SECOND DIVISION
between the parties was legally in existence and the RTC was not the
[G.R. No. 175404. January 31, 2011.]
CARGILL PHILIPPINES, INC., petitioner, vs. SAN FERNANDO REGALA
TRADING, INC., respondent.
DECISION
PERALTA, J p:
Before us is a petition for review on certiorari seeking to reverse and set
aside the Decision 1 dated July 31, 2006 and the Resolution 2 dated
November 13, 2006 of the Court of Appeals (CA) in CA G.R. SP No. 50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with
the Regional Trial Court (RTC) of Makati City a Complaint for Rescission of
Contract with Damages 3 against petitioner Cargill Philippines, Inc. In its
Complaint, respondent alleged that it was engaged in buying and selling of
molasses and petitioner was one of its various sources from whom it
purchased molasses. Respondent alleged that it entered into a contract
dated July 11, 1996 with petitioner, wherein it was agreed upon that
respondent would purchase from petitioner 12,000 metric tons of Thailand
origin cane blackstrap molasses at the price of US$192 per metric ton; that
the delivery of the molasses was to be made in January/February 1997 and
payment was to be made by means of an Irrevocable Letter of Credit
payable at sight, to be opened by September 15, 1996; that sometime
prior to September 15, 1996, the parties agreed that instead of
January/February 1997, the delivery would be made in April/May 1997 and
that payment would be by an Irrevocable Letter of Credit payable at sight,
to be opened upon petitioner's advice. Petitioner, as seller, failed to comply
with its obligations under the contract, despite demands from respondent,
thus, the latter prayed for rescission of the contract and payment of
damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings
and to Refer Controversy to Voluntary Arbitration, 4 wherein it argued that
the alleged contract between the parties, dated July 11, 1996, was never
consummated because respondent never returned the proposed
agreement bearing its written acceptance or conformity nor did respondent
open the Irrevocable Letter of Credit at sight. Petitioner contended that the
controversy between the parties was whether or not the alleged contract
proper forum to ventilate such issue. It claimed that the contract contained
an arbitration clause, to wit: EDACSa
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by
mutual agreement shall be settled by arbitration in the City of New York
before the American Arbitration Association. The Arbitration Award shall be
final and binding on both parties. 5
that respondent must first comply with the arbitration clause before
resorting to court, thus, the RTC must either dismiss the case or suspend
the proceedings and direct the parties to proceed with arbitration,
pursuant to Sections 6 6 and 7 7 of Republic Act (R.A.) No. 876, or the
Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has
jurisdiction over the action for rescission of contract and could not be
changed by the subject arbitration clause. It cited cases wherein
arbitration clauses, such as the subject clause in the contract, had been
struck down as void for being contrary to public policy since it provided
that the arbitration award shall be final and binding on both parties, thus,
ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already
inapplicable, having been rendered prior to the effectivity of the New Civil
Code in 1950 and the Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon
by petitioner is invalid and unenforceable, considering that the
requirements imposed by the provisions of the Arbitration Law had not
been complied with. aCHDST
By way of Sur-Rejoinder, petitioner contended that respondent had even
clarified that the issue boiled down to whether the arbitration clause
contained in the contract subject of the complaint is valid and enforceable;
that the arbitration clause did not violate any of the cited provisions of the
Arbitration Law.
On September 17, 1998, the RTC rendered an Order, 8 the dispositive
portion of which reads:
1
Premises considered, defendant's "Motion to Dismiss/Suspend Proceedings
and to Refer Controversy to Voluntary Arbitration" is hereby DENIED.
Defendant is directed to file its answer within ten (10) days from receipt of
a copy of this order. 9
In denying the motion, the RTC found that there was no clear basis for
petitioner's plea to dismiss the case, pursuant to Section 7 of the
Arbitration Law. The RTC said that the provision directed the court
concerned only to stay the action or proceeding brought upon an issue
arising out of an agreement providing for the arbitration thereof, but did
not impose the sanction of dismissal. However, the RTC did not find the
suspension of the proceedings warranted, since the Arbitration
Law contemplates an arbitration proceeding that must be conducted in the
Philippines under the jurisdiction and control of the RTC; and before an
arbitrator who resides in the country; and that the arbitral award is subject
to court approval, disapproval and modification, and that there must be an
appeal from the judgment of the RTC. The RTC found that the arbitration
clause in question contravened these procedures, i.e., the arbitration
clause contemplated an arbitration proceeding in New York before a non-
resident arbitrator (American Arbitration Association); that the arbitral
award shall be final and binding on both parties. The RTC said that to apply
Section 7 of the Arbitration Law to such an agreement would result in
disregarding the other sections of the same law and rendered them useless
and mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC denied in an
Order 10 dated November 25, 1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue
that the RTC acted in excess of jurisdiction or with grave abuse of
discretion in refusing to dismiss or at least suspend the proceedings a quo,
despite the fact that the party's agreement to arbitrate had not been
complied with.
Respondent filed its Comment and Reply. The parties were then required to
file their respective Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the
petition and affirming the RTC Orders.
In denying the petition, the CA found that stipulation providing for
arbitration in contractual obligation is both valid and constitutional; that
arbitration as an alternative mode of dispute resolution has long been
accepted in our jurisdiction and expressly provided for in the Civil Code;
that R.A. No. 876 (the Arbitration Law) also expressly authorized the
arbitration of domestic disputes. The CA found error in the RTC's holding
that Section 7 of R.A. No. 876 was inapplicable to arbitration clause simply
because the clause failed to comply with the requirements prescribed by
the law. The CA found that there was nothing in the Civil Code, or R.A. No.
876, that require that arbitration proceedings must be conducted only in
the Philippines and the arbitrators should be Philippine residents. It also
found that the RTC ruling effectively invalidated not only the disputed
arbitration clause, but all other agreements which provide for foreign
arbitration. The CA did not find illegal or against public policy the
arbitration clause so as to render it null and void or ineffectual. CTSDAI
Notwithstanding such findings, the CA still held that the case cannot be
brought under the Arbitration Law for the purpose of suspending the
proceedings before the RTC, since in its Motion to Dismiss/Suspend
proceedings, petitioner alleged, as one of the grounds thereof, that the
subject contract between the parties did not exist or it was invalid; that the
said contract bearing the arbitration clause was never consummated by
the parties, thus, it was proper that such issue be first resolved by the
court through an appropriate trial; that the issue involved a question of
fact that the RTC should first resolve. Arbitration is not proper when one of
the parties repudiated the existence or validity of the contract.
Petitioner's motion for reconsideration was denied in a Resolution dated
November 13, 2006.
Hence, this petition.
Petitioner alleges that the CA committed an error of law in ruling that
arbitration cannot proceed despite the fact that: (a) it had ruled, in its
assailed decision, that the arbitration clause is valid, enforceable and
binding on the parties; (b) the case of Gonzales v. Climax Mining Ltd. 11 is
inapplicable here; (c) parties are generally allowed, under the Rules of
Court, to adopt several defenses, alternatively or hypothetically, even if
such defenses are inconsistent with each other; and (d) the complaint filed
by respondent with the trial court is premature.
