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Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 169332

February 11, 2008

ABS-CBN
BROADCASTING
CORPORATION, petitioner,
vs.
WORLD INTERACTIVE NETWORK SYSTEMS (WINS) JAPAN CO., LTD., respondent.
DECISION
CORONA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set
aside the February 16, 2005 decision 1 and August 16, 2005 resolution2 of the Court of
Appeals (CA) in CA-G.R. SP No. 81940.
On September 27, 1999, petitioner ABS-CBN Broadcasting Corporation entered into a
licensing agreement with respondent World Interactive Network Systems (WINS) Japan
Co., Ltd., a foreign corporation licensed under the laws of Japan. Under the agreement,
respondent was granted the exclusive license to distribute and sublicense the
distribution of the television service known as "The Filipino Channel" (TFC) in Japan. By
virtue thereof, petitioner undertook to transmit the TFC programming signals to
respondent which the latter received through its decoders and distributed to its
subscribers.
A dispute arose between the parties when petitioner accused respondent of inserting
nine episodes of WINS WEEKLY, a weekly 35-minute community news program for
Filipinos in Japan, into the TFC programming from March to May 2002. 3 Petitioner
claimed that these were "unauthorized insertions" constituting a material breach of their
agreement. Consequently, on May 9, 2002, 4 petitioner notified respondent of its
intention to terminate the agreement effective June 10, 2002.
Thereafter, respondent filed an arbitration suit pursuant to the arbitration clause of its
agreement with petitioner. It contended that the airing of WINS WEEKLY was made with
petitioner's prior approval. It also alleged that petitioner only threatened to terminate
their agreement because it wanted to renegotiate the terms thereof to allow it to
demand higher fees. Respondent also prayed for damages for petitioner's alleged grant
of an exclusive distribution license to another entity, NHK (Japan Broadcasting
Corporation).5
The parties appointed Professor Alfredo F. Tadiar to act as sole arbitrator. They
stipulated on the following issues in their terms of reference (TOR) 6:

1. Was the broadcast of WINS WEEKLY by the claimant duly authorized by the
respondent [herein petitioner]?
2. Did such broadcast constitute a material breach of the agreement that is a
ground for termination of the agreement in accordance with Section 13 (a)
thereof?
3. If so, was the breach seasonably cured under the same contractual provision
of Section 13 (a)?
4. Which party is entitled to the payment of damages they claim and to the other
reliefs prayed for?
xxx

xxx

xxx

The arbitrator found in favor of respondent. 7 He held that petitioner gave its approval to
respondent for the airing of WINS WEEKLY as shown by a series of written exchanges
between the parties. He also ruled that, had there really been a material breach of the
agreement, petitioner should have terminated the same instead of sending a mere
notice to terminate said agreement. The arbitrator found that petitioner threatened to
terminate the agreement due to its desire to compel respondent to re-negotiate the
terms thereof for higher fees. He further stated that even if respondent committed a
breach of the agreement, the same was seasonably cured. He then allowed respondent
to recover temperate damages, attorney's fees and one-half of the amount it paid as
arbitrator's fee.
Petitioner filed in the CA a petition for review under Rule 43 of the Rules of Court or, in
the alternative, a petition for certiorari under Rule 65 of the same Rules, with application
for temporary restraining order and writ of preliminary injunction. It was docketed as CAG.R. SP No. 81940. It alleged serious errors of fact and law and/or grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of the arbitrator.
Respondent, on the other hand, filed a petition for confirmation of arbitral award before
the Regional Trial Court (RTC) of Quezon City, Branch 93, docketed as Civil Case No.
Q-04-51822.
Consequently, petitioner filed a supplemental petition in the CA seeking to enjoin the
RTC of Quezon City from further proceeding with the hearing of respondent's petition for
confirmation of arbitral award. After the petition was admitted by the appellate court, the
RTC of Quezon City issued an order holding in abeyance any further action on
respondent's petition as the assailed decision of the arbitrator had already become the
subject of an appeal in the CA. Respondent filed a motion for reconsideration but no
resolution has been issued by the lower court to date. 8
On February 16, 2005, the CA rendered the assailed decision dismissing ABS-CBNs
petition for lack of jurisdiction. It stated that as the TOR itself provided that the

arbitrator's decision shall be final and unappealable and that no motion for
reconsideration shall be filed, then the petition for review must fail. It ruled that it is the
RTC which has jurisdiction over questions relating to arbitration. It held that the only
instance it can exercise jurisdiction over an arbitral award is an appeal from the trial
court's decision confirming, vacating or modifying the arbitral award. It further stated that
a petition for certiorari under Rule 65 of the Rules of Court is proper in arbitration cases
only if the courts refuse or neglect to inquire into the facts of an arbitrator's award. The
dispositive portion of the CA decision read:
WHEREFORE, the instant petition is hereby DISMISSED for lack of jurisdiction.
The application for a writ of injunction and temporary restraining order is
likewise DENIED. The Regional Trial Court of Quezon City Branch 93 is directed
to proceed with the trial for the Petition for Confirmation of Arbitral Award.
SO ORDERED.
Petitioner moved for reconsideration. The same was denied. Hence, this petition.
Petitioner contends that the CA, in effect, ruled that: (a) it should have first filed a
petition to vacate the award in the RTC and only in case of denial could it elevate the
matter to the CA via a petition for review under Rule 43 and (b) the assailed decision
implied that an aggrieved party to an arbitral award does not have the option of directly
filing a petition for review under Rule 43 or a petition for certiorari under Rule 65 with the
CA even if the issues raised pertain to errors of fact and law or grave abuse of
discretion, as the case may be, and not dependent upon such grounds as enumerated
under Section 24 (petition to vacate an arbitral award) of RA 876 (the Arbitration Law).
Petitioner alleged serious error on the part of the CA.
The issue before us is whether or not an aggrieved party in a voluntary arbitration
dispute may avail of, directly in the CA, a petition for review under Rule 43 or a petition
for certiorari under Rule 65 of the Rules of Court, instead of filing a petition to vacate the
award in the RTC when the grounds invoked to overturn the arbitrators decision are
other than those for a petition to vacate an arbitral award enumerated under RA 876.
RA 876 itself mandates that it is the Court of First Instance, now the RTC, which has
jurisdiction over questions relating to arbitration, 9 such as a petition to vacate an arbitral
award.
Section 24 of RA 876 provides for the specific grounds for a petition to vacate an award
made by an arbitrator:
Sec. 24. Grounds for vacating award. - In any one of the following cases, the
court must make an order vacating the award upon the petition of any party to
the controversy when such party proves affirmatively that in the arbitration
proceedings:

(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in the arbitrators or any of them;
or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the
hearing upon sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; that one or more of the arbitrators was
disqualified to act as such under section nine hereof, and willfully refrained from
disclosing such disqualifications or of any other misbehavior by which the rights
of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them,
that a mutual, final and definite award upon the subject matter submitted to them
was not made.
Based on the foregoing provisions, the law itself clearly provides that the RTC must
issue an order vacating an arbitral award only "in any one of the . . . cases" enumerated
therein. Under the legal maxim in statutory construction expressio unius est exclusio
alterius, the explicit mention of one thing in a statute means the elimination of others not
specifically mentioned. As RA 876 did not expressly provide for errors of fact and/or law
and grave abuse of discretion (proper grounds for a petition for review under Rule 43
and a petition for certiorari under Rule 65, respectively) as grounds for maintaining a
petition to vacate an arbitral award in the RTC, it necessarily follows that a party may
not avail of the latter remedy on the grounds of errors of fact and/or law or grave abuse
of discretion to overturn an arbitral award.
Adamson v. Court of Appeals10 gave ample warning that a petition to vacate filed in the
RTC which is not based on the grounds enumerated in Section 24 of RA 876 should be
dismissed. In that case, the trial court vacated the arbitral award seemingly based on
grounds included in Section 24 of RA 876 but a closer reading thereof revealed
otherwise. On appeal, the CA reversed the decision of the trial court and affirmed the
arbitral award. In affirming the CA, we held:
The Court of Appeals, in reversing the trial court's decision held that the
nullification of the decision of the Arbitration Committee was not based on the
grounds provided by the Arbitration Law and that xxx private respondents
(petitioners herein) have failed to substantiate with any evidence their claim of
partiality. Significantly, even as respondent judge ruled against the arbitrator's
award, he could not find fault with their impartiality and integrity. Evidently, the
nullification of the award rendered at the case at bar was not made on the
basis of any of the grounds provided by law.
xxx

xxx

xxx

It is clear, therefore, that the award was vacated not because of evident
partiality of the arbitratorsbut because the latter interpreted the contract in a
way which was not favorable to herein petitioners and because it considered that
herein private respondents, by submitting the controversy to arbitration, was
seeking to renege on its obligations under the contract.
xxx

xxx

xxx

It is clear then that the Court of Appeals reversed the trial court not because
the latter reviewed the arbitration award involved herein, but because the
respondent appellate court found that the trial court had no legal basis for
vacating the award. (Emphasis supplied).
In cases not falling under any of the aforementioned grounds to vacate an award, the
Court has already made several pronouncements that a petition for review under Rule
43 or a petition for certiorari under Rule 65 may be availed of in the CA. Which one
would depend on the grounds relied upon by petitioner.
In Luzon Development Bank v. Association of Luzon Development Bank
Employees,11 the Court held that a voluntary arbitrator is properly classified as a "quasijudicial instrumentality" and is, thus, within the ambit of Section 9 (3) of the Judiciary
Reorganization Act, as amended. Under this section, the Court of Appeals shall
exercise:
xxx

xxx

xxx

(3) Exclusive appellate jurisdiction over all final judgments, decisions, resolutions,
orders or awards of Regional Trial
Courts and
quasi-judicial
agencies, instrumentalities, boards or commissions, including the Securities
and Exchange Commission, the Employees Compensation Commission and the
Civil Service Commission, except those falling within the appellate jurisdiction of
the Supreme Court in accordance with the Constitution, the Labor Code of the
Philippines under Presidential Decree No. 442, as amended, the provisions of
this Act and of subparagraph (1) of the third paragraph and subparagraph (4) of
the fourth paragraph of Section 17 of the Judiciary Act of 1948. (Emphasis
supplied)
As such, decisions handed down by voluntary arbitrators fall within the exclusive
appellate jurisdiction of the CA. This decision was taken into consideration in approving
Section 1 of Rule 43 of the Rules of Court.12 Thus:
SECTION 1. Scope. - This Rule shall apply to appeals from judgments or final
orders of the Court of Tax Appeals and from awards, judgments, final orders or
resolutions of or authorized by any quasi-judicial agency in the exercise of its
quasi-judicial functions. Among these agencies are the Civil Service Commission,
Central Board of Assessment Appeals, Securities and Exchange Commission,

Office of the President, Land Registration Authority, Social Security Commission,


Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology
Transfer, National Electrification Administration, Energy Regulatory Board,
National Telecommunications Commission, Department of Agrarian Reform
under Republic Act Number 6657, Government Service Insurance System,
Employees Compensation Commission, Agricultural Inventions Board, Insurance
Commission, Philippine Atomic Energy Commission, Board of Investments,
Construction Industry Arbitration Commission, and voluntary arbitrators
authorized by law. (Emphasis supplied)
This rule was cited in Sevilla Trading Company v. Semana,13 Manila Midtown Hotel v.
Borromeo,14 and Nippon Paint Employees Union-Olalia v. Court of Appeals. 15 These
cases held that the proper remedy from the adverse decision of a voluntary arbitrator, if
errors of fact and/or law are raised, is a petition for review under Rule 43 of the Rules of
Court. Thus, petitioner's contention that it may avail of a petition for review under Rule
43 under the circumstances of this case is correct.
As to petitioner's arguments that a petition for certiorari under Rule 65 may also be
resorted to, we hold the same to be in accordance with the Constitution and
jurisprudence.
Section 1 of Article VIII of the 1987 Constitution provides that:
SECTION 1. The judicial power shall be vested in one Supreme Court and in
such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (Emphasis supplied)
As may be gleaned from the above stated provision, it is well within the power and
jurisdiction of the Court to inquire whether any instrumentality of the Government, such
as a voluntary arbitrator, has gravely abused its discretion in the exercise of its functions
and prerogatives. Any agreement stipulating that "the decision of the arbitrator shall be
final and unappealable" and "that no further judicial recourse if either party disagrees
with the whole or any part of the arbitrator's award may be availed of" cannot be held to
preclude in proper cases the power of judicial review which is inherent in courts. 16 We
will not hesitate to review a voluntary arbitrator's award where there is a showing of
grave abuse of authority or discretion and such is properly raised in a petition for
certiorari17 and there is no appeal, nor any plain, speedy remedy in the course of law.18
Significantly, Insular Savings Bank v. Far East Bank and Trust Company 19 definitively
outlined several judicial remedies an aggrieved party to an arbitral award may
undertake:

(1) a petition in the proper RTC to issue an order to vacate the award on the
grounds provided for in Section 24 of RA 876;
(2) a petition for review in the CA under Rule 43 of the Rules of Court on
questions of fact, of law, or mixed questions of fact and law; and
(3) a petition for certiorari under Rule 65 of the Rules of Court should the
arbitrator have acted without or in excess of his jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction.
Nevertheless, although petitioners position on the judicial remedies available to it was
correct, we sustain the dismissal of its petition by the CA. The remedy petitioner availed
of, entitled "alternative petition for review under Rule 43 or petition for certiorari under
Rule 65," was wrong.
Time and again, we have ruled that the remedies of appeal and certiorari are mutually
exclusive and not alternative or successive.20
Proper issues that may be raised in a petition for review under Rule 43 pertain to errors
of fact, law or mixed questions of fact and law. 21 While a petition for certiorari under Rule
65 should only limit itself to errors of jurisdiction, that is, grave abuse of discretion
amounting to a lack or excess of jurisdiction. 22 Moreover, it cannot be availed of where
appeal is the proper remedy or as a substitute for a lapsed appeal. 23
In the case at bar, the questions raised by petitioner in its alternative petition before the
CA were the following:
A. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT THE BROADCAST OF
"WINS WEEKLY" WAS DULY AUTHORIZED BY ABS-CBN.
B. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT THE UNAUTHORIZED
BROADCAST DID NOT CONSTITUTE MATERIAL BREACH OF THE
AGREEMENT.
C. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT WINS SEASONABLY
CURED THE BREACH.
D. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN RULING THAT TEMPERATE
DAMAGES IN THE AMOUNT OF P1,166,955.00 MAY BE AWARDED TO WINS.
E. THE SOLE ARBITRATOR COMMITTED SERIOUS ERROR AND/OR
GRAVELY ABUSED HIS DISCRETION IN AWARDING ATTORNEY'S FEES IN

THE UNREASONABLE
OF P850,000.00.

AMOUNT

AND

UNCONSCIONABLE

AMOUNT

F. THE ERROR COMMITTED BY THE SOLE ARBITRATOR IS NOT A SIMPLE


ERROR OF JUDGMENT OR ABUSE OF DISCRETION. IT IS GRAVE ABUSE
OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.
A careful reading of the assigned errors reveals that the real issues calling for the CA's
resolution were less the alleged grave abuse of discretion exercised by the arbitrator
and more about the arbitrators appreciation of the issues and evidence presented by
the parties. Therefore, the issues clearly fall under the classification of errors of fact and
law questions which may be passed upon by the CA via a petition for review under
Rule 43. Petitioner cleverly crafted its assignment of errors in such a way as to straddle
both judicial remedies, that is, by alleging serious errors of fact and law (in which case a
petition for review under Rule 43 would be proper) and grave abuse of discretion
(because of which a petition for certiorari under Rule 65 would be permissible).
It must be emphasized that every lawyer should be familiar with the distinctions
between the two remedies for it is not the duty of the courts to determine under which
rule the petition should fall.24 Petitioner's ploy was fatal to its cause. An appeal taken
either to this Court or the CA by the wrong or inappropriate mode shall be
dismissed.25Thus, the alternative petition filed in the CA, being an inappropriate mode
of appeal, should have been dismissed outright by the CA.
WHEREFORE, the petition is hereby DENIED. The February 16, 2005 decision and
August 16, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 81940 directing
the Regional Trial Court of Quezon City, Branch 93 to proceed with the trial of the
petition for confirmation of arbitral award is AFFIRMED.
Costs against petitioner.
SO ORDERED.
RENATO
Associate Justice

C.

CORONA

WE CONCUR:

REYNATO
Chief
Chairperson

S.

PUNO
Justice

ANGELINA
GUTIERREZ
Associate Justice

SANDOVAL- ADOLFO
S.
Associate Justice

AZCUNA

TERESITA
Associate Justice

J.

CASTRO

LEONARDO-DE

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.
REYNATO
Chief Justice

S.

PUNO

EN BANC

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

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


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

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

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G.


JARAULA, petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS
CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT
OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF PUBLIC
WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his
capacity as Head of the Department of Transportation and
Communications, and SECRETARY SIMEON A. DATUMANONG, in his
capacity as Head of the Department of Public Works and
Highways,respondents,

JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON


VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR.,
HARLIN CAST ABAYON, and BENASING O. MACARANBON, respondentsintervenors,

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

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


V. GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE
CATAMIN RONALD SCHLOBOM, ANGELITO SANTOS, MA. LUISA M.
PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG PILIPINAS
(SMPP), petitioners, vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of Transportation
and Communications, respondents.
DECISION
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition
under Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International
Airport Authority (MIAA) and the Department of Transportation and Communications
(DOTC) and its Secretary from implementing the following agreements executed by the
Philippine Government through the DOTC and the MIAA and the Philippine International
Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12,
1997, (2) the Amended and Restated Concession Agreement dated November 26,
1999, (3) the First Supplement to the Amended and Restated Concession Agreement
dated August 27, 1999, (4) the Second Supplement to the Amended and Restated
Concession Agreement dated September 4, 2000, and (5) the Third Supplement to the
Amended and Restated Concession Agreement dated June 22, 2001 (collectively, the
PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to
conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and
determine whether the present airport can cope with the traffic development up to the
year 2010. The study consisted of two parts: first, traffic forecasts, capacity of existing
facilities, NAIA future requirements, proposed master plans and development plans; and
second, presentation of the preliminary design of the passenger terminal building. The
ADP submitted a Draft Final Report to the DOTC in December 1989.

Some time in 1993, six business leaders consisting of John Gokongwei, Andrew
Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then
President Fidel V. Ramos to explore the possibility of investing in the construction and
operation of a new international airport terminal. To signify their commitment to pursue
the project, they formed the Asias Emerging Dragon Corp. (AEDC) which was
registered with the Securities and Exchange Commission (SEC) on September 15,
1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government
through the DOTC/MIAA for the development of NAIA International Passenger Terminal
III (NAIA IPT III) under a build-operate-and-transfer arrangement pursuant to RA 6957
as amended by RA 7718 (BOT Law).[1]
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the
Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA
IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of
AEDC to the National Economic and Development Authority (NEDA). A revised
proposal, however, was forwarded by the DOTC to NEDA on December 13, 1995. On
January 5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) Technical
Board favorably endorsed the project to the ICC Cabinet Committee which approved the
same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the
NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily
newspapers of an invitation for competitive or comparative proposals on AEDCs
unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as amended. The
alternative bidders were required to submit three (3) sealed envelopes on or before 5:00
p.m. of September 20, 1996. The first envelope should contain the Prequalification
Documents, the second envelope the Technical Proposal, and the third envelope the
Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the
Bid Documents and the submission of the comparative bid proposals. Interested firms
were permitted to obtain the Request for Proposal Documents beginning June 28, 1996,
upon submission of a written application and payment of a non-refundable fee
of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent
must have adequate capability to sustain the financing requirement for the detailed
engineering, design, construction, operation, and maintenance phases of the
project. The proponent would be evaluated based on its ability to provide a minimum
amount of equity to the project, and its capacity to secure external financing for the
project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a prebid conference on July 29, 1996.

On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid
Documents. The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its
financial proposal an additional percentage of gross revenue share of the Government,
as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of
equal amount, but payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, and/or operation and
maintenance phases of the project as the case may be. For purposes of prequalification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the
minimum amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or
the members of the consortium are banking with them, that the project proponent and/or
the members are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents compliance with the
minimum technical and financial requirements provided in the Bid Documents and the
IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to
time. Said amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain
clarifications were made. Upon the request of prospective bidder Peoples Air Cargo &
Warehousing Co., Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule
11 of the Implementing Rules and Regulations of the BOT Law, only the proposed
Annual Guaranteed Payment submitted by the challengers would be revealed to AEDC,
and that the challengers technical and financial proposals would remain
confidential. The PBAC also clarified that the list of revenue sources contained in Annex
4.2a of the Bid Documents was merely indicative and that other revenue sources may
be included by the proponent, subject to approval by DOTC/MIAA. Furthermore, the

PBAC clarified that only those fees and charges denominated as Public Utility Fees
would be subject to regulation, and those charges which would be actually deemed
Public Utility Fees could still be revised, depending on the outcome of PBACs query on
the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the
Queries of PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos
queries and the PBACs responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity
requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the
capitalization of each member company is so structured to meet the requirements and
needs of their current respective business undertaking/activities. In order to comply with
this equity requirement, Paircargo is requesting PBAC to just allow each member of
(sic) corporation of the Joint Venture to just execute an agreement that embodies a
commitment to infuse the required capital in case the project is awarded to the Joint
Venture instead of increasing each corporations current authorized capital stock just for
prequalification purposes.
In prequalification, the agency is interested in ones financial capability at the time of
prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that
present financial capability. However, total financial capability of all member companies
of the Consortium, to be established by submitting the respective companies audited
financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension
of a Performance Security to the joint venture in the event that the Concessions
Agreement (sic) is awarded to them.However, Paircargo is being required to submit a
copy of the draft concession as one of the documentary requirements. Therefore,
Paircargo is requesting that theyd (sic) be furnished copy of the approved negotiated
agreement between the PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any
material changes would be made known to prospective challengers through bid
bulletins. However, a final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid
Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to
submit the same with the required Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo and
Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and
Security Bank Corp. (Security Bank) (collectively, Paircargo Consortium) submitted their
competitive proposal to the PBAC. On September 23, 1996, the PBAC opened the first
envelope containing the prequalification documents of the Paircargo Consortium. On

the following day, September 24, 1996, the PBAC prequalified the Paircargo
Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as
regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the
amount that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for
prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine
requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents submitted
by Paircargo and the established prequalification criteria, the PBAC had found that the
challenger, Paircargo, had prequalified to undertake the project. The Secretary of the
DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second envelope of the
Paircargo Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to
Paircargos financial capability, in view of the restrictions imposed by Section 21-B of the
General Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks
and Other Financial Intermediaries. On October 7, 1996, AEDC again manifested its
objections and requested that it be furnished with excerpts of the PBAC meeting and
the accompanying technical evaluation report where each of the issues they raised
were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and
the Paircargo Consortium containing their respective financial proposals. Both
proponents offered to build the NAIA Passenger Terminal III for at least $350 million at
no cost to the government and to pay the government: 5% share in gross revenues for
the first five years of operation, 7.5% share in gross revenues for the next ten years of
operation, and 10% share in gross revenues for the last ten years of operation, in
accordance with the Bid Documents. However, in addition to the foregoing, AEDC
offered to pay the government a total of P135 million as guaranteed payment for 27
years while Paircargo Consortium offered to pay the government a total of P17.75 billion
for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal
submitted by the Paircargo Consortium, and gave AEDC 30 working days or until

November 28, 1996 within which to match the said bid, otherwise, the project would be
awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC
Secretary Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo
Consortium regarding AEDCs failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine
International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and
reiterated its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the secondpass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for
Declaration of Nullity of the Proceedings, Mandamus and Injunction against the
Secretary of the DOTC, the Chairman of the PBAC, the voting members of the PBAC
and Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC Technical
Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the
approval, on a no-objection basis, of the BOT agreement between the DOTC and
PIATCO. As the ad referendum gathered only four (4) of the required six (6) signatures,
the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile,
and PIATCO, through its President, Henry T. Go, signed the Concession Agreement for
the Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport
Passenger Terminal III (1997 Concession Agreement). The Government granted
PIATCO the franchise to operate and maintain the said terminal during the concession
period and to collect the fees, rentals and other charges in accordance with the rates or
schedules stipulated in the 1997 Concession Agreement. The Agreement provided that
the concession period shall be for twenty-five (25) years commencing from the inservice date, and may be renewed at the option of the Government for a period not
exceeding twenty-five (25) years. At the end of the concession period, PIATCO shall
transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and
Restated Concession Agreement (ARCA). Among the provisions of the 1997
Concession Agreement that were amended by the ARCA were: Sec. 1.11 pertaining to
the definition of certificate of completion; Sec. 2.05 pertaining to the Special Obligations
of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the
Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest
in the Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires
insurance; Sec. 5.10 with respect to the temporary take-over of operations by GRP;
Sec. 5.16 pertaining to the taxes, duties and other imposts that may be levied on the
Concessionaire; Sec. 6.03 as regards the periodic adjustment of public utility fees and

charges; the entire Article VIII concerning the provisions on the termination of the
contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case a
dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the
ARCA. The First Supplement was signed on August 27, 1999; the Second Supplement
on September 4, 2000; and the Third Supplement on June 22, 2001 (collectively,
Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining
Revenues or Gross Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of
MIAA to provide sufficient funds for the upkeep, maintenance, repair and/or replacement
of all airport facilities and equipment which are owned or operated by MIAA; and further
providing additional special obligations on the part of GRP aside from those already
enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a stipulation
as regards the construction of a surface road to connect NAIA Terminal II and Terminal
III in lieu of the proposed access tunnel crossing Runway 13/31; the swapping of
obligations between GRP and PIATCO regarding the improvement of Sales Road; and
the changes in the timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to
the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an introductory
paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of Percentage
Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing,
removal, demolition or disposal of subterranean structures uncovered or discovered at
the site of the construction of the terminal by the Concessionaire. It defined the scope of
works; it provided for the procedure for the demolition of the said structures and the
consideration for the same which the GRP shall pay PIATCO; it provided for time
extensions, incremental and consequential costs and losses consequent to the
existence of such structures; and it provided for some additional obligations on the part
of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as
regards the construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the
NAIA Terminals I and II, had existing concession contracts with various service
providers to offer international airline airport services, such as in-flight catering,
passenger handling, ramp and ground support, aircraft maintenance and provisions,
cargo handling and warehousing, and other services, to several international airlines at
the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings
Aviation Systems Corp., and the MacroAsia Group.Miascor, DNATA and MacroAsia,
together with Philippine Airlines (PAL), are the dominant players in the industry with an
aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers,
claiming that they stand to lose their employment upon the implementation of the
questioned agreements, filed before this Court a petition for prohibition to enjoin the
enforcement of said agreements.[2]

On October 15, 2002, the service providers, joining the cause of the petitioning
workers, filed a motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and
Constantino Jaraula filed a similar petition with this Court. [3]
On November 6, 2002, several employees of the MIAA likewise filed a petition
assailing the legality of the various agreements. [4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras,
Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles,
Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to
intervene in the case as Respondents-Intervenors. They filed their Comment-InIntervention defending the validity of the assailed agreements and praying for the
dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal
Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell Export Awards
at Malacaang Palace, stated that she will not honor (PIATCO) contracts which the
Executive Branchs legal offices have concluded (as) null and void. [5]
Respondent PIATCO filed its Comments to the present petitions on November 7
and 27, 2002. The Office of the Solicitor General and the Office of the Government
Corporate Counsel filed their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral
argument, the Court then resolved in open court to require the parties to file
simultaneously their respective Memoranda in amplification of the issues heard in the
oral arguments within 30 days and to explore the possibility of arbitration or mediation
as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office
of the Government Corporate Counsel prayed that the present petitions be given due
course and that judgment be rendered declaring the 1997 Concession Agreement, the
ARCA and the Supplements thereto void for being contrary to the Constitution, the BOT
Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003
PIATCO commenced arbitration proceedings before the International Chamber of
Commerce, International Court of Arbitration (ICC) by filing a Request for Arbitration
with the Secretariat of the ICC against the Government of the Republic of the
Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of resolving complicated
issues made difficult by their intersecting legal and economic implications. The Court is
aware of the far reaching fall out effects of the ruling which it makes today. For more
than a century and whenever the exigencies of the times demand it, this Court has
never shirked from its solemn duty to dispense justice and resolve actual controversies
involving rights which are legally demandable and enforceable, and to determine
whether or not there has been grave abuse of discretion amounting to lack or excess of
jurisdiction.[6] To be sure, this Court will not begin to do otherwise today.

