[G.R. No. 120105.
March 27, 1998] It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C, Complaint), plaintiff BF and
BF CORPORATION, petitioner, vs. COURT OF APPEALS, SHANGRI-LA PROPERTIES, COLAYCO, ALFREDO C. RAMOS, INC.,
RUFO B. MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents.
DECISION
ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction of the EDSA Plaza
between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an arbitration clause in case of
disagreement between the parties in the implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter engaged the former to
construct the main structure of the EDSA Plaza Project, a shopping mall complex in the City of Mandaluyong.
The construction work was in progress when SPI decided to expand the project by engaging the services of petitioner again. Thus,
the parties entered into an agreement for the main contract works after which construction work began.
However, petitioner incurred delay in the construction work that SPI considered as serious and substantial.[1] On the other hand,
according to petitioner, the construction works progressed in faithful compliance with the First Agreement until a fire broke out on
November 30, 1990 damaging Phase I of the Project.[2] Hence, SPI proposed the re-negotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as Agreement for the Execution
of Builders Work for the EDSA Plaza Project. Said agreement would cover the construction work on said project as of May 1, 1991
until its eventual completion.
According to SPI, petitioner failed to complete the construction works and abandoned the project.[3] This resulted in
disagreements between the parties as regards their respective liabilities under the contract. On July 12, 1993, upon SPIs initiative,
the parties respective representatives met in conference but they failed to come to an agreement.[4]
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint for collection of the
balance due under the construction agreement. Named defendants therein were SPI and members of its board of directors namely,
Alfredo C. Ramos, Rufo B. Colayco, Antonio B. Olbes, Gerardo O. Lanuza, Jr., Maximo G. Licauco III and Benjamin C. Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an answer. The motion was
anchored on defendants allegation that the formal trade contract for the construction of the project provided for a clause requiring
prior resort to arbitration before judicial intervention could be invoked in any dispute arising from the contract. The following day,
SPI submitted a copy of the conditions of the contract containing the arbitration clause that it failed to append to its motion to
suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although they entered into an
agreement defining their rights and obligations in undertaking the project. It emphasized that the agreement did not provide for
arbitration and therefore the court could not be deprived of jurisdiction conferred by law by the mere allegation of the existence of
an arbitration clause in the agreement between the parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract between petitioner and
SPI. It alleged that suspension of proceedings would not necessarily deprive the court of its jurisdiction over the case and that
arbitration would expedite rather than delay the settlement of the parties respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that there was no arbitration clause in the contract between the parties. It averred
that granting that such a clause indeed formed part of the contract, suspension of the proceedings was no longer proper. It added
that defendants should be declared in default for failure to file their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioners admission of the due execution of the Articles of Agreement.
Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani Fernando, president of petitioner appear,
while page D/7 shows that the agreement is a public document duly notarized on November 15, 1991 by Notary Public Nilberto
R. Briones as document No. 345, page 70, book No. LXX, Series of 1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court[6] denied the motion to suspend proceedings,
thus:
defendant Shangri-La Properties, Inc. agreed upon the terms and conditions of the Builders Work for the EDSA Plaza Project
(Phases I, II and Carpark), subject to the execution by the parties of a formal trade contract. Defendants have submitted a copy of
the alleged trade contract, which is entitled `Contract Documents For Builders Work Trade Contractor dated 01 May 1991, page 2
of which is entitled `Contents of Contract Documents with a list of the documents therein contained, and Section A thereof consists
of the abovementioned Letter-Agreement dated May 30, 1991. Section C of the said Contract Documents is entitled `Articles of
Agreement and Conditions of Contract which, per its Index, consists of Part A (Articles of Agreement) and B (Conditions of
Contract). The said Articles of Agreement appears to have been duly signed by President Rufo B. Colayco of Shangri-La Properties,
Inc. and President Bayani F. Fernando of BF and their witnesses, and was thereafter acknowledged before Notary Public Nilberto R.
Briones of Makati, Metro Manila on November 15, 1991. The said Articles of Agreement also provides that the `Contract
Documents' therein listed `shall be deemed an integral part of this Agreement, and one of the said documents is the `Conditions of
Contract which contains the Arbitration Clause relied upon by the defendants in their Motion to Suspend Proceedings.
This Court notes, however, that the `Conditions of Contract referred to, contains the following provisions:
`3. Contract Document.
Three copies of the Contract Documents referred to in the Articles of Agreement shall be signed by the parties to the contract and
distributed to the Owner and the Contractor for their safe keeping. (underscoring supplied)
And it is significant to note further that the said `Conditions of Contract is not duly signed by the parties on any page thereof ---
although it bears the initials of BFs representatives (Bayani F. Fernando and Reynaldo M. de la Cruz) without the initials thereon of
any representative of Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was not duly executed or signed by the parties, and
the failure of the defendants to submit any signed copy of the said document, this Court entertains serious doubt whether or not
the arbitration clause found in the said Conditions of Contract is binding upon the parties to the Articles of Agreement.
(Underscoring supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was too late in the day for
defendants to invoke arbitration. It quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the contract and a copy filed with
the Project Manager. The demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts
to settle amicably have failed; in no case, however, shall the demand he made be later than the time of final payment except as
otherwise expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was to be completed by
October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay counted from November 1, 1991 with
liquified (sic) damages up to a maximum of 5% of the total contract price.
The lower court also found that after the project was completed in accordance with the agreement that contained a provision on
progress payment billing, SPI took possession and started operations thereof by opening the same to the public in November,
1991. SPI, having failed to pay for the works, petitioner billed SPI in the total amount of P110,883,101.52, contained in a demand
letter sent by it to SPI on February 17, 1993. Instead of paying the amount demanded, SPI set up its own claim of P220,000,000.00
and scheduled a conference on that claim for July 12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required that `Notice of the demand
for arbitration of a dispute shall be filed in writing with the other party x x x x in no case x x x x later than the time of final
payment x x x x which apparently, had elapsed, not only because defendants had taken possession of the finished works and the
plaintiffs billings for the payment thereof had remained pending since November, 1991 up to the filing of this case on July 14,
1993, but also for the reason that defendants have failed to file any written notice of any demand for arbitration during the said
long period of one year and eight months, this Court finds that it cannot stay the proceedings in this case as required by Sec. 7 of
Republic Act No. 876, because defendants are in default in proceeding with such arbitration.
The lower court denied SPIs motion for reconsideration for lack of merit and directed it and the other defendants to file their
responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules of Court before the Court
of Appeals. Said appellate court granted the petition, annulled and set aside the orders and stayed the proceedings in the lower
court. In so ruling, the Court of Appeals held:
The reasons given by the respondent Court in denying petitioners motion to suspend proceedings are untenable.
1. The notarized copy of the articles of agreement attached as Annex A to petitioners reply dated August 26, 1993, has been
submitted by them to the respondent Court (Annex G, petition). It bears the signature of petitioner Rufo B. Colayco, president of
petitioner Shangri-La Properties, Inc., and of Bayani Fernando, president of respondent Corporation (Annex G-1, petition). At page
D/4 of said articles of agreement it is expressly provided that the conditions of contract are `deemed an integral part thereof (page
188, rollo). And it is at pages D/42 to D/44 of the conditions of contract that the provisions for arbitration are found (Annexes G-3
to G-5, petition, pp. 227-229). Clause No. 35 on arbitration specifically provides:
Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on his behalf and the
Contractor, either during the progress or after the completion or abandonment of the Works as to the construction of this Contract
or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (including any matter or being left
by this Contract to the discretion of the Project Manager or the withholding by the Project Manager of any certificate to which the
Contractor may claim to be entitled or the measurement and valuation mentioned in clause 30 (5) (a) of these Conditions or the
rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the Owner and the Contractor hereby agree
to exert all efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to Arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent Corporations
representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of petitioner Shangri-La Properties,
Inc. does not militate against its effectivity. Said petitioner having categorically admitted that the document, Annex A to its reply
dated August 26, 1993 (Annex G, petition), is the agreement between the parties, the initial or signature of said petitioners
representative to signify conformity to arbitration is no longer necessary. The parties, therefore, should be allowed to submit their
dispute to arbitration in accordance with their agreement.
2. The respondent Court held that petitioners `are in default in proceeding with such arbitration. It took note of `the fact that under
the supposed Arbitration Clause invoked by defendants, it is required that Notice of the demand for arbitration of a dispute shall be
filed in writing with the other party x x x in no case x x x later than the time of final payment, which apparently, had elapsed, not
only because defendants had taken possession of the finished works and the plaintiffs billings for the payment thereof had
remained pending since November, 1991 up to the filing of this case on July 14, 1993, but also for the reason that defendants have
failed to file any written notice of any demand for arbitration during the said long period of one year and eight months, x x x.
Respondent Court has overlooked the fact that under the arbitration clause
Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and a copy filed with the
Project Manager. The demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to
settle amicably had failed; in no case, however, shall the demand be made later than the time of final payment except as otherwise
expressly stipulated in the contract (underscoring supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the amount of
P110,883,101.52, instead of paying, petitioners set up its own claim against respondent Corporation in the amount of
P220,000,000.00 and set a conference thereon on July 12, 1993. Said conference proved futile. The next day, July 14, 1993,
respondent Corporation filed its complaint against petitioners. On August 13, 1993, petitioners wrote to respondent Corporation
requesting arbitration. Under the circumstances, it cannot be said that petitioners resort to arbitration was made beyond reasonable
time. Neither can they be considered in default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A.
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT OF CERTIORARI ALTHOUGH THE REMEDY OF
APPEAL WAS AVAILABLE TO RESPONDENTS.
B.
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE FACTUAL FINDINGS OF THE TRIAL
COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO ARBITRATE, RESPONDENTS ARE ALREADY IN
DEFAULT IN INVOKING THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to suspend proceedings is a
resolution of an incident on the merits. As such, upon the continuation of the proceedings, the lower court would appreciate the
evidence adduced in their totality and thereafter render a decision on the merits that may or may not sustain the existence of an
arbitration clause. A decision containing a finding that the contract has no arbitration clause can then be elevated to a higher court
in an ordinary appeal where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals should have
dismissed the petition for certiorari because the remedy of appeal would still be available to private respondents at the proper time.
[7]
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of appeal is succinctly
reiterated in Ongsitco v. Court of Appeals[8] as follows:
x x x. Countless times in the past, this Court has held that `where appeal is the proper remedy, certiorari will not lie. The writs of
certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave abuse of discretion equivalent to lack of
jurisdiction committed by a lower court. `Where the proper remedy is appeal, the action for certiorari will not be entertained. x x
x. Certiorari is not a remedy for errors of judgment. Errors of judgment are correctible by appeal, errors of jurisdiction are
reviewable by certiorari.