Petitioner alleges that the CA adopted inconsistent positions when it found
the arbitration clause between the parties as valid and enforceable and yet
in the same breath decreed that the arbitration cannot proceed because
petitioner assailed the existence of the entire agreement containing the
arbitration clause. Petitioner claims the inapplicability of the
2
cited Gonzales case decided in 2005, because in the present case, it was
respondent who had filed the complaint for rescission and damages with
the RTC, which based its cause of action against petitioner on the alleged
agreement dated July 11, 2006 between the parties; and that the same
agreement contained the arbitration clause sought to be enforced by
petitioner in this case. Thus, whether petitioner assails the genuineness
and due execution of the agreement, the fact remains that the agreement
sued upon provides for an arbitration clause; that respondent cannot use
the provisions favorable to him and completely disregard those that are
unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two
alternative defenses, i.e., the parties had not entered into any agreement
upon which respondent as plaintiff can sue upon; and, assuming that such
agreement existed, there was an arbitration clause that should be
enforced, thus, the dispute must first be submitted to arbitration before an
action can be instituted in court. Petitioner argues that under Section 1 (j)
of Rule 16 of the Rules of Court, included as a ground to dismiss a
complaint is when a condition precedent for filing the complaint has not
been complied with; and that submission to arbitration when such has
been agreed upon is one such condition precedent. Petitioner submits that
the proceedings in the RTC must be dismissed, or at least suspended, and
the parties be ordered to proceed with arbitration. IaAHCE
On March 12, 2007, petitioner filed a Manifestation 12 saying that the CA's
rationale in declining to order arbitration based on the
2005 Gonzales ruling had been modified upon a motion for reconsideration
decided in 2007; that the CA decision lost its legal basis, because it had
been ruled that the arbitration agreement can be implemented
notwithstanding that one of the parties thereto repudiated the contract
which contained such agreement based on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the
remedy against an order denying a Motion to Dismiss/Suspend Proceedings
and To Refer Controversy to Voluntary Arbitration. It claims that the
Arbitration Law which petitioner invoked as basis for its Motion prescribed,
under its Section 29, a remedy, i.e., appeal by a petition for review
on certiorari under Rule 45. Respondent contends that the Gonzales case,
which was decided in 2007, is inapplicable in this case, especially as to the
doctrine of separability enunciated therein. Respondent argues that even if
the existence of the contract and the arbitration clause is conceded, the
decisions of the RTC and the CA declining referral of the dispute between
the parties to arbitration would still be correct. This is so because
respondent's complaint filed in Civil Case No. 98-1376 presents the
principal issue of whether under the facts alleged in the complaint,
respondent is entitled to rescind its contract with petitioner and for the
latter to pay damages; that such issue constitutes a judicial question or
one that requires the exercise of judicial function and cannot be the subject
of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a
defendant to adopt in the same action several defenses, alternatively or
hypothetically, even if such defenses are inconsistent with each other
refers to allegations in the pleadings, such as complaint, counterclaim,
cross-claim, third-party complaint, answer, but not to a motion to dismiss.
Finally, respondent claims that petitioner's argument is premised on the
existence of a contract with respondent containing a provision for
arbitration. However, its reliance on the contract, which it repudiates, is
inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission
and damages on the basis of the contract, thus, respondent admitted the
existence of all the provisions contained thereunder, including the
arbitration clause; that if respondent relies on said contract for its cause of
action against petitioner, it must also consider itself bound by the rest of
the terms and conditions contained thereunder notwithstanding that
respondent may find some provisions to be adverse to its position; that
respondent's citation of the Gonzales case, decided in 2005, to show that
the validity of the contract cannot be the subject of the arbitration
proceeding and that it is the RTC which has the jurisdiction to resolve the
situation between the parties herein, is not correct since in the resolution
of the Gonzales' motion for reconsideration in 2007, it had been ruled that
an arbitration agreement is effective notwithstanding the fact that one of
the parties thereto repudiated the main contract which contained
it. DEIHAa
We first address the procedural issue raised by respondent that petitioner's
petition for certiorari under Rule 65 filed in the CA against an RTC Order
denying a Motion to Dismiss/Suspend Proceedings and to Refer
Controversy to Voluntary Arbitration was a wrong remedy invoking Section
29 of R.A. No. 876, which provides:
Section 29.
. . . An appeal may be taken from an order made in a proceeding under this
Act, or from a judgment entered upon an award
3
through certiorari proceedings, but such appeals shall be limited to
question of law. . . . .
To support its argument, respondent cites the case of Gonzales v. Climax
Mining Ltd. 13 (Gonzales case), wherein we ruled the impropriety of a
petition for certiorariunder Rule 65 as a mode of appeal from an RTC Order
directing the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a
petition to compel arbitration under R.A. No. 876, pursuant to the
arbitration clause found in the Addendum Contract it entered with
Gonzales. Judge Oscar Pimentel of the RTC of Makati then directed the
parties to arbitration proceedings. Gonzales filed a petition
for certiorari with Us contending that Judge Pimentel acted with grave
abuse of discretion in immediately ordering the parties to proceed with
arbitration despite the proper, valid and timely raised argument in his
Answer with counterclaim that the Addendum Contract containing the
arbitration clause was null and void. Climax-Arimco assailed the mode of
review availed of by Gonzales, citing Section 29 of R.A. No. 876 contending
that certiorari under Rule 65 can be availed of only if there was no appeal
or any adequate remedy in the ordinary course of law; that R.A. No.
876 provides for an appeal from such order. We then ruled that Gonzales'
petition for certiorari should be dismissed as it was filed in lieu of an
appeal by certiorari which was the prescribed remedy under R.A. No.
876 and the petition was filed far beyond the reglementary period. HIEAcC
We found that Gonzales' petition for certiorari raises a question of law, but
not a question of jurisdiction; that Judge Pimentel acted in accordance with
the procedure prescribed in R.A. No. 876 when he ordered Gonzales to
proceed with arbitration and appointed a sole arbitrator after making the
determination that there was indeed an arbitration agreement. It had been
held that as long as a court acts within its jurisdiction and does not gravely
abuse its discretion in the exercise thereof, any supposed error committed
by it will amount to nothing more than an error of judgment reviewable by
a timely appeal and not assailable by a special civil action of certiorari. 14
In this case, petitioner raises before the CA the issue that the respondent
Judge acted in excess of jurisdiction or with grave abuse of discretion in
refusing to dismiss, or at least suspend, the proceedings a quo, despite the
fact that the party's agreement to arbitrate had not been complied with.
Notably, the RTC found the existence of the arbitration clause, since it said
in its decision that "hardly disputed is the fact that the arbitration clause in
question contravenes several provisions ofthe Arbitration Law . . . and to
apply Section 7 of the Arbitration Law to such an agreement would result in
the disregard of the afore-cited sections of the Arbitration Law and render
them useless and mere surplusages." However, notwithstanding the
finding that an arbitration agreement existed, the RTC denied petitioner's
motion and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals, 15 it was held that R.A.
No. 876 explicitly confines the court's authority only to the determination
of whether or not there is an agreement in writing providing for arbitration.
In the affirmative, the statute ordains that the court shall issue an order
summarily directing the parties to proceed with the arbitration in
accordance with the terms thereof. If the court, upon the other hand, finds
that no such agreement exists, the proceedings shall be dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend
Proceedings and to Refer Controversy to Voluntary Arbitration, the RTC
went beyond its authority of determining only the issue of whether or not
there is an agreement in writing providing for arbitration by directing
petitioner to file an answer, instead of ordering the parties to proceed to
arbitration. In so doing, it acted in excess of its jurisdiction and since there
is no plain, speedy, and adequate remedy in the ordinary course of law,
petitioner's resort to a petition for certiorari is the proper remedy.
We now proceed to the substantive issue of whether the CA erred in finding
that this case cannot be brought under the arbitration law for the purpose
of suspending the proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been
recognized and accepted in our jurisdiction. 16 R.A. No. 876 17 authorizes
arbitration of domestic disputes. Foreign arbitration, as a system of settling
commercial disputes of an international character, is likewise
recognized. 18 The enactment of R.A. No. 9285 on April 2, 2004 further
institutionalized the use of alternative dispute resolution systems,
including arbitration, in the settlement of disputes. 19 DaCEIc
A contract is required for arbitration to take place and to be
binding. 20 Submission to arbitration is a contract 21 and a clause in a
contract providing that all matters in dispute between the parties shall be
referred to arbitration is a contract. 22 The provision to submit to
4
arbitration any dispute arising therefrom and the relationship of the parties
is part of the contract and is itself a contract. 23
In this case, the contract sued upon by respondent provides for an
arbitration clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by
mutual agreement shall be settled by arbitration in the City of New York
before the American Arbitration Association, The Arbitration Award shall be
final and binding on both parties.
The CA ruled that arbitration cannot be ordered in this case, since
petitioner alleged that the contract between the parties did not exist or
was invalid and arbitration is not proper when one of the parties repudiates
the existence or validity of the contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed
arbitration clause providing for foreign arbitration, it is our considered
opinion that the case at bench still cannot be brought under the Arbitration
Law for the purpose of suspending the proceedings before the trial court.
We note that in its Motion to Dismiss/Suspend Proceedings, etc.,
petitioner Cargill alleged, as one of the grounds thereof, that the alleged
contract between the parties do not legally exist or is invalid. As posited by
petitioner, it is their contention that the said contract, bearing the
arbitration clause, was never consummated by the parties. That being the
case, it is but proper that such issue be first resolved by the court through
an appropriate trial. The issue involves a question of fact that the trial
court should first resolve.