We shall first dispose of the procedural issues raised by respondent PIATCO


which they allege will bar the resolution of the instant controversy.
Petitioners Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service
providers[7] having separate concession contracts with MIAA and continuing service
agreements with various international airlines to provide in-flight catering, passenger
handling, ramp and ground support, aircraft maintenance and provisions, cargo
handling and warehousing and other services. Also included as petitioners are labor
unions MIASCOR Workers Union-National Labor Union and Philippine Airlines
Employees Association. These petitioners filed the instant action for prohibition as
taxpayers and as parties whose rights and interests stand to be violated by the
implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing
under Philippine laws engaged in the business of providing in-flight catering, passenger
handling, ramp and ground support, aircraft maintenance and provisions, cargo
handling and warehousing and other services to several international airlines at the
Ninoy Aquino International Airport. Petitioners-Intervenors allege that as tax-paying
international airline and airport-related service operators, each one of them stands to be
irreparably injured by the implementation of the PIATCO Contracts. Each of the
petitioners-intervenors have separate and subsisting concession agreements with MIAA
and with various international airlines which they allege are being interfered with and
violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang
Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the
sole and exclusive bargaining agent of all the employees in MIAA. Petitioners anchor
their petition for prohibition on the nullity of the contracts entered into by the
Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III.
They filed the petition as taxpayers and persons who have a legitimate interest to
protect in the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain
stipulations which directly contravene numerous provisions of the Constitution, specific
provisions of the BOT Law and its Implementing Rules and Regulations, and public
policy. Petitioners contend that the DOTC and the MIAA, by entering into said contracts,
have committed grave abuse of discretion amounting to lack or excess of jurisdiction
which can be remedied only by a writ of prohibition, there being no plain, speedy or
adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement
and the ARCA which grant PIATCO the exclusive right to operate a commercial
international passenger terminal within the Island of Luzon, except those international
airports already existing at the time of the execution of the agreement. The contracts
further provide that upon the commencement of operations at the NAIA IPT III, the

Government shall cause the closure of Ninoy Aquino International Airport Passenger
Terminals I and II as international passenger terminals. With respect to existing
concession agreements between MIAA and international airport service providers
regarding certain services or operations, the 1997 Concession Agreement and the
ARCA uniformly provide that such services or operations will not be carried over to the
NAIA IPT III and PIATCO is under no obligation to permit such carry over except
through a separate agreement duly entered into with PIATCO. [8]
With respect to the petitioning service providers and their employees, upon the
commencement of operations of the NAIA IPT III, they allege that they will be effectively
barred from providing international airline airport services at the NAIA Terminals I and II
as all international airlines and passengers will be diverted to the NAIA IPT III. The
petitioning service providers will thus be compelled to contract with PIATCO alone for
such services, with no assurance that subsisting contracts with MIAA and other
international airlines will be respected. Petitioning service providers stress that despite
the very competitive market, the substantial capital investments required and the high
rate of fees, they entered into their respective contracts with the MIAA with the
understanding that the said contracts will be in force for the stipulated period, and
thereafter, renewed so as to allow each of the petitioning service providers to recoup
their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II
and of MIAA on the other hand allege that with the closure of the NAIA Terminals I and II
as international passenger terminals under the PIATCO Contracts, they stand to lose
employment.
The question on legal standing is whether such parties have alleged such a
personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the court so largely
depends for illumination of difficult constitutional questions. [9] Accordingly, it has been
held that the interest of a person assailing the constitutionality of a statute must be
direct and personal. He must be able to show, not only that the law or any government
act is invalid, but also that he sustained or is in imminent danger of sustaining some
direct injury as a result of its enforcement, and not merely that he suffers thereby in
some indefinite way. It must appear that the person complaining has been or is about to
be denied some right or privilege to which he is lawfully entitled or that he is about to be
subjected to some burdens or penalties by reason of the statute or act complained of. [10]
We hold that petitioners have the requisite standing. In the above-mentioned cases,
petitioners have a direct and substantial interest to protect by reason of the
implementation of the PIATCO Contracts. They stand to lose their source of livelihood, a
property right which is zealously protected by the Constitution. Moreover, subsisting
concession agreements between MIAA and petitioners-intervenors and service
contracts between international airlines and petitioners-intervenors stand to be nullified
or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The
financial prejudice brought about by the PIATCO Contracts on petitioners and
petitioners-intervenors in these cases are legitimate interests sufficient to confer on
them the requisite standing to file the instant petitions.

b. G.R. No. 155547


In G.R. No. 155547, petitioners filed the petition for prohibition as members of the
House of Representatives, citizens and taxpayers. They allege that as members of the
House of Representatives, they are especially interested in the PIATCO Contracts,
because the contracts compel the Government and/or the House of Representatives to
appropriate funds necessary to comply with the provisions therein. [11] They cite
provisions of the PIATCO Contracts which require disbursement of unappropriated
amounts in compliance with the contractual obligations of the Government. They allege
that the Government obligations in the PIATCO Contracts which compel government
expenditure without appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall be paid out of the
treasury except in pursuance of an appropriation made by law.[12]
Standing is a peculiar concept in constitutional law because in some cases, suits
are not brought by parties who have been personally injured by the operation of a law or
any other government act but by concerned citizens, taxpayers or voters who actually
sue in the public interest. Although we are not unmindful of the cases of Imus Electric
Co. v. Municipality of Imus[13] and Gonzales v. Raquiza[14] wherein this Court held that
appropriation must be made only on amounts immediately demandable, public interest
demands that we take a more liberal view in determining whether the petitioners
suing as legislators, taxpayers and citizens have locus standi to file the instant
petition. In Kilosbayan, Inc. v. Guingona,[15]this Court held [i]n line with the liberal
policy of this Court on locus standi, ordinary taxpayers, members of Congress, and
even association of planters, and non-profit civic organizations were allowed to initiate
and prosecute actions before this Court to question the constitutionality or validity of
laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court)
is not devoid of discretion as to whether or not it should be entertained. [17] As such . . .
even if, strictly speaking, they [the petitioners] are not covered by the definition, it is still
within the wide discretion of the Court to waive the requirement and so remove the
impediment to its addressing and resolving the serious constitutional questions raised.
[18]
In view of the serious legal questions involved and their impact on public interest, we
resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review
the instant cases as factual issues are involved which this Court is ill-equipped to
resolve. Moreover, PIATCO alleges that submission of this controversy to this Court at
the first instance is a violation of the rule on hierarchy of courts. They contend that trial
courts have concurrent jurisdiction with this Court with respect to a special civil action
for prohibition and hence, following the rule on hierarchy of courts, resort must first be
had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of
the view that the crux of the instant controversy involves significant legal questions.
The facts necessary to resolve these legal questions are well established and, hence,
need not be determined by a trial court.

The rule on hierarchy of courts will not also prevent this Court from assuming
jurisdiction over the cases at bar. The said rule may be relaxed when the redress
desired cannot be obtained in the appropriate courts or where exceptional and
compelling circumstances justify availment of a remedy within and calling for the
exercise of this Courts primary jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in the cases at bar that
call for the relaxation of the rule. Both petitioners and respondents agree that these
cases are oftranscendental importance as they involve the construction and operation
of the countrys premier international airport. Moreover, the crucial issues submitted for
resolution are of first impression and they entail the proper legal interpretation of key
provisions of the Constitution, the BOT Law and its Implementing Rules and
Regulations. Thus, considering the nature of the controversy before the Court,
procedural bars may be lowered to give way for the speedy disposition of the instant
cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is
aware that arbitration proceedings pursuant to Section 10.02 of the ARCA have been
filed at the instance of respondent PIATCO. Again, we hold that the arbitration step
taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the
arbitration clause in the Distributorship Agreement in question is valid and the dispute
between the parties is arbitrable, this Court affirmed the trial courts decision denying
petitioners Motion to Suspend Proceedings pursuant to the arbitration clause under the
contract. In so ruling, this Court held that as contracts produce legal effect between the
parties, their assigns and heirs, only the parties to the Distributorship Agreement are
bound by its terms, including the arbitration clause stipulated therein. This Court ruled
that arbitration proceedings could be called for but only with respect to the parties to the
contract in question. Considering that there are parties to the case who are neither
parties to the Distributorship Agreement nor heirs or assigns of the parties thereto, this
Court, citing its previous ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that
to tolerate the splitting of proceedings by allowing arbitration as to some of the parties
on the one hand and trial for the others on the other hand would, in effect, result
in multiplicity of suits, duplicitous procedure and unnecessary delay.[22] Thus, we
ruled that the interest of justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented
legitimate interests in the resolution of the controversy are not parties to the PIATCO
Contracts. Accordingly, they cannot be bound by the arbitration clause provided for in
the ARCA and hence, cannot be compelled to submit to arbitration proceedings. A
speedy and decisive resolution of all the critical issues in the present
controversy, including those raised by petitioners, cannot be made before an
arbitral tribunal. The object of arbitration is precisely to allow an expeditious

determination of a dispute. This objective would not be met if this Court were to allow
the parties to settle the cases by arbitration as there are certain issues involving nonparties to the PIATCO Contracts which the arbitral tribunal will not be equipped to
resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCOs predecessor,
was not a duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as
the Paircargo Consortium failed to meet the financial capability required under the BOT
Law and the Bid Documents. They allege that in computing the ability of the Paircargo
Consortium to meet the minimum equity requirements for the project, the entire net
worth of Security Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated
October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the
Paircargo Consortium is found to have a combined net worth of P3,900,000,000.00,
sufficient to meet the equity requirements of the project. The said Memorandum was in
response to a letter from Mr. Antonio Henson of AEDC to President Fidel V. Ramos
questioning the financial capability of the Paircargo Consortium on the ground that it
does not have the financial resources to put up the required minimum equity
of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337,
as amended or the General Banking Act that a commercial bank cannot invest in any
single enterprise in an amount more than 15% of its net worth. In the said
Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial
capability will be evaluated based on total financial capability of all the member
companies of the [Paircargo] Consortium. In this connection, the Challenger was found
to have a combined net worth of P3,926,421,242.00 that could support a project costing
approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To impose that as a
requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial
capability. As stated in Bid Bulletin No. 3, financial capability may also be established by
testimonial letters issued by reputable banks. The Challenger has complied with this
requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the
amount of the money to be used to answer the required thirty percent (30%) equity of
the challenger but rather to be used in establishing if there is enough basis to believe
that the challenger can comply with the required 30% equity. In fact, proof of sufficient

equity is required as one of the conditions for award of contract (Section 12.1 IRR of the
BOT Law) but not for pre-qualification (Section 5.4 of the same document). [23]
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the
contract shall be awarded to the bidder who, having satisfied the minimum financial,
technical, organizational and legal standards required by the law, has submitted the
lowest bid and most favorable terms of the project. [24] Further, the 1994 Implementing
Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
.
c. Financial Capability: The project proponent must have adequate capability to sustain
the financing requirements for the detailed engineering design, construction and/or
operation and maintenance phases of the project, as the case may be. For purposes of
pre-qualification, this capability shall be measured in terms of (i) proof of the ability of
the project proponent and/or the consortium to provide a minimum amount of
equity to the project, and (ii) a letter testimonial from reputable banks attesting
that the project proponent and/or members of the consortium are banking with
them, that they are in good financial standing, and that they have adequate
resources. The government agency/LGU concerned shall determine on a project-toproject basis and before pre-qualification, the minimum amount of equity needed.
(emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16,
1996 amending the financial capability requirements for pre-qualification of the project
proponent as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent to the
minimum technical and financial requirements provided in the Bid Documents and in the
IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be
based shall be thirty percent (30%) of the project cost instead of the twenty
percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate
with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any
challenger to the unsolicited proposal of AEDC has to show that it possesses the
requisite financial capability to undertake the project in the minimum amount of
30% of the project cost through (i) proof of the ability to provide a minimum amount of

equity to the project, and (ii) a letter testimonial from reputable banks attesting that the
project proponent or members of the consortium are banking with them, that they are in
good financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction
of the PBAC that it had the ability to provide the minimum equity for the project in the
amount of at least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a
net worth of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial
Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its
equity for the project.[27] Security Banks Audited Financial Statements as of 1995 show
that it has a net worth equivalent to its capital funds in the amount
of P3,523,504,377.00.[28]
We agree with public respondents that with respect to Security Bank, the entire
amount of its net worth could not be invested in a single undertaking or enterprise,
whether allied or non-allied in accordance with the provisions of R.A. No. 337, as
amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the
Monetary Board, whenever it shall deem appropriate and necessary to further national
development objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial banking services, as
well as a government-owned and controlled bank, to operate under an expanded
commercial banking authority and by virtue thereof exercise, in addition
to powers authorized for commercial banks, the powers of an Investment House
as provided in Presidential Decree No. 129, invest in the equity of a non-allied
undertaking, or own a majority or all of the equity in a financial intermediary other than
a commercial bank or a bank authorized to providecommercial banking
services: Provided, That (a) the total investment in equities shall not exceed fifty
percent (50%) of the net worth of the bank; (b) the equity investment in any one
enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of
the net worth of the bank; (c) the equity investment of the bank, or of its wholly
or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirtyfive percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five
percent (35%) of the voting stock in that enterprise; and (d) the equity investment
inother banks shall be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.
.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and
restrictions shall also apply regarding equity investments of banks.

a. In any single enterprise. The equity investments of banks in any single enterprise
shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank
as defined in Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo
Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total
net worth therefore of the Paircargo Consortium, after considering the maximum
amounts that may be validly invested by each of its members is P558,384,871.55 or
only 6.08% of the project cost,[29] an amount substantially less than the prescribed
minimum equity investment required for the project in the amount of P2,755,095,000.00
or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest
opportunity, the ability of the bidder to undertake the project. Thus, with respect to the
bidders financial capacity at the pre-qualification stage, the law requires the government
agency to examine and determine the ability of the bidder to fund the entire cost of the
project by considering the maximum amounts that each bidder may invest in the
project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction,
operation and maintenance of the NAIA IPT III project should prove that it has the ability
to provide equity in the minimum amount of 30% of the project cost, in accordance with
the 70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus, in the case of
Paircargo Consortium, the PBAC should determine the maximum amounts that each
member of the consortium may commit for the construction, operation and maintenance
of the NAIA IPT III project at the time of pre-qualification. With respect to Security
Bank, the maximum amount which may be invested by it would only be 15% of its net
worth in view of the restrictions imposed by the General Banking Act. Disregarding the
investment ceilings provided by applicable law would not result in a proper evaluation of
whether or not a bidder is pre-qualified to undertake the project as for all intents and
purposes, such ceiling or legal restriction determines the true maximum amount which
a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake
the project requires an evaluation of the financial capacity of the said bidder at the time
the bid is submitted based on the required documents presented by the bidder. The
PBAC should not be allowed to speculate on the future financial ability of the bidder to
undertake the project on the basis of documents submitted. This would open doors to
abuse and defeat the very purpose of a public bidding. This is especially true in the
case at bar which involves the investment of billions of pesos by the project proponent.
The relevant government authority is duty-bound to ensure that the awardee of the
contract possesses the minimum required financial capability to complete the project. To
allow the PBAC to estimate the bidders future financial capability would not secure
the viability and integrity of the project. A restrictive and conservative application of the
rules and procedures of public bidding is necessary not only to protect the impartiality
and regularity of the proceedings but also to ensure the financial and technical reliability
of the project. It has been held that:

The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the
foundation of a fair and competitive public bidding would be defeated. Strict
observance of the rules, regulations, and guidelines of the bidding process is the
only safeguard to a fair, honest and competitive public bidding. [30]
Thus, if the maximum amount of equity that a bidder may invest in the project at
the time the bids are submitted falls short of the minimum amounts required to be put
up by the bidder, said bidder should be properly disqualified. Considering that at the
pre-qualification stage, the maximum amounts which the Paircargo Consortium may
invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold
that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by
the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant
controversy, as the legal effects of the disqualification of respondent PIATCOs
predecessor would come into play and necessarily result in the nullity of all the
subsequent contracts entered by it in pursuance of the project, the Court feels that it is
necessary to discuss in full the pressing issues of the present controversy for a
complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is
invalid as it contains provisions that substantially depart from the draft Concession
Agreement included in the Bid Documents. They maintain that a substantial departure
from the draft Concession Agreement is a violation of public policy and renders the 1997
Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid
Documents is intended to be a draft, i.e., subject to change, alteration or modification,
and that this intention was clear to all participants, including AEDC, and DOTC/MIAA. It
argued further that said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued
by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time.
Said amendments shall only cover items that would not materially affect the preparation
of the proponents proposal.
By its very nature, public bidding aims to protect the public interest by giving the
public the best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law,
competition requires, not only `bidding upon a common standard, a common basis,

upon the same thing, the same subject matter, the same undertaking,' but also that it be
legitimate, fair and honest; and not designed to injure or defraud the government. [31]
An essential element of a publicly bidded contract is that all bidders must be on
equal footing. Not simply in terms of application of the procedural rules and regulations
imposed by the relevant government agency, but more importantly, on the contract
bidded upon. Each bidder must be able to bid on the same thing. The rationale is
obvious. If the winning bidder is allowed to later include or modify certain provisions in
the contract awarded such that the contract is altered in any material respect, then the
essence of fair competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may modify the
contract and include provisions which are favorable to it that were not previously made
available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders.
The specifications in such biddings provide the common ground or basis for the bidders.
The specifications should, accordingly, operate equally or indiscriminately upon all
bidders.[32]
The same rule was restated by Chief Justice Stuart of the Supreme Court of
Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a
contract for public work to the lowest responsible bidder, the proposals and
specifications therefore must be so framed as to permit free and full competition. Nor
can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and
specifications upon which the bids were invited. [33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that
the draft concession agreement is subject to amendment, the pertinent portion of which
was quoted above, the PBAC also clarified that [s]aid amendments shall only cover
items that would not materially affect the preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon, such changes must not
constitute substantial or material amendments that would alter the basic
parameters of the contract and would constitute a denial to the other bidders of
the opportunity to bid on the same terms.Hence, the determination of whether or not
a modification or amendment of a contract bidded out constitutes a substantial
amendment rests on whether the contract, when taken as a whole, would contain
substantially different terms and conditions that would have the effect of altering the
technical and/or financial proposals previously submitted by other bidders. The
alterations and modifications in the contract executed between the government and the
winning bidder must be such as to render such executed contract to be an entirely
different contract from the one that was bidded upon.

