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Judgments - Premium Nafta Products Limited (20th Defendant) and others (Respondents) v.

Fili Shipping Company Limited (14th Claimant) and others (Appellants)

HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Premium Nafta Products Limited (20th Defendant) and others (Respondents) v. Fili Shipping Company Limited (14th Claimant) and others (Appellants)
[2007] UKHL 40
LORD HOFFMANN
My Lords,
1

This appeal concerns the scope and effect of arbitration clauses in eight charterparties in Shelltime 4 form made between eight companies forming part of the Sovcomflot group of companies (which is owned by the
Russian state) and eight charterers. It is alleged by the owners that the charters were procured by the bribery of senior officers of the Sovcomflot group by a Mr Nikitin, who controlled or was associated with the charterer
companies. It is unnecessary to set out the details of these allegations because it is not disputed that the owners have an arguable case. They have purported to rescind the charters on this ground and the question is
whether the issue of whether they were entitled to do so should be determined by arbitration or by a court. The owners have commenced court proceedings for a declaration that the charters have been validly rescinded and
the charterers have applied for a stay under section 9 of the Arbitration Act 1996. Morison J [2007] 1 All ER (Comm) 81 refused a stay but the Court of Appeal (Tuckey, Arden and Longmore LJJ)[2007] Bus LR 686 allowed
the appeal and granted it.

The case has been argued on the basis that there are two issues: first, whether, as a matter of construction, the arbitration clause is apt to cover the question of whether the contract was procured by bribery and secondly,
whether it is possible for a party to be bound by submission to arbitration when he alleges that, but for the bribery, he would never have entered into the contract containing the arbitration clause. It seems to me, however,
that for the reasons I shall explain, these questions are very closely connected.

I start by setting out the arbitration clause in the Shelltime 4 form:


"41.(a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England.
(b) Any dispute arising under this charter shall be decided by the English courts to whose jurisdiction the parties hereby agree.
(c) Notwithstanding the foregoing, but without prejudice to any party's right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to
have any such dispute referred . . . . to arbitration in London, one arbitrator to be nominated by Owners and the other by Charterers, and in case the arbitrators shall not agree to the decision of an umpire, whose
decision shall be final and binding upon both parties. Arbitration shall take place in London in accordance with the London Maritime Association of Arbitrators, in accordance with the provisions of the Arbitration Act
1950, or any statutory modification or re-enactment thereof for the time being in force.
(i) A party shall lose its right to make such an election only if:
(a) it receives from the other party a written notice of dispute which (1) states expressly that a dispute has arisen out of this charter;
(2) specifies the nature of the dispute; and
(3) refers expressly to this clause 41(c)
And
(b) it fails to give notice of election to have the dispute referred to arbitration not later than 30 days from the date of receipt of such notice of dispute "

It will be observed that clause 41(b) is a jurisdiction clause in respect of "any dispute arising under this charter" which is then incorporated by reference (by the words "any such dispute") in the arbitration clause in 41(c). So
the first question is whether clause 41(b) refers the question of whether the charters were procured by bribery to the jurisdiction of the English court. If it does, then a party may elect under clause 41(c) to have that question
referred to arbitration. But I shall for the sake of convenience discuss the clause as if it was a simple arbitration clause. The owners say that for two reasons it does not apply. The first is that, as a matter of construction, the
question is not a dispute arising under the charter. The second is that the jurisdiction and arbitration clause is liable to be rescinded and therefore not binding upon them.

Both of these defences raise the same fundamental question about the attitude of the courts to arbitration. Arbitration is consensual. It depends upon the intention of the parties as expressed in their agreement. Only the
agreement can tell you what kind of disputes they intended to submit to arbitration. But the meaning which parties intended to express by the words which they used will be affected by the commercial background and the
reader's understanding of the purpose for which the agreement was made. Businessmen in particular are assumed to have entered into agreements to achieve some rational commercial purpose and an understanding of

this purpose will influence the way in which one interprets their language.
1

In approaching the question of construction, it is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt. The parties have entered into a relationship, an agreement
or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of
such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they
want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction.

If one accepts that this is the purpose of an arbitration clause, its construction must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of
their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but
the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have
questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had
such an intention.

A proper approach to construction therefore requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause. But the same policy of giving effect to
the commercial purpose also drives the approach of the courts (and the legislature) to the second question raised in this appeal, namely, whether there is any conceptual reason why parties who have agreed to submit the
question of the validity of the contract to arbitration should not be allowed to do so.

There was for some time a view that arbitrators could never have jurisdiction to decide whether a contract was valid. If the contract was invalid, so was the arbitration clause. In Overseas Union Insurance Ltd v AA Mutual
International Insurance Co Ltd [1988] 2 Lloyd's Rep 63, 66 Evans J said that this rule "owes as much to logic as it does to authority". But the logic of the proposition was denied by the Court of Appeal in Harbour Assurance
Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] QB 701 and the question was put beyond doubt by section 7 of the Arbitration Act 1996:
"Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or
ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement."

This section shows a recognition by Parliament that, for the reasons I have given in discussing the approach to construction, businessmen frequently do want the question of whether their contract was valid, or came into
existence, or has become ineffective, submitted to arbitration and that the law should not place conceptual obstacles in their way.

