the first year up to P4.9M for the fifth year.

The 2000 Lease Contract also contained an arbitration clause enforceable in the event the parties come to disagreement about the “interpretation, application and execution” of the lease.

After the 2000 Lease Contract expired, FKI and Respondent agreed to renew their lease for another five (5) years. This new lease (2005 Lease Contract) required FKI to pay a fixed annual rent of P4.2M.In addition to paying the fixed rent, however, the 2005 Lease Contract also obligated FKI to make a yearly “donation” of money to the Respondent. Such donations ranged from P3M for the first year up to P3.9M for the fifth year.

Notably, the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease Contract, to wit:

 19. Governing Law – The provisions of this [2005 Lease Contract] shall be governed, interpreted and construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this [2005 Lease Contract] shall be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the Philippines. The decision of the majority of the arbitrators shall be binding upon [FKI and Respondent]. (Emphasis supplied)

From 2005 to 2008, FKI faithfully paid the rentals and “donations” due it per the 2005 Lease Contract. But in June of 2008, FKI sold all its rights and properties relative to its business in favor of herein Petitioner Koppel, Incorporated.

On 29 August 2008, FKI and Petitioner executed an Assignment and Assumption of Lease and Donation—wherein FKI, with the conformity of the Respondent, formally assigned all of its interests and obligations under the Amended Deed of Donation and the 2005 Lease Contract in favor of Petitioner.

The following year, Petitioner discontinued the payment of the rent and “donation” under the 2005Lease Contract.

Petitioner’s refusal to pay such rent and “donation” emanated from its belief that the rental stipulations of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they violated one of the “material conditions” of the donation of the subject land, as stated in the Deed of Donation and Amended Deed of Donation.

According to Petitioner, the Deed of Donation and Amended Deed of Donation actually established not only one but two (2) lease agreements between FKI and Respondent, i.e., one lease for the first twenty-five (25) years or from 1975 to 2000, and another lease for the next twenty-five (25) years thereafter or from 2000 to 2025. Both leases are material conditions of the donation of the subject land.

Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was not fixed in the Deed of Donation and Amended Deed of Donation, both deeds nevertheless prescribed rules and limitations by which the same may be determined. Such rules and limitations ought to be observed in any succeeding lease agreements between Petitioner and Respondent for they are, in themselves, material conditions of the donation of the subject land.

In this connection, Petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation that supposedly limits the amount of rent for the lease over the second twenty-five (25) years to only “three percent (3%) of the fair market value of the [subject] land excluding the improvements.

For Petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation of the aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of Donation. Consequently, Petitioner insists that the amount of rent it has to pay thereon is and must still be governed by the limitations prescribed in the Deed of Donation and Amended Deed of Donation.

Respondent then sent Demand Letters to Petitioners notifying the latter of its default, demanding for the settlement of the rent and “donations” due for the year 2009. Respondent intimated of cancelling the 2005 Lease Contract should Petitioner fail to settle the said obligations. In its last sent Demand Letter, Respondent demand Petitioner to “immediately vacate the leased premises” should it fail to pay such obligations within seven (7) days from its receipt of the letter.Petitioner refused to comply with the demands of the Respondent. Instead, on 30 September 2009, Petitioner filed with the RTC of Parañaque City a Complaint for the Rescission or Cancellation of the Deed of Donation and Amended Deed of Donation against the Respondent.On 5 October 2009, Respondent filed an Unlawful Detainer case against the Petitioner before the MeTC of Parañaque City.

On 4 November 2009, Petitioner filed an Answer with Compulsory Counterclaim.In it, Petitioner reiterated its objection over the rental stipulations of the 2005 Lease Contract for being violative of the material conditions of the Deed of Donation and Amended Deed of Donation.

On 27 April 2010, the MeTC rendered judgment in favor of the Petitioner. While the MeTC refused to dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the Petitioner with respect to the issues regarding the insufficiency of the Respondent’s demand and the nullity of the 2005 Lease Contract.

The Respondent appealed to the RTC which reversed the MeTC’s decision.

Aggrieved, the Petitioner appealed to the CA which affirmed the decision of the RTC.

Hence, the present Petition for Review on Certiorari under Rule 45.

 ISSUE:

Whether or not the present dispute is arbitrable under the Arbitration Clause of the 2005 Lease Agreement Contract?