In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc., [34] this Court
quoted with approval the ruling of the trial court that an amendment to a contract
awarded through public bidding, when such subsequent amendment was made without
a new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs that the due execution
of a contract after public bidding is a limitation upon the right of the contracting parties to
alter or amend it without another public bidding, for otherwise what would a public
bidding be good for if after the execution of a contract after public bidding, the
contracting parties may alter or amend the contract, or even cancel it, at their
will? Public biddings are held for the protection of the public, and to give the public the
best possible advantages by means of open competition between the bidders. He who
bids or offers the best terms is awarded the contract subject of the bid, and it is
obvious that such protection and best possible advantages to the public will
disappear if the parties to a contract executed after public bidding may alter or
amend it without another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997 Concession Agreement
the same agreement that was offered for public bidding, i.e., the draft Concession
Agreement attached to the Bid Documents? A close comparison of the draft Concession
Agreement attached to the Bid Documents and the 1997 Concession Agreement
reveals that the documents differ in at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession
Agreement and the 1997 Concession Agreement may be classified into three distinct
categories: (1) fees which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments are made effective
only upon written approval by MIAA; (2) fees other than those included in the first
category which maybe adjusted by PIATCO whenever it deems necessary without need
for consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the Ninoy Aquino
International Airport Passenger Terminal I, pursuant to Administrative Order No. 1,
Series of 1993, as amended. The glaring distinctions between the draft Concession
Agreement and the 1997 Concession Agreement lie in the types of fees included in
each category and the extent of the supervision and regulation which MIAA is allowed to
exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic
adjustment in accordance with a prescribed parametric formula and effective only upon
written approval by MIAA, the draft Concession Agreement includes the following:[36]
(1) aircraft parking fees;

(2) aircraft tacking fees;


(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and
effective upon MIAA approval are classified as Public Utility Revenues and include: [37]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is
best appreciated in relation to fees included in the second category identified above.
Under the1997 Concession Agreement, fees which PIATCO may adjust whenever it
deems necessary without need for consent of DOTC/MIAA are Non-Public Utility
Revenues and is defined as all other income not classified as Public Utility Revenues
derived from operations of the Terminal and the Terminal Complex. [38] Thus, under the
1997 Concession Agreement, groundhandling fees, rentals from airline offices and
porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves
the right to regulate (1) lobby and vehicular parking fees and (2) other new fees and
charges that may be imposed by PIATCO. Such regulation may be made by periodic
adjustment and is effective only upon written approval of MIAA. The full text of said
provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft
parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices,
check-in-counter rentals and porterage fees shall be allowed only once every two years
and in accordance with the Parametric Formula attached hereto as Annex F. Provided
that adjustments shall be made effective only after the written express approval of the
MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the
conformity of the adjustments with the above said parametric formula. The first
adjustment shall be made prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions
the lobby and vehicular parking fees and other new fees and charges as

contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the


airport shall be deprived of a free option for the services they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting
Non-Public Utility Revenues in order to ensure that End Users are not unreasonably
deprived of services. While the vehicular parking fee, porterage fee and greeter/well
wisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may
intervene and require Concessionaire to explain and justify the fee it may set
from time to time, if in the reasonable opinion of GRP the said fees have become
exorbitant resulting in the unreasonable deprivation of End Users of such services. [40]
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular
parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to
require PIATCO toexplain and justify the fees set by PIATCO. In the draft
Concession Agreement, vehicular parking fee is subject to MIAA regulation and
approval under the second paragraph of Section 6.03 thereof while porterage fee is
covered by the first paragraph of the same provision. There is an obvious relaxation of
the extent of control and regulation by MIAA with respect to the particular fees that may
be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and
collected by PIATCO, i.e., new fees and charges that may be imposed by PIATCO
which have not been previously imposed or collected at the Ninoy Aquino International
Airport Passenger Terminal I, under Section 6.03 of the draft Concession
Agreement MIAA has reserved the right to regulate the same under the same
conditions that MIAA may regulate fees under the first category, i.e., periodic adjustment
of once every two years in accordance with a prescribed parametric formula and
effective only upon written approval by MIAA. However, under the 1997 Concession
Agreement, adjustment of fees under the third category is not subject to MIAA
regulation.
With respect to terminal fees that may be charged by PIATCO, [41] as shown earlier,
this was included within the category of Public Utility Revenues under the 1997
Concession Agreement. This classification is significant because under the 1997
Concession Agreement, Public Utility Revenues are subject to an Interim Adjustment of
fees upon the occurrence of certain extraordinary events specified in the agreement.
[42]
However, under the draft Concession Agreement, terminal fees are not included in
the types of fees that may be subject to Interim Adjustment. [43]
Finally, under the 1997 Concession Agreement, Public Utility Revenues, except
terminal fees, are denominated in US Dollars [44] while payments to the Government are
in Philippine Pesos. In the draft Concession Agreement, no such stipulation was

included. By stipulating that Public Utility Revenues will be paid to PIATCO in US


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

substituted as concessionaire and operator of the Development Facility in accordance


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

PIATCO, however, argues that the parties to the bidding procedure acknowledge
that the draft Concession Agreement is subject to amendment because the Bid
Documents permit financing or borrowing. They claim that it was the lenders who
proposed the amendments to the draft Concession Agreement which resulted in the
1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law
to allow the project proponent or the winning bidder to obtain financing for the project,
especially in this case which involves the construction, operation and maintenance of
the NAIA IPT III. Expectedly, compliance by the project proponent of its undertakings
therein would involve a substantial amount of investment. It is therefore inevitable for
the awardee of the contract to seek alternate sources of funds to support the project. Be
that as it may, this Court maintains that amendments to the contract bidded upon should
always conform to the general policy on public bidding if such procedure is to be faithful
to its real nature and purpose. By its very nature and characteristic, competitive public
bidding aims to protect the public interest by giving the public the best possible
advantages through open competition. [45] It has been held that the three principles in
public bidding are (1) the offer to the public; (2) opportunity for competition; and (3) a
basis for the exact comparison of bids. A regulation of the matter which excludes any of
these factors destroys the distinctive character of the system and thwarts the purpose of
its adoption.[46] These are the basic parameters which every awardee of a contract
bidded out must conform to, requirements of financing and borrowing notwithstanding.
Thus, upon a concrete showing that, as in this case, the contract signed by the
government and the contract-awardee is an entirely different contract from the contract
bidded, courts should not hesitate to strike down said contract in its entirety for violation
of public policy on public bidding. A strict adherence on the principles, rules and
regulations on public bidding must be sustained if only to preserve the integrity and the
faith of the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for public
service and for furnishing supplies and other materials. It aims to secure for the
government the lowest possible price under the most favorable terms and conditions, to
curtail favoritism in the award of government contracts and avoid suspicion of anomalies
and it places all bidders in equal footing. [47] Any government action which permits
any substantial variance between the conditions under which the bids are invited
and the contract executed after the award thereof is a grave abuse of discretion
amounting to lack or excess of jurisdiction which warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments
were made on the 1997 Concession Agreement renders the same null and void for
being contrary to public policy. These amendments convert the 1997 Concession
Agreement to an entirely different agreement from the contract bidded out or the draft
Concession Agreement. It is not difficult to see that the amendments on (1) the types of
fees or charges that are subject to MIAA regulation or control and the extent thereof and
(2) the assumption by the Government, under certain conditions, of the liabilities of
PIATCO directly translates concrete financial advantages to PIATCO that were
previously not available during the bidding process.These amendments cannot be
taken as merely supplements to or implementing provisions of those already existing in

the draft Concession Agreement. The amendments discussed above present new terms
and conditions which provide financial benefit to PIATCO which may have altered the
technical and financial parameters of other bidders had they known that such terms
were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession
Agreement provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default resulted in the acceleration of the payment due date of the
Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall
within one hundred eighty (180) days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to
be substituted as concessionaire and operator of the Development facility in accordance
with the terms and conditions hereof, or designate a qualified operator acceptable to
GRP to operate the Development Facility, likewise under the terms and conditions of
this Agreement; Provided, that if at the end of the 180-day period GRP shall not have
served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall
be deemed to have elected to take over the Development Facility with the
concomitant assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
takeover the operation of the Development Facility. If the concession company should
elect to designate an operator for the Development Facility, the concession company
shall in good faith identify and designate a qualified operator acceptable to GRP within
one hundred eighty (180) days from receipt of GRPs written notice. If the concession
company, acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day
period take over the Development Facility and assume Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding
in the books of the Concessionaire as owing to Unpaid Creditors who have
provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities,

reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors. [48]
It is clear from the above-quoted provisions that Government, in the event that
PIATCO defaults in its loan obligations, is obligated to pay all amounts recorded
and from time to time outstanding from the books of PIATCO which the latter owes to its
creditors.[49] These amounts include all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses. [50] This obligation
of the Government to pay PIATCOs creditors upon PIATCOs default would arise if the
Government opts to take over NAIA IPT III. It should be noted, however, that even if the
Government chooses the second option, which is to allow PIATCOs unpaid creditors
operate NAIA IPT III, the Government is still at a risk of being liable to PIATCOs
creditors should the latter be unable to designate a qualified operator within the
prescribed period.[51] In effect, whatever option the Government chooses to take in
the event of PIATCOs failure to fulfill its loan obligations, the Government is still
at a risk of assuming PIATCOs outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCOs debts if the unpaid creditors
would be able to designate a qualified operator within the period provided for in the
contract. Thus,the Governments assumption of liability is virtually out of its
control. The Government under the circumstances provided for in the 1997 Concession
Agreement is at the mercy of the existence, availability and willingness of a qualified
operator. The above contractual provisions constitute a direct government guarantee
which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of
government funds to construct the infrastructure and development projects necessary
for economic growth and development. This is why private sector resources are being
tapped in order to finance these projects. The BOT law allows the private sector to
participate, and is in fact encouraged to do so by way of incentives, such as minimizing
the unstable flow of returns, [52] provided that the government would not have to
unnecessarily expend scarcely available funds for the project itself. As such, direct
guarantee, subsidy and equity by the government in these projects are strictly
prohibited.[53] This is but logical for if the government would in the end still be at a
risk of paying the debts incurred by the private entity in the BOT projects, then
the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the government or any of its
agencies or local government units assume responsibility for the repayment of debt
directly incurred by the project proponent in implementing the project in case of a
loan default.
Clearly by providing that the Government assumes the attendant liabilities, which
consists of PIATCOs unpaid debts, the 1997 Concession Agreement provided for a
direct government guarantee for the debts incurred by PIATCO in the implementation of
the NAIA IPT III project. It is of no moment that the relevant sections are subsumed

under the title of assignment. The provisions providing for direct government guarantee
which is prohibited by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure
this fatal defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the
ARCA provides:
Section 4.04 Security
.
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith
and enter into direct agreement with the Senior Lenders, or with an agent of such
Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral
ng Pilipinas), in such form as may be reasonably acceptable to both GRP and Senior
Lenders, with regard, inter alia, to the following parameters:
.
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed
to the Senior Lenders, and as a result thereof the Senior Lenders have become
entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify
GRP of the same, and without prejudice to any other rights of the Senior Lenders or any
Senior Lenders agent may have (including without limitation under security interests
granted in favor of the Senior Lenders), to either in good faith identify and designate a
nominee which is qualified under sub-clause (viii)(y) below to operate the Development
Facility [NAIA Terminal 3] or transfer the Concessionaires [PIATCO] rights and
obligations under this Agreement to a transferee which is qualified under sub-clause
(viii) below;
.
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable
to designate a nominee or effect a transfer in terms and conditions satisfactory to the
Senior Lenders within one hundred eighty (180) days after giving GRP notice as
referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall
endeavor in good faith to enter into any other arrangement relating to the Development
Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA
Terminal 3] to GRP) within the following one hundred eighty (180) days. If no
agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP
and the Senior Lenders within the said 180-day period, then at the end thereof
the Development Facility [NAIA Terminal 3] shall be transferred by the
Concessionaire [PIATCO] to GRP or its designee and GRP shall make a
termination payment to Concessionaire [PIATCO] equal to the Appraised Value
(as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum
of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this
Agreement shall be deemed terminated upon the transfer of the Development Facility
[NAIA Terminal 3] to GRP pursuant hereto;

.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable
evidence from time to time owed or which may become owing by Concessionaire
[PIATCO] to Senior Lenders or any other persons or entities who have provided,
loaned, or advanced funds or provided financial facilities to Concessionaire
[PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or trustees of such
persons or entities), whether payable at maturity, by acceleration or otherwise, and
further including amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-contractors. [54]
It is clear from the foregoing contractual provisions that in the event that PIATCO
fails to fulfill its loan obligations to its Senior Lenders, the Government is obligated to
directly negotiate and enter into an agreement relating to NAIA IPT III with the Senior
Lenders, should the latter fail to appoint a qualified nominee or transferee who will take
the place of PIATCO. If the Senior Lenders and the Government are unable to enter into
an agreement after the prescribed period, the Government must then pay PIATCO,
upon transfer of NAIA IPT III to the Government, termination payment equal to the
appraised value of the project or the value of the attendant liabilities whichever is
greater. Attendant liabilities as defined in the ARCA includes all amounts owed or
thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO
has defaulted in its loan obligations but to all other persons who may have loaned,
advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT
III. The amount of PIATCOs debt that the Government would have to pay as a result of
PIATCOs default in its loan obligations -- in case no qualified nominee or transferee is
appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has
been reached between the Government and the Senior Lenders -- includes, but is not
limited to, all principal, interest, associated fees, charges, reimbursements, and other
related expenses . . . whether payable at maturity, by acceleration or otherwise. [55]
It is clear from the foregoing that the ARCA provides for a direct guarantee by
the government to pay PIATCOs loans not only to its Senior Lenders but all other
entities who provided PIATCO funds or services upon PIATCOs default in its loan
obligation with its Senior Lenders. The fact that the Governments obligation to pay
PIATCOs lenders for the latters obligation would only arise after the Senior Lenders fail
to appoint a qualified nominee or transferee does not detract from the fact that, should
the conditions as stated in the contract occur, the ARCA still obligates the Government
to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT
III. Worse, the conditions that would make the Government liable for PIATCOs debts is
triggered by PIATCOs own default of its loan obligations to its Senior Lenders to which
loan contracts the Government was never a party to.The Government was not even
given an option as to what course of action it should take in case PIATCO defaulted in
the payment of its senior loans. The Government, upon PIATCOs default, would be

merely notified by the Senior Lenders of the same and it is the Senior Lenders who are
authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail
to make such an appointment, the Government is then automatically obligated to
directly deal and negotiate with the Senior Lenders regarding NAIA IPT III. The only way
the Government would not be liable for PIATCOs debt is for a qualified nominee or
transferee to be appointed in place of PIATCO to continue the construction, operation
and maintenance of NAIA IPT III. This pre-condition, however, will not take the contract
out of the ambit of a direct guarantee by the government as the existence, availability
and willingness of a qualified nominee or transferee is totally out of the governments
control. As such the Government is virtually at the mercy of PIATCO (that it would
not default on its loan obligations to its Senior Lenders), the Senior Lenders (that they
would appoint a qualified nominee or transferee or agree to some other arrangement
with the Government) and the existence of a qualified nominee or transferee who is able
and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the
policy considerations behind the BOT Law. Clearly, in the present case, the ARCA
obligates the Government to pay for all loans, advances and obligations arising out of
financial facilities extended to PIATCO for the implementation of the NAIA IPT III project
should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to
appoint a qualified nominee or transferee. This in effect would make the Government
liable for PIATCOs loans should the conditions as set forth in the ARCA arise. This is a
form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited
proposal for a BOT project may be accepted, the following conditions must first be
met: (1) the project involves a new concept in technology and/or is not part of the list of
priority projects, (2) no direct government guarantee, subsidy or equity is
required, and (3) the government agency or local government unit has invited by
publication other interested parties to a public bidding and conducted the same. [56] The
failure to meet any of the above conditions will result in the denial of the proposal. It is
further provided that the presence of direct government guarantee, subsidy or equity will
necessarily disqualify a proposal from being treated and accepted as an unsolicited
proposal.[57] The BOT Law clearly and strictly prohibits direct government guarantee,
subsidy and equity in unsolicited proposals that the mere inclusion of a provision to that
effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a
proposal can be denied by reason of the existence of direct government guarantee,
then its inclusion in the contract executed after the said proposal has been accepted is
likewise sufficient to invalidate the contract itself. A prohibited provision, the inclusion of
which would result in the denial of a proposal cannot, and should not, be allowed to later
on be inserted in the contract resulting from the said proposal. The basic rules of justice
and fair play alone militate against such an occurrence and must not, therefore, be
countenanced particularly in this instance where the government is exposed to the risk
of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that
cannot be done directly cannot be done indirectly.[58] To declare the PIATCO contracts
valid despite the clear statutory prohibition against a direct government

guarantee would not only make a mockery of what the BOT Law seeks to prevent
-- which is to expose the government to the risk of incurring a monetary
obligation resulting from a contract of loan between the project proponent and its
lenders and to which the Government is not a party to -- but would also render
the BOT Law useless for what it seeks to achieve - to make use of the resources
of the private sector in the financing, operation and maintenance of infrastructure
and development projects[59] which are necessary for national growth and
development but which the government, unfortunately, could ill-afford to finance
at this point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the
State may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately owned public utility or
business affected with public interest.
The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over the
operation of any business affected with public interest. In the 1986 Constitutional
Commission, the term national emergency was defined to include threat from external
aggression, calamities or national disasters, but not strikes unless it is of such
proportion that would paralyze government service. [60] The duration of the emergency
itself is the determining factor as to how long the temporary takeover by the government
would last.[61] The temporary takeover by the government extends only to the operation
of the business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as there is
no transfer of ownership, whether permanent or temporary. The private entity-owner
affected by the temporary takeover cannot, likewise, claim just compensation for the
use of the said business and its properties as the temporary takeover by the
government is in exercise of itspolice power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any
notice, notification, or declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP shall, by written
notice to Concessionaire, immediately take over the operations of the Terminal and/or
the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency, the

operations shall be returned to Concessionaire, at which time, the Concession period


shall commence to run again. Concessionaire shall be entitled to reasonable
compensation for the duration of the temporary take over by GRP, which
compensation shall take into account the reasonable cost for the use of the
Terminal and/or Terminal Complex, (which is in the amount at least equal to the
debt service requirements of Concessionaire, if the temporary take over should
occur at the time when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other consequential damages. If
the parties cannot agree on the reasonable compensation of Concessionaire, or on the
liability of GRP as aforesaid, the matter shall be resolved in accordance with Section
10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire
shall be offset from the amount next payable by Concessionaire to GRP.[62]
PIATCO cannot, by mere contractual stipulation, contravene the
Constitutional provision on temporary government takeover and obligate the
government to pay reasonable cost for the use of the Terminal and/or Terminal
Complex.[63] Article XII, section 17 of the 1987 Constitution envisions a situation
wherein the exigencies of the times necessitate the government to temporarily take over
or direct the operation of any privately owned public utility or business affected with
public interest. It is the welfare and interest of the public which is the paramount
consideration in determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising its police
power. Police power is the most essential, insistent, and illimitable of powers. [64] Its
exercise therefore must not be unreasonably hampered nor its exercise be a source of
obligation by the government in the absence of damage due to arbitrariness of its
exercise.[65] Thus, requiring the government to pay reasonable compensation for the
reasonable use of the property pursuant to the operation of the business contravenes
the Constitution.
V
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more persons or
companies, consisting in the exclusive right (or power) to carry on a particular business
or trade, manufacture a particular article, or control the sale of a particular commodity.
[66]
The 1987 Constitution strictly regulates monopolies, whether private or public,
and even provides for their prohibition if public interest so requires. Article XII, Section
19 of the 1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be
permitted to exist to aid the government in carrying on an enterprise or to aid in the
performance of various services and functions in the interest of the public.
[67]
Nonetheless, a determination must first be made as to whether public interest
requires a monopoly. As monopolies are subject to abuses that can inflict severe

prejudice to the public, they are subject to a higher level of State regulation than an
ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA,
is granted the exclusive right to operate a commercial international passenger terminal
within the Island of Luzon at the NAIA IPT III. [68] This is with the exception of already
existing international airports in Luzon such as those located in the Subic Bay Freeport
Special Economic Zone (SBFSEZ), Clark Special Economic Zone (CSEZ) and in Laoag
City.[69] As such, upon commencement of PIATCOs operation of NAIA IPT III, Terminals
1 and 2 of NAIA would cease to function as international passenger terminals. This,
however, does not prevent MIAA to use Terminals 1 and 2 as domestic passenger
terminals or in any other manner as it may deem appropriate except those activities that
would compete with NAIA IPT III in the latters operation as an international passenger
terminal.[70] The right granted to PIATCO to exclusively operate NAIA IPT III would be
for a period of twenty-five (25) years from the In-Service Date [71] and renewable for
another twenty-five (25) years at the option of the government. [72] Both the 1997
Concession Agreement and the ARCA further provide that, in view of the
exclusive right granted to PIATCO, the concession contracts of the service
providers currently servicing Terminals 1 and 2 would no longer be renewed and
those concession contracts whose expiration are subsequent to the In-Service
Date would cease to be effective on the said date. [73]
The operation of an international passenger airport terminal is no doubt an
undertaking imbued with public interest. In entering into a BuildOperate-and-Transfer
contract for the construction, operation and maintenance of NAIA IPT III, the
government has determined that public interest would be served better if private sector
resources were used in its construction and an exclusive right to operate be granted to
the private entity undertaking the said project, in this case PIATCO. Nonetheless, the
privilege given to PIATCO is subject to reasonable regulation and supervision by the
Government through the MIAA, which is the government agency authorized to operate
the NAIA complex, as well as DOTC, the department to which MIAA is attached. [74]
This is in accord with the Constitutional mandate that a monopoly which is not
prohibited must be regulated.[75] While it is the declared policy of the BOT Law to
encourage private sector participation by providing a climate of minimum government
regulations,[76] the same does not mean that Government must completely surrender its
sovereign power to protect public interest in the operation of a public utility as a
monopoly. The operation of said public utility can not be done in an arbitrary manner to
the detriment of the public which it seeks to serve. The right granted to the public utility
may be exclusive but the exercise of the right cannot run riot. Thus, while PIATCO may
be authorized to exclusively operate NAIA IPT III as an international passenger terminal,
the Government, through the MIAA, has the right and the duty to ensure that it is done
in accord with public interest. PIATCOs right to operate NAIA IPT III cannot also violate
the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period

.
(e) GRP confirms that certain concession agreements relative to certain services
and operations currently being undertaken at the Ninoy Aquino International Airport
passenger Terminal I have a validity period extending beyond the In-Service
Date. GRP through DOTC/MIAA, confirms that these services and operations shall
not be carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in any
litigation initiated by any such concessionaire or operator, GRP undertakes and hereby
holds Concessionaire free and harmless on full indemnity basis from and against any
loss and/or any liability resulting from any such litigation, including the cost of litigation
and the reasonable fees paid or payable to Concessionaires counsel of choice, all such
amounts shall be fully deductible by way of an offset from any amount which the
Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-inintervention for G.R. No. 155001 stated that there are two service providers whose
contracts are still existing and whose validity extends beyond the In-Service Date. One
contract remains valid until 2008 and the other until 2010. [77]
We hold that while the service providers presently operating at NAIA Terminal 1 do
not have an absolute right for the renewal or the extension of their respective contracts,
those contracts whose duration extends beyond NAIA IPT IIIs In-Service-Date should
not be unduly prejudiced. These contracts must be respected not just by the parties
thereto but also by third parties. PIATCO cannot, by law and certainly not by contract,
render a valid and binding contract nugatory. PIATCO, by the mere expedient of
claiming an exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre and
stevedoring service providers in the case of Anglo-Fil Trading Corporation v.
Lazaro[78] whose contracts consist of temporary hold-over permits, the affected service
providers in the cases at bar, have a valid and binding contract with the Government,
through MIAA, whose period of effectivity, as well as the other terms and conditions
thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The
provisions of the 1997 Concession Agreement and the ARCA did not strip government,
thru the MIAA, of its right to supervise the operation of the whole NAIA complex,
including NAIA IPT III. As the primary government agency tasked with the job, [79] it is
MIAAs responsibility to ensure that whoever by contract is given the right to operate
NAIA IPT III will do so within the bounds of the law and with due regard to the rights
of third parties and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial capacity
of the Paircargo Consortium, predecessor of respondent PIATCO, the award by the

PBAC of the contract for the construction, operation and maintenance of the NAIA IPT
III is null and void. Further, considering that the 1997 Concession Agreement contains
material and substantial amendments, which amendments had the effect of converting
the 1997 Concession Agreement into an entirely different agreement from the contract
bidded upon, the 1997 Concession Agreement is similarly null and void for being
contrary to public policy. The provisions under Sections 4.04(b) and (c) in relation to
Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation to
Section 1.06 of the ARCA, which constitute a direct government guarantee expressly
prohibited by, among others, the BOT Law and its Implementing Rules and Regulations
are also null and void. The Supplements, being accessory contracts to the ARCA, are
likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated
Concession Agreement and the Supplements thereto are set aside for being null and
void.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, and Carpio-Morales, JJ., concur.
Vitug, J., see separate (dissenting) opinion.
Panganiban, J., please see separate opinion.
Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he
concurs.
Carpio, J., no part.
Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

THIRD DIVISION

[G.R. No. 121171. December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS, JESUS S.


CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE
MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA,
and MIGUEL M. ANTONIO, as Minority Stock Holders of Marinduque Mining
and Industrial Corporation, respondents.
DECISION
KAPUNAN, J.:
The petition for review on certiorari before us seeks us to reverse and set aside the
decision of the Court of Appeals which denied due course to the petition
for certiorari filed by the Asset Privatization Trust (APT) assailing the order of the
Regional Trial Court (RTC) Branch 62, Makati City. The Makati RTCs order upheld and
confirmed the award made by the Arbitration Committee in favor of Marinduque Mining
and Industrial Corporation (MMIC) and against the Government, represented by herein
petitioner APT for damages in the amount of P2.5 BILLION (or approximately P4.5
BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for
exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a
consequence of the latters failure to pay its overdue and unpaid obligation of P22 billion
to the Philippine National Bank (PNB) and the Development Bank of the Philippines
(DBP).
The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao
Mineral Reservation have been authorized by Republic Act No. 1828, as amended by
Republic Acts No. 2077 and 4167, by virtue of which laws, a Memorandum of
Agreement was drawn on July 3, 1968, whereby the Republic of the Philippines thru the
Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore,
develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation.
[1]
MMIC is a domestic corporation engaged in mining with respondents Jesus S.
Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by
purchase of MMIC debenture and extension of guarantees. Further, the Philippine
Government obtained a firm, commitment from the DBP and/or other government

financing institutions to subscribed in MMIC and issue guarantee/s for foreign loans or
deferred payment arrangements secured from the US Eximbank, Asian Development
Bank, Kobe Steel, of amount not exceeding US$100 Million. [2]
DBP approved guarantees in favor of MMIC and subsequent requests for
guarantees were based on the unutilized portion of the Government
commitment. Thereafter, the Government extended accommodations to MMIC in
various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust
Agreement[3] whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor of
PNB and DBP as mortgagees, over all MMICs assets, subject of real estate and chattel
mortgage executed by the mortgagor, and additional assets described and identified,
including assets of whatever kind, nature or description, which the mortgagor may
acquire whether in substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount
secured by this Mortgage Trust Agreement when due. [4]
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared
in default, the procedure therefor, waiver of period to foreclose, authority of Trustee
before, during and after foreclosure, including taking possession of the mortgaged
properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages,
MMIC invariably committed to pay either on demand or under certain terms the loans
and accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC
had reached tremendous proportions, and MMIC was having a difficult time meeting its
financial obligations. MMIC had an outstanding loan with DBP in the amount
of P13,792,607,565.92 as of August 31, 1984 and in the amount of P8,789,028,249.38
as of July 15, 1984 or a total Government exposure of Twenty Two Billion Six Hundred
Sixty-Eight Million Five Hundred Thirty-Seven Thousand Seven Hundred Seventy and
05/100 (P22,668,537,770.05), Philippine Currency.[6] Thus, a financial restructuring plan
(FRP) designed to reduce MMIC' interest expense through debt conversion to equity
was drafted by the Sycip Gorres Velayo accounting firm. [7] On April 30, 1984, the FRP
was approved by the Board of Directors of the MMIC. [8] However, the proposed FRP had
never been formally adopted, approved or ratified by either PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP
and PNB to MMIC had become overdue and since any restructuring program relative to
the loans was no longer feasible, and in compliance with the directive of Presidential
Decree No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise
their right to extrajudicially foreclose the mortgages in accordance with the Mortgage
Trust Agreement.[10]

The foreclosed assets were sold to PNB as the lone bidder and were assigned to
three newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining
and Industrial Corporation, and Island Cement Corporation. In 1986, these assets were
transferred to the Asset Privatization Trust (APT). [11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders
of MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch
62, for Annulment of Foreclosures, Specific Performance and Damages. [12] The suit,
docketed as Civil Case No. 9900, prayed that the court: (1) annul the foreclosure,
restore the foreclosed assets to MMIC, and require the banks to account for their use
and operation in the interim; (2) direct the banks to honor and perform their
commitments under the alleged FRP; and (3) pay moral and exemplary damages,
attorneys fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of
the DBP and PNBs interest in MMIC, mutually agreed to submit the case to arbitration
by entering into a Compromise and Arbitration Agreement, stipulating, inter alia:
NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual
covenants contain herein, the parties agreed as follows:
1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying to
the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.
In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and
(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to arbitration
and any arbitral award/order against either PNB and/or DBP shall be the responsibility
of, be discharged by and be enforceable against APT, the partied having agreed to drop
PNB and DBP from the arbitration.
2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900
shall be submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in
Civil Case No. 9900 shall, with the approval of the Trial Court of this Compromise and
Arbitration Agreement, be transferred and reduced to pure pecuniary/money claims with
the parties waiving and foregoing all other forms of reliefs which they prayed for or
should have payed for in Civil Case No. 9900.[13]
The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues. The issues to be submitted for the Committees resolution shall be: (a)
Whether PLAINTIFFS have the capacity or the personality to institute this derivative suit
in behalf of the MMIC or its directors; (b) Whether or not the actions leading to, and
including, the PNB-DBP foreclosure of the MMIC assets were proper, valid and in good
faith.[14]
This agreement was presented for approval to the trial court. On October 14, 1992,
the Makati RTC, Branch 62, issued an order, to wit:
WHEREFORE, this Court orders:
1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.
2. Approving the Compromise and Arbitration Agreement dated October 6,
1992, attached as Annex C of the Omnibus Motion.
3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this
case into pure money claims; and
4. The Complaint is hereby DISMISSED.[15]
The Arbitration Committee was composed of retired Supreme Court Justice
Abraham Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals
Justice Magdangal Elma as Members. On November 24, 1993, after conducting several
hearings, the Arbitration Committee rendered a majority decision in favor of MMIC, the
pertinent portions of which read as follows:
Since, as this Committee finds, there is no foreclosure at all was not legally and validly
done, the Committee holds and so declares that the loans of PNB and DBP to MMIC,
for the payment and recovery of which the void foreclosure sales were undertaken,
continue to remain outstanding and unpaid. Defendant APT as the successor-in-interest
of PNB and DBP to the said loans is therefore entitled and retains the right, to collect
the same from MMIC pursuant to and based on the loan documents signed by MMIC,
subject to the legal and valid defenses that the latter may duly and seasonably
interpose. Such loans shall, however, be reduced by the amount which APT may have
realized from the sale of the seized assets of MMIC which by agreement should no
longer be returned even if the foreclosure were found to be null and void.
The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B;
Exhibits 100; and also Exhibit ZZZ) as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure
is P22,668,537,770.05, more or less.
Therefore, defendant APT can, and is still entitled to, collect the outstanding obligations
of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less, with interest

thereon as stipulated in the loan documents from the date of foreclosure up to the time
they are fully paid less the proportionate liability of DBP as owner of 87% of the total
capitalization of MMIC under the FRP. Simply put, DBP shall share in the award of
damages to, and in obligations of MMIC in proportion to its 87% equity in the total
capital stock of MMIC.
x x x.
As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to
87%. So pursuant to the above provision of the Compromise and Arbitration Agreement,
the 87% equity of DBP is hereby deducted from the actual damages
of P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.
DISPOSITION
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P2,531,635,425.02 with interest thereon at the legal rate of
six per cent (6%) per annumreckoned from August 3, 9, and 24, 1984, pari passu, as
and for actual damages. Payment of these actual damages shall be offset by APT from
the outstanding and unpaid loans of the MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to the MMIC after the offsetting,
the same shall be satisfied from the funds representing the purchase price of the sale of
the shares of Island Cement Corporation in the amount of P503,000,000.00 held under
escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supercede [sic] it pursuant to paragraph (9) of the
Compromise and Arbitration Agreement;
2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation,
except the DBP, the sum of P13,000,000.00 as and for moral and exemplary
damages. Payment of these moral and exemplary damages shall be offset by APT from
the outstanding and unpaid loans of MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to MMIC after the offsetting, the
same shall be satisfied from the funds representing the purchase price of the sale of the
shares of Island Cement Corporation in the of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supercede [sic] it pursuant to paragraph (9) of the Compromise
and Arbitration Agreement;
3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement
that would supercede it, pursuant to paragraph (9) of the Compromise and Arbitration
Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.


This Decision is FINAL and EXECUTORY.
IT IS SO ORDERED.[16]
Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award. Petitioner countered with an
Opposition and Motion to Vacate Judgment raising the following grounds:
1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the proceedings
in Civil Case No. 9900 which was dismissed upon motion of the parties. In fact, the
defendants in the said Civil Case No. 9900 were the Development Bank of the
Philippines and the Philippine National Bank (PNB);
2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission shall
be deemed a special proceedings and a party to the controversy which was arbitrated
may apply to the court having jurisdiction, (not necessarily with this Honorable Court) for
an order confirming the award;
3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure
proceedings. The arbitration award sought to be confirmed herein far exceeded the
issues submitted and even granted moral damages to one of the herein plaintiffs;
4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award
where the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual final and definite award upon the subject matter submitted to them was not
made.[17]
Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984,
arguing that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave
the way for the submission of the controversy to arbitration, and operated simply as a
mere suspension of the proceedings. They denied that the Arbitration Committee had
exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the
Arbitration Committee. The dispositive portion of said order reads:
WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated July
26, 1994, and finally settled and clarified in the Separate Opinion dated September 2,
1994 of Committee Member Elma, and the pertinent provisions of RA 876,also known

as the Arbitration Law, this Court GRANTS PLAINTIFFS APPLICATION AND THUS
CONFIRMS THE ARBITRATION AWARD, AND JUDGMENT IS HEREBY RENDERED:
(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount
of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The
Balance of the award, after the escrow funds are fully applied, shall be executed against
the APT;
(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum
of P13,000,000.00 as and moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00
as and for moral damages; and
(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.
In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of
the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the Arbitration
Committees Award shall henceforth be final and executory.
SO ORDERED.[18]
On December 27, 1994, petitioner filed its motion for reconsideration of the Order
dated November 28, 1994. Private respondents, in turn, submitted their reply and
opposition thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court
declared that considering that the defendant APT through counsel, officially and actually
received a copy of the Order of this Court dated November 28, 1994 on December 6,
1994, the Motion for Reconsideration thereof filed by the defendant APT on December
27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15-day
reglementary period prescribed or provided for by law for the filing of an appeal from
final orders, resolutions, awards, judgments or decisions of any court in all cases, and
by necessary implication for the filling of a motion for reconsideration thereof.
On February 7, 1995, petitioner received private respondents motion for Execution
and Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action
for certiorari with temporary restraining order and/or preliminary injunction dated
February 13, 1996 to annul and declare as void the Orders of the RTC-Makati dated
November 28, 1994 and January 18, 1995 for having been issued without or in excess

of jurisdiction and/or with grave abuse of discretion. [19] As ground therefor, petitioner
alleged that:
I
THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH
LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD
CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD
PREVIOUSLY BEEN DISMISSED.
II
THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND DENYING THE
MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III
THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED
WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE
COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT
FROM THE DATE OF SERVICE OF THE COURTS COPY CONFIRMING THE
AWARD, BUT FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS THE
OPPOSING COUNSELS COPY THEREOF.[20]
On July 12, 1995, the Court of Appeals, through its fifth Division denied due course
and dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals
the following errors.
ASSIGNMENT OF ERRORS
I
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI
REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY DISMISSED
CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL
AWARD UNDER THE SAME CIVIL CASE AND IN NOT RULING THAT THE
APPLICATION FOR CONFIRMATION SHOULD HAVE BEEN FILED AS A NEW
CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE
RTC.
II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER


WAS ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN
PETITIONER QUESTIONED THE JURISDICTION OF THE RTC-MAKATI,
BRANCH 62 AND AT THE SAME TIME MOVED TO VACATE THE ARBITRAL
AWARD.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT
TRIAL COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE
RESPONDENTS MOTION/PETITION FOR CONFIRMATION OF ARBITRATION
AWARD AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION
TO VACATE ARBITRAL AWARD.
IV
THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS
PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD
V
THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF
WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]
The petition is impressed with merit.
I
The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term dismissed is not a mere semantic imperfection. The dispositive
portion of the Order of the trial court dated October 14, 1992 stated in no uncertain
terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion
without trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
Admittedly the correct procedure was for the parties to go back to the court where
the case was pending to have the award confirmed by said court. However, Branch 62
made the fatal mistake of issuing a final order dismissing the case. While Branch 62
should have merely suspended the case and not dismissed it, [24] neither of the parties
questioned said dismissal. Thus, both parties as well as said court are bound by such
error.

It is erroneous then to argue, as private respondents do, that petitioner APT was
charged with the knowledge that the case was merely stayed until arbitration finished,
as again, the order of Branch 62 in very clear terms stated that the complaint was
dismissed. By its own action, Branch 62 had lost jurisdiction over the vase. It could not
have validly reacquired jurisdiction over the said case on mere motion of one of the
parties. The Rules of Court is specific on how a new case may be initiated and such is
not done by mere motion in a particular branch of the RTC. Consequently, as there was
no pending action to speak of, the petition to confirm the arbitral award should have
been filed as a new case and raffled accordingly to one of the branches of the Regional
Trial Court.
II
Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the
jurisdiction of the RTC to confirm the arbitral award because it sought affirmative relief in
said court by asking that the arbitral award be vacated.
The rule is that Where the court itself clearly has no jurisdiction over the subject
matter or the nature of the action, the invocation of this defense may de done at any
time. It is neither for the courts nor for the parties to violate or disregard that rule, let
alone to confer that jurisdiction, this matter being legislative in character. [25] As a rule
the, neither waiver nor estoppel shall apply to confer jurisdiction upon a court barring
highly meritorious and exceptional circumstances. [26] One such exception was
enunciated in Tijam vs. Sibonghanoy,[27] where it was held that after voluntarily
submitting a cause and encountering an adverse decision on the merits, it is too late for
the loser to question the jurisdiction or power of the court."
Petitioners situation is different because from the outset, it has consistently held the
position that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award;
consequently, it cannot be said that it was estopped from questioning the RTCs
jurisdiction. Petitioners prayer for the setting aside of the arbitral award was not
inconsistent with its disavowal of the courts jurisdiction.
III
Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts
denial of APTs motion for reconsideration of the trial courts order confirming the arbitral
award, on the ground that said motion was filed beyond the 15-day reglementary period;
consequently, the petition for certiorari could not be resorted to as substitute to the lost
right of appeal.
We do not agree.

Section 29 of Republic Act No. 876,[28] provides that:


x x x An appeal may be taken from an order made in a proceeding under this Act, or
from a judgment entered upon an award through certiorari proceedings, but such
appeals shall be limited to question of law. x x x.
The aforequoted provision, however, does not preclude a party aggrieved by the
arbitral award from resorting to the extraordinary remedy of certiorari under Rule 65 of
the Rules of Court where, as in this case, the Regional Trial Court to which the award
was submitted for confirmation has acted without jurisdiction, or with grave abuse of
discretion and there is no appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising judicial
functions, has acted without or in excess of its or his jurisdiction, or with grave abuse of
discretion and there is no appeal, nor any plain, speedy, and adequate remedy in the
ordinary course of law, a person aggrieved thereby may file a verified petition in the
proper court alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings, as the law requires, of such tribunal, board or
officer.
In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being from the pleadings and the evidence that the trial court lacked
jurisdiction and/or committed grave abuse of discretion in taking cognizance of private
respondent motion to confirm the arbitral award and, worse, in confirming said award
which is grossly and patently not in accord with the arbitration agreement, as will be
hereinafter demonstrated.
IV
The nature and limits of the Arbitrators powers.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment
either as to the law or as to the facts. [29] Courts are without power to amend or overrule
merely because of disagreement with matters of law or facts determined by the
arbitrators.[30] They will not review the findings of law and fact contained in an award,
and will not undertake to substitute their judgment for that of the arbitrators, since any
other rule would make an award the commencement, not the end, of litigation. [31] Errors
of law and fact, or an erroneous decision of matters submitted to the judgment of the
arbitrators, are insufficient to invalidate an award fairly and honestly made. [32] Judicial
review of an arbitration is, thus, more limited than judicial review of a trial. [33]
Nonetheless, the arbitrators awards is not absolute and without exceptions. The
arbitrators cannot resolve issues beyond the scope of the submission agreement. [34] The
parties to such an agreement are bound by the arbitrators award only to the extent and

in the manner prescribed by the contract and only if the award is rendered in conformity
thereto.[35] Thus, Sections 24 and 25 of the Arbitration Law provide grounds for vacating,
rescinding or modifying an arbitration award. Where the conditions described in Articles
2038,[36] 2039[37] and 2040[38] of the Civil Code applicable to compromises and arbitration
are attendant, the arbitration award may also be annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:
x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators awards is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039, and 2040 applicable to both compromises and
arbitration are obtaining, the arbitrators' award may be annulled or
rescinded. Additionally, under Sections 24 and 25, of the Arbitration Law, there are
grounds for vacating, modifying or rescinding an arbitrators award. Thus, if and when
the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.
Accordingly, Section 20 of R.A. 876 provides:
SEC. 20. Form and contents of award. The award must be made in writing and signed
and acknowledged by a majority of the arbitrators, if more than one; and by the sole
arbitrator, if there is only one. Each party shall be furnished with a copy of the
award. The arbitrators in their award may grant any remedy or relief which they deem
just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.
xxx
The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such
disputes. (Underscoring ours).
xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:
SEC. 24. Grounds for vacating award. In any one of the following cases, the court must
make an order vacating the award upon the petition of any party to the controversy
when such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud, or other undue means; or
(b) That there was evident partiality or corruption in arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such under

section nine hereof, and willfully refrained from disclosing such disqualifications or any
other misbehavior by which the rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. (Underscoring ours).
xxx.
Section 25 which enumerates the grounds for modifying the award provides:
SEC. 25. Grounds for modifying or correcting award In anyone of the following cases,
the court must make an order modifying or correcting the award, upon the application of
any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.
x x x.
Finally, it should be stressed that while a court is precluded from overturning an
award for errors in determination of factual issues, nevertheless, if an examination of
the record reveals no support whatever for the arbitrators determinations, their award
must be vacated.[40] In the same manner, an award must be vacated if it was made
in manifest disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the
arbitrators came out with an award in excess of their powers and palpably devoid of
factual and legal basis.
V
There was no financial structuring program; foreclosure of mortgage was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to
foreclose of the mortgages of MMIC whose obligations were past due. The foreclosure
was not a wrongful act of the banks and, therefore, could not be the basis of any award
of damages. There was no financial restructuring agreement to speak of that could have
constituted an impediment to the exercise of the banks right to foreclose.

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee


who wrote a separate opinion:
1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish
that MMIC has not been complying with the terms of the loan agreement. Restructuring
simply connotes that the obligations are past due that is why it is restructurable;
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only
means that MMIC had been informed or notified that its obligations were past due and
that foreclosure is forthcoming;
3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the
FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly in
behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed the
FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but
with honest and sincere belief that foreclosure was the only alternative; a decision
further explained by Dr. Placido Mapa who testified that foreclosure was, in the
judgment of PNB, the best move to save MMIC itself.
Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as
Exh. 37-A for the respondent, may I know from you, Dr. Mapa what you meant by
that the decision to foreclose was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty
considerations of the information that we have received, and listening to the
prospects which reported to us that we had assumed would be the premises of
the financial rehabilitation plan was not materialized nor expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was
referring to the decision to foreclose, was premised upon the known fact that the
rehabilitation plan earlier approved by the stockholders was no longer feasible,
just what is meant by no longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan
possible, was not anymore expected to be forthcoming because it will result in a
short fall compared to the prices that were actually taking place in the market.
Q : And I supposed that was you were referring to when you stated that the
production targets and assumed prices of MMICs products, among other
projections, used in the financial reorganization program that will make it viable
were not met nor expected to be met?
A : Yes.
xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP absolutely
unjustified in foreclosing the mortgages?
In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that these
loans were already due and unpaid. If these loans were restructurable because they
were already due and unpaid, they are likewise forecloseable. The option is with the
PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option
to foreclose. Neither does it mean that the FRP is legally binding and implementable. It
must be pointed that said FRP will, in effect, supersede the existing and past due loans
of MMIC with PNB-DBP. It will become the new loan agreement between the lenders
and the borrowers. As in all other contracts, there must therefore be a meeting of minds
of the parties; the PNB and DBP must have to validly adopt and ratify such FRP before
they can be bound by it; before it can be implemented. In this case, not an iota of proof
has been presented by the PLAINTIFFS showing that PNB and DBP ratified and
adopted the FRP. PLAINTIFFS simply relied on a legal doctrine of promissory estoppel
to support its allegation in this regard.[42]
Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by
P.D. No. 385, which took effect on January 31, 1974. The decree requires government
financial institutions to foreclose collaterals for loans where the arrearages amount to
20% of the total outstanding obligations. The pertinent provisions of said decree read as
follows:
SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institutions concerned. This shall be without prejudice to
the exercise by the government financial institutions of such rights and/or remedies
available to them under their respective contracts with their debtor, including the right to
foreclosure on loans, credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%).
SEC. 2. No restraining order, temporary or permanent injunction shall be issued by the
court against any government financial institution in any action taken by such institution
in compliance with themandatory foreclosure provided in Section 1 hereof, whether
such restraining order, temporary or permanent injunction is sought by the borrower(s)
or any third party or parties, except after due hearing in which it is established by the
borrower and admitted by the government financial institution concerned that twenty

percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure
proceedings. (Underscoring supplied.)
Private respondents thesis that the foreclosure proceedings were null and void
because of lack of publication in the newspaper is nothing more than a mere
unsubstantiated allegation not borne out by the evidence. In any case, a disputable
presumption exists in favor of petitioner that official duty has been regularly performed
and ordinary course of business has been followed. [43]
VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also,
from the facts of the case, the arbitrators in making the award went beyond the
arbitration agreement.
In their complaint filed before the trial court, private respondent Cabarrus, et
al. prayed for judgment in their favor:
1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of
MMIC null and void and directing said defendants to restore the foreclosed assets to the
possession of MMIC, to render an accounting of their use and/or operation of said
assets and to indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;
2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual stockholders
meeting of MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs
actual damages consisting of the loss of value of their investment amounting to not less
than P80,000,000.00, the damnum emerges and lucrum cessans in such amount as
may be establish during the trial, moral damages in such amount as this Honorable
Court may deem just and equitable in the premises, exemplary damages in such
amount as this Honorable Court may consider appropriate for the purpose of setting an
example for the public good, attorneys fees and litigation expenses in such amounts as
may be proven during the trial, and the costs legally taxable in this litigation.
Further, Plaintiffs pray for such other reliefs as may be just and equitable in the
premises.[44]
Upon submission for arbitration, the Compromise and Arbitration Agreement of the
parties clearly and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this
derivative suit in behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith. [45]

Item No. 8 of the Agreement provides for the period by which the Committee was to
render its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later
than six (6) months from the date of its constitution.
In the event the committee finds that PLAINTIFFS have the personality to file this suit
and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an award in
favor of the PLAINTIFFS (excluding DBP), in an amount as may be established or
warranted by the evidence which shall be payable in Philippine Pesos at the time of the
award. Such award shall be paid by the APT or its successor-in-interest within sixty (60)
days from the date of the award in accordance with the provisions of par. 9 hereunder. x
x x. The PLAINTIFFS remedies under this Section shall be in addition to other remedies
that may be available to the PLAINTIFFS, all such remedies being cumulative and not
exclusive of each other.
On the other hand, in case the arbitration committee finds that PLAINTIFFS have no
capacity to sue and/or that the extra-judicial foreclosure is valid and legal, it shall also
make an award in favor of APT based on the counterclaims of DBP and PNB in an
amount as may be established or warranted by the evidence. This decision of the
arbitration committee in favor of APT shall likewise finally settle all issues regarding the
foreclosure of the MMIC assets so that the funds held in escrow mentioned in par. 9
hereunder will thus be released in full in favor of APT.[46]
The clear and explicit terms of the submission notwithstanding, the Arbitration
Committee clearly exceeded its powers or so imperfectly executed them: (a) in ruling on
and declaring valid the FRP; (b) in awarding damages to MMIC which was not a party to
the derivative suit; and (c) in awarding moral damages to Jesus S. Cabarrus, Sr.
The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its
powers when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the
issue to the validity of the foreclosure and to transform the reliefs prayed for therein into
pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or
impliedly, to the proposed FRP. It cannot be overemphasized that a FRP, as a contract,
requires the consent of the parties thereto. [47] The contract must bind both contracting
parties.[48] Private respondents even by their own admission recognized that the FRP
had yet not been carried out and that the loans of MMIC had not yet been converted
into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective,
but also converted the loans of MMIC into equity raising the equity of DBP to 87%. [50]

The Arbitration Committee ruled that there was a commitment to carry out the
FRP[51] on the ground of promissory estoppel.
Similarly, the principle of promissory estoppel applies in the present case considering as
we observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the
FRP constituted a way out for MMIC. The Committee believes that although the DBP
did not formally agree (assuming that the board and stockholders approvals were not
formal enough), it is bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs equity
(at that time) and as MMICs creditor-the DBP can not validly renege on its commitments
simply because at the same time, it held interest against the MMIC.
The fact, of course, is that as APT itself asserted, the FRP was being carried out
although apparently, it would supposedly fall short of its targets. Assuming that the FRP
would fail to meet its targets, the DBP-and so this Committee holds-can not, in any
event, brook any denial that it was bound to begin with, and the fact is that adequate or
not (the FRP), the government is still bound by virtue of its acts.
The FRP, of course, did not itself promise a resounding success, although it raised
DBPs equity in MMIC to 87%. It is not excuse, however, for the government to deny its
commitments.[52]
Atty. Sison, however, did not agree and correctly observed that:
But the doctrine of promissory estoppel can hardly find application here. The nearest
that there can be said of any estoppel being present in this case is the fact that the
board of MMIC was, at the time the FRP was adopted, mostly composed of PNB and
DBP representatives. But those representatives, singly or collectively, are not
themselves PNB or DBP. They are individuals with personalities separate and distinct
from the banks they represent. PNB and DBP have different boards with different
members who may have different decisions. It is unfair to impose upon them the
decision of the board of another company and thus pin them down on the equitable
principle of estoppel. Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely separate,
distinct and autonomous legal entities like PNB and DBP with thousands of
stockholders will be suppressed and rendered nugatory.[53]
As a rule, a corporation exercises its powers, including the power to enter into
contracts, through its board of directors. While a corporation may appoint agents to
enter into a contract in its behalf, the agent, should not exceed his authority. [54] In the
case at bar, there was no showing that the representatives of PNB and DBP in MMIC
even had the requisite authority to enter into a debt-for-equity swap. And if they had

such authority, there was no showing that the banks, through their board of directors,
had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its
credit reputation was not exactly something to be considered sound and
wholesome. Under Article 2217 of the Civil Code, moral damages include besmirched
reputation which a corporation may possibly suffer. A corporation whose overdue and
unpaid debts to the Government alone reached a tremendous amount of P22 Billion
Pesos cannot certainly have a solid business reputation to brag about. As Atty. Sison in
his separate opinion persuasively put it:
Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a
corporation for besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling
cannot find application in this case. It must be pointed out that when the supposed
wrongful act of foreclosure was done, MMICs credit reputation was no longer a
desirable one. The company then was already suffering from serious financial crisis
which definitely projects an image not compatible with good and wholesome
reputation. So it could not be said that there was a reputation besmirches by the act of
foreclosure.[55]
The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have
been impleaded as a party. It was not joined as a party plaintiff or party defendant at any
stage of the proceedings. As it is, the award of damages to MMIC, which was not a
party before the Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in
interest while the stockholder filing suit for the corporations behalf is only nominal
party. The corporation should be included as a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded as
a nominal party, with the corporation as the real party in interest. x x x.[56]
It is a condition sine qua non that the corporation be impleaded as a party becausex x x. Not only is the corporation an indispensible party, but it is also the present rule
that it must be served with process. The reason given is that the judgment must be
made binding upon the corporation and in order that the corporation may get the benefit
of the suit and may not bring a subsequent suit against the same defendants for the
same cause of action. In other words the corporations must be joined as party because

it is its cause of action that is being litigated and because judgment must be a res
ajudicata against it.[57]
The reasons given for not allowing direct individual suit are:
(1) x x x the universally recognized doctrine that a stockholder in a corporation has no
title legal or equitable to the corporate property; that both of these are in the corporation
itself for the benefit of the stockholders. In other words, to allow shareholders to sue
separately would conflict with the separate corporate entity principle;
(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that the stockholders may not directly
claim those damages for themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be
legally done in view of section 16 of the Corporation Law xxx;
(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in a ascertaining the effect of partial recovery by an
individual on the damages recoverable by the corporation for the same act. [58]
If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the
corporation, in view of the doctrine that a corporation has a personality separate and
distinct from its individual stockholders or members. DBPs alleged equity, even if it were
indeed 87%, did not give it ownership over any corporate property, including the
monetary award, its right over said corporate property being a mere expectancy or
inchoate right.[59]Notably, the stipulation even had the effect of prejudicing the other
creditors of MMIC.
The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case
before it is a derivative suit, in which the aggrieved party or the real party in interest is
supposedly the MMIC, and at the same time award moral damages to an individual
stockholder, to wit:
WHEREFORE, premises considered, judgment is hereby rendered:
xxx.