With that background, I turn to the question of construction. Your Lordships were referred to a number of cases in which various forms of words in arbitration clauses have been considered. Some of them draw a distinction
between disputes "arising under" and "arising out of" the agreement. In Heyman v Darwins Ltd [1942 ] AC 356, 399 Lord Porter said that the former had a narrower meaning than the latter but in Union of India v E B Aaby's
Rederi A/S [1975] AC 797 Viscount Dihorne, at p. 814, and Lord Salmon, at p. 817, said that they could not see the difference between them. Nevertheless, in Overseas Union Insurance Ltd v AA Mutual International
Insurance Co Ltd [1988] 2 Lloyd's Rep 63, 67, Evans J said that there was a broad distinction between clauses which referred "only those disputes which may arise regarding the rights and obligations which are created by
the contract itself" and those which "show an intention to refer some wider class or classes of disputes." The former may be said to arise "under" the contract while the latter would arise "in relation to" or "in connection with"
the contract. In Fillite (Runcorn) Ltd v Aqua-Lift (1989) 26 Con LR 66, 76 Slade LJ said that the phrase "under a contract" was not wide enough to include disputes which did not concern obligations created by or incorporated
in the contract. Nourse LJ gave a judgment to the same effect. The court does not seem to have been referred to Mackender v Feldia AG [1967] 2 QB 590, in which a court which included Lord Denning MR and Diplock LJ
decided that a clause in an insurance policy submitting disputes "arising thereunder" to a foreign jurisdiction was wide enough to cover the question of whether the contract could be avoided for non-disclosure.

I do not propose to analyse these and other such cases any further because in my opinion the distinctions which they make reflect no credit upon English commercial law. It may be a great disappointment to the judges who
explained so carefully the effects of the various linguistic nuances if they could learn that the draftsman of so widely used a standard form as Shelltime 4 obviously regarded the expressions "arising under this charter" in
clause 41(b) and "arisen out of this charter" in clause 41(c)(1)(a)(i) as mutually interchangeable. So I applaud the opinion expressed by Longmore LJ in the Court of Appeal (at paragraph 17) that the time has come to draw a
line under the authorities to date and make a fresh start. I think that a fresh start is justified by the developments which have occurred in this branch of the law in recent years and in particular by the adoption of the principle
of separability by Parliament in section 7 of the 1996 Act. That section was obviously intended to enable the courts to give effect to the reasonable commercial expectations of the parties about the questions which they
intended to be decided by arbitration. But section 7 will not achieve its purpose if the courts adopt an approach to construction which is likely in many cases to defeat those expectations. The approach to construction
therefore needs to be re-examined.

In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have
entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded
from the arbitrator's jurisdiction. As Longmore LJ remarked, at para 17: "if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so."

This appears to be the approach adopted in Germany: see the Bundesgerichtshof's Decision of 27 February 1970 (1990) Arbitration International, vol 6, No 1, p 79:
"There is every reason to presume that reasonable parties will wish to have the relationships created by their contract and the claims arising therefrom, irrespective of whether their contract is effective or not,
decided by the same tribunal and not by two different tribunals."

If one adopts this approach, the language of clause 41 of Shelltime 4 contains nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation
or anything else. In my opinion it therefore applies to the present dispute.

The next question is whether, in view of the allegation of bribery, the clause is binding upon the owners. They say that if they are right about the bribery, they were entitled to rescind the whole contract, including the
arbitration clause. The arbitrator therefore has no jurisdiction and the dispute should be decided by the court.

The principle of separability enacted in section 7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement
must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is
invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he
never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the
signature to the arbitration agreement, as a "distinct agreement", was forged. Similarly, if a party alleges that someone who purported to sign as agent on his behalf had no authority whatever to conclude any agreement on
his behalf, that is an attack on both the main agreement and the arbitration agreement.

On the other hand, if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorized or for improper reasons, that is not necessarily an attack on
the arbitration agreement. It would have to be shown that whatever the terms of the main agreement or the reasons for which the agent concluded it, he would have had no authority to enter into an arbitration agreement.
Even if the allegation is that there was no concluded agreement (for example, that terms of the main agreement remained to be agreed) that is not necessarily an attack on the arbitration agreement. If the arbitration clause
has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration.

In the present case, it is alleged that the main agreement was in uncommercial terms which, together with other surrounding circumstances, give rise to the inference that an agent acting for the owners was bribed to
consent to it. But that does not show that he was bribed to enter into the arbitration agreement. It would have been remarkable for him to enter into any charter without an arbitration agreement, whatever its other terms had
been. Mr Butcher QC, who appeared for the owners, said that but for the bribery, the owners would not have entered into any charter with the charterers and therefore would not have entered into an arbitration agreement.
But that is in my opinion exactly the kind of argument which section 7 was intended to prevent. It amounts to saying that because the main agreement and the arbitration agreement were bound up with each other, the
invalidity of the main agreement should result in the invalidity of the arbitration agreement. The one should fall with the other because they would never have been separately concluded. But section 7 in my opinion means
that they must be treated as having been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity
of the main agreement.

Mr Butcher submitted that the approach to construction and separability adopted by the Court of Appeal infringed the owners' right of access to a court for the resolution of their civil disputes, contrary to article 6 of the
European Convention on Human Rights. I do not think there is anything in this point. The European Convention was not intended to destroy arbitration. Arbitration is based upon agreement and the parties can by agreement
waive the right to a court. If it appears upon a fair construction of the charter that they have agreed to the arbitration of a particular dispute, there is no infringement of their Convention right.