Arbitration is not proper when one of the parties repudiates the existence
or validity of the contract. Apropos is Gonzales v. Climax Mining Ltd., 452
SCRA 607, (G.R. No. 161957), where the Supreme Court held that:
The question of validity of the contract containing the agreement to submit
to arbitration will affect the applicability of the arbitration clause itself. A
party cannot rely on the contract and claim rights or obligations under it
and at the same time impugn its existence or validity. Indeed, litigants are
enjoined from taking inconsistent positions. . . .
Consequently, the petitioner herein cannot claim that the contract was
never consummated and, at the same time, invokes the arbitration clause
provided for under the contract which it alleges to be non-existent or
invalid. Petitioner claims that private respondent's complaint lacks a cause
of action due to the absence of any valid contract between the parties.
Apparently, the arbitration clause is being invoked merely as a fallback
position. The petitioner must first adduce evidence in support of its claim
that there is no valid contract between them and should the court a quo
find the claim to be meritorious, the parties may then be spared the rigors
and expenses that arbitration in a foreign land would surely
entail. 24 IcESaA
However, the Gonzales case, 25 which the CA relied upon for not ordering
arbitration, had been modified upon a motion for reconsideration in this
wise:
. . . The adjudication of the petition in G.R. No. 167994 effectively modifies
part of the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we
now hold that the validity of the contract containing the agreement to
submit to arbitration does not affect the applicability of the arbitration
clause itself. A contrary ruling would suggest that a party's mere
repudiation of the main contract is sufficient to avoid arbitration. That is
exactly the situation that the separability doctrine, as well as jurisprudence
applying it, seeks to avoid. We add that when it was declared in G.R. No.
161957 that the case should not be brought for arbitration, it should be
clarified that the case referred to is the case actually filed by Gonzales
before the DENR Panel of Arbitrators, which was for the nullification of the
main contract on the ground of fraud, as it had already been determined
that the case should have been brought before the regular courts involving
as it did judicial issues. 26
In so ruling that the validity of the contract containing the arbitration
agreement does not affect the applicability of the arbitration clause itself,
we then applied the doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it,
enunciates that an arbitration agreement is independent of the main
contract. The arbitration agreement is to be treated as a separate
agreement and the arbitration agreement does not automatically
terminate when the contract of which it is a part comes to an end.
The separability of the arbitration agreement is especially significant to the
determination of whether the invalidity of the main contract also nullifies
the arbitration clause. Indeed, the doctrine denotes that the invalidity of
the main contract, also referred to as the "container" contract, does not
affect the validity of the arbitration agreement. Irrespective of the fact that
5
the main contract is invalid, the arbitration clause/agreement still remains
valid and enforceable. 27
Respondent argues that the separability doctrine is not applicable in
petitioner's case, since in the Gonzales case, Climax-Arimco sought to
enforce the arbitration clause of its contract with Gonzales and the
former's move was premised on the existence of a valid contract; while
Gonzales, who resisted the move of Climax-Arimco for arbitration, did not
deny the existence of the contract but merely assailed the validity thereof
on the ground of fraud and oppression. Respondent claims that in the case
before Us, petitioner who is the party insistent on arbitration also claimed
in their Motion to Dismiss/Suspend Proceedings that the contract sought by
respondent to be rescinded did not exist or was not consummated; thus,
there is no room for the application of the separability doctrine, since there
is no container or main contract or an arbitration clause to speak
of. SDTcAH
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of
the main contract shall not be regarded as invalid or non-existent just
because the main contract is invalid or did not come into existence, since
the arbitration agreement shall be treated as a separate agreement
independent of the main contract. To reiterate a contrary ruling would
suggest that a party's mere repudiation of the main contract is sufficient to
avoid arbitration and that is exactly the situation that the separability
doctrine sought to avoid. Thus, we find that even the party who has
repudiated the main contract is not prevented from enforcing its arbitration
clause.
Moreover, it is worthy to note that respondent filed a complaint for
rescission of contract and damages with the RTC. In so doing, respondent
alleged that a contract exists between respondent and petitioner. It is that
contract which provides for an arbitration clause which states that "any
dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled before the City of New York by the American
Arbitration Association. The arbitration agreement clearly expressed the
parties' intention that any dispute between them as buyer and seller
should be referred to arbitration. It is for the arbitrator and not the courts
to decide whether a contract between the parties exists or is valid.
Respondent contends that assuming that the existence of the contract and
the arbitration clause is conceded, the CA's decision declining referral of
the parties' dispute to arbitration is still correct. It claims that its complaint
in the RTC presents the issue of whether under the facts alleged, it is
entitled to rescind the contract with damages; and that issue constitutes a
judicial question or one that requires the exercise of judicial function and
cannot be the subject of an arbitration proceeding. Respondent cites our
ruling in Gonzales, wherein we held that a panel of arbitrators is bereft of
jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to
the execution of the addendum contract and the other contracts
emanating from it, and that the complaint should have been filed with the
regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on
the Gonzales case to support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of
Arbitrators, Region II, Mines and Geosciences Bureau, of the Department of
Environment and Natural Resources (DENR) against respondents Climax-
Mining Ltd., Climax-Arimco and Australasian Philippines Mining, Inc.,
seeking the declaration of nullity or termination of the addendum contract
and the other contracts emanating from it on the grounds of fraud and
oppression. The Panel dismissed the complaint for lack of jurisdiction.
However, the Panel, upon petitioner's motion for reconsideration, ruled
that it had jurisdiction over the dispute maintaining that it was a mining
dispute, since the subject complaint arose from a contract between the
parties which involved the exploration and exploitation of minerals over
the disputed area. Respondents assailed the order of the Panel of
Arbitrators via a petition for certiorari before the CA. The CA granted the
petition and declared that the Panel of Arbitrators did not have jurisdiction
over the complaint, since its jurisdiction was limited to the resolution of
mining disputes, such as those which raised a question of fact or matter
requiring the technical knowledge and experience of mining authorities
and not when the complaint alleged fraud and oppression which called for
the interpretation and application of laws. The CA further ruled that the
petition should have been settled through arbitration under R.A. No.
876 the Arbitration Law as provided under the addendum
contract. cCSDaI
On a review on certiorari, we affirmed the CA's finding that the Panel of
Arbitrators who, under R.A. No. 7942 of the Philippine Mining Act of 1995,
has exclusive and original jurisdiction to hear and decide mining disputes,
such as mining areas, mineral agreements, FTAAs or permits and surface
owners, occupants and claimholders/concessionaires, is bereft of
6
jurisdiction over the complaint for declaration of nullity of the addendum
contract; thus, the Panels' jurisdiction is limited only to those mining
disputes which raised question of facts or matters requiring the technical
knowledge and experience of mining authorities. We then said:
In Pearson v. Intermediate Appellate Court, this Court observed that the
trend has been to make the adjudication of mining cases a purely
administrative matter. Decisions of the Supreme Court on mining disputes
have recognized a distinction between (1) the primary powers granted by
pertinent provisions of law to the then Secretary of Agriculture and Natural
Resources (and the bureau directors) of an executive or administrative
nature, such as granting of license, permits, lease and contracts, or
approving, rejecting, reinstating or canceling applications, or deciding
conflicting applications, and (2) controversies or disagreements of civil or
contractual nature between litigants which are questions of a judicial
nature that may be adjudicated only by the courts of justice. This
distinction is carried on even in Rep. Act No. 7942. 28
We found that since the complaint filed before the DENR Panel of
Arbitrators charged respondents with disregarding and ignoring the
addendum contract, and acting in a fraudulent and oppressive manner
against petitioner, the complaint filed before the Panel was not a dispute
involving rights to mining areas, or was it a dispute involving claimholders
or concessionaires, but essentially judicial issues. We then said that the
Panel of Arbitrators did not have jurisdiction over such issue, since it does
not involve the application of technical knowledge and expertise relating to
mining. It is in this context that we said that:
Arbitration before the Panel of Arbitrators is proper only when there is a
disagreement between the parties as to some provisions of the contract
between them, which needs the interpretation and the application of that
particular knowledge and expertise possessed by members of that Panel. It
is not proper when one of the parties repudiates the existence or validity of
such contract or agreement on the ground of fraud or oppression as in this
case. The validity of the contract cannot be subject of arbitration
proceedings. Allegations of fraud and duress in the execution of a contract
are matters within the jurisdiction of the ordinary courts of law. These
questions are legal in nature and require the application and interpretation
of laws and jurisprudence which is necessarily a judicial function. 29
In fact, We even clarified in our resolution on Gonzales' motion for
reconsideration that "when we declared that the case should not be
brought for arbitration, it should be clarified that the case referred to is the
case actually filed by Gonzales before the DENR Panel of Arbitrators, which
was for the nullification of the main contract on the ground of fraud, as it
had already been determined that the case should have been brought
before the regular courts involving as it did judicial issues." We made such
clarification in our resolution of the motion for reconsideration after ruling
that the parties in that case can proceed to arbitration under the
Arbitration Law, as provided under the Arbitration Clause in their
Addendum Contract. AaSIET
WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2006
and the Resolution dated November 13, 2006 of the Court of Appeals in
CA-G.R. SP No. 50304 are REVERSED and SET ASIDE. The parties are
hereby ORDERED to SUBMIT themselves to the arbitration of their dispute,
pursuant to their July 11, 1996 agreement.