 ARGUMENTS:

At different points in the proceedings of this case, the following arguments were offered against the application of the arbitration clause of the 2005 Lease Contract:

1. The disagreement between the Petitioner and Respondent is non-arbitrable as it will inevitably touch upon the issue of the validity of the 2005 Lease Contract. It was submitted that one of the reasons offered by the Petitioner in justifying its failure to pay under the 2005 Lease Contract was the nullity of such contract for being contrary to law and public policy. The Supreme Court, in Gonzales v. Climax Mining, Ltd .   [2005] , held that “the validity of contract cannot be subject of arbitration proceedings” as such questions are “legal in nature and require the application and interpretation of laws and jurisprudence which is necessarily a judicial function.”

2. The Petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the same time, impugn such contract’s validity.

3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the2005 Lease Contract, Petitioner still did not file a formal application before the MeTC so as to render such arbitration clause operational. Section 24 of Republic Act No. 9285 requires the party seeking arbitration to first file a “request” or an application therefor with the court not later than the preliminary conference.

4. Petitioner and Respondent already underwent JDR proceedings before the RTC. Hence, a further referral of the dispute to arbitration would only be circuitous. Moreover, an ejectment case, in view of its summary nature, already fulfills the prime purpose of arbitration, i.e., to provide parties in conflict with an expedient method for the resolution of their dispute. Arbitration then would no longer be necessary in this case.

RULING:

YES. None of the above-mentioned arguments have any merit. The MeTC, RTC and CA all erred in overlooking the significance of the arbitration clause incorporated in the 2005 Lease Contract. As the SC sees it, that is a fatal mistake.

Hence, the Petition is GRANTED and thus referring the Petitioner and the Respondent to arbitration pursuant to the arbitration clause of the 2005 Lease Contract, repeatedly included in the 2000 Lease Contract and in the 1976 Amended Deed of Donation.

 RATIO DECIDENDI:

The arbitration clause of the 2005 Lease Contract stipulates that “any disagreement” as to the “interpretation, application or execution” of the 2005 Lease Contract ought to be submitted to arbitration. To the mind of the Court, such stipulation is clear and is comprehensive enough so as to include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contractincluding the one that presently besets Petitioner and Respondent.

First. The disagreement between the Petitioner and Respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease Contract. While it may be conceded that in the arbitration of such disagreement, the validity of the 2005 Lease Contract, or at least, of such contract’s rental stipulations would have to be determined, the same would not render such disagreement non-arbitrable. The quotation from Gonzales case that was used to justify the contrary position was taken out of context.

The pivotal issue that confronted the Court in the Gonzales case was whether the complaint for arbitration raises arbitrable issues that the Panel of Arbitrators of the Mines and Geosciences Bureau (PA-MGB) can take cognizance of.

Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to take cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or the Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only over mining disputes, i.e., disputes involving “rights to mining areas,” “mineral agreements or permits,” and “surface owners, occupants, claimholders or concessionaires” requiring the technical knowledge and experience of mining authorities in order to be resolved. Accordingly, since the complaint for arbitration in Gonzales did not raise mining disputes as contemplated under R.A. No. 7942 but only issues relating to the validity of certain mining related agreements, SC held that such complaint could not be arbitrated before the PA-MGB. It is in this context that SC made the pronouncement now in discussion:

Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the parties as to some provisions of the contract between them, which needs the interpretation and the application of that particular knowledge and expertise possessed by members of that Panel. It is not proper when one of the parties repudiates the existence or validity of such contract or agreement on the ground of fraud or oppression as in this case. The validity of the contract cannot be subject of arbitration proceedings. Allegations of fraud and duress in the execution of a contract are matters within the jurisdiction of the ordinary courts of law. These questions are legal in nature and require the application and interpretation of laws and jurisprudence which is necessarily a judicial function. (Emphasis supplied)

SC in Gonzales did not simply base its rejection of the complaint for arbitration on the ground that the issue raised therein, i.e., the validity of contracts, is per se non-arbitrable. The real consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral body. Gonzales rejected the complaint for arbitration because the issue raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason, and only for this reason, that such issue is rendered non-arbitrable before the PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB only tomining disputes.

Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc. v. San Fernando Regal Trading, Inc   [2011] . In Cargill, SC answered the question of whether issues involving the rescission of a contract are arbitrable. The respondent in Cargill argued against arbitrability, also citing therein Gonzales. After dissecting Gonzales, SC ruled in favor of arbitrability. Thus, SC held:

Respondent contends that assuming that the existence of the contract and the arbitration clause is conceded, the CA’s decision declining referral of the parties’ dispute to arbitration is still correct. It claims that its complaint in the RTC presents the issue of whether under the facts alleged, it is entitled to rescind the contract with damages; and that issue constitutes a judicial question or one that requires the exercise of judicial function and cannot be the subject of an arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we held that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of the subject contracts on the grounds of fraud and oppression attendant to the execution of the addendum contract and the other contracts emanating from it, and that the complaint should have been filed with the regular courts as it involved issues which are judicial in nature.

Such argument is misplaced and respondent cannot rely on the Gonzales case to support its argument. (Emphasis ours)

Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contractnotwithstanding the fact that it assails the validity of such contract. This is due to the doctrine of separability.

Under the doctrine of separability, an arbitration agreement is considered as independent of the main contract. Being a separate contract in itself, the arbitration agreement may thus be invoked regardless of the possible nullity or invalidity of the main contract.

Once again instructive is Cargill, wherein SC held that, as a further consequence of the doctrine of separability, even the very party who repudiates the main contract may invoke its arbitration clause.

Third. The operation of the arbitration clause in this case is not at all defeated by the failure of the Petitioner to file a formal “request” or application therefor with the MeTC. SC finds that the filing of a “request” pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an arbitration clause may be validly invoked in a pending suit.Section 24 of R.A. No. 9285 reads:

SEC. 24. Referral to Arbitration. – A court before which an action is brought in a matter which is the subject matter of an arbitration agreement shall, if at least one party so requestsnot later that the pre-trial conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed. [Emphasis ours; italics original]

The “request” referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 ofA.M. No. 07-11-08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules):

RULE 4: REFERRAL TO ADR

Rule 4.1. Who makes the request. – A party to a pending action filed in violation of the arbitration agreement, whether contained in an arbitration clause or in a submission agreement, may request the court to refer the parties to arbitration in accordance with such agreement.

Rule 4.2. When to make request. – (A) Where the arbitration agreement exists before the action is filed. – The request for referral shall be made not later than the pre-trial conference. After the pre-trial conference, the court will only act upon the request for referral if it is made with the agreement of all parties to the case.

(B) Submission agreement. – If there is no existing arbitration agreement at the time the case is filed but the parties subsequently enter into an arbitration agreement, they may request the court to refer their dispute to arbitration at any time during the proceedings.

Rule 4.3. Contents of request. – The request for referral shall be in the form of a motion, which shall state that the dispute is covered by an arbitration agreement.

Apart from other submissions, the movant shall attach to his motion an authentic copy of the arbitration agreement.

The request shall contain a notice of hearing addressed to all parties specifying the date and time when it would be heard. The party making the request shall serve it upon the respondent to give him the opportunity to file a comment or opposition as provided in the immediately succeeding Rule before the hearing. [Emphasis ours; italics original]

Attention must be paid, however, to the salient wordings of Rule 4.1. It reads: “[a] party to a pending action filed in violation of the arbitration agreement x x x may request the court to refer the parties to arbitration in accordance with such agreement.”

In using the word “may” to qualify the act of filing a “request” under Section 24 of R.A. No. 9285, the Special ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a pending suit solely via such “request.” After all, non-compliance with an arbitration agreement is a valid defense to any offending suit and, as such, may even be raised in an answer as provided in our ordinary rules of procedure.

In this case, it is conceded that Petitioner was not able to file a separate “request” of arbitration before the MeTC. However, it is equally conceded that the Petitioner, as early as in its Answer with Counterclaim, had already apprised the MeTC of the existence of the arbitration clause in the 2005 Lease Contract and, more significantly, of its desire to have the same enforced in this case. This act of Petitioner is enough valid invocation of his right to arbitrate.

Fourth. The fact that the Petitioner and Respondent already underwent through JDR proceedings before the RTC, will not make the subsequent conduct of arbitration between the parties unnecessary or circuitous. The JDR system is substantially different from arbitration proceedings.