For these reasons, which are substantially the same as those given by Longmore LJ in the Court of Appeal, I would hold that the charterers are entitled to a stay of the proceedings to rescind the charters and dismiss the
appeal.
LORD HOPE OF CRAIGHEAD
My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I entirely agree with it, and for the reasons he gives I too would dismiss the appeal. I wish to add only a few brief
comments.

There are, as my noble and learned friend has said, two issues in this appeal. The first is an issue of construction: whether the appellants' claims that the charterparties have been validly rescinded are disputes which arise
under, or out of, the charterparties within the meaning of clause 41. The second is an issue of separability: whether, assuming that the appellants have an arguable case that the charterparties have been validly rescinded,
they also have an arguable case that the arbitration agreements in clause 41 have been rescinded as well. The appellants submit that they were entitled to rescind the charterparties, including the arbitration agreements,
because the charterparties were induced by bribery. The allegations of bribery are directed to the terms on which the charters were entered into by the Sovcomflot group of companies as owners with Mr Nikitin's chartering
companies. They are said to have been uncommercial and unbelievably generous. The bribes are said to impeach not only the charters themselves but also the arbitration clause. The argument is essentially one of
causation. It is that the charters would not have been entered into in the absence of these bribes or other benefits, and that but for the agreement to enter into them there would have been no agreement to go to arbitration.
Had it not been for the bribes provided by Mr Nikitin to their director-general, Mr Skarga, Sovcomflot would not have done business with Mr Nikitin's companies at all.

On the first issue, the appellants say that it is highly unlikely that the parties, in agreeing to an arbitration provision, intended it to cover disputes as to whether the contract itself was induced by bribery, as to which it must be
assumed one party would be entirely ignorant. The clear trend of recent authorities, they say, is to give a narrow meaning to the words used in the arbitration agreement to identify the disputes that are referred by it. They
must be taken to have informed any decision to use the clause which is set out in the Shelltime 4 standard forms. I think that there are two answers to this argument. One is to be found in the wording of clause 41 itself. The
other is to be found by considering whether its consequences make sense in the international commercial context within which these standard forms are designed to operate.

As for the wording, contracts negotiated between parties in the international market are commonly based upon standard forms the terms of which are well known. Because they have a well-understood meaning, they
enable contracts to be entered into quickly and efficiently. The Shelltime 4 standard form is a good example of this practice. It has been in frequent use since at least 1984, and it is still in use. But it must be appreciated that
the various clauses in these forms serve various functions. In some a high degree of precision is necessary. Terms which define the parties' mutual obligations in relation to price and performance lie at the heart of every
business transaction. They fall into that category. In others, where the overall purpose is clear, the parties are unlikely to linger over the words which are used to express it.

Clause 41 falls into the latter category. No contract of this kind is complete without a clause which identifies the law to be applied and the methods to be used for the determination of disputes. Its purpose is to avoid the
expense and delay of having to argue about these matters later. It is the kind of clause to which ordinary businessmen readily give their agreement so long as its general meaning is clear. They are unlikely to trouble
themselves too much about its precise language or to wish to explore the way it has been interpreted in the numerous authorities, not all of which speak with one voice. Of course, the court must do what it can to provide
charterers and shipowners with legal certainty at the negotiation stage as to what they are agreeing to. But there is no conflict between that proposition and the guidance which Longmore LJ gave in paras 17 - 19 of the
Court of Appeal's judgment about the interpretation of jurisdiction and arbitration clauses in international commercial contracts. The proposition that any jurisdiction or arbitration clause in an international commercial contract
should be liberally construed promotes legal certainty. It serves to underline the golden rule that if the parties wish to have issues as to the validity of their contract decided by one tribunal and issues as to its meaning or
performance decided by another, they must say so expressly. Otherwise they will be taken to have agreed on a single tribunal for the resolution of all such disputes.

The overall purpose of clause 41 is identified in the two opening paragraphs. These are the choice of law and jurisdiction clauses. There is no sign here - leaving aside the question of arbitration for a moment - that the
parties intended that the disputes which were to be determined in accordance with the laws of England and be decided by the English courts were not to include disputes about the charter's validity. The simplicity of the
wording is a plain indication to the contrary. The arbitration clause which follows is to be read in that context. It indicates to the reader that he need not trouble himself with fussy distinctions as to what the words "arising
under" and "arising out of" may mean. Taken overall, the wording indicates that arbitration may be chosen as a one-stop method of adjudication for the determination of all disputes. Disputes about validity, after all, are no
less appropriate for determination by an arbitrator than any other kind of dispute that may arise. So I do not think that there is anything in the appellants' point that it must be assumed that when the charters were entered into
one party was entirely ignorant that they were induced by bribery. The purpose of the clause is to provide for the determination of disputes of all kinds, whether or not they were foreseen at the time when the contract was
entered into.