SO ORDERED.
||| (Cargill Philippines, Inc. v. San Fernando Regala Trading, Inc., G.R. No.
175404, [January 31, 2011], 656 PHIL 29-49)
SECOND DIVISION
[G.R. No. 185582. February 29, 2012.]
TUNA PROCESSING, INC., petitioner, vs. PHILIPPINE KINGFORD,
INC., respondent.
DECISION
PEREZ, J p:
Can a foreign corporation not licensed to do business in the Philippines, but
which collects royalties from entities in the Philippines, sue here to enforce
a foreign arbitral award?
In this Petition for Review on Certiorari under Rule
45, 1 petitioner Tuna Processing, Inc. (TPI), a foreign corporation not
licensed to do business in the Philippines, prays that the
Resolution 2 dated 21 November 2008 of the Regional Trial Court (RTC) of
Makati City be declared void and the case be remanded to the RTC for
further proceedings. In the assailed Resolution, the RTC dismissed
petitioner's Petition for Confirmation, Recognition, and Enforcement of
7
Foreign Arbitral Award 3 against respondent Philippine Kingford, Inc.
(Kingford), a corporation duly organized and existing under the laws of the
Philippines, 4 on the ground that petitioner lacked legal capacity to sue. 5
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the
"licensor"), co-patentee of U.S. Patent No. 5,484,619, Philippine Letters
Patent No. 31138, and Indonesian Patent No. ID0003911 (collectively
referred to as the "Yamaoka Patent"), 6 and five (5)
Philippine tuna processors, namely, Angel Seafood Corporation, East Asia
Fish Co., Inc., Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc., and
respondent Kingford (collectively referred to as the
"sponsors"/"licensees") 7 entered into a Memorandum of Agreement
(MOA), 8 pertinent provisions of which read:
1. Background and objectives. The Licensor, co-owner of U.S. Patent No.
5,484,619, Philippine Patent No. 31138, and Indonesian Patent No.
ID0003911 . . . wishes to form an alliance with Sponsors for purposes of
enforcing his three aforementioned patents, granting licenses under those
patents, and collecting royalties. TcIaHC
The Sponsors wish to be licensed under the aforementioned patents in
order to practice the processes claimed in those patents in the United
States, the Philippines, and Indonesia, enforce those patents and collect
royalties in conjunction with Licensor.
xxx xxx xxx
4. Establishment of Tuna Processors, Inc. The parties hereto agree to the
establishment of Tuna Processors, Inc. ("TPI"), a corporation established in
the State of California, in order to implement the objectives of this
Agreement.
5. Bank account. TPI shall open and maintain bank accounts in the United
States, which will be used exclusively to deposit funds that it will collect
and to disburse cash it will be obligated to spend in connection with the
implementation of this Agreement.
6. Ownership of TPI. TPI shall be owned by the Sponsors and Licensor.
Licensor shall be assigned one share of TPI for the purpose of being elected
as member of the board of directors. The remaining shares of TPI shall be
held by the Sponsors according to their respective equity shares. 9
xxx xxx xxx
The parties likewise executed a Supplemental Memorandum of
Agreement 10 dated 15 January 2003 and an Agreement to Amend
Memorandum of Agreement 11dated 14 July 2003.
Due to a series of events not mentioned in the petition, the licensees,
including respondent Kingford, withdrew from petitioner TPI and
correspondingly reneged on their obligations. 12 Petitioner submitted the
dispute for arbitration before the International Centre for Dispute
Resolution in the State of California, United States and won the case
against respondent. 13 Pertinent portions of the award read:
13.1 Within thirty (30) days from the date of transmittal of this Award to
the Parties, pursuant to the terms of this award, the total sum to be paid
byRESPONDENT KINGFORD to CLAIMANT TPI, is the sum of ONE MILLION
SEVEN HUNDRED FIFTY THOUSAND EIGHT HUNDRED FORTY SIX DOLLARS
AND TEN CENTS ($1,750,846.10).
(A) For breach of the MOA by not paying past due
assessments, RESPONDENT KINGFORD shall pay CLAIMANT the total sum
of TWO HUNDRED TWENTY NINE THOUSAND THREE HUNDRED AND FIFTY
FIVE DOLLARS AND NINETY CENTS ($229,355.90) which is 20%
of MOA assessments since September 1, 2005[;]
(B) For breach of the MOA in failing to cooperate with CLAIMANT TPI in
fulfilling the objectives of the MOA, RESPONDENT KINGFORDshall
pay CLAIMANTthe total sum of TWO HUNDRED SEVENTY ONE THOUSAND
FOUR HUNDRED NINETY DOLLARS AND TWENTY CENTS ($271,490.20)
[;] 14 and
(C) For violation of THE LANHAM ACT and infringement of the YAMAOKA
619 PATENT, RESPONDENT KINGFORD shall pay CLAIMANT the total sum
ofONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS
($1,250,000.00). . . .
xxx xxx xxx 15
To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral
Award before the RTC of Makati City. The petition was raffled to Branch 150
presided by Judge Elmo M. Alameda.
8
At Branch 150, respondent Kingford filed a Motion to Dismiss. 16 After the
court denied the motion for lack of merit, 17 respondent sought for the
inhibition of Judge Alameda and moved for the reconsideration of the order
denying the motion. 18 Judge Alameda inhibited himself notwithstanding
"[t]he unfounded allegations and unsubstantiated assertions in the
motion." 19 Judge Cedrick O. Ruiz of Branch 61, to which the case was re-
raffled, in turn, granted respondent's Motion for Reconsideration and
dismissed the petition on the ground that the petitioner lacked legal
capacity to sue in the Philippines. 20
Petitioner TPI now seeks to nullify, in this instant Petition for Review on
Certiorari under Rule 45, the order of the trial court dismissing its Petition
for Confirmation, Recognition, and Enforcement of Foreign Arbitral Award.
Issue
The core issue in this case is whether or not the court a quo was correct in
so dismissing the petition on the ground of petitioner's lack of legal
capacity to sue.
Our Ruling
The petition is impressed with merit.
The Corporation Code of the Philippines expressly provides:
Sec. 133. Doing business without a license. No foreign corporation
transacting business in the Philippines without a license, or its successors
or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.
It is pursuant to the aforequoted provision that the court a quo dismissed
the petition. Thus:
Herein plaintiff TPI's "Petition, etc." acknowledges that it "is a foreign
corporation established in the State of California" and "was given the
exclusive right to license or sublicense the Yamaoka Patent" and "was
assigned the exclusive right to enforce the said patent and collect
corresponding royalties" in the Philippines. TPI likewise admits that it does
not have a license to do business in the Philippines.