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only when `there is no
appeal or any plain, speedy and adequate remedy in the ordinary course of law x x x. That is why they are referred to as
`extraordinary. x x x.
The Court has likewise ruled that certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law
or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to
nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari.[9]v.
Court of Appeals, 327 Phil. 1, 41-42 (1996).9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the lower court over the
controversy, the issue posed basically is whether the lower court prematurely assumed jurisdiction over it. If the lower court indeed
prematurely assumed jurisdiction over the case, then it becomes an error of jurisdiction which is a proper subject of a petition for
certiorari before the Court of Appeals. And if the lower court does not have jurisdiction over the controversy, then any decision or
order it may render may be annulled and set aside by the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the existence of the arbitration
clause, which is a question of fact. In the instant case, the lower court found that there exists an arbitration clause. However, it
ruled that in contemplation of law, said arbitration clause does not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the Arbitration Clause does not in fact
exist. On its face, the question is one of fact which is not proper in a petition for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact, the Court of Appeals
interpreted the construction of the subject contract documents containing the Arbitration Clause in accordance with Republic Act
No. 876 (Arbitration Law) and existing jurisprudence which will be extensively discussed hereunder. In effect, the issue posed
before the Court of Appeals was likewise a question of law. Being a question of law, the private respondents rightfully invoked the
special civil action of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned by the petitioners before
this Court. But at the heart of said issue is the question of whether there exists an Arbitration Clause because if an Arbitration
Clause does not exist, then private respondents took the wrong mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode of appeal, which,
incidentally, is a question of law, then it has to answer the core issue of whether there exists an Arbitration Clause which,
admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result in a manifest failure or
miscarriage of justice, the provisions of the Rules of Court which are technical rules may be relaxed.[10] As we shall show
hereunder, had the Court of Appeals dismissed the petition for certiorari, the issue of whether or not an arbitration clause exists in
the contract would not have been resolved in accordance with evidence extant in the record of the case. Consequently, this would
have resulted in a judicial rejection of a contractual provision agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the contract between petitioner and
private respondents is a legal issue that must be determined in this petition for review on certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts that in contemplation of law
there could not have been one considering the following points. First, the trial court found that the conditions of contract
embodying the arbitration clause is not duly signed by the parties. Second, private respondents misrepresented before the Court of
Appeals that they produced in the trial court a notarized duplicate original copy of the construction agreement because what were
submitted were mere photocopies thereof. The contract(s) introduced in court by private respondents were therefore of dubious
authenticity because: (a) the Agreement for the Execution of Builders Work for the EDSA Plaza Project does not contain an
arbitration clause, (b) private respondents surreptitiously attached as Annexes `G-3 to `G-5 to their petition before the Court of
Appeals but these documents are not parts of the Agreement of the parties as there was no formal trade contract executed, (c) if the
entire compilation of documents is indeed a formal trade contract, then it should have been duly notarized, (d) the certification
from the Records Management and Archives Office dated August 26, 1993 merely states that the notarial record of Nilberto
Briones x x x is available in the files of (said) office as Notarial Registry Entry only, (e) the same certification attests that the
document entered in the notarial registry pertains to the Articles of Agreement only without any other accompanying documents,
and therefore, it is not a formal trade contract, and (f) the compilation submitted by respondents are a mere hodge-podge of
documents and do not constitute a single intelligible agreement.
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the representatives of the
contracting corporations did not sign the Conditions of Contract that contained the said clause. Its other contentions, specifically
that insinuating fraud as regards the alleged insertion of the arbitration clause, are questions of fact that should have been threshed
out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the parties contract. Republic Act No.
876 provides for the formal requisites of an arbitration agreement as follows:
Section 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the parties, as well as a
submission to arbitrate an existing controversy, shall be in writing and subscribed by the party sought to be charged, or by his
lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for arbitration of any controversy,
shall be deemed a consent of the parties of the province or city where any of the parties resides, to enforce such contract of
submission. (Underscoring supplied.)
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing and (b) it must be
subscribed by the parties or their representatives. There is no denying that the parties entered into a written contract that was
submitted in evidence before the lower court. To subscribe means to write underneath, as ones name; to sign at the end of a
document.[11] That word may sometimes be construed to mean to give consent to or to attest.[12]
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in the contract in question.
The Articles of Agreement, which incorporates all the other contracts and agreements between the parties, was signed by
representatives of both parties and duly notarized. The failure of the private respondents representative to initial the `Conditions of
Contract would therefor not affect compliance with the formal requirements for arbitration agreements because that particular
portion of the covenants between the parties was included by reference in the Articles of Agreement.
Petitioners contention that there was no arbitration clause because the contract incorporating said provision is part of a hodge-
podge document, is therefore untenable. A contract need not be contained in a single writing. It may be collected from several
different writings which do not conflict with each other and which, when connected, show the parties, subject matter, terms and
consideration, as in contracts entered into by correspondence.[13] A contract may be encompassed in several instruments even
though every instrument is not signed by the parties, since it is sufficient if the unsigned instruments are clearly identified or
referred to and made part of the signed instrument or instruments. Similarly, a written agreement of which there are two copies,
one signed by each of the parties, is binding on both to the same extent as though there had been only one copy of the agreement
and both had signed it.[14]
The flaw in petitioners contentions therefore lies in its having segmented the various components of the whole contract between
the parties into several parts. This notwithstanding, petitioner ironically admits the execution of the Articles of Agreement. Notably,
too, the lower court found that the said Articles of Agreement also provides that the `Contract Documents therein listed `shall be
deemed an integral part of this Agreement, and one of the said documents is the `Conditions of Contract which contains the
Arbitration Clause. It is this Articles of Agreement that was duly signed by Rufo B. Colayco, president of private respondent SPI,
and Bayani F. Fernando, president of petitioner corporation. The same agreement was duly subscribed before notary public
Nilberto R. Briones. In other words, the subscription of the principal agreement effectively covered the other documents
incorporated by reference therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were not in default in invoking
the provisions of the arbitration clause which states that (t)he demand for arbitration shall be made within a reasonable time after
the dispute has arisen and attempts to settle amicably had failed. Under the factual milieu, private respondent SPI should have paid
its liabilities under the contract in accordance with its terms. However, misunderstandings appeared to have cropped up between
the parties ostensibly brought about by either delay in the completion of the construction work or by force majeure or the fire that
partially gutted the project. The almost two-year delay in paying its liabilities may not therefore be wholly ascribed to private
respondent SPI.
Besides, private respondent SPIs initiative in calling for a conference between the parties was a step towards the agreed resort to
arbitration. However, petitioner posthaste filed the complaint before the lower court. Thus, while private respondent SPIs request
for arbitration on August 13, 1993 might appear an afterthought as it was made after it had filed the motion to suspend
proceedings, it was because petitioner also appeared to act hastily in order to resolve the controversy through the courts.
The arbitration clause provides for a reasonable time within which the parties may avail of the relief under that clause.
Reasonableness is a relative term and the question of whether the time within which an act has to be done is reasonable depends
on attendant circumstances.[15] This Court finds that under the circumstances obtaining in this case, a one-month period from the
time the parties held a conference on July 12, 1993 until private respondent SPI notified petitioner that it was invoking the
arbitration clause, is a reasonable time. Indeed, petitioner may not be faulted for resorting to the court to claim what was due it
under the contract. However, we find its denial of the existence of the arbitration clause as an attempt to cover up its misstep in
hurriedly filing the complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section 7 of Republic Act No.
876 provides that proceedings therein have only been stayed. After the special proceeding of arbitration[16] has been pursued and
completed, then the lower court may confirm the award[17] made by the arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before the approval on June 19,
1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes through arbitration.[18] Republic Act No.
876 was adopted to supplement the New Civil Codes provisions on arbitration.[19] Its potentials as one of the alternative dispute
resolution methods that are now rightfully vaunted as the wave of the future in international relations, is recognized worldwide. To
brush aside a contractual agreement calling for arbitration in case of disagreement between the parties would therefore be a step
backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition for certiorari DENIED. This
Decision is immediately executory. Costs against petitioner.
SO ORDERED.
G.R. No. 103200 August 31, 1994
LA NAVAL DRUG CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WILSON C. YAO, respondents.
Jerome T. Paras for petitioner.
Quasha, Asperilla, Ancheta, Peña & Nolasco for private respondent.
VITUG, J.:
In an effort to declog the courts of an increasing volume of work load and, most importantly, in order to accord contending parties
with expenditious alternatives for settling disputes, the law authorities, indeed encourages, out of court settlements or
adjudications. Compromises and arbitration are widely known and used as such acceptable methods of resolving adversarial
claims.
Arbitrations, in particular, is governed by a special law, Republic Act 876, suppletory to which are laws and rules of general
application. This case before us concerns the jurisdiction of courts, in relation to the provisions of Section 6 of Republic Act No.
876, and, in that respect, the applicability of the doctrine of estoppel. The law (R.A. 876), specifically Section 6 thereof, provides:
Sec. 6. Hearing by court. — A party aggrieved by the failure, neglect or refusal of another to perform under an agreement in
writing providing for arbitration may petition the court for an order directing that such arbitration proceed in the manner provided
for in such agreement. Five days notice in writing of the hearing of such application shall be served either personally or by
registered mail upon the party in default. The court shall hear the parties, and upon being satisfied that the making of the
agreement or such failure to comply therewith is not in issue, shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. If the making of the agreement or default be in issue the court shall proceed to
summarily hear such issue. If the finding be that no agreement in writing providing for arbitration was made, or that there is no
default in the proceeding thereunder, the proceeding shall be dismissed. If the finding be that a written provision for arbitration
was made and there is a default in proceeding thereunder, an order shall be made summarily directing the parties to proceed with
the arbitration in accordance with the terms thereof.
The court shall decide all motions, petitions or application filed under the provisions of this Act, within ten days after such
motions, petitions, or applications have been heard by it.
In chronology, the events that have led to the case at bench are detailed in the appealed decision of respondent appellate court,
which we here reproduce in toto.
Original action for Certiorari and Prohibition for Annulment of the Orders, dated April 26, 1990 and June 22, 1990, respectively, of
Branch LXI, Regional Trial Court, Angeles City, in Special Case No. 6024 for Enforcement of ARBITRATION Agreement with
Damages. Petitioner assails that portion of subject Order of April 26, 1990, stating as follows:
(1) Petitioner's claim for damages predicated on alleged tortuous acts of respondents La Naval Drug corporation such as
their alleged interference and dilatory tactics, etc. in the implementation of the Arbitration Agreement in the Contract of Lease,
thereby compelling among others the petitioner to go to Court for redress; and respondent La Naval Drug Corporation's
counterclaim for damages may be entertained by this Court in a hearing — not summary — for the purpose, under the Rules of
Court.