Then there are consequences that would follow, if the appellants are right. It is not just that the parties would be deprived of the benefit of having all their disputes decided in one forum. The jurisdiction clause does not say
where disputes about the validity of the contract are to be determined, if this is not to be in the forum which is expressly mentioned. The default position is that such claims would have to be brought in the jurisdiction where
their opponents were incorporated, wherever and however unreliable that might be, while claims for breach of contract have to be brought in England. But why, it may be asked, would any sensible businessmen have wished
to agree to this? As Bingham LJ said inAshville Investments Ltd v Elmer Contractors Ltd [1989] QB 488, 517, one should be slow to attribute to reasonable parties an intention that there should in any foreseeable eventuality
be two sets of proceedings. If the parties have confidence in their chosen jurisdiction for one purpose, why should they not have confidence in it for the other? Why, having chosen their jurisdiction for one purpose, should
they leave the question which court is to have jurisdiction for the other purpose unspoken, with all the risks that this may give rise to? For them, everything is to be gained by avoiding litigation in two different jurisdictions.
The same approach applies to the arbitration clause

The Court of Appeal said that the time had come for a fresh start to be made, at any rate for cases arising in an international commercial context. It has indeed been clear for many years that the trend of recent authority
has risked isolating the approach that English law takes to the wording of such clauses from that which is taken internationally. It makes sense in the context of international commerce for decisions about their effect to be
informed by what has been decided elsewhere.

The Bundesgerichtshof's Decision of 27 February 1970 to which Lord Hoffmann has referred makes two points that are relevant to this issue. The first is that haphazard interpretations should be avoided and a rule of
construction established which presumes, in cases of doubt, that reasonable parties will wish to have the claims arising from their contract decided by the same tribunal irrespective of whether their contract is effective or not.
The second is that experience shows that as soon as a dispute of any kind arises from a contract, objections are very often also raised against its validity. As the Bundesgerichtshof said, entrusting the assessment of the
facts of the case to different tribunals according to the approach that is taken to the issues between them is unlikely to occur to the contracting parties.

In AT & T Technologies Inc v Communications Workers of America, 475 US 643 (1986), 650, the United States Supreme Court said that, in the absence of any express provision excluding a particular grievance from
arbitration, only the most forceful evidence of a purpose to exclude the claim from arbitration could prevail. In Threlkeld & Co Inc v Metallgesellschaft Ltd (London), 923 F 2d 245 (2d Cir 1991), the court observed that federal
arbitration policy required that any doubts concerning the scope of arbitral issues should be resolved in favour of arbitration and that arbitration clauses should be construed as broadly as possible. In Comandate Marine
Corp v Pan Australia Shipping Pty Ltd[2006] FCAFC 192, para 165 the Federal Court of Australia said that a liberal approach to the words chosen by the parties was underpinned by the sensible commercial presumption that
the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places, particularly when they were operating in a truly international market. This approach to the issue of
construction is now firmly embedded as part of the law of international commerce. I agree with the Court of Appeal that it must now be accepted as part of our law too.

It is in the light of these observations that the issue of severability should be viewed also. Section 7 of the Arbitration Act 1996 reproduces in English law the principle that was laid down by section 4 of the United States
Arbitration Act 1925. That section provides that, on being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to
proceed to arbitration. Section 7 uses slightly different language, but it is to the same effect. The validity, existence or effectiveness of the arbitration agreement is not dependent upon the effectiveness, existence or validity of
the underlying substantive contract unless the parties have agreed to this. The purpose of these provisions, as the United States Supreme Court observed in Prima Paint Corpn v Flood & Conklin Mfg Co, 388 US 395 (1967),
404, is that the arbitration procedure, when selected by the parties to a contract, should be speedy and not subject to delay and obstruction in the courts. The statutory language, it said, did not permit the court to consider
claims of fraud in the inducement of the contract generally. It could consider only issues relating to the making and performance of the agreement to arbitrate. Dicey, Morris and Collins, The Conflict of Laws, 14th ed (2006),
vol 1, para 12-099, acknowledge that there are excellent reasons of policy to support this approach.

The appellants' case is that, as there was no real consent to the charterparties because they were induced by bribery, there was no real consent to the arbitration clauses. They submit that a line does not have to be drawn
between matters which might impeach the arbitration clause and those which affect the main contract. What is needed is an analysis of whether the matters that affect the main contract are also matters which affect the

validity of the arbitration clause. As the respondents point out, this is a causation argument. The appellants say that no substantive distinction can be drawn between various situations where the complaint is made that there
was no real consent to the transaction. It would be contrary to the policy of the law, which is to deter bribery, that acts of the person who is alleged to have been bribed should deprive the innocent party of access to a court
for determination of the issue whether the contract was induced by bribery.
1

But, as Longmore LJ said in para 21 of the Court of Appeal's judgment, this case is different from a dispute as to whether there was ever a contract at all. As everyone knows, an arbitral award possesses no binding force
except that which is derived from the joint mandate of the contracting parties. Everything depends on their contract, and if there was no contract to go to arbitration at all an arbitrator's award can have no validity. So, where
the arbitration agreement is set out in the same document as the main contract, the issue whether there was an agreement at all may indeed affect all parts of it. Issues as to whether the entire agreement was procured by
impersonation or by forgery, for example, are unlikely to be severable from the arbitration clause.