There is no doubt, therefore, in the mind of this Court that TPI has been
doing business in the Philippines, but sans a license to do so issued by the
concerned government agency of the Republic of the Philippines, when it
collected royalties from "five (5) Philippine tuna processors[,] namely[,]
Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy
Gina Tuna Resources, Santa Cruz Seafoods, Inc. and respondent
Philippine Kingford, Inc." This being the real situation, TPI cannot be
permitted to maintain or intervene in any action, suit or proceedings in any
court or administrative agency of the Philippines." A priori, the "Petition,
etc." extant of the plaintiff TPI should be dismissed for it does not have the
legal personality to sue in the Philippines. 21
The petitioner counters, however, that it is entitled to seek for the
recognition and enforcement of the subject foreign arbitral award in
accordance with Republic Act No. 9285 (Alternative Dispute Resolution Act
of 2004), 22 the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards drafted during the United Nations Conference on
International Commercial Arbitration in 1958 (New York Convention), and
the UNCITRAL Model Law on International Commercial Arbitration (Model
Law),23 as none of these specifically requires that the party seeking for the
enforcement should have legal capacity to sue. It anchors its argument on
the following: cCSHET
In the present case, enforcement has been effectively refused on a ground
not found in the [Alternative Dispute Resolution Act of 2004], New York
Convention,or Model Law. It is for this reason that TPI has brought this
matter before this most Honorable Court, as it [i]s imperative to clarify
whether the Philippines' international obligations and State policy to
strengthen arbitration as a means of dispute resolution may be defeated
by misplaced technical considerations not found in the relevant laws. 24
Simply put, how do we reconcile the provisions of the Corporation Code of
the Philippines on one hand, and the Alternative Dispute Resolution Act of
2004, the New York Convention and the Model Law on the other?
In several cases, this Court had the occasion to discuss the nature and
applicability of the Corporation Code of the Philippines, a general law, viz-
-viz other special laws. Thus, in Koruga v. Arcenas, Jr., 25 this Court
rejected the application of the Corporation Code and applied the New
Central Bank Act. It ratiocinated:
Koruga's invocation of the provisions of the Corporation Code is misplaced.
In an earlier case with similar antecedents, we ruled that:
9
"The Corporation Code, however, is a general law applying to all types of
corporations, while the New Central Bank Act regulates specifically banks
and other financial institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter shall prevail
generalia specialibus non derogant." (Emphasis supplied) 26
Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential
Agrarian Reform Council, 27 this Court held:
Without doubt, the Corporation Code is the general law providing for the
formation, organization and regulation of private corporations. On the
other hand, RA 6657 is the special law on agrarian reform. As between a
general and special law, the latter shall prevail generalia specialibus non
derogant. 28
Following the same principle, the Alternative Dispute Resolution Act of
2004 shall apply in this case as the Act, as its title An Act to
Institutionalize the Use of an Alternative Dispute Resolution System in the
Philippines and to Establish the Office for Alternative Dispute Resolution,
and for Other Purposes would suggest, is a law especially enacted "to
actively promote party autonomy in the resolution of disputes or the
freedom of the party to make their own arrangements to resolve their
disputes." 29 It specifically provides exclusive grounds available to the
party opposing an application for recognition and enforcement of the
arbitral award. 30
Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal
law, applies in the instant petition, we do not see the need to discuss
compliance with international obligations under the New York
Convention and the Model Law. After all, both already form part of the
law. DaIACS
In particular, the Alternative Dispute Resolution Act of 2004 incorporated
the New York Convention in the Act by specifically providing:
SEC. 42. Application of the New York Convention. The New York
Convention shall govern the recognition and enforcement of arbitral
awards covered by the said Convention.
xxx xxx xxx
SEC. 45. Rejection of a Foreign Arbitral Award. A party to a foreign
arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedural rules
to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other ground
raised shall be disregarded by the regional trial court.
It also expressly adopted the Model Law, to wit:
Sec. 19. Adoption of the Model Law on International Commercial
Arbitration. International commercial arbitration shall be governed by
the Model Law on International Commercial Arbitration (the "Model Law")
adopted by the United Nations Commission on International Trade Law on
June 21, 1985 . . . ."
Now, does a foreign corporation not licensed to do business in the
Philippines have legal capacity to sue under the provisions of
the Alternative Dispute Resolution Act of 2004? We answer in the
affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the
opposing party in an application for recognition and enforcement of the
arbitral award may raise only those grounds that were enumerated under
Article V of the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award may be refused, at the
request of the party against whom it is invoked, only if that party furnishes
to the competent authority where the recognition and enforcement is
sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law
applicable to them, under some incapacity, or the said agreement is not
valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was
made; or
(b) The party against whom the award is invoked was not given proper
notice of the appointment of the arbitrator or of the arbitration proceedings
or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions
on matters beyond the scope of the submission to arbitration, provided
that, if the decisions on matters submitted to arbitration can be separated
from those not so submitted, that part of the award which contains
10
decisions on matters submitted to arbitration may be recognized and
enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was
not in accordance with the agreement of the parties, or, failing such
agreement, was not in accordance with the law of the country where the
arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set
aside or suspended by a competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if
the competent authority in the country where recognition and enforcement
is sought finds that:
(a) The subject matter of the difference is not capable of settlement by
arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the
public policy of that country.
Clearly, not one of these exclusive grounds touched on the capacity to sue
of the party seeking the recognition and enforcement of the award.
Pertinent provisions of the Special Rules of Court on Alternative Dispute
Resolution, 31 which was promulgated by the Supreme Court, likewise
support this position. CAcEaS
Rule 13.1 of the Special Rules provides that "[a]ny party to a foreign
arbitration may petition the court to recognize and enforce a foreign
arbitral award." The contents of such petition are enumerated in Rule
13.5. 32 Capacity to sue is not included. Oppositely, in the Rule on local
arbitral awards or arbitrations in instances where "the place of arbitration
is in the Philippines," 33 it is specifically required that a petition "to
determine any question concerning the existence, validity and
enforceability of such arbitration agreement" 34 available to the parties
before the commencement of arbitration and/or a petition for "judicial
relief from the ruling of the arbitral tribunal on a preliminary question
upholding or declining its jurisdiction" 35 after arbitration has already
commenced should state "[t]he facts showing that the persons named as
petitioner or respondent have legal capacity to sue or be sued." 36
Indeed, it is in the best interest of justice that in the enforcement of a
foreign arbitral award, we deny availment by the losing party of the rule
that bars foreign corporations not licensed to do business in the Philippines
from maintaining a suit in our courts. When a party enters into a contract
containing a foreign arbitration clause and, as in this case, in fact submits
itself to arbitration, it becomes bound by the contract, by the arbitration
and by the result of arbitration, conceding thereby the capacity of the
other party to enter into the contract, participate in the arbitration and
cause the implementation of the result. Although not on all fours with the
instant case, also worthy to consider is the wisdom of then Associate
Justice Flerida Ruth P. Romero in her Dissenting Opinion in Asset
Privatization Trust v. Court of Appeals, 37to wit:
. . . Arbitration, as an alternative mode of settlement, is gaining adherents
in legal and judicial circles here and abroad. If its tested mechanism can
simply be ignored by an aggrieved party, one who, it must be stressed,
voluntarily and actively participated in the arbitration proceedings from the
very beginning, it will destroy the very essence of mutuality inherent in
consensual contracts. 38
Clearly, on the matter of capacity to sue, a foreign arbitral award should be
respected not because it is favored over domestic laws and procedures,
but because Republic Act No. 9285 has certainly erased any conflict of law
question.
Finally, even assuming, only for the sake of argument, that the court a
quo correctly observed that the Model Law, not the New York Convention,
governs the subject arbitral award, 39 petitioner may still seek recognition
and enforcement of the award in Philippine court, since the Model
Law prescribes substantially identical exclusive grounds for refusing
recognition or enforcement. 40
Premises considered, petitioner TPI, although not licensed to do business in
the Philippines, may seek recognition and enforcement of the foreign
arbitral award in accordance with the provisions of the Alternative Dispute
Resolution Act of 2004.
II
The remaining arguments of respondent Kingford are likewise
unmeritorious.
First. There is no need to consider respondent's contention that petitioner
TPI improperly raised a question of fact when it posited that its act of
11
entering into a MOA should not be considered "doing business" in the
Philippines for the purpose of determining capacity to sue. We reiterate
that the foreign corporation's capacity to sue in the Philippines is not
material insofar as the recognition and enforcement of a foreign arbitral
award is concerned.