(2) A preliminary hearing of the special and affirmative defense to show that Petitioner has not cause of action against respondent's
claim for damages is denied; a resolution on this issue is deferred after the trial of the case on the merits.
And challenges the Order of June 22, 1990 denying its motion for reconsideration of the said earlier Order.
From the petition below of respondent Yao, it appears that he is the present owner of a commercial building a portion of which is
leased to petitioner under a contract of lease executed on December 23, 1993 with the former owner thereof, La Proveedora, Inc.,
which contract expired on April 30, 1989. However, petitioner exercised its option to lease the same building for another five
years. But petitioner and respondent Yao disagreed on the rental rate, and to resolve the controversy, the latter, thru written notices
to the former, expressed his intention to submit their disagreement to arbitration, in accordance with Republic Act 876, otherwise
known as the Arbitration Law, and paragraph 7 of their lease contract, providing that:
7. . . . Should the parties fail to agree on the rate of rentals, the same shall be submitted to a group of Arbitrators composed
of three (3) members, one to be appointed by LESSOR, another by LESSEE and the third one to be agreed upon by the two
arbitrators previously chosen and the parties hereto shall submit to the decision of the arbitrators.
Thus, on May 6, 1989, respondent Yao appointed Domingo Alamarez, Jr. as his arbitrator, while on June 5, 1989, petitioner chose
Atty. Casiano Sabile as its arbitrator. The confirmation of the appointment of Aurelio Tupang, as third arbitrator, was held in
abeyance because petitioner instructed Atty. Sabile to defer the same until its Board of Directors could convene and approve
Tupang's appointment. Respondent Yao theorizes that this was petitioner's design to delay the arbitration proceedings, in violation
of the Arbitration Law, and the governing stipulation of their contract of lease.
On the basis of the aforesaid allegations, respondent Yao prayed that after summary hearing pursuant to Section 6 of the Arbitration
Law, Atty. Casiano Sabile and Domingo Alamarez be directed to proceed with the arbitration in accordance with Section 7 of
subject Contract of Lease and the applicable provisions of the Arbitration law, by appointing and confirming the appointment of
the Third Arbitrator; and that the Board of Three Arbitrators be ordered to immediately convene and resolve the controversy before
it, pursuant to Section 12 and the succeeding sections of the Arbitration Law. (Annex "A," Petition.)
In its Answer with Counterclaim (Annex "C," Petition), petitioner here specifically denied the averments of the petition below;
theorizing that such petition is premature since respondent Yao has not yet formally required arbitrators Alamarez and Sabile to
agree on the third arbitrator, within ten (10) days from notice, and that the delay in the arbitration was due to respondent Yao's
failure to perform what is incumbent upon him, of notifying and thereafter, requiring both arbitrators to appoint the third member
of the Board of Arbitrators. According to petitioner, it actually gave arbitrators Sabile and Alamarez a free hand in choosing the
third arbitrator; and, therefore, respondent Yao has no cause of action against it (petitioner). By way of Counterclaim, petitioner
alleged that it suffered actual damages of P100,000.00; and incurred attorney's fees of P50,000.00, plus P500.00 for every court
appearance of its counsel.
On October 20, 1989, respondent Yao filed an amended petition for "Enforcement of Arbitration Agreement with Damages;"
praying that petitioner be ordered to pay interest on the unpaid rents, at the prevailing rate of interest in commercial banks, and
exemplary damages of at least P250,000.00.
On October 24, 1989, despite petitioner's opposition to the motion to admit the amended petition, the respondent court admitted
the same.
On October 31, 1989, petitioner answered the amended petition; contending, among others, that the amended petition should be
dismissed on the ground of non-payment of the requisite filing fees therefor; and it being in the nature of an ordinary civil action, a
full blown and regular trial, is necessary; so that respondent Yao's proposition for a summary hearing of the arbitration issue and
separate trial for his claim for damages is procedurally untenable and implausible.
Invoking Section 5, Rule 16 of the Rules of Court, petitioner presented a "Motion to Set Case for Preliminary Hearing" of its special
and affirmative defenses, which are grounds fro a motion to dismiss.
In its Order of November 14, 1989, the respondent court announced that the two arbitrators chose Mrs. Eloisa R. Narciso as the
third arbitrator. And on November 21, 1989, it ordered the parties to submit their position papers on the issue as to whether or not
respondent Yao's claim for damages may be litigated upon in the summary proceeding for enforcement of arbitration agreement. It
likewise informed the parties that petitioner's Motion to Set Case for Preliminary Hearing" of Special and Affirmative Defenses
would be resolved together with the question of damages.
On April 26, 1990, the aforequoted assailed Order issued. In moving for reconsideration of the said Order, petitioner argued that
in Special Case No. 6024, the respondent court sits as a special court exercising limited jurisdiction and is not competent to act on
respondent Yao's claim for damages, which poses an issue litigable in an ordinary civil action. But the respondent court was not
persuaded by petitioner's submission. On June 22, 1990, it denied the motion for reconsideration. (Rollo, pp. 89-93).
While the appellate court has agreed with petitioner that, under Section 6 of Republic Act No. 876, a court, acting within the
limits of its special jurisdiction, may in this case solely determine the issue of whether the litigants should proceed or not to
arbitration, it, however, considered petitioner in estoppel from questioning the competence of the court to additionally hear and
decide in the summary proceedings private respondent's claim for damages, it (petitioner) having itself filed similarly its own
counterclaim with the court a quo.
It is hardly disputable that when a court is called upon to exercise limited and special jurisdiction, that court cannot stray to
matters outside the area of its declared authority or beyond what has been expressly invested by law (Elumbaring vs. Elumbaring,
12 Phil. 384, 387), particularly, such as in this instance, where the proceedings are summary in nature.
Prefatorily, recalling the distinctions, pertinent to the case, between the court's lack of jurisdiction over the person of the
defendant, on the one hand, and its lack of jurisdiction over the subject matter or the nature of the action, upon the other hand,
should be useful.
The lack of jurisdiction over the person of the defendant may be waived either expressly or impliedly. When a defendant
voluntarily appears, he is deemed to have submitted himself to the jurisdiction of the court. If he so wishes not to waive this
defense, he must do so seasonably by motion for the purpose of objecting to the jurisdiction of the court; otherwise, he shall be
deemed to have submitted himself to that jurisdiction. The decisions promulgated heretofore by this Court would likewise
seemingly apply estoppel to bar the defendant from pursuing that defense by alleging in his answer any other issue for dismissing
the action.
A citation of a few of our decisions might be apropos.
In Wang Laboratories, Inc., vs. Mendoza (156 SCRA 44), this Court has ruled that if the defendant, besides setting up in a motion
to dismiss his objection to the jurisdiction of the court, alleges at the same time any other ground for dismissing the action, he is
deemed to have submitted himself to the jurisdiction of the court. In the process, it has equated the matter to a situation where,
such as in Immaculata vs. Judge Navarro, et al. (146 SCRA 5), the defendant invokes an affirmative relief against his opponent.
In De Midgely vs. Judge Ferandos (64 SCRA 23, 31), the Court elaborated thusly:
We are of the opinion that the lower court has acquired jurisdiction over the person of Mrs. Midgely by reason of her voluntary
appearance. The reservation in her motion to dismiss that she was making a special appearance to contest the court's jurisdiction
over her person may be disregarded.
It may be disregarded because it was nullified by the fact that in her motion to dismiss she relied not only on the ground of lack of
jurisdiction over her person but also on the ground that there was no showing that earnest efforts were exerted to compromise the
case and because she prayed "for such other relief as" may be deemed "appropriate and proper."
xxx xxx xxx
When the appearance is by motion for the purpose of objecting to the jurisdiction of the court over the person, it must be for the
sole and separate purpose of objecting to the jurisdiction of the court. If his motion is for any other purpose than to object to the
jurisdiction of the court over his person, he thereby submits himself to the jurisdiction of the court. A special appearance by
motion made for the purpose of objecting to the jurisdiction of the court over the person will be held to be a general appearance,
if the party in said motion should, for example, ask for a dismissal of the action upon the further ground that the court had no
jurisdiction over the subject matter. (Syllabus, Flores vs. Zurbito, supra, at page 751. That rule was followed in Ocampo vs. Mina
and Arejola, 41 Phil. 308).
The justification for the rule was expressed in Republic vs. Ker and Companry, Ltd. (18 SCRA 207, 213-214), in this wise:
We observed that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action had prescribed. By
interposing such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative defense on the basis of which it
prayed the court to resolve controversy in its favor. For the court to validly decide the said plea of defendant Ker & Co., Ltd., it
necessarily had to acquire jurisdiction upon the latter's person, who, being the proponent of the affirmative defense, should be
deemed to have abandoned its special appearance and voluntarily submitted itself to the jurisdiction of the court.
Voluntary appearance cures defects of summons, if any, Such defect, if any, was further cured when defendant filed its answer to
the complaint. A defendant can not be permitted to speculate upon the judgment of the court by objecting to the court's
jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over its person if and when the judgment
sustains its defenses.
The doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according to natural law
and right. It is a principle intended to avoid a clear case of injustice. The term is hardly distinguishable from a waiver of right.
Estoppel, like its said counterpart, must be unequivocal and intentional for, when misapplied, it can easily become a most
convenient and effective means of injustice. Estoppel is not understood to be a principle that, as a rule, should prevalently apply
but, such as it concededly is, as a mere exception from the standard legal norms of general application that can be invoked only in
highly exceptional and justifiable cases.
Tested by the above criteria, the Court sees it propitious to re-examine specifically the question of whether or not the submission of
other issues in a motion to dismiss, or of an affirmative defense (as distinguished from an affirmative relief) in an answer, would
necessarily foreclose, and have the effect of a waiver of, the right of a defendant to set up the court's lack of jurisdiction over the
person of the defendant.
Not inevitably.
Section 1, Rule 16, of the Rules of Court, provides that a motion to dismiss may be made on the following grounds:
(a) That the court has no jurisdiction over the person of the defendant or over the subject of the action or suit;
(b) That the court has no jurisdiction over the nature of the action or suit;
(c) The venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by statute of limitations;
(g) That the complaint states no cause of action;
(h) That the claim or demand set forth in the plaintiff's pleading has been paid, waived, abandoned, or otherwise extinguished;
( i ) That the claim on which the action or suit is founded is unenforceable under the provisions of the statute of frauds;
( j ) That the suit is between members of the same family and no earnest efforts towards a compromise have been made.