The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation which entails the submission of a dispute before a “JDR judge” who shall merely “facilitate settlement” between the parties in conflict or make a “non-binding evaluation or assessment of the chances of each party’s case.” Thus in JDR, the JDR judge lacks the authority to render a resolution of the dispute that is binding upon the parties in conflict. In arbitration, on the other hand, the dispute is submitted to an arbitrator/s—a neutral third person or a group of thereof—who shall have the authority to render a resolution binding upon the parties.

Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the subsequent conduct of arbitration a mere surplusage. The failure of the parties in conflict to reach an amicable settlement before the JDR may, in fact, be supplemented by their resort to arbitration where a binding resolution to the dispute could finally be achieved. This situation precisely finds application to the case at bench.

Neither would the summary nature of ejectment cases be a valid reason to disregard the enforcement of the arbitration clause of the 2005 Lease Contract. Notwithstanding the summary nature of ejectment cases, arbitration still remains relevant as it aims not only to afford the parties an expeditious method of resolving their dispute.

A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost, a product of party autonomy or the freedom of the parties to “make their own arrangements to resolve their own disputes.” Arbitration agreements manifest not only the desire of the parties in conflict for an expeditious resolution of their dispute. They also represent, if not more so, the parties’ mutual aspiration to achieve such resolution outside of judicial auspices, in a more informal and less antagonistic environment under the terms of their choosing. Needless to state, this critical feature can never be satisfied in an ejectment case no matter how summary it may be.

Legal Effect of the Application of the Arbitration Clause 

Since there really are no legal impediments to the application of the arbitration clause of the 2005 Contract of Lease in this case, We find that the instant unlawful detainer action was instituted in violation of such clause. The Law, therefore, should have governed the fate of the parties and this suit:

R.A. No. 876

Section 7. Stay of civil action. – If any suit or proceeding be brought upon an issue arising out of an agreement providing for the arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until an arbitration has been had in accordance with the terms of the agreement: Provided, That the applicant for the stay is not in default in proceeding with such arbitration. [Emphasis supplied]

R.A. No. 9285

Section 24. Referral to Arbitration. – A court before which an action is brought in a matter which is the subject matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial conference, or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed. [Emphasis supplied]

It is clear that under the law, the instant unlawful detainer action should have been stayed; the Petitioner and the Respondent should have been referred to arbitration pursuant to the arbitration clause of the 2005 Lease Contract. The MeTC, however, did not do so in violation of the law—which violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.

The violation by the MeTC of the clear directives under R.A. Nos. 876 and 9285 renders invalid all proceedings it undertook in the ejectment case after the filing by Petitioner of its Answer with Counterclaim—the point when the Petitioner and the Respondent should have been referred to arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said point. Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated and set aside.

The Petitioner and the Respondent must then be referred to arbitration pursuant to the arbitration clause of the 2005 Lease Contract.

Jurisprudence: LM Power Engineering Corporation vs. Capitol Industrial Construction Groups, Inc. [2003]

Is there a need to file first a Formal Request for Arbitration with the Construction Industry Arbitration Commission (CIAC) in order to

vest it with jurisdiction to decide a construction dispute?G.R. No. 141833 (March 26, 2003)

PANGANIBAN, J.:FACTS:

Petitioner and Respondent entered into a “Subcontract Agreement” involving electrical work at the Third Port of Zamboanga. Two years thereafter, Respondent took over some of the work contracted to Petitioner. Allegedly, the latter had failed to finish it because of its inability to procure materials.Upon completing its task under the Contract, Petitioner billed Respondent in the amount of P6.7M. Respondent, however, refused to pay and contested the accuracy of the amount of advances and billable accomplishments listed by Petitioner. Respondent also took refuge in the termination clause of the Agreement.  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 RTC of Makati a Complaint for Collection of the amount representing the alleged balance due it under the Subcontract. Instead of submitting anAnswer, Respondent filed a Motion to Dismiss, alleging that the Complaint was premature because there was no prior recourse to arbitration.RTC denied the Motion to Dismiss 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. The RTC 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.On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The CA 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.Hence, this Petition for Review on Certiorari under Rule 45.