Second. Respondent cannot fault petitioner for not filing a motion for
reconsideration of the assailed Resolution dated 21 November 2008
dismissing the case. We have, time and again, ruled that the prior filing of
a motion for reconsideration is not required in certiorari under Rule 45. 41
Third. While we agree that petitioner failed to observe the principle of
hierarchy of courts, which, under ordinary circumstances, warrants the
outright dismissal of the case, 42 we opt to relax the rules following the
pronouncement in Chua v. Ang, 43 to wit: IEaATD
[I]t must be remembered that [the principle of hierarchy of courts]
generally applies to cases involving conflicting factual allegations. Cases
which depend on disputed facts for decision cannot be brought
immediately before us as we are not triers of facts. 44 A strict
application of this rule may be excused when the reason behind the rule is
not present in a case, as in the present case, where the issues are not
factual but purely legal. In these types of questions, this Court has the
ultimate say so that we merely abbreviate the review process if we,
because of the unique circumstances of a case, choose to hear and decide
the legal issues outright. 45
Moreover, the novelty and the paramount importance of the issue herein
raised should be seriously considered. 46 Surely, there is a need to take
cognizance of the case not only to guide the bench and the bar, but if only
to strengthen arbitration as a means of dispute resolution, and uphold the
policy of the State embodied in theAlternative Dispute Resolution Act of
2004, to wit:
Sec. 2. Declaration of Policy. It is hereby declared the policy of the State
to actively promote party autonomy in the resolution of disputes or the
freedom of the party to make their own arrangements to resolve their
disputes. Towards this end, the State shall encourage and actively promote
the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. . . .
Fourth. As regards the issue on the validity and enforceability of the foreign
arbitral award, we leave its determination to the court a quo where its
recognition and enforcement is being sought.
Fifth. Respondent claims that petitioner failed to furnish the court of origin
a copy of the motion for time to file petition for review on certiorari before
the petition was filed with this Court. 47 We, however, find petitioner's
reply in order. Thus:
26. Admittedly, reference to "Branch 67" in petitioner TPI's "Motion for
Time to File a Petition for Review on Certiorari under Rule 45" is a
typographical error. As correctly pointed out by respondent Kingford, the
order sought to be assailed originated from Regional Trial Court, Makati
City, Branch 61.
27. . . . Upon confirmation with the Regional Trial Court, Makati City, Branch
61, a copy of petitioner TPI's motion was received by the Metropolitan Trial
Court, Makati City, Branch 67. On 8 January 2009, the motion was
forwarded to the Regional Trial Court, Makati City, Branch 61. 48 cHECAS
All considered, petitioner TPI, although a foreign corporation not licensed to
do business in the Philippines, is not, for that reason alone, precluded from
filing the Petition for Confirmation, Recognition, and Enforcement of
Foreign Arbitral Award before a Philippine court.
WHEREFORE, the Resolution dated 21 November 2008 of the Regional Trial
Court, Branch 61, Makati City in Special Proceedings No. M-6533 is
hereby REVERSED andSET ASIDE. The case is REMANDED to Branch 61 for
further proceedings. STEacI
SO ORDERED.
||| (Tuna Processing, Inc. v. Philippine Kingford, Inc., G.R. No. 185582,
[February 29, 2012], 683 PHIL 276-294)
SECOND DIVISION
[G.R. No. 174938. October 1, 2014.]
GERARDO LANUZA, JR. AND ANTONIO O.
OLBES, petitioners, vs. BF CORPORATION, SHANGRI-LA PROPERTIES, INC.,
12
ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND
BENJAMIN C. RAMOS, respondents.
DECISION
LEONEN, J p:
Corporate representatives may be compelled to submit to arbitration
proceedings pursuant to a contract entered into by the corporation they
represent if there are allegations of bad faith or malice in their acts
representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006
decision and October 5, 2006 resolution. The Court of Appeals affirmed the
trial court's decision holding that petitioners, as directors, should submit
themselves as parties to the arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial
Court against Shangri-La and the members of its board of directors: Alfredo
C. Ramos, Rufo B. Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo
G. Licauco III, and Benjamin C. Ramos. 1
BF Corporation alleged in its complaint that on December 11, 1989 and
May 30, 1991, it entered into agreements with Shangri-La wherein it
undertook to construct for Shangri-La a mall and a multilevel parking
structure along EDSA. 2
Shangri-La had been consistent in paying BF Corporation in accordance
with its progress billing statements. 3 However, by October 1991, Shangri-
La started defaulting in payment. 4
BF Corporation alleged that Shangri-La induced BF Corporation to continue
with the construction of the buildings using its own funds and credit
despite Shangri-La's default. 5 According to BF Corporation, Shangri-La
misrepresented that it had funds to pay for its obligations
with BF Corporation, and the delay in payment was simply a matter of
delayed processing of BF Corporation's progress billing statements. 6
BF Corporation eventually completed the construction of the
buildings. 7 Shangri-La allegedly took possession of the buildings while still
owing BF Corporation an outstanding balance. 8
BF Corporation alleged that despite repeated demands, Shangri-La refused
to pay the balance owed to it. 9 It also alleged that the Shangri-La's
directors were in bad faith in directing Shangri-La's affairs. Therefore, they
should be held jointly and severally liable with Shangri-La for its obligations
as well as for the damages that BFCorporation incurred as a result of
Shangri-La's default. 10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo
G. Licauco III, and Benjamin C. Ramos filed a motion to suspend the
proceedings in view of BFCorporation's failure to submit its dispute to
arbitration, in accordance with the arbitration clause provided in its
contract, quoted in the motion as follows: 11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise
between the Owner or the Project Manager on his behalf and the
Contractor, either during the progress or after the completion or
abandonment of the Works as to the construction of this Contract or as to
any matter or thing of whatsoever nature arising thereunder or in
connection therewith (including any matter or thing left by this Contract to
the discretion of the Project Manager or the withholding by the Project
Manager of any certificate to which the Contractor may claim to be entitled
or the measurement and valuation mentioned in clause 30(5)(a) of these
Conditions or the rights and liabilities of the parties under clauses 25, 26,
32 or 33 of these Conditions), the owner and the Contractor hereby agree
to exert all efforts to settle their differences or dispute amicably. Failing
these efforts then such dispute or difference shall be referred to arbitration
in accordance with the rules and procedures of the Philippine Arbitration
Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the
parties. The decision of the Arbitrators shall be a condition precedent to
any right of legal action that either party may have against the
other. . . . 12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend
proceedings. 13
In the November 18, 1993 order, the Regional Trial Court denied the
motion to suspend proceedings. 14
13
On December 8, 1993, petitioners filed an answer to BF Corporation's
complaint, with compulsory counterclaim against BF Corporation and cross-
claim against Shangri-La. 15 They alleged that they had resigned as
members of Shangri-La's board of directors as of July 15, 1991. 16
After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C.
Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin Ramos filed a
petition for certiorari with the Court of Appeals. 17
On April 28, 1995, the Court of Appeals granted the petition
for certiorari and ordered the submission of the dispute to arbitration. 18
Aggrieved by the Court of Appeals' decision, BF Corporation filed a petition
for review on certiorari with this court. 19 On March 27, 1998, this court
affirmed the Court of Appeals' decision, directing that the dispute be
submitted for arbitration. 20
Another issue arose after BF Corporation had initiated arbitration
proceedings. BF Corporation and Shangri-La failed to agree as to the law
that should govern the arbitration proceedings. 21 On October 27, 1998,
the trial court issued the order directing the parties to conduct the
proceedings in accordance with Republic Act No. 876. 22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion
for clarification, both seeking to clarify the term, "parties," and whether
Shangri-La's directors should be included in the arbitration proceedings
and served with separate demands for arbitration. 23
Petitioners filed their comment on Shangri-La's and BF Corporation's
motions, praying that they be excluded from the arbitration proceedings
for being non-parties to Shangri-La's and BF Corporation's agreement. 24
On July 28, 2003, the trial court issued the order directing service of
demands for arbitration upon all defendants in BF Corporation's
complaint. 25 According to the trial court, Shangri-La's directors were
interested parties who "must also be served with a demand for arbitration
to give them the opportunity to ventilate their side of the controversy,
safeguard their interest and fend off their respective
positions." 26 Petitioners' motion for reconsideration of this order was
denied by the trial court on January 19, 2005. 27 SIcEHD
Petitioners filed a petition for certiorari with the Court of Appeals, alleging
grave abuse of discretion in the issuance of orders compelling them to
submit to arbitration proceedings despite being third parties to the
contract between Shangri-La and BF Corporation. 28
In its May 11, 2006 decision, 29 the Court of Appeals dismissed petitioners'
petition for certiorari. The Court of Appeals ruled that Shangri-La's
directors were necessary parties in the arbitration
proceedings. 30 According to the Court of Appeals:
[They were] deemed not third-parties to the contract as they [were] sued
for their acts in representation of the party to the contract pursuant to Art.