Any ground for dismissal in a motion to dismiss, except improper venue, may, as further set forth in Section 5 of the same rule, be
pleaded as an affirmative defense and a preliminary hearing may be had thereon as if a motion to dismiss had been filed. An
answer itself contains the negative, as well as affirmative, defenses upon which the defendant may rely (Section 4, Rule 6, Rules of
Court). A negative defense denies the material facts averred in the complaint essential to establish the plaintiff's cause of action,
while an affirmative defense in an allegation of a new matter which, while admitting the material allegations of the complaint,
would, nevertheless, prevent or bar recovery by the plaintiff. Inclusive of these defenses are those mentioned in Rule 16 of the
Rules of Court which would permit the filing of a motion to dismiss.
In the same manner that the plaintiff may assert two or more causes of action in a court suit, a defendant is likewise expressly
allowed, under Section 2, Rule 8, of the Rules of Court, to put up his own defenses alternatively or even hypothetically. Indeed,
under Section 2, Rule 9, of the Rules of Court, defenses and objections not pleaded either in a motion to dismiss or in an answer,
except for the failure to state a cause of action, are deemed waived. We take this to mean that a defendant may, in fact, feel
enjoined to set up, along with his objection to the court's jurisdiction over his person, all other possible defenses. It thus appears
that it is not the invocation of any of such defenses, but the failure to so raise them, that can result in waiver or estoppel. By
defenses, of course, we refer to the grounds provided for in Rule 16 of the Rules of Court that must be asserted in a motion to
dismiss or by way of affirmative defenses in an answer.
Mindful of the foregoing, in Signetics Corporation vs. Court of Appeals and Freuhauf Electronics Phils., Inc. (225 SCRA 737, 738),
we lately ruled:
This is not to say, however, that the petitioner's right to question the jurisdiction of the court over its person is now to be deemed a
foreclosed matter. If it is true, as Signetics claims, that its only involvement in the Philippines was through a passive investment in
Sigfil, which it even later disposed of, and that TEAM Pacific is not its agent, then it cannot really be said to be doing business in
the Philippines. It is a defense, however, that requires the contravention of the allegations of the complaint, as well as full
ventilation, in effect, of the main merits of the case, which should not thus be within the province of a mere motion to dismiss. So,
also, the issue posed by the petitioner as to whether a foreign corporation which has done business in the country, but which has
ceased to do business at the time of the filing of a complaint, can still be made to answer for a cause of action which accrued
while it was doing business, is another matter that would yet have to await the reception and admission of evidence. Since these
points have seasonably been raised by the petitioner, there should be no real cause for what may understandably be its
apprehension, i.e., that by its participation during the trial on the merits, it may, absent an invocation of separate or independent
reliefs of its own, be considered to have voluntarily submitted itself to the court's jurisdiction.
Lack of jurisdiction over the subject matter of the suit is yet another matter. Whenever it appears that the court has no jurisdiction
over the subject matter, the action shall be dismissed (Section 2, Rule 9, Rules of Court). This defense may be interposed at any
time, during appeal (Roxas vs. Rafferty, 37 Phil. 957) or even after final judgment (Cruzcosa vs. Judge Concepcion, et al., 101 Phil.
146). Such is understandable, as this kind of jurisdiction is conferred by law and not within the courts, let alone the parties, to
themselves determine or conveniently set aside. In People vs. Casiano (111 Phil. 73 93-94), this Court, on the issue of estoppel,
held:
The operation of the principle of estoppel on the question of jurisdiction seemingly depends upon whether the lower court actually
had jurisdiction or not. If it had no jurisdiction, but the case was tried and decided upon the theory that it had jurisdiction, the
parties are not barred, on appeal, from assailing such jurisdiction, for the same "must exist as a matter of law, and may not be
conferred by consent of the parties or by estoppel" (5 C.J.S., 861-863). However, if the lower court had jurisdiction, and the case
was heard and decided upon a given theory, such, for instance, as that the court had no jurisdiction, the party who induced it to
adopt such theory will not be permitted, on appeal, to assume an inconsistent position — that the lower court had jurisdiction.
Here, the principle of estoppel applies. The rule that jurisdiction is conferred by law, and does not depend upon the will of the
parties, has not bearing thereon.
The rule was reiterated in Calimlim vs. Ramirez (118 SCRA 399, 406), and quite recently, in Southeast Asian Fisheries
Development Center-Aquaculture Department vs. National Labor Relations Commission (206 SCRA 283).
Jurisdiction over the nature of the action, in concept, differs from jurisdiction over the subject matter. Illustrated, lack of jurisdiction
over the nature of the action is the situation that arises when a court, which ordinarily would have the authority and competence
to take a case, is rendered without it either because a special law has limited the exercise of its normal jurisdiction on a particular
matter or because the type of action has been reposed by law in certain other courts or quasi-judicial agencies for determination.
Nevertheless, it can hardly be questioned that the rules relating to the effects of want of jurisdiction over the subject matter should
apply with equal vigor to cases where the court is similarly bereft of jurisdiction over the nature of the action.
In summary, it is our considered view, as we now so hereby express,
that —
(1) Jurisdiction over the person must be seasonably raised, i.e., that it is pleaded in a motion to dismiss or by way of an affirmative
defense in an answer. Voluntary appearance shall be deemed a waiver of this defense. The assertion, however, of affirmative
defenses shall not be constructed as an estoppel or as a waiver of such defense.
(2) Where the court itself clearly has no jurisdiction over the subject matter or the nature of the action, the invocation of this
defense may be done at any time. It is neither for the courts nor the parties to violate or disregard that rule, let alone to confer that
jurisdiction, this matter being legislative in character. Barring highly meritorious and exceptional circumstances, such as
hereinbefore exemplified, neither estoppel nor waiver shall apply.
In the case at bench, the want of jurisdiction by the court is indisputable, given the nature of the controversy. The arbitration law
explicitly confines the court's authority only to pass upon the issue of whether there is or there is no agreement in writing
providing for arbitration. In the affirmative, the statute ordains that the court shall issue an order "summarily directing the parties to
proceed with the arbitration in accordance with the terms thereof." If the court, upon the other hand, finds that no such agreement
exists, "the proceeding shall be dismissed." The proceedings are summary in nature.
All considered, the court a quo must then refrain from taking up the claims of the contending parties for damages, which, upon the
other hand, may be ventilated in separate regular proceedings at an opportune time and venue. The circumstances obtaining in this
case are far, we hold, from justifying the application of estoppel against either party.
WHEREFORE, the decision of the Court of Appeals and the orders of the trial court in question are SET ASIDE. The court a quo, in
the instant proceedings, is ordered to DESIST from further hearing private respondent's claim, as well as petitioner's counterclaim,
for damages. No costs.
SO ORDERED.
G.R. No. L-78325 January 25, 1990
DEL MONTE CORPORATION and PHILIPPINE PACKING CORPORATION, petitioners,
vs.
COURT OF APPEALS and SUNSHINE SAUCE MANUFACTURING INDUSTRIES, respondents.
Bito, Misa & Lozada for petitioners.
Reynaldo F. Singson for private respondent.
CRUZ, J.:
The petitioners are questioning the decision of the respondent court upholding the dismissal by the trial court of their complaint
against the private respondent for infringement of trademark and unfair competition.
Petitioner Del Monte Corporation is a foreign company organized under the laws of the United States and not engaged in business
in the Philippines. Both the Philippines and the United States are signatories to the Convention of Paris of September 27, 1965,
which grants to the nationals of the parties rights and advantages which their own nationals enjoy for the repression of acts of
infringement and unfair competition.
Petitioner Philippine Packing Corporation (Philpack) is a domestic corporation duly organized under the laws of the Philippines.
On April 11, 1969, Del Monte granted Philpack the right to manufacture, distribute and sell in the Philippines various agricultural
products, including catsup, under the Del Monte trademark and logo.
On October 27,1965, Del Monte authorized Philpack to register with the Philippine Patent Office the Del Monte catsup bottle
configuration, for which it was granted Certificate of Trademark Registration No. SR-913 by the Philippine Patent Office under the
Supplemental Register. 1 On November 20, 1972, Del Monte also obtained two registration certificates for its trademark "DEL
MONTE" and its logo. 2
Respondent Sunshine Sauce Manufacturing Industries was issued a Certificate of Registration by the Bureau of Domestic Trade on
April 17,1980, to engage in the manufacture, packing, distribution and sale of various kinds of sauce, identified by the logo
Sunshine Fruit Catsup.3
This logo was registered in the Supplemental Register on September 20, 1983. 4
The product itself was contained in various kinds of bottles, including the Del Monte bottle, which the private respondent bought
from the junk shops for recycling.
Having received reports that the private respondent was using its exclusively designed bottles and a logo confusingly similar to Del
Monte's, Philpack warned it to desist from doing so on pain of legal action. Thereafter, claiming that the demand had been
ignored, Philpack and Del Monte filed a complaint against the private respondent for infringement of trademark and unfair
competition, with a prayer for damages and the issuance of a writ of preliminary injunction. 5
In its answer, Sunshine alleged that it had long ceased to use the Del Monte bottle and that its logo was substantially different from
the Del Monte logo and would not confuse the buying public to the detriment of the petitioners. 6
After trial, the Regional Trial Court of Makati dismissed the complaint. It held that there were substantial differences between the
logos or trademarks of the parties; that the defendant had ceased using the petitioners' bottles; and that in any case the defendant
became the owner of the said bottles upon its purchase thereof from the junk yards. Furthermore, the complainants had failed to
establish the defendant's malice or bad faith, which was an essential element of infringement of trademark or unfair competition. 7
This decision was affirmed in toto by the respondent court, which is now faulted in this petition for certiorari under Rule 45 of the
Rules of Court.
Section 22 of R.A. No. 166, otherwise known as the Trademark Law, provides in part as follows:
Sec. 22. Infringement, what constitutes. — Any person who shall use, without the consent of the registrant, any reproduction,
counterfeit, copy or colorable imitation of any registered mark or trade-name in connection with the sale, offering for sale, or
advertising of any goods, business or services on or in connection with which such use is likely to cause confusion or mistake or to
deceive purchasers or others as to the source or origin of such goods or services or identity of such business; or reproduce,
counterfeit copy or colorably imitate any such mark or trade name and apply such reproduction, counterfeit copy or colorable
imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon or in connection
with such goods, business or services, shall be liable to a civil action by the registrant for any or all of the remedies herein
provided.