That is not this case, however. The appellants' argument was not that there was no contract at all, but that they were entitled to rescind the contract including the arbitration agreement because the contract was induced by
bribery. Allegations of that kind, if sound, may affect the validity of the main agreement. But they do not undermine the validity of the arbitration agreement as a distinct agreement. The doctrine of separability requires direct
impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a
challenge to the validity to the main agreement will not do. That being the situation in this case, the agreement to go to arbitration must be given effect.
LORD SCOTT OF FOSCOTE
My Lords,

I have had the advantage of reading in advance the opinion of my noble and learned friend Lord Hoffmann and find myself in complete agreement with the conclusion he has reached and his reasons for that conclusion. I
cannot improve upon those reasons and shall not try to do so. I, too, would dismiss this appeal.
LORD WALKER OF GESTINGTHORPE
My Lords,

I have had the privilege of reading in draft the opinion of my noble and learned friend Lord Hoffmann. I am in full agreement with it. It gives full effect to the legislative purpose of section 7 of the Arbitration Act 1996. It marks
a fresh start, leaving behind some fine verbal distinctions (on the language of particular arbitration clauses) which few commercial men would regard as significant. For these reasons I too would dismiss this appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD
My Lords,

For the reasons given in the speeches prepared by my noble and learned friends, Lord Hoffmann and Lord Hope of Craighead, with which I am in full agreement, I too would dismiss this appeal.

G.R. No. L-42283 March 18, 1985


BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:


This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the
plaintiffs-appellees, to pay P500.00 attorney's fees and costs.
The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus
7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The
plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffsappellees.
On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts.
On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendantsappellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent
payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land.
The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments
corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the decision reads:
WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT VALIDLY cancelled by
the defendants. Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the defendants.
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:

First Assignment of Error


THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN
FAVOR OF THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which provides:
xxx xxx xxx
SIXTH.In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expired; without the payments corresponding to both months having been satisfied, an
interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of
SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof,
the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this contract had never been entered into . In case of such cancellation of the contract, all the amounts paid in
accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure
of the party of the SECOND PART to fulfill his part of the agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and
deliver the same to the party of the FIRST PART. (Emphasis supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955)
where this Court upheld the right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence of
the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to declare
the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an
agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276)
Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions' (Lopez v. Commissioner
of Customs, 37 SCRA 327, and cases cited therein)

Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court.
(Ponce Enrile v. Court of Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the
Philippines v. De los Angeles, (35 SCRA 102) where we explained that:
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to
scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated many consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court
that will conclusively and finally settle whether the action taken was or was not correct in law. ... .
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking
Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that
The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. (Song Fo & Co.
v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides:
SECOND.That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED
TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from this date until the total payment of the price above stipulated, including interest.
because they failed to pay the August installment, despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9)
years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate amount of P
4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land
which they can really call their own.
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:

NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as well as any other condonation
that the party of the FIRST PART may give to the party of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by this
contract, in case of default or non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the
plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68),
we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in question. On the contrary, it is
admitted that the delayed payments were received without protest or qualification. ... Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited
their right to invoke the above-quoted provision regarding the nullifying effect of the non-payment of six months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their
arrearages.
The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees
may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract specifically provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the contract
which provides:
SECOND.That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED
TWENTY ONLY (P 3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... . (Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to
paragraph 12 of the contract which provides:
TWELFTH.That once the payment of the sum of P3,920.00, the total price of the sale is completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART, the necessary deed or deeds to transfer to the latter
the title of the parcel of land sold, free from all hens and encumbrances other than those expressly provided in this contract; it is understood, however, that au the expenses which may be incurred in the said transfer of title shall be paid by
the party of the SECOND PART, as above stated.
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which
they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines,
Inc. v. Teves (83 SCRA 36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this
category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer
upon payment of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same,
especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers."
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation
of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in
paragraph 12 of the contract. The attorney's fees are justified.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS
(P671.67) without any interests. Costs against the defendants-appellants.
SO ORDERED.