31 of the Corporation Code, and that as directors of the defendant
corporation, [they], in accordance with Art. 1217 of the Civil Code,stand to
be benefited or injured by the result of the arbitration proceedings, hence,
being necessary parties, they must be joined in order to have complete
adjudication of the controversy. Consequently, if [they were] excluded as
parties in the arbitration proceedings and an arbitral award is rendered,
holding [Shangri-La] and its board of directors jointly and solidarily liable to
private respondent BF Corporation, a problem will arise, i.e., whether
petitioners will be bound by such arbitral award, and this will prevent
complete determination of the issues and resolution of the controversy. 31
The Court of Appeals further ruled that "excluding petitioners in the
arbitration proceedings . . . would be contrary to the policy against
multiplicity of suits." 32
The dispositive portion of the Court of Appeals' decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28,
2003 and January 19, 2005 of public respondent RTC, Branch 157, Pasig
City, in Civil Case No. 63400, are AFFIRMED. 33
The Court of Appeals denied petitioners' motion for reconsideration in the
October 5, 2006 resolution. 34
On November 24, 2006, petitioners filed a petition for review of the May
11, 2006 Court of Appeals decision and the October 5, 2006 Court of
Appeals resolution. 35
The issue in this case is whether petitioners should be made parties to the
arbitration proceedings, pursuant to the arbitration clause provided in the
contract betweenBF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate
acts or obligations. 36 The corporation is a separate being, and nothing
14
justifies BF Corporation's allegation that they are solidarily liable with
Shangri-La. 37 Neither did they bind themselves personally nor did they
undertake to shoulder Shangri-La's obligations should it fail in its
obligations. 38 BF Corporation also failed to establish fraud or bad faith on
their part. 39
Petitioners also argue that they are third parties to the contract
between BF Corporation and Shangri-La. 40 Provisions including arbitration
stipulations should bind only the parties. 41 Based on our arbitration laws,
parties who are strangers to an agreement cannot be compelled to
arbitrate. 42
Petitioners point out that our arbitration laws were enacted to promote the
autonomy of parties in resolving their disputes. 43 Compelling them to
submit to arbitration is against this purpose and may be tantamount to
stipulating for the parties. 44
Separate comments on the petition were filed by BF Corporation, and
Maximo G. Licauco III, Alfredo C. Ramos and Benjamin C. Ramos. 45
Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos agreed
with petitioners that Shangri-La's directors, being non-parties to the
contract, should not be made personally liable for Shangri-La's
acts. 46 Since the contract was executed only by BF Corporation and
Shangri-La, only they should be affected by the contract's
stipulation. 47 BF Corporation also failed to specifically allege the unlawful
acts of the directors that should make them solidarily liable with Shangri-La
for its obligations. 48
Meanwhile, in its comment, BF Corporation argued that the courts' ruling
that the parties should undergo arbitration "clearly contemplated the
inclusion of the directors of the corporation[.]" 49
BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation
Code. 50 Section 31 makes directors solidarily liable for fraud, gross
negligence, and bad faith. 51 Petitioners are not really third parties to the
agreement because they are being sued as Shangri-La's representatives,
under Section 31 of the Corporation Code. 52
BF Corporation further argued that because petitioners were impleaded for
their solidary liability, they are necessary parties to the arbitration
proceedings. 53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice. 54
In the manifestation dated September 6, 2007, petitioners informed the
court that the Arbitral Tribunal had already promulgated its decision on July
31, 2007. 55 The Arbitral Tribunal denied BF Corporation's claims against
them. 56 Petitioners stated that "[they] were included by the Arbitral
Tribunal in the proceedings conducted . . . notwithstanding [their]
continuing objection thereto. . ." 57 They also stated that "[their] unwilling
participation in the arbitration case was done ex abundante ad cautela, as
manifested therein on several occasions." 58 Petitioners informed the court
that they already manifested with the trial court that "any action taken on
[the Arbitral Tribunal's decision] should be without prejudice to the
resolution of [this] case." 59
Upon the court's order, petitioners and Shangri-La filed their respective
memoranda. Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and
Benjamin C. Ramos reiterated their arguments that they should not be held
liable for Shangri-La's default and made parties to the arbitration
proceedings because only BF Corporation and Shangri-La were parties to
the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for
their solidary liability under Section 31 of the Corporation Code. Shangri-La
added that their exclusion from the arbitration proceedings will result in
multiplicity of suits, which "is not favored in this jurisdiction." 60 It pointed
out that the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated
in. 61 Moreover, BF Corporation assailed only the correctness of the
Arbitral Tribunal's award and not the part absolving Shangri-La's directors
from liability. 62
BF Corporation filed a counter-manifestation with motion to dismiss 63 in
lieu of the required memorandum.
In its counter-manifestation, BF Corporation pointed out that since
"petitioners' counterclaims were already dismissed with finality, and the
claims against them were likewise dismissed with finality, they no longer
have any interest or personality in the arbitration case. Thus, there is no
longer any need to resolve the present Petition, which mainly questions the
inclusion of petitioners in the arbitration proceedings." 64 The court's
decision in this case will no longer have any effect on the issue of
petitioners' inclusion in the arbitration proceedings. 65
The petition must fail.
15
The Arbitral Tribunal's decision, absolving petitioners from liability, and its
binding effect on BF Corporation, have rendered this case moot and
academic.
The mootness of the case, however, had not precluded us from resolving
issues so that principles may be established for the guidance of the bench,
bar, and the public. In De la Camara v. Hon. Enage, 66 this court
disregarded the fact that petitioner in that case already escaped from
prison and ruled on the issue of excessive bails: DAcaIE
While under the circumstances a ruling on the merits of the petition
for certiorari is not warranted, still, as set forth at the opening of this
opinion, the fact that this case is moot and academic should not preclude
this Tribunal from setting forth in language clear and unmistakable, the
obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required. 67
This principle was repeated in subsequent cases when this court deemed it
proper to clarify important matters for guidance. 68
Thus, we rule that petitioners may be compelled to submit to the
arbitration proceedings in accordance with Shangri-La and BF Corporation's
agreement, in order to determine if the distinction between Shangri-La's
personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows
the parties to avoid litigation and settle disputes amicably and more
expeditiously by themselves and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil
Code,69 which was approved as early as 1949. It was later institutionalized
by the approval of Republic Act No. 876, 70 which expressly authorized,
made valid, enforceable, and irrevocable parties' decision to submit their
controversies, including incidental issues, to arbitration. This court
recognized this policy in Eastboard Navigation, Ltd. v. Ysmael and
Company, Inc.: 71
As a corollary to the question regarding the existence of an arbitration
agreement, defendant raises the issue that, even if it be granted that it
agreed to submit its dispute with plaintiff to arbitration, said agreement is
void and without effect for it amounts to removing said dispute from the
jurisdiction of the courts in which the parties are domiciled or where the
dispute occurred. It is true that there are authorities which hold that "a
clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitrators and to them alone, is contrary to
public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are
authorities which favor "the more intelligent view that arbitration, as an
inexpensive, speedy and amicable method of settling disputes, and as a
means of avoiding litigation, should receive every encouragement from the
courts which may be extended without contravening sound public policy or
settled law" (3 Am. Jur., p. 835). Congress has officially adopted the
modern view when it reproduced in the new Civil Code the provisions of the
old Code on Arbitration. And only recently it approved Republic Act No.
876 expressly authorizing arbitration of future disputes. 72 (Emphasis
supplied)
In view of our policy to adopt arbitration as a manner of settling disputes,
arbitration clauses are liberally construed to favor arbitration. Thus, in LM
Power Engineering Corporation v. Capitol Industrial Construction Groups,
Inc., 73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes,
arbitration along with mediation, conciliation and negotiation is
encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging alternative
dispute resolution methods, courts should liberally construe arbitration
clauses. Provided such clause is susceptible of an interpretation that
covers the asserted dispute, an order to arbitrate should be granted. Any
doubt should be resolved in favor of arbitration. 74 (Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and
to favor interpretations that would render effective an arbitration clause
was later expressed in Republic Act No. 9285: 75
SEC. 2. Declaration of Policy. It is hereby declared the policy of the State
to actively promote party autonomy in the resolution of disputes or the
freedom of the party to make their own arrangements to resolve their
disputes. Towards this end, the State shall encourage and actively promote
the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. As such,
16
the State shall provide means for the use of ADR as an efficient tool and an
alternative procedure for the resolution of appropriate cases. Likewise, the
State shall enlist active private sector participation in the settlement of
disputes through ADR. This Act shall be without prejudice to the adoption
by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy
and efficient means of resolving cases pending before all courts in the
Philippines which shall be governed by such rules as the Supreme Court
may approve from time to time.
xxx xxx xxx
SEC. 25. Interpretation of the Act. In interpreting the Act, the court shall
have due regard to the policy of the law in favor of arbitration. Where
action is commenced by or against multiple parties, one or more of whom
are parties who are bound by the arbitration agreement although the civil
action may continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration
clause for purposes of avoiding litigation and expediting resolution of the
dispute, that interpretation shall be adopted.