ISSUES:1. Whether or not there exists a controversy/dispute between

Petitioner and Respondent regarding the interpretation and implementation of the Subcontract Agreement that requires prior recourse to voluntary arbitration?;

2. In the affirmative, whether or not there is a need to file a request first with the CIAC in order to vest it with jurisdiction to decide a construction dispute?

ARGUMENTS:1.

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, Respondent 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.

2.According to Petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal request for arbitration with the CIAC precluded the latter from acquiring jurisdiction over the question.

RULING:The Petition is unmeritorious; hence, DENIED.  The assailed Decision of the CA is AFFIRMED.

1.YES. SC sides with Respondent. The instant case involves technical discrepancies that are better left to an arbitral body that has expertise in those areas.

2.NO. SC is not persuaded with Petitioner’s contention. Section 1 of Article III of the NEW Rules of Procedure Governing Construction Arbitration has dispensed with the requirement to submit a request for arbitration. Recourse to the CIAC may now be availed of whenever a contract “contains a clause for the submission of a future controversy to arbitration.”

RATIO DECIDENDI:1.

In the instant case, 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.”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, the resolutions of which lies in the interpretation of the provisions of the Subcontract Agreement:

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?

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with mediation, conciliation and negotiation — is encouraged by the SC. 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.

2.Section 1 of Article III of the NEW Rules of Procedure Governing Construction Arbitration provides:“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.”As clearly explained in China Chang Jiang Energy Corporation (Philippines) v. Rosal Infrastructure Builders et al. (an extended unsigned Resolution) and reiterated in National Irrigation Administration v. Court of Appeals [1999], from which SC 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.”

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. And because it covers the dispute between the parties in the present case, either of them may compel the other to arbitrate.

Jurisprudence: Tuna Processing, Inc. vs. Philippine Kingford, Inc. [2012]

May a foreign corporation not licensed to do business in the Philippines, but which collects royalties from entities in the Philippines, sue here to enforce a foreign arbitral award?

G.R. No. 185582 (February 29, 2012)PEREZ, J.:

FACTS:

Kanemitsu Yamaoka, co-patentee of a US Patent, Philippine Letters Patent, and an Indonesian Patent, entered into a Memorandum of Agreement (MOA) with five Philippine tuna processors including Respondent Philippine Kingford, Inc. (KINGFORD).  The MOA provides for the enforcing of the abovementioned patents, granting licenses under the same, and collecting royalties, and for the establishment of herein Petitioner Tuna Processors, Inc. (TPI).

Due to a series of events not mentioned in the Petition, the tuna processors, including Respondent KINGFORD, withdrew from Petitioner TPI and correspondingly reneged on their obligations. Petitioner TPI submitted the dispute for arbitration before the International Centre for Dispute Resolution in the State of California, United States and won the case against Respondent KINGFORD.

To enforce the award, Petitioner TPI filed a Petition for Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before the RTC of Makati City. Respondent KINGFORD filed a Motion to Dismiss, which the RTC denied for lack of merit. Respondent KINGFORD then sought for the inhibition of the RTC judge, Judge Alameda, and moved for the reconsideration of the order denying the Motion. Judge Alameda inhibited himself notwithstanding “[t]he unfounded allegations and unsubstantiated assertions in the motion.”  Judge Ruiz, to which the case was re-raffled, in turn, granted Respondent KINGFORDS’s Motion for Reconsideration and dismissed the Petition on the ground that Petitioner TPI lacked legal capacity to sue in the Philippines. Petitioner TPI is a corporation established in the State of California and not licensed to do business in the Philippines.Hence, the present Petition for Review on Certiorari under Rule 45.

 ISSUE:

Whether or not a foreign corporation not licensed to do business in the Philippines, but which collects royalties from entities in the Philippines, sue here to enforce a foreign arbitral award?

ARGUMENT:

Petitioner TPI contends that it is entitled to seek for the recognition and enforcement of the subject foreign arbitral award in accordance with RA No. 9285 ( Alternative Dispute Resolution Act of 2004 ) , the Convention on the Recognition and Enforcement of Foreign Arbitral Awards drafted during the United Nations Conference on International Commercial Arbitration in 1958 ( New York Convention ) , and the UNCITRAL Model Law on International Commercial Arbitration ( Model Law ) , as none of these specifically requires that the party seeking for the enforcement should have legal capacity to sue. 