KOREA TECHNOLOGIES CO., G.R. No. 143581


LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in civil and commercial disputes. Arbitration along with mediation, conciliation, and negotiation, being inexpensive, speedy and less hostile methods have long been
favored by this Court. The petition before us puts at issue an arbitration clause in a contract mutually agreed upon by the parties stipulating that they would submit themselves to arbitration in a foreign country. Regrettably, instead of hastening the resolution of
their dispute, the parties wittingly or unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants, while private respondent Pacific General Steel Manufacturing
Corp. (PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a Contract [1] whereby KOGIES would set up an LPG Cylinder Manufacturing Plant in Carmona, Cavite. The contract was executed in the Philippines. On April 7, 1997, the parties executed, in Korea,
an Amendment for Contract No. KLP-970301 dated March 5, 1997[2] amending the terms of payment. The contract and its amendment stipulated that KOGIES will ship the machinery and facilities necessary for manufacturing LPG cylinders for which PGSMC
would pay USD 1,224,000. KOGIES would install and initiate the operation of the plant for which PGSMC bound itself to pay USD 306,000 upon the plants production of the 11-kg. LPG cylinder samples. Thus, the total contract price amounted to USD
1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease [3] with Worth Properties, Inc. (Worth) for use of Worths 5,079-square meter property with a 4,032-square meter warehouse building to house the LPG manufacturing plant. The monthly
rental was PhP 322,560 commencing on January 1, 1998 with a 10% annual increment clause.Subsequently, the machineries, equipment, and facilities for the manufacture of LPG cylinders were shipped, delivered, and installed in the Carmona plant. PGSMC
paid KOGIES USD 1,224,000.
However, gleaned from the Certificate [4] executed by the parties on January 22, 1998, after the installation of the plant, the initial operation could not be conducted as PGSMC encountered financial difficulties affecting the supply of materials, thus
forcing the parties to agree that KOGIES would be deemed to have completely complied with the terms and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial operation of the plant, PGSMC issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998 for PhP 4,500,000; and (2) BPI Check No. 0316413 dated
March 30, 1998 for PhP 4,500,000.[5]
When KOGIES deposited the checks, these were dishonored for the reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES sent a demand letter [6] to PGSMC threatening criminal action for violation of Batas Pambansa Blg. 22 in case of
nonpayment. On the same date, the wife of PGSMCs President faxed a letter dated May 7, 1998 to KOGIES President who was then staying at a Makati City hotel. She complained that not only did KOGIES deliver a different brand of hydraulic press from that
agreed upon but it had not delivered several equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded but the payments were stopped for reasons previously made known to KOGIES. [7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract dated March 5, 1997 on the ground that KOGIES had altered the quantity and lowered the quality of the machineries and equipment it delivered to PGSMC, and
that PGSMC would dismantle and transfer the machineries, equipment, and facilities installed in the Carmona plant. Five days later, PGSMC filed before the Office of the Public Prosecutor an Affidavit-Complaint for Estafa docketed as I.S. No. 98-03813 against
Mr. Dae Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not unilaterally rescind their contract nor dismantle and transfer the machineries and equipment on mere imagined violations by KOGIES. It also insisted that their
disputes should be settled by arbitration as agreed upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1, 1998 letter threatening that the machineries, equipment, and facilities installed in the plant would be dismantled and transferred on July 4, 1998. Thus, on July 1,
1998, KOGIES instituted an Application for Arbitration before the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case No. 98-117 [8] against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted a temporary restraining order (TRO) on July 4, 1998,
which was subsequently extended until July 22, 1998. In its complaint, KOGIES alleged that PGSMC had initially admitted that the checks that were stopped were not funded but later on claimed that it stopped payment of the checks for the reason that their
value was not received as the former allegedly breached their contract by altering the quantity and lowering the quality of the machinery and equipment installed in the plant and failed to make the plant operational although it earlier certified to the contrary as
shown in a January 22, 1998 Certificate. Likewise, KOGIES averred that PGSMC violated Art. 15 of their Contract, as amended, by unilaterally rescinding the contract without resorting to arbitration. KOGIES also asked that PGSMC be restrained from
dismantling and transferring the machinery and equipment installed in the plant which the latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not entitled to the TRO since Art. 15, the arbitration clause, was null and void for being against public policy as it ousts the local courts of jurisdiction over the instant
controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim [9] asserting that it had the full right to dismantle and transfer the machineries and equipment because it had paid for them in full as stipulated in the contract; that KOGIES was
not entitled to the PhP 9,000,000 covered by the checks for failing to completely install and make the plant operational; and that KOGIES was liable for damages amounting to PhP 4,500,000 for altering the quantity and lowering the quality of the machineries
and equipment. Moreover, PGSMC averred that it has already paid PhP 2,257,920 in rent (covering January to July 1998) to Worth and it was not willing to further shoulder the cost of renting the premises of the plant considering that the LPG cylinder
manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order denying the application for a writ of preliminary injunction, reasoning that PGSMC had paid KOGIES USD 1,224,000, the value of the machineries and
equipment as shown in the contract such that KOGIES no longer had proprietary rights over them.And finally, the RTC held that Art. 15 of the Contract as amended was invalid as it tended to oust the trial court or any other court jurisdiction over any dispute that
may arise between the parties. KOGIES prayer for an injunctive writ was denied. [10] The dispositive portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this Court believes and so holds that no cogent reason exists for this Court to grant the writ of preliminary injunction to restrain and refrain defendant from dismantling the machineries
and facilities at the lot and building of Worth Properties, Incorporated at Carmona, Cavite and transfer the same to another site: and therefore denies plaintiffs application for a writ of preliminary injunction.

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

facilities and transfer of technology for a total contract price of USD 1,530,000 such that the dismantling and transfer of the machinery and facilities would result in the dismantling and transfer of the very plant itself to the great prejudice of KOGIES as the still
unpaid owner/seller of the plant. Moreover, KOGIES points out that the arbitration clause under Art. 15 of the Contract as amended was a valid arbitration stipulation under Art. 2044 of the Civil Code and as held by this Court in Chung Fu Industries (Phils.), Inc.
[15]