Sec. 29 of the same law states as follows:
Sec. 29. Unfair competition, rights and remedies. — A person who has identified in the mind of the public the goods he
manufactures or deals in, his business or services from those of others, whether or not a mark or tradename is employed, has a
property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as
other property rights. Such a person shall have the remedies provided in section twenty- three, Chapter V hereof.
Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods
manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or
who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action
therefor.
In particular, and without in any way limiting the scope of unfair competition, the following shall be deemed guilty of unfair
competition:
(a) Any person, who in selling his goods shall give them the general appearance of goods of another manufacturer or
dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words
thereon, or in any other feature of their appearance, which would likely influence purchasers to believe that the goods offered are
those of a manufacturer or dealer other than the actual manufacturer or dealer, or who otherwise clothes the goods with such
appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any
agent of any vendor engaged in selling such goods with a like purpose;
(b) Any person who by any artifice, or device, or who employs ally other means calculated to induce the false belief that
such person is offering the services of another who has identified such services in the mind of the public; or
(c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to
good faith of a nature calculated to discredit the goods, business or services of another.
To arrive at a proper resolution of this case, it is important to bear in mind the following distinctions between infringement of
trademark and unfair competition.
(1) Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of one's
goods as those of another.
(2) In infringement of trademark fraudulent intent is unnecessary whereas in unfair competition fraudulent intent is
essential.
(3) In infringement of trademark the prior registration of the trademark is a prerequisite to the action, whereas in unfair
competition registration is not necessary. 8
In the challenged decision, the respondent court cited the following test laid down by this Court in a number of cases:
In determining whether two trademarks are confusingly similar, the two marks in their entirety as they appear in the respective
labels must be considered in relation to the goods to which they are attached; the discerning eye of the observer must focus not
only on the predorninant words but also on the other features appearing on both labels. 9
and applying the same, held that there was no colorable imitation of the petitioners' trademark and logo by the private respondent.
The respondent court agreed with the findings of the trial court that:
In order to resolve the said issue, the Court now attempts to make a comparison of the two products, to wit:
1. As to the shape of label or make:
Del Monte: Semi-rectangular with a crown or tomato shape design on top of the rectangle.
Sunshine: Regular rectangle.
2. As to brand printed on label:
Del Monte: Tomato catsup mark.
Sunshine: Fruit catsup.
3. As to the words or lettering on label or mark:
Del Monte: Clearly indicated words packed by Sysu International, Inc., Q.C., Philippines.
Sunshine: Sunshine fruit catsup is clearly indicated "made in the Philippines by Sunshine Sauce Manufacturing Industries" No. 1
Del Monte Avenue, Malabon, Metro Manila.
4. As to color of logo:
Del Monte: Combination of yellow and dark red, with words "Del Monte Quality" in white.
Sunshine: White, light green and light red, with words "Sunshine Brand" in yellow.
5. As to shape of logo:
Del Monte: In the shape of a tomato.
Sunshine: Entirely different in shape.
6. As to label below the cap:
Del Monte: Seal covering the cap down to the neck of the bottle, with picture of tomatoes with words "made from real tomatoes."
Sunshine: There is a label below the cap which says "Sunshine Brand."
7. As to the color of the products:
Del Monte: Darker red.
Sunshine: Lighter than Del Monte.
While the Court does recognize these distinctions, it does not agree with the conclusion that there was no infringement or unfair
competition. It seems to us that the lower courts have been so pre-occupied with the details that they have not seen the total
picture.
It has been correctly held that side-by-side comparison is not the final test of similarity. 10 Such comparison requires a careful
scrutiny to determine in what points the labels of the products differ, as was done by the trial judge. The ordinary buyer does not
usually make such scrutiny nor does he usually have the time to do so. The average shopper is usually in a hurry and does not
inspect every product on the shelf as if he were browsing in a library. Where the housewife has to return home as soon as possible
to her baby or the working woman has to make quick purchases during her off hours, she is apt to be confused by similar labels
even if they do have minute differences. The male shopper is worse as he usually does not bother about such distinctions.
The question is not whether the two articles are distinguishable by their label when set side by side but whether the general
confusion made by the article upon the eye of the casual purchaser who is unsuspicious and off his guard, is such as to likely result
in his confounding it with the original. 11 As observed in several cases, the general impression of the ordinary purchaser, buying
under the normally prevalent conditions in trade and giving the attention such purchasers usually give in buying that class of goods
is the touchstone. 12
It has been held that in making purchases, the consumer must depend upon his recollection of the appearance of the product
which he intends to purchase. 13 The buyer having in mind the mark/label of the respondent must rely upon his memory of the
petitioner's mark. 14 Unlike the judge who has ample time to minutely examine the labels in question in the comfort of his sala,
the ordinary shopper does not enjoy the same opportunity.
A number of courts have held that to determine whether a trademark has been infringed, we must consider the mark as a whole
and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. 15 The court
therefore should be guided by its first impression, 16 for a buyer acts quickly and is governed by a casual glance, the value of
which may be dissipated as soon as the court assumes to analyze carefully the respective features of the mark. 17
It has also been held that it is not the function of the court in cases of infringement and unfair competition to educate purchasers
but rather to take their carelessness for granted, and to be ever conscious of the fact that marks need not be identical. A confusing
similarity will justify the intervention of equity. 18 The judge must also be aware of the fact that usually a defendant in cases of
infringement does not normally copy but makes only colorable changes. 19 Well has it been said that the most successful form of
copying is to employ enough points of similarity to confuse the public with enough points of difference to confuse the courts. 20
We also note that the respondent court failed to take into consideration several factors which should have affected its conclusion,
to wit: age, training and education of the usual purchaser, the nature and cost of the article, whether the article is bought for
immediate consumption and also the conditions under which it is usually purchased . 21 Among these, what essentially
determines the attitude of the purchaser, specifically his inclination to be cautious, is the cost of the goods. To be sure, a person
who buys a box of candies will not exercise as much care as one who buys an expensive watch. As a general rule, an ordinary
buyer does not exercise as much prudence in buying an article for which he pays a few centavos as he does in purchasing a more
valuable thing. 22 Expensive and valuable items are normally bought only after deliberate, comparative and analytical
investigation. But mass products, low priced articles in wide use, and matters of everyday purchase requiring frequent replacement
are bought by the casual consumer without great care. 23 In this latter category is catsup.
At that, even if the labels were analyzed together it is not difficult to see that the Sunshine label is a colorable imitation of the Del
Monte trademark. The predominant colors used in the Del Monte label are green and red-orange, the same with Sunshine. The
word "catsup" in both bottles is printed in white and the style of the print/letter is the same. Although the logo of Sunshine is not a
tomato, the figure nevertheless approximates that of a tomato.
As previously stated, the person who infringes a trade mark does not normally copy out but only makes colorable changes,
employing enough points of similarity to confuse the public with enough points of differences to confuse the courts. What is
undeniable is the fact that when a manufacturer prepares to package his product, he has before him a boundless choice of words,
phrases, colors and symbols sufficient to distinguish his product from the others. When as in this case, Sunshine chose, without a
reasonable explanation, to use the same colors and letters as those used by Del Monte though the field of its selection was so
broad, the inevitable conclusion is that it was done deliberately to deceive .24
It has been aptly observed that the ultimate ratio in cases of grave doubt is the rule that as between a newcomer who by the
confusion has nothing to lose and everything to gain and one who by honest dealing has already achieved favor with the public,
any doubt should be resolved against the newcomer inasmuch as the field from which he can select a desirable trademark to
indicate the origin of his product is obviously a large one. 25
Coming now to the second issue, we find that the private respondent is not guilty of infringement for having used the Del Monte
bottle. The reason is that the configuration of the said bottle was merely registered in the Supplemental Register. In the case of
Lorenzana v. Macagba, 26 we declared that:
(1) Registration in the Principal Register gives rise to a presumption of the validity of the registration, the registrant's
ownership of the mark and his right to the exclusive use thereof. There is no such presumption in the registration in the
Supplemental Register.
(2) Registration in the Principal Register is limited to the actual owner of the trademark and proceedings therein on the issue of
ownership which may be contested through opposition or interference proceedings or, after registration, in a petition for
cancellation.
Registration in the Principal Register is constructive notice of the registrant's claim of ownership, while registration in the
Supplemental Register is merely proof of actual use of the trademark and notice that the registrant has used or appropriated it. It is
not subject to opposition although it may be cancelled after the issuance. Corollarily, registration in the Principal Register is a basis
for an action for infringement while registration in the Supplemental Register is not.
(3) In applications for registration in the Principal Register, publication of the application is necessary. This is not so in applications
for registrations in the Supplemental Register.
It can be inferred from the foregoing that although Del Monte has actual use of the bottle's configuration, the petitioners cannot
claim exclusive use thereof because it has not been registered in the Principal Register. However, we find that Sunshine, despite
the many choices available to it and notwithstanding that the caution "Del Monte Corporation, Not to be Refilled" was embossed
on the bottle, still opted to use the petitioners' bottle to market a product which Philpack also produces. This clearly shows the
private respondent's bad faith and its intention to capitalize on the latter's reputation and goodwill and pass off its own product as
that of Del Monte.
The Court observes that the reasons given by the respondent court in resolving the case in favor of Sunshine are untenable. First, it
declared that the registration of the Sunshine label belied the company's malicious intent to imitate petitioner's product. Second, it
held that the Sunshine label was not improper because the Bureau of Patent presumably considered other trademarks before
approving it. Third, it cited the case of Shell Co. v. Insular Petroleum, 27 where this Court declared that selling oil in containers of
another with markings erased, without intent to deceive, was not unfair competition.
Regarding the fact of registration, it is to be noted that the Sunshine label was registered not in the Principal Register but only in
the Supplemental Register where the presumption of the validity of the trademark, the registrant's ownership of the mark and his
right to its exclusive use are all absent.
Anent the assumption that the Bureau of Patent had considered other existing patents, it is reiterated that since registration was
only in the Supplemental Register, this did not vest the registrant with the exclusive right to use the label nor did it give rise to the
presumption of the validity of the registration.
On the argument that no unfair competition was committed, the Shell Case is not on all fours with the case at bar because:
(1) In Shell, the absence of intent to deceive was supported by the fact that the respondent therein, before marketing its
product, totally obliterated and erased the brands/mark of the different companies stenciled on the containers thereof, except for a
single isolated transaction. The respondent in the present case made no similar effort.
(2) In Shell, what was involved was a single isolated transaction. Of the many drums used, there was only one container
where the Shell label was not erased, while in the case at hand, the respondent admitted that it made use of several Del Monte
bottles and without obliterating the embossed warning.