RULING:

YES. Petitioner TPI, although not licensed to do business in the Philippines, may seek recognition and enforcement of the foreign arbitral award in accordance with the provisions of the Alternative Dispute Resolution Act of 2004.  A foreign corporation’s capacity to sue in the Philippines is not material insofar as the recognition and enforcement of a foreign arbitral award is concerned.

The Resolution of the RTC is REVERSED and SET ASIDE.

RATIO DECIDENDI:

Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the opposing party in an application for recognition and enforcement of the arbitral award may raise only those grounds that were enumerated under Article V of the New York Convention, to wit:

Article V

1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

a. The parties to the agreement referred to in Article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made;

b. The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;

c. The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced;

d. The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

e. The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

a. The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

b. The recognition or enforcement of the award would be contrary to the public policy of that country.

Not one of the abovementioned exclusive grounds touched on the capacity to sue of the party seeking the recognition and enforcement of the award.

Pertinent provisions of the Special Rules of Court on Alternative Dispute Resolution, which was promulgated by the Supreme Court, likewise support this position.Rule 13.1 of the Special Rules provides that “[a]ny party to a foreign arbitration may petition the court to recognize and enforce a foreign arbitral award.”  The contents of such petition are enumerated in Rule 13.5.  Capacity to sue is not included.  Oppositely, in the rule on local arbitral awards or arbitrations in instances where “the place of arbitration is in the Philippines,” it is specifically required that a petition “to determine any question concerning the existence, validity and enforceability of such arbitration agreement” available to the parties before the commencement of arbitration and/or a petition for “judicial relief from the ruling of the arbitral tribunal on a preliminary question upholding or declining its jurisdiction” after arbitration has already commenced should state “[t]he facts showing that the persons named as petitioner or respondent have legal capacity to sue or be sued.”Indeed,  it is in the best  interest  of justice that in the enforcement   of  a foreign  arbitral  award, the Court deny  availment by  the  losing  party  of  the rule that bars foreign corporations not licensed to do business in the Philippines  from  maintaining  a  suit in Philippine courts.  When a party enters into  a  contract  containing  a  foreign  arbitration  clause and, as in this case,  in  fact  submits itself to arbitration, it   becomes bound by the contract, by  the arbitration and by the result of arbitration, conceding thereby  the  capacity of the  other  party to enter into the contract, participate in the arbitration and cause the implementation of the result.  Although not on all fours with the instant case, also worthy to consider is the wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting Opinion in Asset Privatization Trust v. Court of Appeals [1998], to wit:

 xxx Arbitration, as an alternative mode of settlement, is gaining adherents in legal and judicial circles here and abroad.  If its tested mechanism can simply be ignored by an aggrieved party, one who, it must be stressed, voluntarily and actively participated in the arbitration proceedings from the very beginning, it will destroy the very essence of mutuality inherent in consensual contracts.

Clearly, on the matter of capacity to sue, a foreign arbitral award should be respected not because it is favored over domestic laws and procedures, but because Republic Act No. 9285 has certainly erased any conflict of law question.Finally, even assuming, only for the sake of argument, that the RTC correctly observed that theModel Law, not the New York Convention, governs the subject arbitral award, Petitioner TPI may still seek recognition and enforcement of the award in Philippine court, since the Model Law prescribes substantially identical exclusive grounds for refusing recognition or enforcement.…

Jurisprudence: J Plus Asia Development Corporation vs. Utility Assurance Corporation [2013]

Does CA have jurisdiction to review arbitral awards?G.R. No. 199650 (June 26, 2013)

VILLARAMA, JR., J.:

FACTS:

Petitioner J Plus Asia Development Corporation and Martin E. Mabunay entered into aConstruction Agreement on December 24, 2007 whereby the latter undertook to build the former’s 72-room condominium/hotel located in Boracay Island.The project, costing P42M, was to be completed within one year or 365 days reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment (20% of contract price).  The P8.4M down payment was fully paid on January 14, 2008. Payment of the balance of the contract price will be based on actual work finished within 15 days from receipt of the monthly progress billings. Per the agreed work schedule, the completion date of the project was December 2008. Mabunay also submitted the required Performance Bond issued by Respondent Utility Assurance Corporation in the amount equivalent to 20% down payment or P8.4M.