Petitioners' main argument arises from the separate personality given to
juridical persons vis--vis their directors, officers, stockholders, and agents.
Since they did not sign the arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in
accordance with the arbitration agreement. Moreover, they had already
resigned as directors of Shangri-La at the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-
La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This means
that while it is not a person, naturally, the law gives it a distinct personality
and treats it as such. A corporation, in the legal sense, is an individual with
a personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives, 77 and other juridical
entities.
The law vests in corporations rights, powers, and attributes as if they were
natural persons with physical existence and capabilities to act on their
own. 78 For instance, they have the power to sue and enter into
transactions or contracts. Section 36 of the Corporation Code enumerates
some of a corporation's powers, thus: ScaHDT
Section 36. Corporate powers and capacity. Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions
of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided
in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in its articles of incorporation.
(13a)
17
Because a corporation's existence is only by fiction of law, it can only
exercise its rights and powers through its directors, officers, or agents, who
are all natural persons. A corporation cannot sue or enter into contracts
without them.
A consequence of a corporation's separate personality is that consent by a
corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official acts of
its representatives, are its own. A stockholder, director, or representative
does not become a party to a contract just because a corporation executed
a contract through that stockholder, director or representative.
Hence, a corporation's representatives are generally not bound by the
terms of the contract executed by the corporation. They are not personally
liable for obligations and liabilities incurred on or in behalf of the
corporation.
Petitioners are also correct that arbitration promotes the parties' autonomy
in resolving their disputes. This court recognized in Heirs of Augusto Salas,
Jr. v. Laperal Realty Corporation 79 that an arbitration clause shall not
apply to persons who were neither parties to the contract nor assignees of
previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement,
containing the stipulation on arbitration, binds the parties thereto, as well
as their assigns and heirs. But only they. 80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals, 81 this court
ruled:
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. Clearly, only parties to the Agreement . . . are bound by the
Agreement and its arbitration clause as they are the only signatories
thereto. 82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International
Air Terminals Co., Inc. 83 and Stanfilco Employees v. DOLE Philippines, Inc.,
et al. 84
As a general rule, therefore, a corporation's representative who did not
personally bind himself or herself to an arbitration agreement cannot be
forced to participate in arbitration proceedings made pursuant to an
agreement entered into by the corporation. He or she is generally not
considered a party to that agreement.
However, there are instances when the distinction between personalities of
directors, officers, and representatives, and of the corporation, are
disregarded. We call this piercing the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of
a corporation] is used as a means to perpetrate fraud or an illegal act, or
as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues." 85 It is also warranted in alter
ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another
corporation." 86
When corporate veil is pierced, the corporation and persons who are
normally treated as distinct from the corporation are treated as one
person, such that when the corporation is adjudged liable, these persons,
too, become liable as if they were the corporation.
Among the persons who may be treated as the corporation itself under
certain circumstances are its directors and officers. Section 31 of the
Corporation Code provides the instances when directors, trustees, or
officers may become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of
any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)
18
Based on the above provision, a director, trustee, or officer of a corporation
may be made solidarily liable with it for all damages suffered by the
corporation, its stockholders or members, and other persons in any of the
following cases:
a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in
directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict
with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following
instances:
a) "When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto"; 87
b) "When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation"; 88 and
c) "When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action." 89
When there are allegations of bad faith or malice against corporate
directors or representatives, it becomes the duty of courts or tribunals to
determine if these persons and the corporation should be treated as one.
Without a trial, courts and tribunals have no basis for determining whether
the veil of corporate fiction should be pierced. Courts or tribunals do not
have such prior knowledge. Thus, the courts or tribunals must first
determine whether circumstances exist to warrant the courts or tribunals
to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made
by one tribunal or court in a proceeding participated in by all parties
involved, including current representatives of the corporation, and those
persons whose personalities are impliedly the same as the corporation.
This is because when the court or tribunal finds that circumstances exist
warranting the piercing of the corporate veil, the corporate representatives
are treated as the corporation itself and should be held liable for corporate
acts. The corporation's distinct personality is disregarded, and the
corporation is seen as a mere aggregation of persons undertaking a
business under the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against
a corporation, alleging malice or bad faith on their part in directing the
affairs of the corporation, complainants are effectively alleging that the
directors and the corporation are not acting as separate entities. They are
alleging that the acts or omissions by the corporation that violated their
rights are also the directors' acts or omissions. 90 They are alleging that
contracts executed by the corporation are contracts executed by the
directors. Complainants effectively pray that the corporate veil be pierced
because the cause of action between the corporation and the directors is
the same. EADSIa
In that case, complainants have no choice but to institute only one
proceeding against the parties. Under the Rules of Court,filing of multiple
suits for a single cause of action is prohibited. Institution of more than one
suit for the same cause of action constitutes splitting the cause of action,
which is a ground for the dismissal of the others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. A party may not institute
more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. If two or more suits
are instituted on the basis of the same cause of action, the filing of one or
a judgment upon the merits in any one is available as a ground for the
dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later
be found to be indistinct that we rule that petitioners may be compelled to
submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the
arbitration proceedings, we are not overturning Heirs of Augusto
Salas wherein this court affirmed the basic arbitration principle that only
parties to an arbitration agreement may be compelled to submit to
arbitration.
In that case, this court recognized that persons other than the main party
may be compelled to submit to arbitration, e.g., assignees and heirs.
Assignees and heirs may be considered parties to an arbitration agreement
entered into by their assignor because the assignor's rights and obligations
are transferred to them upon assignment. In other words, the assignor's
rights and obligations become their own rights and obligations. In the same
19
way, the corporation's obligations are treated as the representative's
obligations when the corporate veil is pierced.
Moreover, in Heirs of Augusto Salas, this court affirmed its policy against
multiplicity of suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties
would "result in multiplicity of suits, duplicitous procedure and unnecessary
delay." 91 This court also intimated that the interest of justice would be
best observed if it adjudicated rights in a single proceeding. 92 While the
facts of that case prompted this court to direct the trial court to proceed to
determine the issues of that case, it did not prohibit courts from allowing
the case to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation's acts in violation of
complainant's rights, and the incidental issue of whether piercing of the
corporate veil is warranted, should be determined in a single proceeding.
Such finding would determine if the corporation is merely an aggregation
of persons whose liabilities must be treated as one with the corporation.
However, when the courts disregard the corporation's distinct and separate
personality from its directors or officers, the courts do not say that the
corporation, in all instances and for all purposes, is the same as its
directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons
composing or representing it. Courts merely discount the distinction and
treat them as one, in relation to a specific act, in order to extend the terms
of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation's illegal acts. This is done so
that the legal fiction cannot be used to perpetrate illegalities and
injustices.
Thus, in cases alleging solidary liability with the corporation or praying for
the piercing of the corporate veil, parties who are normally treated as
distinct individuals should be made to participate in the arbitration
proceedings in order to determine if such distinction should indeed be
disregarded and, if so, to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding
that BF Corporation failed to prove the existence of circumstances that
render petitioners and the other directors solidarily liable. It ruled that
petitioners and Shangri-La's other directors were not liable for the
contractual obligations of Shangri-La to BF Corporation. The Arbitral
Tribunal's decision was made with the participation of petitioners, albeit
with their continuing objection. In view of our discussion above, we rule
that petitioners are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May
11, 2006 and resolution of October 5, 2006 are AFFIRMED.
SO ORDERED.
||| (Lanuza, Jr. v. BF Corp., G.R. No. 174938, [October 1, 2014])
20