(3) In Shell, the product of respondent was sold to dealers, not to ultimate consumers. As a general rule, dealers are well
acquainted with the manufacturer from whom they make their purchases and since they are more experienced, they cannot be so
easily deceived like the inexperienced public. There may well be similarities and imitations which deceive all, but generally the
interests of the dealers are not regarded with the same solicitude as are the interests of the ordinary consumer. For it is the form in
which the wares come to the final buyer that is of significance. 28
As Sunshine's label is an infringement of the Del Monte's trademark, law and equity call for the cancellation of the private
respondent's registration and withdrawal of all its products bearing the questioned label from the market. With regard to the use of
Del Monte's bottle, the same constitutes unfair competition; hence, the respondent should be permanently enjoined from the use
of such bottles.
The court must rule, however, that the damage prayed for cannot be granted because the petitioner has not presented evidence to
prove the amount thereof. Section 23 of R.A. No. 166 provides:
Sec. 23. Actions and damages and injunction for infringement. — Any person entitled to the exclusive use of a registered mark or
trade name may recover damages in a civil action from any person who infringes his rights, and the measure of the damages
suffered shall be either the reasonable profit which the complaining party would have made, had the defendant not infringed his
said rights or the profit which the defendant actually made out of the infringement, or in the event such measure of damages
cannot be readily ascertained with reasonable certainty the court may award as damages reasonable percentage based upon the
amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in
the infringement of the rights of the complaining party. In cases where actual intent to mislead the public or to defraud the
complaining party shall be shown, in the discretion of the court, the damages may be doubled.
The complaining party, upon proper showing may also be granted injunction.1âwphi1
Fortunately for the petitioners, they may still find some small comfort in Art. 2222 of the Civil Code, which provides:
Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in Art. 1157, or in every
case where any property right has been invaded.
Accordingly, the Court can only award to the petitioners, as it hereby does award, nominal damages in the amount of Pl,000.00.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated December 24, 1986 and the Resolution dated
April 27,1987, are REVERSED and SET ASIDE and a new judgment is hereby rendered:
(1) Canceling the private respondent's Certificate of Register No. SR-6310 and permanently enjoining the private
respondent from using a label similar to that of the petitioners.
(2) Prohibiting the private respondent from using the empty bottles of the petitioners as containers for its own products.
(3) Ordering the private respondent to pay the petitioners nominal damages in the amount of Pl,000.00, and the costs of the
suit.

SO ORDERED.
G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the Decision2 and Resolution3 of the
Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision4 of the Regional Trial Court (RTC), Branch 141,
Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment (sic),
accessories, spares, services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two
Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the prompt
payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.’s surety bond dated 3 December 1999, in favor
of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased
products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the equipment (including
the software components for which payment was secured by the surety bond, was shipped by GILAT and duly received by One
Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtual’s conformity, an
amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of May 30, 2000
in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting GILAT to write the surety
defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of the
amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay
on the succeeding payment instalment date of 30 November 2000 as set out in Annex "A" of the surety bond, prompting GILAT to
send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under
the surety bond, plus interests and expenses (Exhibits "H") and which letter was received by the defendant surety on January 25,
2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint."5
(Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6 against respondent UCPB General Insurance Co.,
Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC
rendered its Decision,7 the dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the defendant, ordering, to
wit:
1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars (US$1,200,000.00)
representing the principal debt under the Surety Bond, with legal interest thereon at the rate of 12% per annum computed from the
time the judgment becomes final and executory until the obligation is fully settled; and
2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four Cents (US$44,004.04)
representing attorney’s fees and litigation expenses.
Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject equipments [sic] and the
same was installed. Even with the delivery and installation made, One Virtual failed to pay any of the payments agreed upon.
Demand notwithstanding, defendant failed and refused and continued to fail and refused to settle the obligation."8
Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and between One Virtual as
Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee,"9 respondent agreed and bound itself to pay in accordance with
the Payment Milestones. This obligation was not made dependent on any condition outside the terms and conditions of the Surety
Bond and Payment Milestones.10
Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while a surety can be held liable for
interest even if it becomes more onerous than the principal obligation, the surety shall only accrue when the delay or refusal to
pay the principal obligation is without any justifiable cause.11 Here, respondent failed to pay its surety obligation because of the
advice of its principal (One Virtual) not to pay.12 The RTC then obligated respondent to pay petitioner the amount of
USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the rate of 12% per annum
computed from the time the judgment becomes final and executory, and USD44,004.04 representing attorney’s fees and litigation
expenses.
On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a Decision14 in the following manner:
WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision dated December 28, 2006 is
VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to arbitration, the outcome of
which shall necessary bind the parties, including the surety, defendant-appellant United Coconut Planters Bank General Insurance
Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine finds application."
According to this doctrine, the accessory contract must be construed with the principal agreement.15 In this case, the appellate
court considered the Purchase Agreement entered into between petitioner and One Virtual as the principal contract,16 whose
stipulations are also binding on the parties to the suretyship.17 Bearing in mind the arbitration clause contained in the Purchase
Agreement18 and pursuant to the policy of the courts to encourage alternative dispute resolution methods,19 the trial court’s
Decision was vacated; petitioner and One Virtual were ordered to proceed to arbitration.
On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was denied for
lack of merit in a Resolution20 issued by the CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November 2010, petitioner filed a Reply.22
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation under the
Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an
arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this
relief.23 This referral, however, can only be demanded by one who is a party to the arbitration agreement.24 Considering that
neither petitioner nor One Virtual has asked for a referral, there is no basis for the CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may proceed against the surety without
having first sued the principal debtor.26 Even the Surety Agreement itself states that respondent becomes liable upon "mere failure
of the Principal to make such prompt payment."27 Thus, petitioner should not be ordered to make a separate claim against One
Virtual (via arbitration) before proceeding against respondent.28
On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid
obligation.29 Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt30 – that
is, the right to invoke the arbitration clause in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal debtor. This undertaking
makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract.31 Nevertheless, although
the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or "promise" of the
principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the principal.32 He
becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal interest in the
obligations constituted by the latter.33 Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion.34
It may in fact be sued separately or together with the principal debtor.35
After a thorough examination of the pieces of evidence presented by both parties,36 the RTC found that petitioner had delivered
all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation,37
triggering respondent’s liability to petitioner as the former’s surety.1âwphi1 In other words, the failure of One Virtual, as the
principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the Purchase Agreement, being the principal contract to which the
Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38 that "[the] acceptance [of a surety
agreement], however, does not change in any material way the creditor’s relationship with the principal debtor nor does it make
the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the
right to intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly
held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement. We
agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not
a party to that contract.39 An arbitration agreement being contractual in nature,40 it is binding only on the parties thereto, as well
as their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place "if at least one
party so requests not later than the pre-trial conference, or upon the request of both parties thereafter." Respondent has not
presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are contracted precisely to mitigate risks
of non-performance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the
principal debtor.44 The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This
is the reason why excussion cannot be invoked.45 To require the creditor to proceed to arbitration would render the very essence
of suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals,46 "if the
surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself
and become subrogated to all the rights and remedies of the creditor."
Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latter’s
obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first
demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latter’s delay in
discharging its monetary obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the
time it demanded the fulfilment of respondent’s obligation under the suretyship contract. Significantly, respondent does not contest
this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioner’s last demand on 24
January 2001.
In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the refusal of a party to pay is
without any justifiable cause.48 In this case, respondent’s failure to heed the demand was due to the advice of One Virtual that
petitioner allegedly breached its undertakings as stated in the Purchase Agreement.49 The CA, however, made no pronouncement
on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the debtor incurs a delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation,
and the latter fails to comply.50 Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the
fulfilment of obligations.51 It is the nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.53
Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation.54 The increased liability is not because of the contract, but because of the default and the
necessity of judicial collection.55
However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la Hotel,56 citing RCPI v.
Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a
corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from
liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the
contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves
to preserve the interests of the promissee that may include his "expectation interest," which is his interest in having the benefit of
his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance interest,"
which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would
have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to him any benefit
that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for society, unless they
are made the basis for action. The effect of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who
has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like
proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability.
(Emphasis ours)
We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed justified by the circumstances
– that is, One Virtual’s advice regarding petitioner’s alleged breach of obligations. The lower court’s Decision itself belied this
contention when it said that "plaintiff is not disputing that it did not complete commissioning work on one of the two systems
because One Virtual at that time is already in default and has not paid GILAT."58 Assuming arguendo that the commissioning work
was not completed, respondent has no one to blame but its principal, One Virtual; if only it had paid its obligation on time,
petitioner would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat,
repeatedly stated that petitioner had delivered all equipment, including the licensed software; and that the equipment had been
installed and in fact, gone into operation.59 Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and
of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the
amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial demand.60
Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the
extrajudicial demand of petitioner was sent on 5 June 2000,61 we agree with the latter that interest must start to run from the time
petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time.
With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,62 which modified the guidelines
established in Eastern Shipping Lines v. CA63 in relation to Bangko Sentral-Monetary Board Circular No. 799 (Series of 2013), to
wit:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded.1âwphi1 In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

xxxx
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby compelled to award
petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra judicial demand, until the satisfaction
of the debt in accordance with the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch 141, Makati City is
REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned. Respondent is hereby ordered to pay legal
interest at the rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract and
Purchase Agreement.
SO ORDERED.
G.R. No. 174938 October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III,
AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
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 director, should submit themselves as parties tothe 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-Laand 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, ShangriLa 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 BF Corporation 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 BF Corporation’s failure to submit its dispute to arbitration, in accordance with the
arbitration clauseprovided 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 there under or inconnection 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
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory counter claim against BF
Corporation and crossclaim 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 ofthis order was denied by the trial court on January
19, 2005.27
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
ShangriLa’s directors were necessary parties in the arbitration proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe 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 bysuch 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 between BF 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 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 thatour 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 werefiled 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’sdirectors, 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 dismiss63 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 orpersonality 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.
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:
While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, 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-Laand 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, 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.
....
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 whomare 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 ofavoiding 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-à-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-Laat 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:
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
ofincorporation;
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 asmay be essential or necessary to carry out its purpose or purposes as stated in its articles of
incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through itsdirectors, 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 Corporation79 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 treatedas 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 inhim 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)
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 towarrant 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 sameas 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 orbad 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 veilbe pierced because the cause of action between the corporation and the
directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the parties.1âwphi1 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 ofthe 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 recognizedthat 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 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 thatcase, 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 ifsuch
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.