Mabunay commenced work at the project site on January 7, 2008.  Petitioner paid up to the 7th monthly progress billing sent by Mabunay.  As of September 16, 2008, Petitioner had paid the total amount of P15.98M inclusive of the 20% down payment.  However, as of said date, Mabunay had accomplished only 27.5% of the project. It was later found out by the joint inspection and evaluation by the Petitioner and Mabunay that, as of November 14, 2008, the project was only 31.39% complete and that the uncompleted portion was 68.61%.

On November 19, 2008, Petitioner terminated the contract and sent Demand Letters to Mabunay and Respondent surety.  As its demands went unheeded, Petitioner filed a Request for Arbitrationbefore the Construction Industry Arbitration Commission (CIAC).

In his Answer, Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by Petitioner.  He asserted that he actually had until April 30, 2009 to finish the project since the 365 days period of completion started only on May 2, 2008 after clearing the retrofitted old structure.  Hence, the termination of the contract by Petitioner was premature and the filing of the Complaint against him was baseless, malicious and in bad faith.Respondent, on the other hand, filed a Motion to Dismiss on the ground that Petitioner has no cause of action and the complaint states no cause of action against it. The CIAC denied the Motion to Dismiss.In its Answer Ex Abundante Ad Cautelam with Compulsory Counterclaims and Cross-claims, Respondent argued that the Performance Bond merely guaranteed the 20% down payment and not the entire obligation of Mabunay under the Construction Agreement.  Since the value of the project’s accomplishment already exceeded the said amount, Respondent’s obligation under thePerformance Bond had been fully extinguished. As to the claim for alleged overpayment to Mabunay, Respondent contended that it should not be credited against the 20% down payment which was already exhausted and such application by Petitioner is tantamount to reviving an obligation that had been legally extinguished by payment.  Respondent also set up a cross-claim against Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify Respondent for whatever amounts it may be adjudged liable to pay Petitioner under the surety bond.

On February 2, 2010, CIAC rendered its Decision and made Awards in favor of Petitioner. CIAC ruled that Mabunay had incurred delay which entitled Petitioner to the stipulated liquidated damages and unrecouped down payment.

Dissatisfied, Respondent filed in the CA a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure, as amended, which reversed the CIAC’s ruling.Hence, the present Petition for Review on Certiorari under Rule 45 seeking to reverse the CA insofar as it denied its claims under the Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision.

ISSUE:

Whether or not the Alternative Dispute Resolution Act of 2004 and the Special ADR Rules have stripped the CA of jurisdiction to review arbitral awards?

ARGUMENT:

Petitioner contends that that with the institutionalization of alternative dispute resolution under RA No. 9285, otherwise known as the Alternative Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review the decisions or awards of the CIAC.

RULING:

NO. The Petitioner’s contention is without merit. Petitioner erroneously relied on the provision in RA No. 9285 allowing any party to a domestic arbitration to file in the RTC a petition either to confirm, correct or vacate a domestic arbitral award.

The Petition is GRANTED. The assailed decision of the CA is REVERSED and SET ASIDE. The Award made in the Decision rendered by CIAC dated February 2, 2010 is REINSTATED with MODIFICATIONS.

RATIO DECIDENDI:

SC holds that RA No. 9285 did not confer on RTCs jurisdiction to review awards or decisions of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation by the RTC is NOT required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory decisions of the Regional Trial Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O. No. 1008. (Emphasis supplied.)

EO No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof.  By express provision of Section 19 thereof, the arbitral award of the CIAC is final and unappealable, except on questions of law, which are appealable to the Supreme Court. With the amendments introduced by RA No. 7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in the enumeration of quasi- judicial agencies whose decisions or awards may be appealed to the CA in a Petition for Review under Rule 43.   Such review of the CIAC award may involve either questions of fact, of law, or of fact and law.Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by the SC and which took effect on October 30, 2009. Since RA No. 9285 explicitly excluded CIAC awards from domestic arbitration awards that need to be confirmed to be executory, said awards are therefore not covered by Rule 11 of the Special ADR Rules, as they continue to be governed byEO No. 1008, as amended and the rules of procedure of the CIAC.   The CIAC Revised Rules of Procedure Governing Construction Arbitration provide for the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:

SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.