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement
that would supersede it, pursuant to paragraph (9), Compromise and Arbitration
Agreement, as and for moral damages; x x x[60]
The majority decision of the Arbitration Committee sought to justify its award of
moral damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets
seized by the government were assets belonging to Industrial Enterprise Inc. (IEI), of
which Cabarrus is the majority stockholder. It then acknowledge that Cabarrus had
already recovered said assets in the RTC, but that he won no more than actual
damages. While the Committee cannot possibly speak for the RTC, there is no doubt
that Jesus S. Cabarrus, Sr., suffered moral damages on account of that specific
foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus, Sr.,
may be awarded in this proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he
is the majority stockholder, having been ventilated in a complaint he previously filed with
the RTC, from which he obtained actual damages, he was barred res judicata from filing
a similar case in another court, this time asking for moral damages which he failed to
get from the earlier case.[62] Worse, private respondents violated the rule against nonforum shopping.
It is a basic postulate that s corporation has a personality separate and distinct from
its stockholders.[63] The properties foreclosed belonged to MMIC, not to its
stockholders. Hence, if wrong was committed in the foreclosure, it was done against the
corporation. Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those
damages for himself that would result in the appropriation by, and the distribution to, him
part of the corporations assets before the dissolution of the corporation and the
liquidation of its debts and liabilities. The Arbitration Committee, therefore, passed upon
matters not submitted to it. Moreover, said cause of action had already been decided in
a separate case. It is thus quite patent that the arbitration committee exceeded the
authority granted to it by the parties Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award
of moral damages to Jesus S. Cabarrus, Sr.:
It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in
this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the corporation(MMIC)
and that they are filing this for and in behalf of MMIC.
Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.

Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not
the co-owner of corporate property. Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary principles
of Corporation Law say so. Therefore, I am constrained to dissent from the award of
moral damages to Cabarrus.[64]
From the foregoing discussions, it is evident that, not only did the arbitration
committee exceed its powers or so imperfectly execute them, but also, its findings and
conclusions are palpably devoid of any factual basis and in manifest disregard of the
law.
We do not find it necessary to remand this case to the RTC for appropriate
action. The pleadings and memoranda filed with this Court, as well as in the Court of
Appeals, raised and extensively discussed the issues on the merits. Such being the
case, there is sufficient basis for us to resolve the controversy between the parties
anchored on the records and the pleadings before us. [65]
WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as
the Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994
and January 19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the
Arbitration Committee is hereby VACATED.
SO ORDERED
Romero (Chairman) J., Please see Dissenting Opinion.
Purisima, J., concur and also joined the separate concurring opinion of J. Pardo.
Pardo, J., see separate concurring opinion.
FIRST DIVISION
CHARLES BERNARD H. REYES G.R. No. 168384
doing business under the name and
style CBH REYES ARCHITECTS,
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
ANTONIO YULO BALDE II, PAULINO
M. NOTO and ERNESTO J. BATTAD,
SR., in their capacities as Arbitrators of

the CONSTRUCTION INDUSTRY


ARBITRATION COMMISSION, Promulgated:
SPOUSES CESAR and CARMELITA
ESQUIG and ROSEMARIE PAPAS,
Respondents. August 18, 2006
x ---------------------------------------------------------------------------------------- x
RESOLUTION
YNARES-SANTIAGO, J.:

Before the Court is a Motion to Inhibit the Honorable Chief Justice and Motion to Refer
Case to the Court En Banc, dated August 4, 2006, filed by Atty. Francisco I. Chavez.
I.
According to the movant, the Motion to Inhibit the Chief Justice is not an
accusation of wrongdoing on the part of the Honorable Chief Justice. Rather it is
impelled by Atty. Chavezs perception that in this case, the Honorable Chief Justice has
not acted in an objective, impartial and neutral manner in disposing of incidental issues
and motions presented by the parties.
The movant adds that the dizzying pace by which private respondents motions have
been received and favorably acted upon in record time supports Atty. Chavezs
perception that private respondents motions without as much as requiring petitioner to
respond thereto have been granted special attention and favor by the Honorable Chief
Justice. (bold types in original)
Atty. Chavezs perception about the alleged closeness and the good relationship
between Atty. Ordoez and the Chief Justice to impair the latters objectivity and
impartiality has no basis, for the following reasons:
(1) The actions taken on the various motions and incidents enumerated by the movant
were made by the entire membership of the First Division. Not being the ponente, the
Chief Justice did not initiate or propose any of the actions and rulings made by the
Court. Like the three other Division members, he merely concurred with the
actions/rulings proposed by the ponente. While some orders and actions, especially
temporary restraining orders, are issued in the name of the Division chairman (who in

this case is the Chief Justice), they are really collective actions of the entire Division, not
merely those of the Chair. This is the normal procedure in all Divisions, not just in the
First.
(2) The alleged unpleasant interaction these past 19 years between Atty. Chavez and
Atty. Sedfrey Ordoez with whom Chief Justice worked either as associate or partner
sometime ago has nothing to do at all with the concurrences made by the Chief Justice
on this case. These concurrences were given on the basis only of legal merit, and on
nothing else.
(3) True, the Chief Justice was an associate (not a partner) in 1961 to 1963 in the
Salonga, Ordoez and Associates, which incidentally had been dissolved in 1987. True
also, he has had a close personal and professional relationship with the principal
partner in that law firm, Sen. Jovito R. Salonga. That is the reason the Chief Justice has
inhibited himself from cases in which Sen. Salonga was/is a party or a counsel. [1]
However, he had no similar closeness with Atty. Ordoez. That is why he has not
inhibited himself from cases involving Atty. Ordoez. In fact, he has not hesitated, on
several occasions, to vote against parties/causes represented by the former Secretary
of Justice.
(4) In fairness to all concerned, Atty. Ordoez has never spoken, directly or indirectly, with
the Chief Justice on any matter pending in the Supreme Court and in any other court.He
has never attempted, directly or indirectly, personally or through others, to influence the
Chief Justice in any manner whatsoever. In fact, the Chief Justice understands that Atty.
Ordoez has been seriously ill, going in and out of the hospital, over the past several
months. And yet the Chief Justice has not even visited or spoken with him during such
period.
(5) On the other hand, the Chief Justice, when so warranted by the facts and law, has
voted in favor of causes and parties represented by Atty. Chavez. One outstanding
example is Chavez v. PCGG (360 Phil. 133, December 9, 1998; 366 Phil. 863, May 19,
1999), which was written by then Associate Justice Artemio V. Panganiban. Atty.
Chavez knows that he has won the vote of the Chief Justice without his having to speak
with or influence him in any manner.

(6) Movants perception that Atty. Ordoezs concern for and interest in upholding
the CIAC jurisdiction must have somehow been relayed to the Honorable Chief Justice
is completely baseless. As already stated, there had been no conversation or
communication, directly or indirectly, personally or through others, between the Chief
Justice and Atty. Ordoez (or anyone representing him) about any matter related to any
case in this, or any other, court. Neither is the Chief Justice aware of any alleged
personal interest of Atty. Ordoez to uphold the CIAC.
(7) In a few months, the incumbent Chief Justice is scheduled to retire from the
judiciary. It is totally inconceivable that he will smear his eleven year record of integrity,
independence and ethical conduct in the Supreme Court with any action that is less
than objective, impartial and neutral. On the other hand, he assures movant (and all
concerned) that he will continue with his vow to lead a judiciary characterized by
four Ins: independence, integrity, industry and intelligence.
II.
Following his misperception of closeness and bonding between Atty. Ordoez and the
Chief Justice, the movant assailed certain proceedings in this Honorable Courts First
Division. However, these proceedings can easily be explained, thus:
(1) Respondents Motion to Include Hon. Pedro Sabundayo, Jr., Presiding Judge,
Regional Trial Court of Muntinlupa City, Branch 203, as public respondent was denied
because Section 4, Rule 45 of the Rules of Court provides that in a petition for review
on certiorari to the Supreme Court, there is no need to implead the lower courts or
judges thereof either as petitioners or respondents. There is no irregularity when the
Resolution denying respondents motion was issued when the Chief Justice was on
official leave. The remaining Members of the Division can proceed with official business
despite the absence of the Chief Justice as long as the required majority is
present. This is in accordance with Section 4(3), Article VIII of the Constitution which
provides that cases or matters heard by a division shall be decided or resolved with the
concurrence of a majority of the Members who actually took part in the deliberations on
the issues in the case and voted thereon, and in no case, without the concurrence of at
least three of such Members.

(2) The issuance of a TRO enjoining the Presiding Judge of Muntinlupa City,
Branch 203 from continuing with any of the proceedings in Civil Case No. 03-110 and
from enforcing the Order of the trial court dated June 29, 2006 ordering the sheriff to
implement the writ of execution dated May 17, 2006, is in order. Respondents
satisfactorily established that they are entitled to the injunction.
It appears from the records that petitioner filed a complaint against respondents
with the Regional Trial Court of Muntinlupa City which was docketed as Civil Case No.
03-110 praying that an accounting be rendered to determine the cost of the materials
purchased by respondent Papas; that respondents be ordered to pay the cost of the
additional works done on the property; that the Design-Build Construction Agreement be
ordered rescinded because respondents breach the same; and that respondents be
ordered to pay moral and exemplary damages. Based on the same Design-Build
Construction Agreement, respondents filed with the Construction Industry Arbitration
Commission (CIAC) a complaint praying that petitioner be ordered to finish the project
or, in the alternative, to pay the cost to finish the same; to reimburse the overpayments
made by respondents; and to pay liquidated damages, attorneys fees and costs of the
suit.
On June 8, 2005,[2] the CIAC rendered a decision on the merits of the case
awarding in favor of respondents the sum of P4,419,094.98. The case is presently on
appeal with the Court of Appeals[3] docketed as CA-G.R. SP No. 90136.[4]
Meanwhile, on July 29, 2005, the trial court rendered judgment in Civil Case No.
03-110 in favor of petitioner ordering the respondents to pay P840,300.00 representing
the cost of the additional works; P296,658.95 representing the balance of the contract
price; P500,000.00 by way of moral damages; P500,000.00 as exemplary damages;
P500,000.00 as attorneys fees and costs of the suit. In an Order dated May 17, 2006,
Judge Sabundayo, Jr. directed Sheriff Melvin T. Bagabaldo to implement the writ of
execution by causing the respondents to render an accounting of all the construction
materials they bought for the construction of the project x x x; to levy the goods and
chattels of the [respondents] x x x and to make the sale thereof x x x. [5]
In their Second Manifestation with Prayer for Issuance of a Temporary
Restraining Order/Injunction[6] filed with this Court on July 10, 2006, respondents
averred that from July 7, 2006 until 4 oclock in the morning of July 8, 2006, Sheriff

Bagabaldo went to the residence of respondent Papas and levied several of her
personal properties.[7]Respondents bewailed that despite the pronouncement of the
Court of Appeals that the CIAC, not the Regional Trial Court, which has jurisdiction over
the case, and despite the pendency of the instant case before us, the Regional Trial
Court still proceeded with the implementation of the writ.
It is important to mention that in both cases, the parties insist that the other
breached their obligation under the Design-Build Construction Agreement. Petitioner
however argues that the Regional Trial Court properly took cognizance of the case while
respondents claim that CIAC has the exclusive and original jurisdiction on the subject
matter.Otherwise stated, if we rule in the instant case that CIAC has jurisdiction over the
controversy, then it would necessarily follow that the Regional Trial Court does not have
jurisdiction. Since it did not acquire jurisdiction over the controversy, then the writ of
execution that it issued was void. If we allow the RTC Judge and the Sheriff to continue
with the proceedings in Civil Case No. 03-110, then, whatever judgment that would be
rendered in the instant case would be rendered nugatory. In view of the above
circumstances, respondents clearly established that they are entitled to the issuance of
a TRO.
Thus on July 12, 2006, the Court issued a Resolution that reads:
Acting on the prayer for issuance of a temporary restraining
order/injunction, the Court further resolves to issue a TEMPORARY
RESTRAINING ORDER enjoining the Presiding Judge, Regional Trial
Court, Branch 203, Muntinlupa City, from continuing with any of the
proceedings in Civil Case No. 03-110 entitled Charles Bernard H. Reyes,
doing business under the name and style of CBH Reyes Architects vs.
Spouses Mely and Cesar Esquig, et al. [subject matter of the assailed
Court of Appeals decision and resolution dated February 18, 2005 and
May 20, 2005, respectively, in CA-G.R. SP No. 83816 entitled Charles
Bernard H. Reyes, doing business under the name and style CBH REYES
ARCHITECTS vs. Antonio Yulo Balde II, et al] and from enforcing the
Order dated June 29, 2006 ordering the designated sheriff to implement
the writ of execution dated May 17, 2006 to enforce the decision dated
July 29, 2005 in Civil Case No. 03-110, upon the private respondents filing
of a bond in the amount of Three Hundred Thousand Pesos (P300,000.00)
within a period of five (5) days from notice hereof x x x.

(3) Thereafter, respondents filed an Urgent Motion for Clarification of the above
resolution. Accordingly, on July 19, 2006, we issued a resolution which is a clarification
of the TRO issued on July 12, 2006. Both the July 12, 2006 and July 19,
2006 Resolutions are covered by the same bond in the amount of P300,000.00.
(4) A petition review under Rule 45 of the Rules of Court is not a matter of right
but of sound judicial discretion. [8] For purposes of determining whether the petition
should be dismissed or denied, or where the petition is given due course, the Supreme
Court may require or allow the filing of such pleadings, briefs, memoranda or
documents asit may deem necessary within such periods and under such conditions
as it may consider appropriate, and impose the corresponding sanctions in case of nonfiling or unauthorized filing of such pleadings and documents or non-compliance with
the conditions therefor.[9] This Court exercised its discretion when it did not require
petitioner to file comment on respondents Manifestation with Urgent Motion to Resolve
with Prayer for Injunction, Second Manifestation with Prayer for Issuance of a
Temporary
Restraining
Order/Injunction,
Urgent
Motion
for
Clarification, and Compliance.
(5) The Court did not exceed its jurisdiction; neither did it encroach on the
jurisdiction of the Court of Appeals or of the lower court when it issued the Resolution
datedJuly 12, 2006. As discussed, there is compelling reason to issue a TRO as the
respondents satisfactorily established they are entitled to the relief demanded. It may
further be said that the issuance of a TRO on July 12, 2006 is not a final determination
of the matter. It was a remedy intended to avoid any irreparable injury that might be
caused to the parties.It may be recalled that the CIAC and the trial court each asserted
its jurisdiction over the controversy to the exclusion of the other.
(6) There is no truth or basis to the allegation that the case has been given
special attention. All actions on the motions and incidents have been performed
regularly.
WHEREFORE, the Motion to Inhibit the Honorable Chief Justice is DENIED. The
Motion to Refer Case to the Court En Banc is GRANTED.
SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.
Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Resolution were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 96283 February 25, 1992


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

ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July
31, 1990 and August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil
Case No. 90-1335. Respondent Court of Appeals affirmed the ruling of the trial court
that herein petitioners, after submitting themselves for arbitration and agreeing to the
terms and conditions thereof, providing that the arbitration award shall be final and
unappealable, are precluded from seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu
for brevity) and private respondent Roblecor Philippines, Inc. (Roblecor for short) forged
a construction agreement 1 whereby respondent contractor committed to construct and
finish on December 31, 1989, petitioner corporation's industrial/factory complex in
Tanawan, Tanza, Cavite for and in consideration of P42,000,000.00. In the event of
disputes arising from the performance of subject contract, it was stipulated therein that
the issue(s) shall be submitted for resolution before a single arbitrator chosen by both
parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into
two (2) other ancillary contracts, to wit: one dated June 23, 1989, for the construction of
a dormitory and support facilities with a contract price of P3,875,285.00, to be
completed on or before October 31, 1989; 2 and the other dated August 12, 1989, for
the installation of electrical, water and hydrant systems at the plant site, commanding a
price of P12.1 million and requiring completion thereof one month after civil works have
been finished. 3

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 timeconsuming, 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 ofcertiorari, 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., 22this 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
23
attention . . . (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'tat;
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.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.

SECOND DIVISION
[G.R. No. 136154. February 7, 2001]
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and
LUIS HIDALGO, petitioners, vs. COURT OF APPEALS, JUDGE BIENVENIDO
L. REYES in his capacity as Presiding Judge, RTC-Br. 74, Malabon, Metro
Manila, MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and
SABROSA FOODS, INC., respondents.
DECISION
BELLOSILLO, J.:
This Petition for Review on certiorari assails the 17 July 1998 Decision[1] of the
Court of Appeals affirming the 11 November 1997 Order [2] of the Regional Trial Court
which denied petitioners Motion to Suspend Proceedings in Civil Case No. 2637-MN. It
also questions the appellate courts Resolution[3] of 30 October 1998 which denied
petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte CorporationUSA (DMC-USA) appointed private respondent Montebueno Marketing, Inc. (MMI) as
the sole and exclusive distributor of its Del Monte products in the Philippines for a
period of five (5) years, renewable for two (2) consecutive five (5) year periods with the
consent of the parties. The Agreement provided, among others, for an arbitration clause
which states 12. GOVERNING LAW AND ARBITRATION[4]
This Agreement shall be governed by the laws of the State of California and/or, if
applicable, the United States of America. All disputes arising out of or relating to this
Agreement or the parties relationship, including the termination thereof, shall be
resolved by arbitration in the City of San Francisco, State of California, under the Rules
of the American Arbitration Association. The arbitration panel shall consist of three
members, one of whom shall be selected by DMC-USA, one of whom shall be selected
by MMI, and third of whom shall be selected by the other two members and shall have
relevant experience in the industry x x x x
In October 1994 the appointment of private respondent MMI as the sole and
exclusive distributor of Del Monte products in the Philippines was published in several
newspapers in the country.Immediately after its appointment, private respondent MMI

appointed Sabrosa Foods, Inc. (SFI), with the approval of petitioner DMC-USA, as
MMIs marketing arm to concentrate on its marketing and selling function as well as to
manage its critical relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director
Liong Liong C. Sy (LILY SY) filed a Complaint [5] against petitioners DMC-USA, Paul E.
Derby, Jr.,[6] Daniel Collins[7]and Luis Hidalgo,[8] and Dewey Ltd.[9] before the Regional
Trial Court of Malabon, Metro Manila. Private respondents predicated their complaint on
the alleged violations by petitioners of Arts. 20, [10] 21[11]and 23[12] of the Civil
Code. According to private respondents, DMC-USA products continued to be brought
into the country by parallel importers despite the appointment of private respondent MMI
as the sole and exclusive distributor of Del Monte products thereby causing them great
embarrassment and substantial damage. They alleged that the products brought into
the country by these importers were aged, damaged, fake or counterfeit, so that in
March 1995 they had to cause, after prior consultation with Antonio Ongpin, Market
Director for Special Markets of Del Monte Philippines, Inc., the publication of a "warning
to the trade" paid advertisement in leading newspapers. Petitioners DMC-USA and Paul
E. Derby, Jr., apparently upset with the publication, instructed private respondent MMI to
stop coordinating with Antonio Ongpin and to communicate directly instead with
petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously
continued to deal with the former in bad faith by involving disinterested third parties and
by proposing solutions which were entirely out of their control. Private respondents
claimed that they had exhausted all possible avenues for an amicable resolution and
settlement of their grievances; that as a result of the fraud, bad faith, malice and wanton
attitude of petitioners, they should be held responsible for all the actual expenses
incurred by private respondents in the delayed shipment of orders which resulted in the
extra handling thereof, the actual expenses and cost of money for the unused Letters of
Credit (LCs) and the substantial opportunity losses due to created out-of-stock
situations and unauthorized shipments of Del Monte-USA products to the Philippine
Duty Free Area and Economic Zone; that the bad faith, fraudulent acts and willful
negligence of petitioners, motivated by their determination to squeeze private
respondents out of the outstanding and ongoing Distributorship Agreement in favor of
another party, had placed private respondent LILY SY on tenterhooks since then; and,
that the shrewd and subtle manner with which petitioners concocted imaginary
violations by private respondent MMI of the Distributorship Agreement in order to justify
the untimely termination thereof was a subterfuge. For the foregoing, private
respondents claimed, among other reliefs, the payment of actual damages, exemplary
damages, attorneys fees and litigation expenses.

On 21 October 1996 petitioners filed a Motion to Suspend Proceedings [13] invoking


the arbitration clause in their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of
petitioners Motion to Suspend Proceedings as the grounds alleged therein did not
constitute the suspension of the proceedings considering that the action was for
damages with prayer for the issuance of Writ of Preliminary Attachment and not on the
Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which private
respondents filed their Comment/Opposition. On 31 January 1997 petitioners filed
their Reply. Subsequently, private respondents filed an Urgent Motion for Leave to
Admit Supplemental Pleading dated 2 April 1997. This Motion was admitted, over
petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners filed on 22
July 1997 a Manifestation adopting their Motion to Suspend Proceedings of 17 October
1996 and Motion for Reconsideration of 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial
court on the ground that it "will not serve the ends of justice and to allow said
suspension will only delay the determination of the issues, frustrate the quest of the
parties for a judicious determination of their respective claims, and/or deprive and delay
their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the decision of the trial court. It held that
the alleged damaging acts recited in the Complaint, constituting petitioners causes of
action, required the interpretation of Art. 21 of the Civil Code [16] and that in determining
whether petitioners had violated it "would require a full blown trial" making arbitration
"out of the question." [17] Petitioners Motion for Reconsiderationof the affirmation was
denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties
warrants an order compelling them to submit to arbitration.
Petitioners contend that the subject matter of private respondents causes of action
arises out of or relates to the Agreement between petitioners and private
respondents. Thus, considering that the arbitration clause of the Agreement provides
that all disputes arising out of or relating to the Agreement or the parties relationship,
including the termination thereof, shall be resolved by arbitration, they insist on the

suspension of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA


876[18] Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising
out of an agreement providing for arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue involved in such suit or
proceeding is referable to arbitration, shall stay the action or proceeding until an
arbitration has been had in accordance with the terms of the agreement.Provided, That
the applicant for the stay is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of action are rooted
in Arts. 20, 21 and 23 of the Civil Code, [19] the determination of which demands a full
blown trial, as correctly held by the Court of Appeals. Moreover, they claim that the
issues before the trial court were not joined so that the Honorable Judge was not given
the opportunity to satisfy himself that the issue involved in the case was referable to
arbitration. They submit that, apparently, petitioners filed a motion to suspend
proceedings instead of sending a written demand to private respondents to arbitrate
because petitioners were not sure whether the case could be a subject of
arbitration. They maintain that had petitioners done so and private respondents failed to
answer the demand, petitioners could have filed with the trial court their demand for
arbitration that would warrant a determination by the judge whether to refer the case to
arbitration. Accordingly, private respondents assert that arbitration is out of the question.
Private respondents further contend that the arbitration clause centers more on
venue rather than on arbitration. They finally allege that petitioners filed their motion for
extension of time to file this petition on the same date [20] petitioner DMC-USA filed a
petition to compel private respondent MMI to arbitrate before the United States District
Court in Northern California, docketed as Case No. C-98-4446. They insist that the filing
of the petition to compel arbitration in the United States made the petition filed before
this Court an alternative remedy and, in a way, an abandonment of the cause they are
fighting for here in the Philippines, thus warranting the dismissal of the present petition
before this Court.
There is no doubt that arbitration is valid and constitutional in our jurisdiction.
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
[21]

the United Nations "Convention on the Recognition and the Enforcement of Foreign
Arbitral Awards of 1958" under the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing enforcement of international
arbitration agreements between parties of different nationalities within a contracting
state.[23]
A careful examination of the instant case shows that the arbitration clause in the
Distributorship Agreement between petitioner DMC-USA and private respondent MMI is
valid and the dispute between the parties is arbitrable. However, this Court must deny
the petition.
The Agreement between petitioner DMC-USA and private respondent MMI is a
contract. The provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a contract. As a rule,
contracts are respected as the law between the contracting parties and produce effect
as between them, their assigns and heirs. [24] Clearly, only parties to the Agreement, i.e.,
petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr., and
private respondents MMI and its Managing Director LILY SY are bound by the
Agreement and its arbitration clause as they are the only signatories thereto. Petitioners
Daniel Collins and Luis Hidalgo, and private respondent SFI, not parties to the
Agreement and cannot even be considered assigns or heirs of the parties, are not
bound by the Agreement and the arbitration clause therein. Consequently, referral to
arbitration in the State of California pursuant to the arbitration clause and the
suspension of the proceedings in Civil Case No. 2637-MN pending the return of the
arbitral award could be called for [25] but only as to petitioners DMC-USA and Paul E.
Derby, Jr., and private respondents MMI and LILY SY, and not as to the other parties in
this case, in accordance with the recent case of Heirs of Augusto L. Salas, Jr. v. Laperal
Realty Corporation,[26] which superseded that of Toyota Motor Philippines Corp. v. Court
of Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that the arbitration clause has
become dysfunctional because of the presence of third parties is untenable ratiocinating
that "[c]ontracts are respected as the law between the contracting parties" [28] and that
"[a]s such, the parties are thereby expected to abide with good faith in their contractual
commitments."[29] However, in Salas, Jr., only parties to the Agreement, their assigns or
heirs have the right to arbitrate or could be compelled to arbitrate. The Court went
further by declaring that in recognizing the right of the contracting parties to arbitrate or
to compel arbitration, the splitting of the proceedings to arbitration as to some of the
parties on one hand and trial for the others on the other hand, 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.