G.R. No. 198075 September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered owner of a parcel of land
located at Km. 16, South Superhighway, Parañaque City (subject land).3 Within the subject land are buildings and other
improvements dedicated to the business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of herein respondent Makati Rotary
Club Foundation, Incorporated by way of a conditional donation.6 The respondent accepted the donation with all of its conditions.
7 On 26 May1975, FKI and the respondent executed a Deed of Donation8 evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease the subject land back to FKI under terms specified in their
Deed of Donation.9 With the respondent’s acceptance of the donation, a lease agreement between FKI and the respondent was,
therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is ₱40,126.00 per annum .11
The Deed of Donation also stipulated that the lease over the subject property is renewable for another period of twenty-five (25)
years " upon mutual agreement" of FKI and the respondent.12 In which case, the amount of rent shall be determined in
accordance with item 2(g) of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual agreement and in case of disagreement the matter shall be
referred to a Board of three Arbitrators appointed and with powers in accordance with the Arbitration Law of the Philippines,
Republic Act 878, whose function shall be to decide the current fair market value of the land excluding the improvements,
provided, that, any increase in the fair market value of the land shall not exceed twenty five percent (25%) of the original value of
the land donated as stated in paragraph 2(c) of this Deed. The rental for the second 25 years shall not exceed three percent (3%) of
the fair market value of the land excluding the improvements as determined by the Board of Arbitrators.13
In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that reiterated the provisions of the Deed of
Donation , including those relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of Donation , FKI was able to
continue in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation was set to expire, or on 23
May 2000, FKI and respondent executed another contract of lease ( 2000 Lease Contract )15 covering the subject land. In this
2000 Lease Contract, FKI and respondent agreed on a new five-year lease to take effect on the 26th of May 2000, with annual
rents ranging from ₱4,000,000 for the first year up to ₱4,900,000 for the fifth year.16 The 2000 Lease Contract also contained an
arbitration clause enforceable in the event the parties come to disagreement about the" interpretation, application and execution"
of the lease, viz :
19. Governing Law – The provisions of this 2000 Lease Contract shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract shall be submitted to a board of
three (3) arbitrators constituted in accordance with the arbitration law of the Philippines. The decision of the majority of the
arbitrators shall be binding upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another five (5) years. This new lease
(2005 Lease Contract )18 required FKI to pay a fixed annual rent of ₱4,200,000.19 In addition to paying the fixed rent, however,
the 2005 Lease Contract also obligated FKI to make a yearly " donation " of money to the respondent.20 Such donations ranged
from ₱3,000,000 for the first year up to ₱3,900,000for the fifth year.21 Notably, the 2005 Lease Contract contained an arbitration
clause similar to that in the 2000 Lease Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be submitted to a board of
three (3) arbitrators constituted in accordance with the arbitration law of the Philippines. The decision of the majority of the
arbitrators shall be binding upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease Contract.23 But in June of 2008, FKI
sold all its rights and properties relative to its business in favor of herein petitioner Koppel, Incorporated.24 On 29 August 2008,
FKI and petitioner executed an Assignment and Assumption of Lease and Donation25 —wherein FKI, with the conformity of the
respondent, formally assigned all of its interests and obligations under the Amended Deed of Donation and the 2005 Lease
Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the 2005 Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental stipulations of the 2005 Lease Contract,
and even of the 2000 Lease Contract, cannot be given effect because they violated one of the" material conditions " of the
donation of the subject land, as stated in the Deed of Donation and Amended Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually established not only one but two (2) lease
agreements between FKI and respondent, i.e. , one lease for the first twenty-five (25)years or from 1975 to 2000, and another lease
for the next twenty-five (25)years thereafter or from 2000 to 2025. 27 Both leases are material conditions of the donation of the
subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was not fixed in the Deed of
Donation and Amended Deed of Donation , both deeds nevertheless prescribed rules and limitations by which the same may be
determined. Such rules and limitations ought to be observed in any succeeding lease agreements between petitioner and
respondent for they are, in themselves, material conditions of the donation of the subject land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation that supposedly limits the
amount of rent for the lease over the second twenty-five (25) years to only " three percent (3%) of the fair market value of the
subject land excluding the improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract cannot be enforced as they are
clearly, in view of their exorbitant exactions, in violation of the aforementioned threshold in item 2(g) of the Deed of Donation and
Amended Deed of Donation . Consequently, petitioner insists that the amount of rent it has to pay thereon is and must still be
governed by the limitations prescribed in the Deed of Donation and Amended Deed of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter of its default " per Section 12 of
the 2005 Lease Contract " and demanding for the settlement of the rent and " donation " due for the year 2009. Respondent, in the
same letter, further intimated of canceling the 2005 Lease Contract should petitioner fail to settle the said obligations.32 Petitioner
received the First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the rental stipulations of the 2005
Lease Contract — calling them " severely disproportionate," "unconscionable" and "in clear violation to the nominal rentals
mandated by the Amended Deed of Donation." In lieu of the amount demanded by the respondent, which purportedly totaled to
₱8,394,000.00, exclusive of interests, petitioner offered to pay only ₱80,502.79,35 in accordance with the rental provisions of the
Deed of Donation and Amended Deed of Donation.36 Respondent refused this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner, reiterating its demand for the
payment of the obligations already due under the 2005 Lease Contract. The Second Demand Letter also contained a demand for
petitioner to " immediately vacate the leased premises " should it fail to pay such obligations within seven (7) days from its receipt
of the letter.39 The respondent warned of taking " legal steps " in the event that petitioner failed to comply with any of the said
demands.40 Petitioner received the Second Demand Letter on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009, petitioner filed with the
Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission or cancellation of the Deed of Donation and
Amended Deed of Donation against the respondent. This case is currently pending before Branch 257 of the RTC, docketed as
Civil Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the Metropolitan Trial Court
(MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and was docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it, petitioner reiterated its objection over
the rental stipulations of the 2005 Lease Contract for being violative of the material conditions of the Deed of Donation and
Amended Deed of Donation.45 In addition to the foregoing, however, petitioner also interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in view of the insufficiency of
respondent’s demand.46 The First Demand Letter did not contain an actual demand to vacate the premises and, therefore, the
refusal to comply there with does not give rise to an action for unlawful detainer.47
2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same until the disagreement between the
parties is first referred to arbitration pursuant to the arbitration clause of the 2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would not lie as the 2005 Lease Contract is
void abinitio.49 The stipulation in the 2005 Lease Contract requiring petitioner to give yearly " donations " to respondent is a
simulation, for they are, in fact, parts of the rent. 50 Such grants were only denominated as " donations " in the contract so that the
respondent—anon-stock and non-profit corporation—could evade payment of the taxes otherwise due thereon.51
In due course, petitioner and respondent both submitted their position papers, together with their other documentary evidence.52
Remarkably, however, respondent failed to submit the Second Demand Letter as part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to dismiss the action on the
ground that the dispute is subject to arbitration, it nonetheless sided with the petitioner with respect to the issues regarding the
insufficiency of the respondent’s demand and the nullity of the 2005 Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch 274 of the RTC of Parañaque City
and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial Court, Branch 77, Parañaque City,
is hereby reversed, judgment is thus rendered in favor of the plaintiff-appellant and against the defendant-appellee, and ordering
the latter –
(1) to vacate the lease[d] premises made subject of the case and to restore the possession thereof to the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two Thousand Four Hundred Thirty Six Pesos
(₱9,362,436.00), penalties and net of 5% withholding tax, for the lease period from May 25, 2009 to May 25, 2010 and such
monthly rental as will accrue during the pendency of this case;
(3) to pay attorney’s fees in the sum of ₱100,000.00 plus appearance fee of ₱3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-appellee, as these were built in good faith, the provisions of Art.
1678of the Civil Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
1. The respondent had adequately complied with the requirement of demand as a jurisdictional precursor to an unlawful detainer
action.58 The First Demand Letter, in substance, contains a demand for petitioner to vacate when it mentioned that it was a notice
" per Section12 of the 2005 Lease Contract."59 Moreover, the issue of sufficiency of the respondent’s demand ought to have been
laid to rest by the Second Demand Letter which, though not submitted in evidence, was nonetheless admitted by petitioner as
containing a" demand to eject " in its Answer with Compulsory Counterclaim.60
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the same time, impugn such
contract’s validity.61 Even assuming that it can, petitioner still did not file a formal application before the MeTC so as to render
such arbitration clause operational.62 At any rate, the MeTC would not be precluded from exercising its jurisdiction over an action
for unlawful detainer, over which, it has exclusive original jurisdiction.63
3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was not able to adduce any evidence to support
its allegation that the same is void.64 There was, in this case, no evidence that respondent is guilty of any tax evasion.65
Aggrieved, the petitioner appealed to the Court of Appeals.
On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:
WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of Parañaque City, Branch 274, in Civil
Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary Restraining Order68 staying the
immediate implementation of the decisions adverse to it.
OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in overlooking the significance of the
arbitration clause incorporated in the 2005 Lease Contract . As the Court sees it, that is a fatal mistake.
For this reason, We grant the petition.
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner and respondent emanates from the
rental stipulations of the 2005 Lease Contract. The respondent insists upon the enforce ability and validity of such stipulations,
whereas, petitioner, in substance, repudiates them. It is from petitioner’s apparent breach of the 2005 Lease Contract that
respondent filed the instant unlawful detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the petitioner and respondent arose
from the application or execution of the 2005 Lease Contract . Undoubtedly, such kinds of dispute are covered by the arbitration
clause of the 2005 Lease Contract to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and construed in all aspects in
accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be submitted to a board of
three (3) arbitrators constituted in accordance with the arbitration law of the Philippines. The decision of the majority of the
arbitrators shall be binding upon FKI and respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the " interpretation, application or
execution " of the 2005 Lease Contract ought to be submitted to arbitration.70 To the mind of this Court, such stipulation is clear
and is comprehensive enough so as to include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contract
including the one that presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain legal effects. However,
before discussing what these legal effects are, We shall first deal with the challenges posed against the application of such
arbitration clause.
Challenges Against the Application of the
Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as well as the MeTC, RTC and
the Court of Appeals, vouched for the non-application of the same in the instant case. A plethora of arguments was hurled in favor
of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against the application of the arbitration
clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is non-arbitrable as it will inevitably touch upon the issue of the
validity of the 2005 Lease Contract.71 It was submitted that one of the reasons offered by the petitioner in justifying its failure to
pay under the 2005 Lease Contract was the nullity of such contract for being contrary to law and public policy.72 The Supreme
Court, in Gonzales v. Climax Mining, Ltd.,73 held that " the validity of contract cannot be subject of arbitration proceedings " as
such questions are " legal in nature and require the application and interpretation of laws and jurisprudence which is necessarily a
judicial function ." 74
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the same time, impugn such
contract’s validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the 2005 Lease Contract , petitioner still did
not file a formal application before the MeTC so as to render such arbitration clause operational.76 Section 24 of Republic Act No.