In the meantime, PGSMC filed a Motion for Inspection of Things [16] to determine whether there was indeed alteration of the quantity and lowering of quality of the machineries and equipment, and whether these were properly installed. KOGIES
opposed the motion positing that the queries and issues raised in the motion for inspection fell under the coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion for inspection; (2) denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order; and (3) denying KOGIES motion to dismiss PGSMCs compulsory
counterclaims as these counterclaims fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration [17] of the September 21, 1998 RTC Order granting inspection of the plant and denying dismissal of PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998 urgent motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for certiorari [18] docketed as CA-G.R. SP No. 49249, seeking
annulment of the July 23, 1998 and September 21, 1998 RTC Orders and praying for the issuance of writs of prohibition, mandamus, and preliminary injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and transferring the machineries and
equipment in the Carmona plant, and to direct the RTC to enforce the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for reconsideration and directed the Branch Sheriff to proceed with the inspection of the machineries and equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition [20] in CA-G.R. SP No. 49249 informing the CA about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the writs of prohibition, mandamus and preliminary injunction
which was not acted upon by the CA. KOGIES asserted that the Branch Sheriff did not have the technical expertise to ascertain whether or not the machineries and equipment conformed to the specifications in the contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report [21] finding that the enumerated machineries and equipment were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision [22] affirming the RTC Orders and dismissing the petition for certiorari filed by KOGIES. The CA found that the RTC did not gravely abuse its discretion in issuing the assailed July 23,
1998 and September 21, 1998 Orders. Moreover, the CA reasoned that KOGIES contention that the total contract price for USD 1,530,000 was for the whole plant and had not been fully paid was contrary to the finding of the RTC that PGSMC fully paid the
price of USD 1,224,000, which was for all the machineries and equipment. According to the CA, this determination by the RTC was a factual finding beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the lower court that an arbitration clause which provided for a final determination of the legal rights of the parties to the contract by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum shopping by PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones and payment of docket fees was not required since the Answer
with counterclaim was not an initiatory pleading. For the same reason, the CA said a certificate of non-forum shopping was also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since KOGIES did not wait for the resolution of its urgent motion for reconsideration of the September 21, 1998 RTC Order which was the plain, speedy, and adequate
remedy available. According to the CA, the RTC must be given the opportunity to correct any alleged error it has committed, and that since the assailed orders were interlocutory, these cannot be the subject of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY AND FACILITIES AS A QUESTION OF FACT BEYOND THE AMBIT OF A PETITION FOR CERTIORARI INTENDED ONLY FOR CORRECTION OF
ERRORS OF JURISDICTION OR GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS FINDING ON THE SAME QUESTION WAS
IMPROPERLY RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE 15 OF THE CONTRACT BETWEEN THE PARTIES FOR BEING CONTRARY TO PUBLIC POLICY AND FOR OUSTING THE COURTS OF JURISDICTION;
c.

DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS TO BE ALL COMPULSORY NOT NECESSITATING PAYMENT OF DOCKET FEES AND CERTIFICATION OF NON-FORUM SHOPPING;

d.
RULING THAT THE PETITION WAS FILED PREMATURELY WITHOUT WAITING FOR THE RESOLUTION OF THE MOTION FOR RECONSIDERATION OF THE ORDER DATED SEPTEMBER 21, 1998 OR WITHOUT
GIVING THE TRIAL COURT AN OPPORTUNITY TO CORRECT ITSELF;
e.

PROCLAIMING THE TWO ORDERS DATED JULY 23 AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY IN NATURE;

f.

NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY WITHOUT MERIT.[23]
The Courts Ruling

The petition is partly meritorious.


Before we delve into the substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid docket fees and filed a certificate of non-forum shopping, and that its failure to do so was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer with Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997 Revised Rules of Civil Procedure, the rule that was effective at
the time the Answer with Counterclaim was filed. Sec. 8 on existing counterclaim or cross-claimstates, A compulsory counterclaim or a cross-claim that a defending party has at the time he files his answer shall be contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims against KOGIES, it was not liable to pay filing fees for said counterclaims being compulsory in nature. We stress, however, that effective August 16, 2004 under
Sec. 7, Rule 141, as amended by A.M. No. 04-2-04-SC, docket fees are now required to be paid in compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an initiatory pleading which requires a certification against forum shopping under Sec. 5 [24] of Rule 7, 1997 Revised Rules of Civil Procedure. It is a responsive pleading,
hence, the courts a quo did not commit reversible error in denying KOGIES motion to dismiss PGSMCs compulsory counterclaims.
Interlocutory orders proper subject of certiorari
[25]

Citing Gamboa v. Cruz, the CA also pronounced that certiorari and Prohibition are neither the remedies to question the propriety of an interlocutory order of the trial court. [26] The CA erred on its reliance on Gamboa. Gamboa involved the denial of a
motion to acquit in a criminal case which was not assailable in an action for certiorari since the denial of a motion to quash required the accused to plead and to continue with the trial, and whatever objections the accused had in his motion to quash can then be
used as part of his defense and subsequently can be raised as errors on his appeal if the judgment of the trial court is adverse to him. The general rule is that interlocutory orders cannot be challenged by an appeal. [27] Thus, in Yamaoka v. Pescarich
Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse judgment on the merits, incorporating in said appeal the grounds for assailing the interlocutory orders. Allowing appeals from interlocutory orders would
result in the sorry spectacle of a case being subject of a counterproductive ping-pong to and from the appellate court as often as a trial court is perceived to have made an error in any of its interlocutory rulings. However, where the assailed
interlocutory order was issued with grave abuse of discretion or patently erroneous and the remedy of appeal would not afford adequate and expeditious relief, the Court allows certiorari as a mode of redress. [28]
Also, appeals from interlocutory orders would open the floodgates to endless occasions for dilatory motions. Thus, where the interlocutory order was issued without or in excess of jurisdiction or with grave abuse of discretion, the remedy is certiorari.
[29]