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]
[31]

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.
Mendoza, Buena, and De Leon, Jr., JJ., concur.
Quisumbing, J., no part, related to counsel of a party.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION
KOREA TECHNOLOGIES CO., G.R. No. 143581
LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION

VELASCO, JR., J.:


In our jurisdiction, the policy is to favor alternative methods of resolving disputes,
particularly in civil and commercial disputes. Arbitration along with mediation,
conciliation, and negotiation, being inexpensive, speedy and less hostile methods
have long been favored by this Court. The petition before us puts at issue an
arbitration clause in a contract mutually agreed upon by the parties stipulating that
they would submit themselves to arbitration in a foreign country. Regrettably,
instead of hastening the resolution of their dispute, the parties wittingly or
unwittingly prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation


which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG)
Cylinder manufacturing plants, while private respondent Pacific General Steel
Manufacturing Corp. (PGSMC) is a domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract [1] whereby
KOGIES would set up an LPG Cylinder Manufacturing Plant in
Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997,
the parties executed, in Korea, an Amendment for Contract No. KLP-970301
dated March 5, 1997[2] amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC would pay USD
1,224,000. KOGIES would install and initiate the operation of the plant for which
PGSMC bound itself to pay USD 306,000 upon the plants production of the 11-kg.
LPG cylinder samples. Thus, the total contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease [3] with Worth
Properties, Inc. (Worth) for use of Worths 5,079-square meter property with a
4,032-square meter warehouse building to house the LPG manufacturing
plant. The monthly rental was PhP 322,560 commencing on January 1, 1998 with a
10% annual increment clause.Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped, delivered, and
installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January
22, 1998, after the installation of the plant, the initial operation could not be
conducted as PGSMC encountered financial difficulties affecting the supply of
materials, thus forcing the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial
operation of the plant, PGSMC issued two postdated checks: (1) BPI Check No.
0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI Check No.
0316413 dated March 30, 1998 for PhP 4,500,000.[5]

When KOGIES deposited the checks, these were dishonored for the
reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand
letter[6] to PGSMC threatening criminal action for violation of Batas Pambansa
Blg. 22 in case of nonpayment. On the same date, the wife of PGSMCs President
faxed a letter dated May 7, 1998 to KOGIES President who was then staying at
a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several
equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES
were fully funded but the payments were stopped for reasons previously made
known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling
their Contract dated March 5, 1997 on the ground that KOGIES had altered the
quantity and lowered the quality of the machineries and equipment it delivered to
PGSMC, and that PGSMC would dismantle and transfer the machineries,
equipment, and facilities installed in the Carmona plant. Five days later, PGSMC
filed before the Office of the Public Prosecutor an Affidavit-Complaint
for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of
KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC
could not unilaterally rescind their contract nor dismantle and transfer the
machineries and equipment on mere imagined violations by KOGIES. It also
insisted that their disputes should be settled by arbitration as agreed upon in Article
15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of
its June 1, 1998 letter threatening that the machineries, equipment, and facilities
installed in the plant would be dismantled and transferred on July 4, 1998. Thus,
on July 1, 1998, KOGIES instituted an Application for Arbitration before the
Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15
of the Contract as amended.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance,


docketed as Civil Case No. 98-117[8] against PGSMC before the Muntinlupa City
Regional Trial Court (RTC). The RTC granted a temporary restraining order (TRO)
on July 4, 1998, which was subsequently extended until July 22, 1998. In its
complaint, KOGIES alleged that PGSMC had initially admitted that the checks
that were stopped were not funded but later on claimed that it stopped payment of
the checks for the reason that their value was not received as the former allegedly
breached their contract by altering the quantity and lowering the quality of the
machinery and equipment installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as shown in a January 22,
1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their
Contract, as amended, by unilaterally rescinding the contract without resorting to
arbitration. KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant which the latter
threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that
KOGIES was not entitled to the TRO since Art. 15, the arbitration clause, was null
and void for being against public policy as it ousts the local courts of jurisdiction
over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim[9] asserting that it had the full right to dismantle and transfer the
machineries and equipment because it had paid for them in full as stipulated in the
contract; that KOGIES was not entitled to the PhP 9,000,000 covered by the
checks for failing to completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for altering the
quantity and lowering the quality of the machineries and equipment. Moreover,
PGSMC averred that it has already paid PhP 2,257,920 in rent (covering January to
July 1998) to Worth and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder manufacturing plant
never became operational.

After the parties submitted their Memoranda, on July 23, 1998, the RTC
issued an Order denying the application for a writ of preliminary injunction,
reasoning that PGSMC had paid KOGIES USD 1,224,000, the value of the
machineries and equipment as shown in the contract such that KOGIES no longer
had proprietary rights over them.And finally, the RTC held that Art. 15 of the
Contract as amended was invalid as it tended to oust the trial court or any other
court jurisdiction over any dispute that may arise between the parties. KOGIES
prayer for an injunctive writ was denied.[10] The dispositive portion of the Order
stated:
WHEREFORE, in view of the foregoing consideration, this Court
believes and so holds that no cogent reason exists for this Court to grant
the writ of preliminary injunction to restrain and refrain defendant from
dismantling the machineries and facilities at the lot and building of
Worth Properties, Incorporated at Carmona, Cavite and transfer the same
to another site: and therefore denies plaintiffs application for a writ of
preliminary injunction.

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the
quality of the machinery, equipment, and facilities it delivered to the plant. It
claimed that it had performed all the undertakings under the contract and had
already produced certified samples of LPG cylinders. It averred that whatever was
unfinished was PGSMCs fault since it failed to procure raw materials due to lack
of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of
Appeals,[12] insisted that the arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to
Dismiss[13] answering PGSMCs memorandum of July 22, 1998 and seeking
dismissal of PGSMCs counterclaims, KOGIES, on August 4, 1998, filed its Motion
for Reconsideration[14] of the July 23, 1998 Order denying its application for
an injunctive writ claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an LPG manufacturing plant

consisting of supply of all the machinery and facilities and transfer of technology
for a total contract price of USD 1,530,000 such that the dismantling and transfer
of the machinery and facilities would result in the dismantling and transfer of the
very plant itself to the great prejudice of KOGIES as the still unpaid owner/seller
of the plant. Moreover, KOGIES points out that the arbitration clause under Art. 15
of the Contract as amended was a valid arbitration stipulation under Art. 2044 of
the Civil Code and as held by this Court in Chung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things [16] to
determine whether there was indeed alteration of the quantity and lowering of
quality of the machineries and equipment, and whether these were properly
installed. KOGIES opposed the motion positing that the queries and issues raised
in the motion for inspection fell under the coverage of the arbitration clause in their
contract.
On September 21, 1998, the trial court issued an Order (1) granting
PGSMCs motion for inspection; (2) denying KOGIES motion for reconsideration
of the July 23, 1998 RTC Order; and (3) denying KOGIES motion to dismiss
PGSMCs compulsory counterclaims as these counterclaims fell within the
requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration[17] of the September 21, 1998 RTC Order granting inspection of
the plant and denying dismissal of PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its
October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court
of Appeals (CA) a petition for certiorari[18] docketed as CA-G.R. SP No. 49249,
seeking annulment of the July 23, 1998 and September 21, 1998 RTC Orders and
praying for the issuance of writs of prohibition, mandamus, and preliminary
injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and
transferring the machineries and equipment in the Carmona plant, and to direct the
RTC to enforce the specific agreement on arbitration to resolve the dispute.

In the meantime, on October 19, 1998, the RTC denied KOGIES urgent
motion for reconsideration and directed the Branch Sheriff to proceed with the
inspection of the machineries and equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition [20] in CA-G.R. SP
No. 49249 informing the CA about the October 19, 1998 RTC Order. It also
reiterated its prayer for the issuance of the writs of prohibition, mandamus and
preliminary injunction which was not acted upon by the CA. KOGIES asserted that
the Branch Sheriff did not have the technical expertise to ascertain whether or not
the machineries and equipment conformed to the specifications in the contract and
were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs
Report[21] finding that the enumerated machineries and equipment were not fully
and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the
RTC Orders and dismissing the petition for certiorari filed by KOGIES. The CA
found that the RTC did not gravely abuse its discretion in issuing the assailed July
23, 1998 and September 21, 1998 Orders. Moreover, the CA reasoned that
KOGIES contention that the total contract price for USD 1,530,000 was for the
whole plant and had not been fully paid was contrary to the finding of the RTC that
PGSMC fully paid the price of USD 1,224,000, which was for all the machineries
and equipment. According to the CA, this determination by the RTC was a factual
finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the
lower court that an arbitration clause which provided for a final determination of
the legal rights of the parties to the contract by arbitration was against public
policy.

On the issue of nonpayment of docket fees and non-attachment of a


certificate of non-forum shopping by PGSMC, the CA held that the counterclaims
of PGSMC were compulsory ones and payment of docket fees was not required
since the Answer with counterclaim was not an initiatory pleading. For the same
reason, the CA said a certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed
prematurely since KOGIES did not wait for the resolution of its urgent motion for
reconsideration of the September 21, 1998 RTC Order which was the plain, speedy,
and adequate remedy available. According to the CA, the RTC must be given the
opportunity to correct any alleged error it has committed, and that since the
assailed orders were interlocutory, these cannot be the subject of a petition for
certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT
BEYOND THE AMBIT OF A PETITION FOR CERTIORARI
INTENDED ONLY FOR CORRECTION OF ERRORS OF
JURISDICTION OR GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION,
AND CONCLUDING THAT THE TRIAL COURTS FINDING ON
THE SAME QUESTION WAS IMPROPERLY RAISED IN THE
PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION
CLAUSE IN ARTICLE 15 OF THE CONTRACT BETWEEN THE
PARTIES FOR BEING CONTRARY TO PUBLIC POLICY AND FOR
OUSTING THE COURTS OF JURISDICTION;
c.
DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS
TO BE ALL COMPULSORY NOT NECESSITATING PAYMENT OF
DOCKET FEES AND CERTIFICATION OF NON-FORUM
SHOPPING;

d.
RULING
THAT
THE
PETITION
WAS
FILED
PREMATURELY WITHOUT WAITING FOR THE RESOLUTION OF
THE MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT
AN OPPORTUNITY TO CORRECT ITSELF;
e.
PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY
IN NATURE;
f.
NOT GRANTING THE RELIEFS AND REMEDIES PRAYED
FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE
SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling


The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the
procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it
should have paid docket fees and filed a certificate of non-forum shopping, and
that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated
in its Answer with Compulsory Counterclaim dated July 17, 1998 in accordance
with Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure, the rule that
was effective at the time the Answer with Counterclaim was filed. Sec. 8
on existing counterclaim or cross-claimstates, A compulsory counterclaim or a

cross-claim that a defending party has at the time he files his answer shall be
contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its
counterclaims against KOGIES, it was not liable to pay filing fees for said
counterclaims being compulsory in nature. We stress, however, that
effective August 16, 2004 under Sec. 7, Rule 141, as amended by A.M. No. 04-204-SC, docket fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer
is not an initiatory pleading which requires a certification against forum shopping
under Sec. 5[24] of Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive
pleading, hence, the courts a quo did not commit reversible error in denying
KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and
Prohibition are neither the remedies to question the propriety of an interlocutory
order
of
the
trial
court.[26] The
CA
erred
on
its
reliance
on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal case
which was not assailable in an action for certiorari since the denial of a motion to
quash required the accused to plead and to continue with the trial, and whatever
objections the accused had in his motion to quash can then be used as part of his
defense and subsequently can be raised as errors on his appeal if the judgment of
the trial court is adverse to him. The general rule is that interlocutory orders cannot
be challenged by an appeal.[27] Thus, in Yamaoka v. Pescarich Manufacturing
Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the grounds
for assailing the interlocutory orders. Allowing appeals from
interlocutory orders would result in the sorry spectacle of a case being
subject of a counterproductive ping-pong to and from the appellate court

as often as a trial court is perceived to have made an error in any of its


interlocutory rulings. However, where the assailed interlocutory order
was issued with grave abuse of discretion or patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief, the
Court allows certiorari as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates to endless
occasions for dilatory motions. Thus, where the interlocutory order was issued
without or in excess of jurisdiction or with grave abuse of discretion, the remedy is
certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to
lack of jurisdiction in the issuance of the two assailed orders coupled with the fact
that there is no plain, speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition for certiorari under
Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the
petition for certiorari. Note that KOGIES motion for reconsideration of the July 23,
1998 RTC Order which denied the issuance of the injunctive writ had already been
denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory order via
a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the
September 21, 1998 RTC Order relating to the inspection of things, and the
allowance of the compulsory counterclaims has not yet been resolved, the
circumstances in this case would allow an exception to the rule that before
certiorari may be availed of, the petitioner must have filed a motion for
reconsideration and said motion should have been first resolved by the court a
quo. The reason behind the rule is to enable the lower court, in the first instance, to
pass upon and correct its mistakes without the intervention of the higher court.[30]

The September 21, 1998 RTC Order directing the branch sheriff to inspect
the plant, equipment, and facilities when he is not competent and knowledgeable
on said matters is evidently flawed and devoid of any legal support. Moreover,
there is an urgent necessity to resolve the issue on the dismantling of the facilities
and any further delay would prejudice the interests of KOGIES. Indeed, there is
real and imminent threat of irreparable destruction or substantial damage to
KOGIES equipment and machineries. We find the resort to certiorari based on the
gravely abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the
arbitration clause. It provides:
Article 15. Arbitration.All disputes, controversies, or differences
which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall finally be
settled by arbitration in Seoul, Korea in accordance with the Commercial
Arbitration Rules of the Korean Commercial Arbitration Board. The
award rendered by the arbitration(s) shall be final and binding upon
both parties concerned. (Emphasis supplied.)

Petitioner claims the RTC and the CA erred in ruling that the arbitration
clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the
contract is made governs. Lex loci contractus. The contract in this case was
perfected here in the Philippines. Therefore, our laws ought to
govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually
agreed arbitral clause or the finality and binding effect of an arbitral award. Art.
2044 provides, Any stipulation that the arbitrators award or decision shall be

final, is valid, without prejudice to Articles 2038, 2039 and 2040. (Emphasis
supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a
compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043,
[34]
may be voided, rescinded, or annulled, but these would not denigrate the finality
of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the
parties. It has not been shown to be contrary to any law, or against morals, good
customs, public order, or public policy. There has been no showing that the parties
have not dealt with each other on equal footing. We find no reason why the
arbitration clause should not be respected and complied with by both
parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to
arbitration is a contract and that a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitration is a contract. [36] Again
in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he
provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract.[37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the
KCAB, and that the arbitral award is final and binding, is not contrary to public
policy. This Court has sanctioned the validity of arbitration clauses in a catena of
cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,
[38]
this Court had occasion to rule that an arbitration clause to resolve differences
and breaches of mutually agreed contractual terms is valid. In BF Corporation v.
Court of Appeals, we held that [i]n this jurisdiction, arbitration has been held valid
and constitutional. Even before the approval on June 19, 1953 of Republic Act No.
876, this Court has countenanced the settlement of disputes through
arbitration. Republic Act No. 876 was adopted to supplement the New Civil Codes
provisions on arbitration.[39] And in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc., we declared that:

Being an inexpensive, speedy and amicable method of settling


disputes, arbitrationalong with mediation, conciliation and negotiationis
encouraged by the Supreme Court. Aside from unclogging judicial
dockets, arbitration also hastens the resolution of disputes, especially of
the commercial kind. It is thus regarded as the wave of the future in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally construe
arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate
should be granted. Any doubt should be resolved in favor of arbitration.
[40]

Having said that the instant arbitration clause is not against public policy, we
come to the question on what governs an arbitration clause specifying that in case
of any dispute arising from the contract, an arbitral panel will be constituted in a
foreign country and the arbitration rules of the foreign country would govern and
its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory

For domestic arbitration proceedings, we have particular agencies to


arbitrate disputes arising from contractual relations. In case a foreign arbitral body
is chosen by the parties, the arbitration rules of our domestic arbitration bodies
would not be applied. As signatory to the Arbitration Rules of the UNCITRAL
Model Law on International Commercial Arbitration[41] of the United Nations
Commission on International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippinescommitted 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 pretrial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.

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


Foreign arbitral awards while mutually stipulated by the parties in the
arbitration clause to be final and binding are not immediately enforceable or cannot
be implemented immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates
the requirement for the arbitral award to be recognized by a competent court for
enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA 9285 incorporated
these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is not
made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.

The applicant shall establish that the country in which foreign


arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral
Awards Not Covered by the New York Convention.The recognition and
enforcement of foreign arbitral awards not covered by the New York
Convention shall be done in accordance with procedural rules to be
promulgated by the Supreme Court. The Court may, on grounds of
comity and reciprocity, recognize and enforce a non-convention award as
a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign
arbitral award when confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award and not as a
judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and executory
decisions of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside,
correction or modification of an arbitral award, and any application with
a court for arbitration assistance and supervision shall be deemed as
special proceedings and shall be filed with the Regional Trial Court (i)
where arbitration proceedings are conducted; (ii) where the asset to be
attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or
(iv) in the National Judicial Capital Region, at the option of the
applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding
for recognition and enforcement of an arbitral award, the Court shall
send notice to the parties at their address of record in the arbitration, or if
any part cannot be served notice at such address, at such partys last
known address. The notice shall be sent al least fifteen (15) days before
the date set for the initial hearing of the application.

It is now clear that foreign arbitral awards when confirmed by the RTC are
deemed not as a judgment of a foreign court but as a foreign arbitral award, and
when confirmed, are enforced as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award
is similar to judgments or awards given by some of our quasi-judicial bodies, like
the National Labor Relations Commission and Mines Adjudication Board, whose
final judgments are stipulated to be final and binding, but not immediately
executory in the sense that they may still be judicially reviewed, upon the instance
of any party. Therefore, the final foreign arbitral awards are similarly situated in
that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC
with specific authority and jurisdiction to set aside, reject, or vacate a foreign
arbitral award on grounds provided under Art. 34(2) of the UNCITRAL Model
Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its
enforcement shall file with the court the original or authenticated copy of
the award and the arbitration agreement. If the award or agreement is not
made in any of the official languages, the party shall supply a duly
certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.

If the application for rejection or suspension of enforcement of an


award has been made, the Regional Trial Court may, if it considers it
proper, vacate its decision and may also, on the application of the party
claiming recognition or enforcement of the award, order the party to
provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a
foreign arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the procedures
and rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other
ground raised shall be disregarded by the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes governed by
arbitration mutually agreed upon by the parties, still the foreign arbitral award is
subject to judicial review by the RTC which can set aside, reject, or vacate it. In
this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by
KOGIES is applicable insofar as the foreign arbitral awards, while final and
binding, do not oust courts of jurisdiction since these arbitral awards are not
absolute and without exceptions as they are still judicially reviewable. Chapter 7 of
RA 9285 has made it clear that all arbitral awards, whether domestic or foreign, are
subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral
awards
The differences between a final arbitral award from an international or
foreign arbitral tribunal and an award given by a local arbitral tribunal are the
specific grounds or conditions that vest jurisdiction over our courts to review the
awards.
For foreign or international arbitral awards which must first be confirmed by
the RTC, the grounds for setting aside, rejecting or vacating the award by the RTC
are provided under Art. 34(2) of the UNCITRAL Model Law.

For final domestic arbitral awards, which also need confirmation by the RTC
pursuant to Sec. 23 of RA 876[44] and shall be recognized as final and executory
decisions of the RTC,[45] they may only be assailed before the RTC and vacated on
the grounds provided under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of
an aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or
corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A
decision of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the Court
of Appeals in accordance with the rules and procedure to be promulgated
by the Supreme Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to
post a counterbond executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to be promulgated by
the Supreme Court.

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


Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to
the foreign arbitration as it bound itself through the subject contract. While it may
have misgivings on the foreign arbitration done in Korea by the KCAB, it has
available remedies under RA 9285. Its interests are duly protected by the law
which requires that the arbitral award that may be rendered by KCAB must be
confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an
arbitration clause, stipulating that the arbitral award is final and binding, does not

oust our courts of jurisdiction as the international arbitral award, the award of
which is not absolute and without exceptions, is still judicially reviewable under
certain conditions provided for by the UNCITRAL Model Law on ICA as applied
and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which
provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and
binding on the parties, and not contrary to public policy; consequently, being
bound to the contract of arbitration, a party may not unilaterally rescind or
terminate the contract for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles[47] and reiterated in succeeding cases,[48] that the act of treating a contract as
rescinded on account of infractions by the other contracting party is valid albeit
provisional as it can be judicially assailed, is not applicable to the instant case on
account of a valid stipulation on arbitration. Where an arbitration clause in a
contract is availing, neither of the parties can unilaterally treat the contract as
rescinded since whatever infractions or breaches by a party or differences arising
from the contract must be brought first and resolved by arbitration, and not through
an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on
whether the equipment and machineries delivered and installed were properly
installed and operational in the plant in Carmona, Cavite; the ownership of
equipment and payment of the contract price; and whether there was substantial
compliance by KOGIES in the production of the samples, given the alleged fact
that PGSMC could not supply the raw materials required to produce the sample
LPG cylinders, are matters proper for arbitration.Indeed, we note that on July 1,
1998, KOGIES instituted an Application for Arbitration before the KCAB
in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.

Corollarily, the trial court gravely abused its discretion in granting PGSMCs
Motion for Inspection of Things on September 21, 1998, as the subject matter of
the motion is under the primary jurisdiction of the mutually agreed arbitral body,
the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch
Sheriff from the inspection made on October 28, 1998, as ordered by the trial court
on October 19, 1998, is of no worth as said Sheriff is not technically competent to
ascertain the actual status of the equipment and machineries as installed in the
plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC
Orders pertaining to the grant of the inspection of the equipment and machineries
have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the
total contract price of USD 1,530,000 was for the whole plant and its installation is
beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for
certiorari.[49] Whether or not there was full payment for the machineries and
equipment and installation is indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the
RTC in resolving the issue on the ownership of the plant when it is the arbitral
body (KCAB) and not the RTC which has jurisdiction and authority over the said
issue. The RTCs determination of such factual issue constitutes grave abuse of
discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the injunctive writ
paving the way for PGSMC to dismantle and transfer the equipment and
machineries, we find it to be in order considering the factual milieu of the instant
case.
Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral body to
decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant
interim measures to protect vested rights of the parties. Sec. 28 pertinently
provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not
incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during arbitral
proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent that
the arbitral tribunal has no power to act or is unable to act
effectivity, the request may be made with the Court. The arbitral
tribunal is deemed constituted when the sole arbitrator or the third
arbitrator, who has been nominated, has accepted the nomination and
written communication of said nomination and acceptance has been
received by the party making the request.
(b) The following rules on interim or provisional relief shall be
observed:
Any party may request that provisional relief be granted against
the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned upon


the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal as the
case may be and the party against whom the relief is sought, describing
in appropriate detail the precise relief, the party against whom the relief
is requested, the grounds for the relief, and the evidence supporting the
request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral
tribunal.
(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)

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


measure of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form
of an award or in another form, by which, at any time prior to the
issuance of the award by which the dispute is finally decided, the arbitral
tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the
dispute;
(b) Take action that would prevent, or refrain from taking action that is
likely to cause, current or imminent harm or prejudice to the arbitral
process itself;

(c) Provide a means of preserving assets out of which a subsequent


award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution
of the dispute.