9285 requires the party seeking arbitration to first file a " request " or an application therefor with the court not later than the
preliminary conference.77
4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR) proceedings before the RTC.78 Hence, a further
referral of the dispute to arbitration would only be circuitous.79 Moreover, an ejectment case, in view of its summary nature,
already fulfills the prime purpose of arbitration, i.e. , to provide parties in conflict with an expedient method for the resolution of
their dispute.80 Arbitration then would no longer be necessary in this case.81
None of the arguments have any merit.
First. As highlighted in the previous discussion, the disagreement between the petitioner and respondent falls within the all-
encompassing terms of the arbitration clause of the 2005 Lease Contract. While it may be conceded that in the arbitration of such
disagreement, the validity of the 2005 Lease Contract, or at least, of such contract’s rental stipulations would have to be
determined, the same would not render such disagreement non-arbitrable. The quotation from Gonzales that was used to justify
the contrary position was taken out of context. A rereading of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and Geosciences Bureau (PA-MGB)
seeking the nullification of a Financial Technical Assistance Agreement and other mining related agreements entered into by
private parties.82
Grounds invoked for the nullification of such agreements include fraud and unconstitutionality.83 The pivotal issue that confronted
the Court then was whether the PA-MGB has jurisdiction over that particular arbitration complaint. Stated otherwise, the question
was whether the complaint for arbitration raises arbitrable issues that the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to take cognizance of the
complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or the Mining Act of 1995, which granted the
PA-MGB with exclusive original jurisdiction only over mining disputes, i.e., disputes involving " rights to mining areas," "mineral
agreements or permits," and " surface owners, occupants, claim holders or concessionaires" requiring the technical knowledge and
experience of mining authorities in order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not
raise mining disputes as contemplated under R.A. No. 7942 but only issues relating to the validity of certain mining related
agreements, this Court held that such complaint could not be arbitrated before the PA-MGB.85 It is in this context that we made
the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the parties as to some provisions of
the contract between them, which needs the interpretation and the application of that particular knowledge and expertise
possessed by members of that Panel. It is not proper when one of the parties repudiates the existence or validity of such contract or
agreement on the ground of fraud or oppression as in this case. The validity of the contract cannot be subject of arbitration
proceedings. Allegations of fraud and duress in the execution of a contract are matters within the jurisdiction of the ordinary courts
of law. These questions are legal in nature and require the application and interpretation of laws and jurisprudence which is
necessarily a judicial function.86 (Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground that the issue raised therein,
i.e. , the validity of contracts, is per se non-arbitrable. The real consideration behind the ruling was the limitation that was placed
by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral body . Gonzales rejected the complaint for arbitration
because the issue raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason, and only for this reason, that
such issue is rendered non-arbitrable before the PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of
the PA-MGB only to mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc. v. San Fernando Regal
Trading, Inc.88 In Cargill , this Court answered the question of whether issues involving the rescission of a contract are arbitrable.
The respondent in Cargill argued against arbitrability, also citing therein Gonzales . After dissecting Gonzales , this Court ruled in
favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause is conceded, the CA's decision
declining referral of the parties' dispute to arbitration is still correct. It claims that its complaint in the RTC presents the issue of
whether under the facts alleged, it is entitled to rescind the contract with damages; and that issue constitutes a judicial question or
one that requires the exercise of judicial function and cannot be the subject of an arbitration proceeding. Respondent cites our
ruling in Gonzales, wherein we held that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/
or termination of the subject contracts on the grounds of fraud and oppression attendant to the execution of the addendum
contract and the other contracts emanating from it, and that the complaint should have been filed with the regular courts as it
involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its argument.90 (Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding the fact that it assails the
validity of such contract. This is due to the doctrine of separability.91
Under the doctrine of separability, an arbitration agreement is considered as independent of the main contract.92 Being a separate
contract in itself, the arbitration agreement may thus be invoked regardless of the possible nullity or invalidity of the main contract.
93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the doctrine of separability, even the
very party who repudiates the main contract may invoke its arbitration clause.94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of the petitioner to file a formal
"request" or application therefor with the MeTC. We find that the filing of a "request" pursuant to Section 24 of R.A. No. 9285 is
not the sole means by which an arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is the subject matter of an
arbitration agreement shall, if at least one party so requests not later that the pre-trial conference, or upon the request of both
parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or
incapable of being performed. [Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of A.M. No. 07-11-08-SC or the
Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration agreement, whether contained
in an arbitration clause or in a submission agreement, may request the court to refer the parties to arbitration in accordance with
such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action is filed . - The request for referral
shall be made not later than the pre-trial conference. After the pre-trial conference, the court will only act upon the request for
referral if it is made with the agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is filed but the parties subsequently
enter into an arbitration agreement, they may request the court to refer their dispute to arbitration at any time during the
proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which shall state that the dispute is
covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the arbitration agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and time when it would be heard. The
party making the request shall serve it upon the respondent to give him the opportunity to file a comment or opposition as
provided in the immediately succeeding Rule before the hearing. [Emphasis ours; italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a pending action filed in violation of the
arbitration agreement x x x may request the court to refer the parties to arbitration in accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No. 9285, the Special ADR Rules clearly
did not intend to limit the invocation of an arbitration agreement in a pending suit solely via such "request." After all, non-
compliance with an arbitration agreement is a valid defense to any offending suit and, as such, may even be raised in an answer as
provided in our ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration before the MeTC. However, it is
equally conceded that the petitioner, as early as in its Answer with Counterclaim ,had already apprised the MeTC of the existence
of the arbitration clause in the 2005 Lease Contract96 and, more significantly, of its desire to have the same enforced in this case.
97 This act of petitioner is enough valid invocation of his right to arbitrate. Fourth . The fact that the petitioner and respondent
already under went through JDR proceedings before the RTC, will not make the subsequent conduct of arbitration between the
parties unnecessary or circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation which entails the submission of
a dispute before a " JDR judge " who shall merely " facilitate settlement " between the parties in conflict or make a " non-binding
evaluation or assessment of the chances of each party’s case."98 Thus in JDR, the JDR judge lacks the authority to render a
resolution of the dispute that is binding upon the parties in conflict. In arbitration, on the other hand, the dispute is submitted to an
arbitrator/s —a neutral third person or a group of thereof— who shall have the authority to render a resolution binding upon the
parties.99
Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the subsequent conduct of arbitration a
mere surplusage. The failure of the parties in conflict to reach an amicable settlement before the JDR may, in fact, be supplemented
by their resort to arbitration where a binding resolution to the dispute could finally be achieved. This situation precisely finds
application to the case at bench.
Neither would the summary nature of ejectment cases be a valid reason to disregard the enforcement of the arbitration clause of
the 2005 Lease Contract . Notwithstanding the summary nature of ejectment cases, arbitration still remains relevant as it aims not
only to afford the parties an expeditious method of resolving their dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost, a product of party
autonomy or the freedom of the parties to " make their own arrangements to resolve their own disputes."100 Arbitration
agreements manifest not only the desire of the parties in conflict for an expeditious resolution of their dispute. They also represent,
if not more so, the parties’ mutual aspiration to achieve such resolution outside of judicial auspices, in a more informal and less
antagonistic environment under the terms of their choosing. Needless to state, this critical feature can never be satisfied in an
ejectment case no matter how summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease Agreement in this case, We
shall now proceed with the discussion of its legal effects.
Legal Effect of the Application of the
Arbitration Clause
Since there really are no legal impediments to the application of the arbitration clause of the 2005 Contract of Lease in this case,
We find that the instant unlawful detainer action was instituted in violation of such clause. The Law, therefore, should have
governed the fate of the parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue arising out of an agreement
providing for the arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that the issue
involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until an arbitration has been had
in accordance with the terms of the agreement: Provided, That the applicant for the stay is not in default in proceeding with such
arbitration.[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is brought in a matter which is the subject matter of an
arbitration agreement shall, if at least one party so requests not later that the pre-trial conference, or upon the request of both
parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null and void, in operative or
incapable of being performed. [Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been stayed;101 the petitioner and the respondent
should have been referred to arbitration pursuant to the arbitration clause of the 2005 Lease Contract . The MeTC, however, did not
do so in violation of the law—which violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid all proceedings it undertook in the
ejectment case after the filing by petitioner of its Answer with Counterclaim —the point when the petitioner and the respondent
should have been referred to arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said point.
Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated and set aside.
The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration clause of the 2005 Lease
Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about to make. Nonetheless, this Court must make the
same if only to stress the point that, in our jurisdiction, bona fide arbitration agreements are recognized as valid;102 and that laws,
103 rules and regulations104 do exist protecting and ensuring their enforcement as a matter of state policy. Gone should be the
days when courts treat otherwise valid arbitration agreements with disdain and hostility, if not outright " jealousy,"105 and then get
away with it. Courts should instead learn to treat alternative means of dispute resolution as effective partners in the administration
of justice and, in the case of arbitration agreements, to afford them judicial restraint.106 Today, this Court only performs its part in
upholding a once disregarded state policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a complaint107 for the rescission or
cancellation of the Deed of Donation and Amended Deed of Donation against the respondent. The case is currently pending
before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.

This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve matters that are rightfully
arbitrable per the arbitration clause of the 2005 Lease Contract. However, since the records of Civil Case No. CV 09-0346 are not
before this Court, We can never know with true certainty and only speculate. In this light, let a copy of this Decision be also served
to Branch 257of the RTC of Parañaque for its consideration and, possible, application to Civil Case No. CV 09-0346.

WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby render a Decision:

1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of Parañaque City in relation to Civil
Case No. 2009-307 after the filing by petitioner of its Answer with Counterclaim ;

2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by petitioner of its Answer with
Counterclaim;

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865,

b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of Parañaque City in Civil Case No. 10-0255,

c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of Parañaque City in Civil Case No. 2009-307; and

4. REFERRING the petitioner and the respondent to arbitration pursuant to the arbitration clause of the 2005 Lease Contract,
repeatedly included in the 2000 Lease Contract and in the 1976 Amended Deed of Donation.

Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its consideration and, possible, application to
Civil Case No. CV 09-0346.

No costs.

SO ORDERED.