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

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


Corporation, we were explicit that even the pendency of an arbitral proceeding
does not foreclose resort to the courts for provisional reliefs. We explicated this
way:
As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the
ICC, which governs the parties arbitral dispute, allows the application of
a party to a judicial authority for interim or conservatory
measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) recognizes the rights of any party to petition the court
to take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004, allows the
filing of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction to grant
interim measures of protection.
Secondly, considering that the equipment and machineries are in the
possession of PGSMC, it has the right to protect and preserve the equipment and
machineries in the best way it can. Considering that the LPG plant was nonoperational, PGSMC has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the better way to
make good use of them which is ineluctably within the management discretion of
PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment
and machineries in Worths property is not to the best interest of PGSMC due to the
prohibitive rent while the LPG plant as set-up is not operational. PGSMC was
losing PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without
considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions
relating to the preservation or transfer of the equipment and machineries as an
interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-recognition by the lower
courts of the arbitral clause, has accorded an interim measure of protection to
PGSMC which would otherwise been irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been
paid a substantial amount based on the contract. Moreover, KOGIES is amply
protected by the arbitral action it has instituted before the KCAB, the award of
which can be enforced in our jurisdiction through the RTC. Besides, by our
decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and
transfer the subject equipment and machineries, it does not have the right to

convey or dispose of the same considering the pending arbitral proceedings to


settle the differences of the parties. PGSMC therefore must preserve and maintain
the subject equipment and machineries with the diligence of a good father of a
family[51] until final resolution of the arbitral proceedings and enforcement of the
award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:


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

WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson

ANTONIO T. CARPIO CONCHITA CARPIO MORALES


Associate Justice Associate Justice

DANTE O. TINGA
Associate Justice
AT T E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

THIRD DIVISION
[G.R. No. 141833. March 26, 2003]
LM POWER ENGINEERING CORPORATION, petitioner, vs. CAPITOL INDUSTRIAL
CONSTRUCTION GROUPS, INC., respondent.
DECISION
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation,
negotiation and conciliation -- are encouraged by the Supreme Court. By enabling
parties to resolve their disputes amicably, they provide solutions that are less timeconsuming, less tedious, less confrontational, and more productive of goodwill and
lasting relationships.[1]
The Case
Before us is a Petition for Review on Certiorari[2] under Rule 45 of the Rules of
Court, seeking to set aside the January 28, 2000 Decision of the Court of
Appeals[3] (CA) in CA-GR CV No. 54232. The dispositive portion of the Decision reads
as follows:
WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The
parties are ORDERED to present their dispute to arbitration in accordance with their
Sub-contract Agreement. The surety bond posted by [respondent] is [d]ischarged. [4]
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and
Respondent Capitol Industrial Construction Groups Inc. entered into a Subcontract
Agreement involving electrical work at the Third Port of Zamboanga. [5]

[6]

On April 25, 1985, 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. [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 takeover -- against the amount it owed the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati
(Branch 141) a Complaint[10] for the collection of the amount representing the alleged
balance due it under the Subcontract. Instead of submitting an Answer, respondent filed
a Motion to Dismiss,[11] alleging that the Complaint was premature, because there was
no prior recourse to arbitration.
In its Order[12] dated September 15, 1987, the RTC denied the Motion on the ground
that the dispute did not involve the interpretation or the implementation of the
Agreement and was, therefore, not covered by the arbitral clause. [13]
After trial on the merits, the RTC[14] ruled that the take-over of some work items by
respondent was not equivalent to a termination, but a mere modification, of the
Subcontract. The latter was ordered to give full payment for the work completed by
petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to
arbitration. The appellate court held as arbitrable the issue of whether respondents
take-over of some work items had been intended to be a termination of the original
contract under Letter K of the Subcontract. It ruled likewise on two other issues: whether
petitioner was liable under the warranty clause of the Agreement, and whether it should
reimburse respondent for the work the latter had taken over.[15]
Hence, this Petition.[16]
The Issues
In its Memorandum, petitioner raises the following issues for the Courts
consideration:
A
Whether or not there exist[s] a controversy/dispute between petitioner and respondent
regarding the interpretation and implementation of the Sub-Contract Agreement dated
February 22, 1983 that requires prior recourse to voluntary arbitration;
B

In the affirmative, whether or not the requirements provided in Article III [1] of CIAC
Arbitration Rules regarding request for arbitration ha[ve] been complied with[.] [17]
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the
implementation of the Agreement. Thus, without having to resort to prior arbitration, it is
entitled to collect the value of the services it rendered through an ordinary action for the
collection of a sum of money from respondent. On the other hand, the latter contends
that there is a need for prior arbitration as provided in the Agreement. This is because
there are some disparities between the parties positions regarding the extent of the
work done, the amount of advances and billable accomplishments, and the set off of
expenses incurred by respondent in its take-over of petitioners work.
We side with respondent. Essentially, the dispute arose from the parties ncongruent
positions on whether certain provisions of their Agreement could be applied to the
facts. The instant case involves technical discrepancies that are better left to an arbitral
body that has expertise in those areas. In any event, the inclusion of an arbitration
clause in a contract does not ipso facto divest the courts of jurisdiction to pass upon the
findings of arbitral bodies, because the awards are still judicially reviewable under
certain conditions.[18]
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 petitioners delay
in completing the work. Such delay was in violation of the provision in the Agreement as
to time schedule:
G. TIME SCHEDULE
[Petitioner] shall adhere strictly to the schedule related to the WORK and
complete the WORK within the period set forth in Annex C hereof. NO time
extension shall be granted by [respondent] to [petitioner] unless a corresponding
time extension is granted by [the Ministry of Public Works and Highways] to the
CONSORTIUM.[20]
Because of the delay, respondent alleges that it took over some of the work
contracted to petitioner, pursuant to the following provision in the Agreement:
K. TERMINATION OF AGREEMENT
[Respondent] has the right to terminate and/or take over this Agreement for any
of the following causes:
xxxxxxxxx
6. If despite previous warnings by [respondent], [petitioner] does not
execute the WORK in accordance with this Agreement, or persistently or
flagrantly neglects to carry out [its] obligations under this Agreement. [21]
Supposedly, as a result of the take-over, respondent incurred expenses in excess of
the contracted price. It sought to set off those expenses against the amount claimed by
petitioner for the work the latter accomplished, pursuant to the following provision:
If the total direct and indirect cost of completing the remaining part of the WORK exceed
the sum which would have been payable to [petitioner] had it completed the WORK, the
amount of such excess [may be] claimed by [respondent] from either of the following:
1. Any amount due [petitioner] from [respondent] at the time of the termination of this
Agreement.[22]

The issue as to the correct amount of petitioners advances and billable


accomplishments involves an evaluation of the manner in which the parties completed
the work, the extent to which they did it, and the expenses each of them incurred in
connection therewith. Arbitrators also need to look into the computation of foreign and
local costs of materials, foreign and local advances, retention fees and letters of credit,
and taxes and duties as set forth in the Agreement. These data can be gathered from a
review of the Agreement, pertinent portions of which are reproduced hereunder:
C. CONTRACT PRICE AND TERMS OF PAYMENT
xxxxxxxxx
All progress payments to be made by [respondent] to [petitioner] shall be
subject to a retention sum of ten percent (10%) of the value of the approved
quantities. Any claims by [respondent] on [petitioner] may be deducted by
[respondent] from the progress payments and/or retained amount. Any excess
from the retained amount after deducting [respondents] claims shall be released
by [respondent] to [petitioner] after the issuance of [the Ministry of Public Works
and Highways] of the Certificate of Completion and final acceptance of the
WORK by [the Ministry of Public Works and Highways].
xxxxxxxxx
D. IMPORTED MATERIALS AND EQUIPMENT
[Respondent shall open the letters of credit for the importation of equipment and
materials listed in Annex E hereof after the drawings, brochures, and other
technical data of each items in the list have been formally approved by [the
Ministry of Public Works and Highways]. However, petitioner will still be fully
responsible for all imported materials and equipment.
All expenses incurred by [respondent], both in foreign and local currencies in
connection with the opening of the letters of credit shall be deducted from the
Contract Prices.
xxxxxxxxx
N. OTHER CONDITIONS
xxxxxxxxx

2. All customs duties, import duties, contractors taxes, income taxes, and other
taxes that may be required by any government agencies in connection with this
Agreement shall be for the sole account of [petitioner]. [23]
Being an inexpensive, speedy and amicable method of settling disputes,
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]
[24]

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
Decision AFFIRMED. Costs against petitioner.

is DENIED and

the

assailed

SO ORDERED.
Puno, (Chairman), Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.

THIRD DIVISION
[G.R. No. 127004. March 11, 1999]
NATIONAL STEEL CORPORATION, petitioner, vs. THE REGIONAL TRIAL COURT
OF LANAO DEL NORTE, BRANCH 2, ILIGAN CITY and E. WILLKOM
ENTERPRISES, INC., respondents.
DECISION
PURISIMA, J.:
Before the Court is a Petition for Certiorari with Prayer for Preliminary Injunction &
Temporary Restraining Order under Rule 65 of the Revised Rules of Court assailing the
decision of the Regional Trial Court of Lanao del Norte, Branch 2, Iligan City, on the
following consolidated cases :
(a) Special Proceeding Case No. 2206 entitled National Steel Corporation vs E.
Willkom Enterprise Inc to Vacate Arbitrators Award; and;
(b) Civil Case No. 2198 entitled to E. Willkom Enterprises Inc . vs National Steel
Corporation for Sum of Money with application for Confirmation of Arbitrators Award.
The facts as found below are, as follows:
"xxx On Nov. 18, 1992, petitioner-defendant Edward Wilkom Enterprises Inc. (EWEI for
brevity) together with one Ramiro Construction and respondent-petitioner National Steel
Corporation (NSC for short) executed a contract whereby the former jointly undertook
the Contract for Site Development (Exhs. "3" & "D") for the latter's Integrated Iron and
Steel Mills Complex to be established at Iligan City.
Sometime in the year 1983, the services of Ramiro Construction was terminated and on
March 7, 1983, petitioner-defendant EWEI took over Ramiro's contractual
obligation. Due to this and to other causes deemed sufficient by EWEI, extensions of
time for the termination of the project, initially agreed to be finished on July 17, 1983,
were granted by NSC.
Differences later arose, Plaintiff-defendant EWEI filed Civil Case No. 1615 before the
Regional Trial Court of Lanao del Norte, Branch 06, (Exhs. "A" and "1") praying
essentially for the payments ofP458,381.001 with interest from the time of delay; the

price adjustment as provided by PD 1594; and exemplary damages in the amount


of P50,000.00 and attorney's fees.
Defendant-petitioner NSC filed an answer with counterclaim to plaintiff's complaints on
May 18, 1990.
On August 21, 1990, the Honorable Court through Presiding Judge Valario M. Salazar
upon joint motion of both parties had issued an order (Exhs. "C" and "3") dismissing the
said complaint and counterclaim x x x in view of the desire of both parties to implement
Sec. 19 of the contract, providing for a resolution of any conflict by arbitration x x
x . ( underscoring supplied).
In accordance with the aforesaid order, and pursuant to Sec. 19 of the Contract for Site
Development (id) the herein parties constituted an Arbitration Board composed of the
following:
(a) Engr. Pafnucio M. Mejia as Chairman, who was nominated by the two
arbitrators earlier nominated by EWEI and NSC with an Oath of Office (Exh.
"E");
(b) Engr. Eutaquio 0. Lagapa, Jr., member, who was nominated by EWEI with
an oath office (Exh. "F")
(c) Engr. Gil A. Aberilia, a member who was nominated by NSC, with an Oath of
Office (Exh. "G").
After series of hearings, the Arbitrators rendered the decision (Exh. "H" & "4") which is
the subject matter of these present causes of action, both initiated separately by the
herein contending parties, substantial portion of which directs NSC to pay EWEI, as
follows:
(a) P458,381.00 representing EWEI's last billing No. 16 with interest thereon at
the rate of 1-1/4% per month from January 1, 1985 to actual date of payment;
(b) P1,335,514.20 representing price escalation adjustment under PD No. 1594,
with interest thereon at the rate of 1-1/4 % per month from January 1, 1985 to
actual date of payment;
(c) P50,000 as and for exemplary damages;
(d) P350,000 as and for attorney's fees.; and

(e) P35,000.00 as and for cost of arbitration." [1]


The Regional Trial Court of Lanao del Norte Branch 2, Iligan City through Judge
Maximo B. Ratunil, rendered judgment as follows:
(1) In Civil Case No. 11-2198, declaring the award of the Board of Arbitrators,
dated April 21, 1992 to be duly AFFIRMED and CONFIRMED "en toto" ; that
an entry of judgment be entered therewith pursuant to Republic Act No. 876
(the Arbitration Law); and costs against respondent National Steel
Corporation.
(2) In Special Proceeding No. 11-2206, ordering the petition to vacate the
aforesaid award be DISMISSED.
SO ORDERED.[2] "
With the denial on October 18, 1996 of its Motion for Reconsideration, the National
Steel Corporation (NSC) has come to this court via the present petition.
After deliberating on the petition as well as the comment and reply thereon, the
court gave due course to the petition and considered the case ripe for decision.
The pivot of inquiry here is whether or not the lower court acted with grave
abuse of discretion in not vacating the arbitrator's award.
A stipulation to refer all future disputes or to submit an ongoing dispute to an
arbitrator is valid. Republic Act 876, otherwise known as the Arbitration Law, was
enacted by Congress since there was a growing need for a law regulating arbitration in
general.
The parties in the present case, upon entering into a Contract for Site Development,
mutually agreed that any dispute arising from the said contract shall be submitted for
arbitration. Explicit is Paragraph 19 of subject contract, which reads:
"Paragraph 19. ARBITRATION. All disputes questions or differences which may at any
time arise between the parties hereto in connection with or relating to this Agreement or
the subject matter hereof, including questions of interpretation or construction, shall be
referred to an Arbitration Board composed of three (3) arbitrators, one to be appointed
by each party, and the third, to be appointed by the two (2) arbitrators. The appointment
of arbitrators and procedure for arbitration shall be governed by the provisions of the
Arbitration Law (Republic Act No. 876). The Board shall apply Philippine Law in
adjudicating the dispute. The decision of a majority of the members of the Arbitration

Board shall be valid, binding, final and conclusive upon the parties, and from which
there will be no appeal, subject to the provisions on vacating, modifying, or correcting
an award under the said Republic Act No. 876.[3]
Thereunder, if a dispute should arise from the contract, the Arbitration Board shall
assume jurisdiction and conduct hearings. After the Board comes up with a decision,
the parties may immediately implement the same by treating it as an amicable
settlement. However, if one of the parties refuses to comply or is dissatisfied with the
decision, he may file a Petition to Vacate the Arbitrator's decision before the trial
court. On the other hand, the winning party may ask the trial court's confirmation to have
such decision enforced.
It should be stressed that voluntary arbitrators, by the nature of their functions, act
in a quasi-judicial capacity.[4] As a rule, findings of facts by quasi-judicial bodies, which
have acquired expertise because their jurisdiction is confined to specific matters, are
accorded not only respect but even finality if they are supported by substantial
evidence,[5] even if not overwhelming or preponderant. [6] As the petitioner has availed of
Rule 65, the Court will not review the facts found nor even of the law as interpreted or
applied by the arbitrator unless the supposed errors of facts or of law are so patent and
gross and prejudicial as to amount to a grave abuse of discretion or an excess de
pouvoir on the part of the arbitrators.[7]
Thus, in a Petition to Vacate Arbitrator's Decision before the trial court, regularity in
the performance of official functions is presumed and the complaining party has the
burden of proving the existence of any of the grounds for vacating the award, as
provided for by Sections 24 of the Arbitration Law, to wit:
"Sec. 24 GROUNDS FOR VACATING THE AWARD - In any one of the following cases,
the court must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:
(a) The award was procured by corruption, fraud or other undue means;
(b) That there was evident partiality or corruption in the arbitrators of any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such under
section nine hereof, and wilfully refrained from disclosing such disqualification or of any
other misbehavior by which the rights of any party have been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. xxx"
The grounds relied upon by the petitioner were the following (a) That there was
evident partiality in the assailed decision of the Arbitrators in favor of the respondent;
and (b) That there was mistaken appreciation of the facts and application of the law by
the Arbitrators. These were the very same grounds alleged by NSC before the trial court
in their Petition to Vacate the Arbitration Award and which petitioner is reiterating in this
petition under scrutiny.
Petitioner's allegation that there was evident partiality is untenable. It is anemic of
evidentiary support.
In the case of Adamson vs. Court of Appeals, 232 SCRA 602, in upholding the
decision of the Board of Arbitrators, this Court ruled that the fact that a party was
disadvantaged by the decision of the Arbitration Committee does not prove evident
partiality. Proofs other than mere inference are needed to establish evident
partiality. Here, petitioner merely averred evident partiality without any proof to back it
up. Petitioner was never deprived of the right to present evidence nor was there any
showing that the Board showed signs of any bias in favor of EWEI. As correctly found
by the trial court:
"Thirdly, this Court cannot find its way to support NSC's contention that there was
evident partiality in the assailed Award of the Arbitrator in favor of the respondent
because the conclusion of the Board, which the Court found to be well-founded, is fully
supported by substantial evidence, as follows:
"xxx The testimonies of witnesses from both parties were heard to clarify facts
and to threash (sic) out the dispute in the hearings. Upon motion by NSC
counsel, the hearing of testimony from witnesses was terminated on 22
January 1992. To end the testimonies in the hearing both litigant parties upon
query by Arbitrator-Chairman freely declared that there has been no partiality in
the manner the Arbitrators conducted the hearing, that there has been no
instance, where Arbitrators refused to postpone requested or to hear/accept
evidence pertinent and material to the dispute. xxx (underscoring supplied)
Parentethically, and in the light of the record above-mentioned, this Court hereby holds
that the Board of Arbitrators did not commit any 'evident partiality' imputed by petitioner
NSC. Above all, this Court must sustain the said decision for it is a well settled rule that
the actual findings of an administrative body should be affirmed if there is substantial

evidence to support them and the conclusions stated in the decision are not clearly
against the law and jurisprudence similar to the instant case. Henceforth, every
reasonable intendment will be indulged to give effect such proceedings and in favor of
the regulatory and integrity of the arbitrators act. (Corpus Juris, Vol. 5, p. 20)" [8]
Indeed, the allegation of evident partiality is not well-taken because the petitioner
failed to substantiate the same.
Anent the issue of mistaken appreciation of facts and law of the case, the petitioner
theorizes that the awards made by the Board were unsubstantiated and the same were
a plain misapplication of the law and even contrary to jurisprudence. To have a clearer
understanding of the petition, this Court will try to discuss individually the awards made
by the Board, and determine if there was grave abuse of discretion on the part of the
trial court when it adopted such awards in toto.
I. P458,381.00 representing EWEI's last billing No. 16 with interest thereon at the rate of 1 1/4% per month from January 1, 1985 to actual date
of payment;

Petitioner seeks to bar payment of the said amount to EWEI. Since the latter failed
to complete the works as agreed upon, NSC had the right to withhold such amount. The
same will be used to cover the cost differential paid to another contractor who finished
the work allegedly left uncompleted by EWEI. Said work cost NSC P1,225,000, and
should be made chargeable to EWEI's receivables on Final Billing No. 16 issued to
NSC.
The query here therefore is whether there was failure on the part of EWEI to
complete the work agreed upon. This will determine whether Final Billing No. 16 can be
made chargeable to the cost differential paid by NSC to another contractor.
After a series of hearings, the Board of Arbitrators concluded that the work was
completed by EWEI. As correctly stated:
"To authenticate the extent of unfinished work, quantity, unit cost differential and
amount, NSC was required to submit copies of payment vouchers and/or job awards
extended to the other contractor engaged to complete the works. The best efforts by
NSC despite the multiplicity of accounting/auditing/engineering records required in a
corporate complex failed to produce documentary proofs from their Iligan or Makati
office despite repeated requests. NSC failed to substantiate such allusion of completion
by another contractor three unfinished items of works, actual quantities accomplished
and unit cost differential paid chargeable against EWEI.

xxx xxx xxx


The latest evaluation on record of the items of work completed by EWEI under the
contract is drawn from the NSC report (Exhibit "11-d") dated 12 November 1985
submitted with the EWEI Billing No. 16-Final in the course of processing claim on items
of work accomplished. There is no such report or mention of unfinished work of 90,000
MT of dumped riprap, 100,000 cu. m. of site grading and 300,000 cu. m. of spreading
common excavated materials in the EWEI contract alluded to by the NSC as unfinished
work otherwise EWEI Billing No. 16-Final would not have passed processing for
payment unless there is really no such unfinished work NSC evaluation report with no
adverse findings of unfinished work consider the contract as completed.
To affirm the work items, quantity, unit cost differential and amount of unfinished work
left behind by EWEI, NSC in serving notice of contract termination to EWEI should have
instead specifically cited these obligations in detail for EWEI to perform/comply within
30 days, such failure to perform/comply should have constituted as an event in default
that would have justified termination of contract of NSC with EWEI. If at all, this
unfinished work may be additional/extra work awarded in 1984 to another contractor at
prices higher than the unit price tendered by EWEI in 1982 and/or the discrepancy
between actual quantities of work accomplished per plans versus estimated quantities
of work covered by separate contract as expansion of the original project."
xxx xxx xxx
IN VIEW OF THE FOREGOING, THE SO-CALLED UNFINISHED WORKS IN THE
CONTRACT BY EWEI ALLUDED TO BY NSC IS NOT CONSIDERED AN OBLIGATION
TO PERFORM/COMPLY THUS ABSOLVING EWEI OF ANY FAILURE TO
PERFORM/COMPLY AND THEREFORE CANNOT BE AVAILED OF AS A RIGHT OR
REMEDY BY NSC TO RECOVER UNIT DIFFERENTIAL COST FROM EWEI FOR THE
SAME UNSUBSTANTIATED WORK DONE BY ANOTHER CONTRACTOR." (ANNEX
"C" ARBITRATION, page 86-88 of Rollo.)
Furthermore, under the contract sued upon, it is clear that should the Owner feel
that the work agreed upon was not completed by the contractor, it is incumbent upon
the OWNER to send to CONTRACTOR a letter within seven (7) days after completion of
the inspection to specify the objections thereto [9] NSC failed to comply with such
requirement, and therefore it would be unfair to refuse payment to EWEI, considering
that the latter had faithfully submitted Final Billing No.16 believing that its work had been
completed because NSC did not call its attention to any objectionable aspect of their
project.

But, what cannot be upheld is the Board's imposition of a 1-1/4% interest per month
from January 1, 1985 to actual date of payment. There is nothing in the said contract to
justify or authorize such an award. The trial court should have therefore disregarded the
same and instead, applied the legal rate of 6% per annum, from Jan. 1, 1985 until this
decision becomes final and executory. This is so because the legal rate of interest on
monetary obligations not arising from loans or forebearance of credits or goods is
6%[10] per annum in the absence of any stipulation to the contrary.
(II) Price escalation with the interest rate of 1-1/4% per month from 1 January 1985 to actual date of payment.

Petitioner contends that EWEI is not entitled to price escalation absent any
stipulation to that effect in the contract under which, the contract price is fixed, citing
Paragraph 2 thereof, which stipulates:
2. CONTRACT PRICE xxx xxx
The applicable unit prices above fixed are based on the assumption that the disposal
areas for cleared, grubbed materials, debris, excess filling materials and other matters
that are to be disposed of or are within the boundary limits of the site, as designated in
Annex A hereof. In the event that disposal areas fixed and designated in Annex A are
diverted and transferred to such other areas as would be outside the limits of the site as
would require additional costs to the contractor, then Owner shall be liable for such
additional hauling costs of P1.45/km/m3." (Annex "A", Contract for Site Development,
page 55 of Rollo)
The phrase "prices above fixed" means that the contract price of the work shall be
that agreed upon by the parties at the time of the execution of the contract, which is the
law between them provided it is not contrary to law, morals, good customs, public order,
or public policy. (Article 1306, New Civil Code). It cannot be inferred therefrom,
however, that the parties are prohibited from imposing future increases or price
escalation. It is a cardinal rule in the interpretation of contracts that "if the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control." [11]
But price escalation is expressly allowed under Presidential Decree 1594, which law
allows price escalation in all contracts involving government projects including contracts
entered into by government entities and instrumentalities and Government Owned or
Controlled Corporations (GOCCs). It is a basic rule in contracts that the law is deemed
written into the contract between the parties. And when there is no prohibitory clause on

price escalation, the Court will allow payment therefor. Thus, petitioner cannot rely on
the case of Llama Development Corporation vs. Court of Appeals and National Steel
Corporation, GR 88093, Resolution, Third Division, 20 Sept 1989. It is not applicable
here since in that case, the contract explicitly provided that the contract price stipulated
was fixed, inclusive of all costs and not subject to escalation, (emphasis
supplied). This, in effect, waived the provisions of PD 1594. The case under scrutiny is
different as the disputed contract does not contain a similar provision.
In a vain attempt to evade said law's application, they would like the Court to
believe that it is an acquired asset corporation and not a government owned or
controlled corporation so that they are not within the coverage of PD 1594. Whether
NSC is an asset-acquired corporation or a government owned or controlled corporation
is of no moment. It is not determinative of the pivot of inquiry. It bears emphasizing that
during the hearings conducted by the Board of Arbitrators, there was presented
documentary evidence to show that NSC, despite its being allegedly an asset acquired
corporation, allowed price escalation to another contractor, Geo Transport and
Construction, Inc. (GTCI). As said in the decision of the Board of Arbitrators:
"On the other hand, there was documentary evidence presented that NSC granted Geo
Transport and Construction, Inc. (GTCI), the other favored contractor working side by
side with EWEI on the site development project during the same period the GTCE was
granted upon request and paid by NSC an actual sum of P6.9 million as price
adjustment compensation even without the benefit of escalation provision in the contract
but allowed in accordance with PD NO. 1594 enforceable among government controlled
or owned corporation. The statement is embodied in an affidavit (Exhibit "111-h")
submitted by affiant Jose M. Mesina, Asst. to the President and Legal Counsel of GTCI,
submitted to the Arbitrators upon solicitation of EWEI, copy to NSC, on 3 October
1991. NSC did not assail the affidavit upon receipt of such document as evidence until
the hearing of 19 December 1991 when the affidavit was branded by NSC counsel as
incorrect and hearsay. Within 7 days reglamentary period after receipt of affidavit in 3
October 1991, the NSC had the recourse to contest the affidavit even preferably charge
the affiant for slander if NSC could disprove the statements as untrue." [12]
If Petitioner seeks to refute such evidence, it should have done so before the Board
of Arbitrators, during the hearings. To raise the issue now is futile.
However, the same line of reasoning with respect to the first award should be used
in disregarding the interest rate of 1-1/4%. The legal rate of 6% per annum should be
similarly applied to the price escalation to be computed from Jan. 1, 1985 until this
decision becomes final and executory.

(III) The award of P50,000 as exemplary damages and P350,000 as attorney's fees;

The exemplary damages and attorneys fees awarded by the Board of Arbitrators
should be deleted in light of the circumstances surrounding the case.
The requirements for an award of exemplary damages, are: (1) they may be
imposed by way of example in addition to compensatory damages, and only after the
claimants right to them has been established; (2) that they cannot be recovered as a
matter of right, their determination depending upon the amount of compensatory
damages that may be awarded to the claimant; (3) the act must be accompanied by bad
faith or done in a wanton, fraudulent, oppressive or malevolent manner.[13]
EWEI cannot claim that NSC acted in bad faith or in a wanton manner when it
refused payment of the Final Billing No. 16. The belief that the work was never
completed by EWEI and that it (NSC) had the right to make it chargeable to the cost
differential paid by the latter to another contractor was neither wanton nor done in
evident bad faith. The payment of legal rate of interest will suffice to compensate EWEI
of whatever prejudice it suffered by reason of the delay caused by NSC.
As regards the award of attorney's fees, award for attorney's fees without
justification is a "conclusion without a premise, its basis being improperly left to
speculation and conjencture.[14] The "fixed counsel's fee" of P350,000 should be
disallowed. The trial court acted with grave abuse of discretion when it adopted the
same in toto.
WHEREFORE, the awards made by the Board of Arbitrators which the trial court
adopted in its decision of July 31,1996, are modified, thus:
(1) The award of P474,780.23 for Billing No. 16-Final and P1,335,514.20 for
price adjustment shall be paid with legal interest of six (6 %) percent per
annum, from January 1, 1985 until this decision shall have become final and
executory;
(2) The award of P50,000 for exemplary damages and attorney's fees
of P350,000 are deleted; and
(3) The cost of arbitration of P35,000 to supplement arbitration agreement has
to be paid.
No pronouncement as to costs.
SO ORDERED.

Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

FIRST DIVISION
[G.R. No. 129169. November 17, 1999]
NATIONAL IRRIGATION ADMINISTRATION (NIA), petitioner, vs. HONORABLE
COURT OF APPEALS (4th Division), CONSTRUCTION INDUSTRY
ARBITRATION COMMISSION, and HYDRO RESOURCES CONTRACTORS
CORPORATION, respondents.
DECISION
DAVIDE, JR., C.J.:
In this special civil action for certiorari under Rule 65 of the Rules of Court, the
National Irrigation Administration (hereafter NIA), seeks to annul and set aside the
Resolutions[1]of the Court of Appeals in CA-GR. SP No. 37180 dated 28 June 1996 and
24
February
1997,
which
dismissed
respectively
NIAs
petition
for certiorari and prohibition against the Construction Industry Arbitration Commission
(hereafter CIAC), and the motion for reconsideration thereafter filed.
Records show that in a competitive bidding held by NIA in August 1978, Hydro
Resources Contractors Corporation (hereafter HYDRO) was awarded Contract MPI-C-2
for the construction of the main civil works of the Magat River Multi-Purpose
Project. The contract provided that HYDRO would be paid partly in Philippine pesos and
partly in U.S. dollars. HYDRO substantially completed the works under the contract in
1982 and final acceptance by NIA was made in 1984. HYDRO thereafter determined
that it still had an account receivable from NIA representing the dollar rate differential of
the price escalation for the contract.[2]
After unsuccessfully pursuing its case with NIA, HYDRO, on 7 December 1994, filed
with the CIAC a Request for Adjudication of the aforesaid claim. HYDRO nominated six
arbitrators for the arbitration panel, from among whom CIAC appointed Engr. Lauro M.
Cruz. On 6 January 1995, NIA filed its Answer wherein it questioned the jurisdiction of
the CIAC alleging lack of cause of action, laches and estoppel in view of HYDROs
alleged failure to avail of its right to submit the dispute to arbitration within the
prescribed period as provided in the contract. On the same date, NIA filed a Compliance
wherein it nominated six arbitrators, from among whom CIAC appointed Atty. Custodio
O. Parlade, and made a counterclaim for P1,000,000 as moral damages; at
least P100,000 as exemplary damages;P100,000 as attorneys fees; and the costs of
the arbitration.[3]

The two designated arbitrators appointed Certified Public Accountant Joven B.


Joaquin as Chairman of the Arbitration Panel. The parties were required to submit
copies of the evidence they intended to present during the proceedings and were
provided the draft Terms of Reference.[4]
At the preliminary conference, NIA through its counsel Atty. Joy C. Legaspi of the
Office of the Government Corporate Counsel, manifested that it could not admit the
genuineness of HYDROs evidence since NIAs records had already been destroyed. NIA
requested an opportunity to examine the originals of the documents which HYDRO
agreed to provide.[5]
After reaching an accord on the issues to be considered by the arbitration panel, the
parties scheduled the dates of hearings and of submission of simultaneous memoranda.
[6]

On 13 March 1995, NIA filed a Motion to Dismiss [7]alleging lack of jurisdiction over
the disputes. NIA contended that there was no agreement with HYDRO to submit the
dispute to CIAC for arbitration considering that the construction contract was executed
in 1978 and the project completed in 1982, whereas the Construction Industry
Arbitration Law creating CIAC was signed only in 1985; and that while they have agreed
to arbitration as a mode of settlement of disputes, they could not have contemplated
submission of their disputes to CIAC. NIA further argued that records show that it had
not voluntarily submitted itself to arbitration by CIAC citing TESCO Services, Inc. v. Hon.
Abraham Vera, et al.,[8] wherein it was ruled:
CIAC did not acquire jurisdiction over the dispute arising from the sub-contract
agreement between petitioner TESCO and private respondent LAROSA. The records
do not show that the parties agreed to submit the disputes to arbitration by the CIAC
xxxx. While both parties in the sub-contract had agreed to submit the matter to
arbitration, this was only between themselves, no request having been made by both
with the CIAC. Hence, as already stated, the CIAC, has no jurisdiction over the
dispute. xxxx. Nowhere in the said article (sub-contract) does it mention the CIAC, much
less, vest jurisdiction with the CIAC.
On 11 April 1995, the arbitral body issued an order [9] which deferred the
determination of the motion to dismiss and resolved to proceed with the hearing of the
case on the merits as the grounds cited by NIA did not seem to be indubitable. NIA filed
a motion for reconsideration of the aforesaid Order. CIAC in denying the motion for
reconsideration ruled that it has jurisdiction over the HYDROs claim over NIA pursuant
to E.O 1008 and that the hearing should proceed as scheduled. [10]

On 26 May 1996, NIA filed with the Court of Appeals an original action
of certiorari and prohibition with prayer for restraining order and/or injunction, seeking to
annul the Orders of the CIAC for having been issued without or in excess of
jurisdiction. In support of its petition NIA alleged that:
A
RESPONDENT CIAC HAS NO AUTHORITY OR JURIDICTION TO HEAR AND TRY
THIS DISPUTE BETWEEN THE HEREIN PARTIES AS E.O. NO. 1008 HAD NO
RETROACTIVE EFFECT.
B
THE DISPUTE BETWEEN THE PARTIES SHOULD BE SETTLED IN ACCORDANCE
WITH GC NO. 25, ART. 2046 OF THE CIVIL CODE AND R.A. NO. 876 THE
GOVERNING LAWS AT THE TIME CONTRACT WAS EXECUTED AND TERMINATED.
C
E.O. NO. 1008 IS A SUBSTANTIVE LAW, NOT MERELY PROCEDURAL AS RULED
BY THE CIAC.
D
AN INDORSEMENT OF THE AUDITOR GENERAL DECIDING A CONTROVERSY IS A
DECISION BECAUSE ALL THE ELEMENTS FOR JUDGMENT ARE THERE; THE
CONTROVERSY, THE AUTHORITY TO DECIDE AND THE DECISION. IF IT IS NOT
APPEALED SEASONABLY, THE SAME BECOMES FINAL.
E
NIA HAS TIMELY RAISED THE ISSUE OF JURISDICTION. IT DID NOT WAIVE NOR
IS IT ESTOPPED FROM ASSAILING THE SAME.
F
THE LEGAL DOCTRINE THAT JURISDICTION IS DETERMINED BY THE STATUTE IN
FORCE AT THE TIME OF THE COMMENCEMENT OF THE ACTION DOES NOT
ONLY APPLY TO THE INSTANT CASE.[11]
The Court of Appeals, after finding that there was no grave abuse of discretion on
the part of the CIAC in issuing the aforesaid Orders, dismissed the petition in its

Resolution dated 28 June 1996. NIAs motion for reconsideration of the said decision
was likewise denied by the Court of Appeals on 26 February 1997.
On 2 June 1997, NIA filed before us an original action for certiorari and prohibition
with urgent prayer for temporary restraining order and writ of preliminary injunction,
praying for the annulment of the Resolutions of the Court of Appeals dated 28 June
1996 and 24 February 1997. In the said special civil action, NIA merely reiterates the
issues it raised before the Court of Appeals. [12]
We take judicial notice that on 10 June 1997, CIAC rendered a decision in the main
case in favor of HYDRO.[13] NIA assailed the said decision with the Court of Appeals. In
view of the pendency of the present petitions before us the appellate court issued a
resolution dated 26 March 1998 holding in abeyance the resolution of the same until
after the instant petitions have been finally decided. [14]
At the outset, we note that the petition suffers from a procedural defect that
warrants its outright dismissal. The questioned resolutions of the Court of Appeals have
already become final and executory by reason of the failure of NIA to appeal
therefrom. Instead of filing this petition for certiorari under Rule 65 of the Rules of Court,
NIA should have filed a timely petition for review under Rule 45.
There is no doubt that the Court of Appeals has jurisdiction over the special civil
action for certiorari under Rule 65 filed before it by NIA. The original jurisdiction of the
Court of Appeals over special civil actions for certiorari is vested upon it under Section
9(1) of B.P. 129. This jurisdiction is concurrent with the Supreme Court [15] and with the
Regional Trial Court.[16]
Thus, since the Court of Appeals had jurisdiction over the petition under Rule 65,
any alleged errors committed by it in the exercise of its jurisdiction would be errors of
judgment which are reviewable by timely appeal and not by a special civil action
of certiorari.[17] If the aggrieved party fails to do so within the reglementary period, and
the decision accordingly becomes final and executory, he cannot avail himself of the writ
of certiorari, his predicament being the effect of his deliberate inaction. [18]
The appeal from a final disposition of the Court of Appeals is a petition for review
under Rule 45 and not a special civil action under Rule 65 of the Rules of Court, now
Rule 45 and Rule 65, respectively, of the 1997 Rules of Civil Procedure. [19] Rule 45 is
clear that decisions, final orders or resolutions of the Court of Appeals in any case, i.e.,
regardless of the nature of the action or proceedings involved, may be appealed to this
Court by filing a petition for review, which would be but a continuation of the appellate

process over the original case.[20] Under Rule 45 the reglementary period to appeal is
fifteen (15) days from notice of judgment or denial of motion for reconsideration. [21]
In the instant case the Resolution of the Court of Appeals dated 24 February 1997
denying the motion for reconsideration of its Resolution dated 28 June 1997 was
received by NIA on 4 March1997.Thus, it had until 19 March 1997 within which to
perfect its appeal. NIA did not appeal. What it did was to file an original action
for certiorari before this Court, reiterating the issues and arguments it raised before the
Court of Appeals.
For the writ of certiorari under Rule 65 of the Rules of Court to issue, a petitioner
must show that he has no plain, speedy and adequate remedy in the ordinary course of
law against its perceived grievance. [22] A remedy is considered plain, speedy and
adequate if it will promptly relieve the petitioner from the injurious effects of the
judgment and the acts of the lower court or agency.[23] In this case, appeal was not only
available but also a speedy and adequate remedy.
Obviously, NIA interposed the present special civil action of certiorari not because it
is the speedy and adequate remedy but to make up for the loss, through omission or
oversight, of the right of ordinary appeal. It is elementary that the special civil action
of certiorari is not and cannot be a substitute for an appeal, where the latter remedy is
available, as it was in this case. A special civil action under Rule 65 of the Rules of
Court will not be a cure for failure to timely file a petition for review on certiorari under
Rule 45 of the Rules of Court. [24] Rule 65 is an independent action that cannot be
availed of as a substitute for the lost remedy of an ordinary appeal, including that under
Rule 45,[25] especially if such loss or lapse was occasioned by ones own neglect or error
in the choice of remedies.[26]
For obvious reasons the rules forbid recourse to a special civil action for certiorari if
appeal is available, as the remedies of appeal and certiorari are mutually exclusive and
not alternative or successive.[27] Although there are exceptions to the rules, none is
present in the case at bar. NIA failed to show circumstances that will justify a deviation
from the general rule as to make available a petition forcertiorari in lieu of taking an
appropriate appeal.
Based on the foregoing, the instant petition should be dismissed.
In any case, even if the issue of technicality is disregarded and recourse under Rule
65 is allowed, the same result would be reached since a review of the questioned
resolutions of the CIAC shows that it committed no grave abuse of discretion.

Contrary to the claim of NIA, the CIAC has jurisdiction over the
controversy. Executive Order No.1008, otherwise known as the Construction Industry
Arbitration Law which was promulgated on 4 February 1985, vests upon 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. The disputes may involve government or private contracts. For the Board to
acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary
arbitration.[28]
The complaint of HYDRO against NIA on the basis of the contract executed
between them was filed on 7 December 1994, during the effectivity of E.O. No.
1008. Hence, it is well within the jurisdiction of CIAC. The jurisdiction of a court is
determined by the law in force at the time of the commencement of the action. [29]
NIAs argument that CIAC had no jurisdiction to arbitrate on contract which preceded
its existence is untenable. E.O. 1008 is clear that the CIAC has jurisdiction over all
disputes arising from or connected with construction contract whether the dispute arises
before or after the completion of the contract. Thus, the date the parties entered into a
contract and the date of completion of the same, even if these occurred before the
constitution of the CIAC, did not automatically divest the CIAC of jurisdiction as long as
the dispute submitted for arbitration arose after the constitution of the CIAC. Stated
differently, the jurisdiction of CIAC is over the dispute, not the contract; and the instant
dispute having arisen when CIAC was already constituted, the arbitral board was
actually exercising current, not retroactive, jurisdiction. As such, there is no need to
pass upon the issue of whether E.O. No. 1008 is a substantive or procedural statute.
NIA also contended that the CIAC did not acquire jurisdiction over the dispute since
it was only HYDRO that requested for arbitration. It asserts that to acquire jurisdiction
over a case, as provided under E.O. 1008, the request for arbitration filed with CIAC
should be made by both parties, and hence the request by one party is not enough.
It is undisputed that the contracts between HYDRO and NIA contained an arbitration
clause wherein they agreed to submit to arbitration any dispute between them that may
arise before or after the termination of the agreement. Consequently, the claim of
HYDRO having arisen from the contract is arbitrable. NIAs reliance with the ruling on
the case of Tesco Services Incorporated v. Vera, [30] is misplaced.
The 1988 CIAC Rules of Procedure which were applied by this Court in Tesco case
had been duly amended by CIAC Resolutions No. 2-91 and 3-93, Section 1 of Article III
of which read as follows:

Submission to CIAC Jurisdiction - An arbitration clause in a construction contract or a


submission to arbitration of 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.
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.[31]
Moreover, it is undeniable that NIA agreed to submit the dispute for arbitration to the
CIAC. NIA through its counsel actively participated in the arbitration proceedings by
filing an answer with counterclaim, as well as its compliance wherein it nominated
arbitrators to the proposed panel, participating in the deliberations on, and the
formulation of, the Terms of Reference of the arbitration proceeding, and examining the
documents submitted by HYDRO after NIA asked for the originals of the said
documents.[32]
As to the defenses of laches and prescription, they are evidentiary in nature which
could not be established by mere allegations in the pleadings and must not be resolved
in a motion to dismiss. Those issues must be resolved at the trial of the case on the
merits wherein both parties will be given ample opportunity to prove their respective
claims and defenses.[33] Under the rule[34] the deferment of the resolution of the said
issues was, thus, in order. An allegation of prescription can effectively be used in a
motion to dismiss only when the complaint on its face shows that indeed the action has
already prescribed.[35] In the instant case, the issue of prescription and laches cannot be
resolved on the basis solely of the complaint. It must, however, be pointed that under
the new rules,[36] deferment of the resolution is no longer permitted. The court may either
grant the motion to dismiss, deny it, or order the amendment of the pleading.

WHEREFORE, the instant petition is DISMISSED for lack of merit. The Court of
Appeals is hereby DIRECTED to proceed with reasonable dispatch in the disposition of
C.A. G.R. No. 44527 and include in the resolution thereof the issue of laches and
prescription.
SO ORDERED.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 135362 December 13, 1999


HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself and
as legal guardian of the minor FABRICE CYRILL D. SALAS, MA. CRISTINA S.
LESACA,
and
KARINA
TERESA
D.
SALAS, petitioners,
vs.
LAPERAL REALTY CORPORATION, ROCKWAY REAL ESTATE CORPORATION,
SOUTH RIDGE VILLAGE, INC., MAHARAMI DEVELOPMENT CORPORATION,
Spouses THELMA D. ABRAJANO and GREGORIO ABRAJANO, OSCAR DACILLO,
Spouses VIRGINIA D. LAVA and RODEL LAVA, EDUARDO A. VACUNA, FLORANTE
DE LA CRUZ, JESUS VICENTE B. CAPELLAN, and the REGISTER OF DEEDS FOR
LIPA CITY,respondents.

DE LEON, JR., J.:


Before us is a petition for review on certiorari of the Order 1 of Branch 85 of the Regional
Trial Court of Lipa City 2dismissing petitioners' complaint 3 for rescission of several sale
transactions involving land owned by Augusto L. Salas, Jr., their predecessor-in-interest,
on the ground that they failed to first resort to arbitration.
Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas
spanning 1,484,354 square meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement 4 (hereinafter
referred to as the Agreement) with respondent Laperal Realty Corporation (hereinafter
referred to as Laperal Realty) to render and provide complete (horizontal) construction
services on his land.

On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of
respondent Laperal Realty to exercise general control, supervision and management of
the sale of his land, for cash or on installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva
Ecija. He never returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati City
a verified petition for the declaration of presumptive death of her husband, Salas, Jr.,
who had then been missing for more than seven (7) years. It was granted on December
12, 1996. 5
Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold
subdivided portions thereof to respondents Rockway Real Estate Corporation and
South Ridge Village, Inc. on February 22, 1990; to respondent spouses Abrajano and
Lava and Oscar Dacillo on June 27, 1991; and to respondents Eduardo Vacuna,
Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of whom are
hereinafter referred to as respondent lot buyers).
On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court of
Lipa City a Complaint 6for declaration of nullity of sale, reconveyance, cancellation of
contract, accounting and damages against herein respondents which was docketed as
Civil Case No. 98-0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to
Dismiss 7 on the ground that petitioners failed to submit their grievance to arbitration as
required under Article VI of the Agreement which provides:
Art. VI. ARBITRATION.
All cases of dispute between CONTRACTOR and OWNER'S
representative shall be referred to the committee represented by:
a. One representative of the OWNER;
b. One representative of the CONTRACTOR;
c. One representative acceptable to both
OWNER and CONTRACTOR. 8

On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed a
Joint Answer with Counterclaim and Crossclaim 9 praying for dismissal of petitioners'
Complaint for the same reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing
petitioners' Complaint for non-compliance with the foregoing arbitration clause.
Hence this petition.
Petitioners argue, thus:
The petitioners' causes of action did not emanate from the OwnerContractor Agreement.
The petitioners' causes of action for cancellation of contract and
accounting are covered by the exception under the Arbitration Law.
Failure to arbitrate is not a ground for dismissal.

10

In a catena of cases 11 inspired by Justice Malcolm's provocative dissent in Vega v. San


Carlos Milling Co. 12, this Court has recognized arbitration agreements as valid, binding,
enforceable and not contrary to public policy so much so that when there obtains a
written provision for arbitration which is not complied with, the trial court should suspend
the proceedings and order the parties to proceed to arbitration in accordance with the
terms
of
their
13
14
agreement . Arbitration is the "wave of the future" in dispute resolution. To brush
aside a contractual agreement calling for arbitration in case of disagreement between
parties would be a step backward. 15
Nonetheless, we grant the petition.
A submission to arbitration is a contract. 16 As such, the Agreement, containing the
stipulation on arbitration, binds the parties thereto, as well as their assigns and
heirs. 17 But only they. Petitioners, as heirs of Salas, Jr., and respondent Laperal Realty
are certainly bound by the Agreement. If respondent Laperal Realty had assigned its
rights under the Agreement to a third party, making the former, the assignor, and the
latter, the assignee, such assignee would also be bound by the arbitration provision
since assignment involves such transfer of rights as to vest in the assignee the power to
enforce them to the same extent as the assignor could have enforced them against the
debtor 18 or in this case, against the heirs of the original party to the Agreement.
However, respondents Rockway Real Estate Corporation, South Ridge Village, Inc.,
Maharami Development Corporation, spouses Abrajano, spouses Lava, Oscar Dacillo,

Eduardo Vacuna, Florante de la Cruz and Jesus Vicente Capellan are not assignees of
the rights of respondent Laperal Realty under the Agreement to develop Salas, Jr.'s land
and sell the same. They are, rather, buyers of the land that respondent Laperal Realty
was given the authority to develop and sell under the Agreement. As such, they are not
"assigns" contemplated in Art. 1311 of the New Civil Code which provides that
"contracts take effect only between the parties, their assigns and heirs".
Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of
Salas, Jr.'s land when respondent Laperal Realty subdivided it and sold portions thereof
to respondent lot buyers. Thus, they instituted action 19 against both respondent Laperal
Realty and respondent lot buyers for rescission of the sale transactions and
reconveyance to them of the subdivided lots. They argue that rescission, being their
cause of action, falls under the exception clause in Sec. 2 of Republic Act No. 876
which provides that "such submission [to] or contract [of arbitration] shall be valid,
enforceable and irrevocable, save upon such grounds as exist at law for the revocation
of any contract".
The petitioners' contention is without merit. For while rescission, as a general rule, is an
arbitrable issue, 20 they impleaded in the suit for rescission the respondent lot buyers
who are neither parties to the Agreement nor the latter's assigns or heirs. Consequently,
the right to arbitrate as provided in Article VI of the Agreement was never vested in
respondent lot buyers.
Respondent Laperal Realty, as a contracting party to the Agreement, has the right to
compel petitioners to first arbitrate before seeking judicial relief. However, to split the
proceedings into arbitration for respondent Laperal Realty and trial for the respondent
lot buyers, or to hold trial in abeyance pending arbitration between petitioners and
respondent Laperal Realty, would in effect result in multiplicity of suits, duplicitous
procedure and unnecessary delay. On the other hand, it would be in the interest of
justice if the trial court hears the complaint against all herein respondents and
adjudicates petitioners' rights as against theirs in a single and complete proceeding.
WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19,
1998 of Branch 85 of the Regional Trial Court of Lipa City is hereby NULLIFIED and
SET ASIDE. Said court is hereby ordered to proceed with the hearing of Civil Case No.
98-0047.
Costs against private respondents.
SO ORDERED.

Bellosillo, Mendoza, Quisumbing and Buena, JJ., concur.