The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction in the issuance of the two assailed orders coupled with the fact that there is no plain, speedy, and adequate remedy in the ordinary course of law amply
provides the basis for allowing the resort to a petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition for certiorari. Note that KOGIES motion for reconsideration of the July 23, 1998 RTC Order which denied the issuance of the injunctive writ had already been
denied. Thus, KOGIES only remedy was to assail the RTCs interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the September 21, 1998 RTC Order relating to the inspection of things, and the allowance of the compulsory counterclaims has not yet been resolved, the circumstances in this case
would allow an exception to the rule that before certiorari may be availed of, the petitioner must have filed a motion for reconsideration and said motion should have been first resolved by the court a quo. The reason behind the rule is to enable the lower court, in
the first instance, to pass upon and correct its mistakes without the intervention of the higher court. [30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant, equipment, and facilities when he is not competent and knowledgeable on said matters is evidently flawed and devoid of any legal support. Moreover, there is an
urgent necessity to resolve the issue on the dismantling of the facilities and any further delay would prejudice the interests of KOGIES. Indeed, there is real and imminent threat of irreparable destruction or substantial damage to KOGIES equipment and
machineries. We find the resort to certiorari based on the gravely abusive orders of the trial court sans the ruling on the October 2, 1998 motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It provides:
Article 15. Arbitration.All disputes, controversies, or differences which may arise between the parties, out of or in relation to or in connection with this Contract or for the breach thereof, shall finally be settled by arbitration in
Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial Arbitration Board. The award rendered by the arbitration(s) shall be final and binding upon both parties concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null and void.

Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the contract is made governs. Lex loci contractus. The contract in this case was perfected here in the Philippines. Therefore, our laws ought to govern. Nonetheless, Art. 2044 of
the Civil Code sanctions the validity of mutually agreed arbitral clause or the finality and binding effect of an arbitral award. Art. 2044 provides, Any stipulation that the arbitrators award or decision shall be final, is valid, without prejudice to Articles 2038,
2039 and 2040. (Emphasis supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043, [34] may be voided, rescinded, or annulled, but these would not denigrate the finality of the arbitral
award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been shown to be contrary to any law, or against morals, good customs, public order, or public policy. There has been no showing that the parties have not dealt
with each other on equal footing. We find no reason why the arbitration clause should not be respected and complied with by both parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to arbitration is a contract and that a clause in a contract
providing that all matters in dispute between the parties shall be referred to arbitration is a contract. [36] Again in Del Monte Corporation-USA v. Court of Appeals, we likewise ruled that [t]he provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a contract. [37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in accordance with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and binding, is not contrary to public policy. This Court has
sanctioned the validity of arbitration clauses in a catena of cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and Co., Inc.,[38] this Court had occasion to rule that an arbitration clause to resolve differences and breaches of mutually agreed
contractual terms is valid. In BF Corporation v. Court of Appeals, we held that [i]n this jurisdiction, arbitration has been held valid and constitutional. Even before the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement
of disputes through arbitration. Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on arbitration. [39] And in LM Power Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling disputes, arbitrationalong with mediation, conciliation and negotiationis encouraged by the Supreme Court. Aside from unclogging judicial dockets, arbitration also
hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as the wave of the future in international civil and commercial disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers the
asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in favor of arbitration. [40]
Having said that the instant arbitration clause is not against public policy, we come to the question on what governs an arbitration clause specifying that in case of any dispute arising from the contract, an arbitral panel will be constituted in a foreign
country and the arbitration rules of the foreign country would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising from contractual relations. In case a foreign arbitral body is chosen by the parties, the arbitration rules of our domestic arbitration bodies would not be
applied. As signatory to the Arbitration Rules of the UNCITRAL Model Law on International Commercial Arbitration [41] of the United Nations Commission on International Trade Law (UNCITRAL) in the New York Convention on June 21, 1985,
the Philippinescommitted itself to be bound by the Model Law. We have even incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as the Alternative Dispute Resolution Act of 2004 entitled An Act to Institutionalize the Use of an
Alternative Dispute Resolution System in the Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial Arbitration.International commercial arbitration shall be governed by the Model Law on International Commercial Arbitration (the Model Law) adopted by the
United Nations Commission on International Trade Law on June 21, 1985 (United Nations Document A/40/17) and recommended for enactment by the General Assembly in Resolution No. 40/72 approved on December 11, 1985, copy of
which is hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model Law, regard shall be had to its international origin and to the need for uniformity in its interpretation and resort may be made to the travaux preparatories and the
report of the Secretary General of the United Nations Commission on International Trade Law dated March 25, 1985 entitled, International Commercial Arbitration: Analytical Commentary on Draft Trade identified by reference number A/CN.
9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since it is a procedural law which has a retroactive effect. Likewise, KOGIES filed its application for arbitration before the KCAB on July 1, 1998 and it is still pending
because no arbitral award has yet been rendered. Thus, RA 9285 is applicable to the instant case. Well-settled is the rule that procedural laws are construed to be applicable to actions pending and undetermined at the time of their passage, and are deemed
retroactive in that sense and to that extent. As a general rule, the retroactive application of procedural laws does not violate any personal rights because no vested right has yet attached nor arisen from them. [42]
Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:

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

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


Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final and binding are not immediately enforceable or cannot be implemented immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates the requirement
for the arbitral award to be recognized by a competent court for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement on the grounds provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and
44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York Convention shall govern the recognition and enforcement of arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed with the Regional Trial Court in accordance with the rules of procedure to be promulgated by the Supreme Court. Said procedural rules shall provide that
the party relying on the award or applying for its enforcement shall file with the court the original or authenticated copy of the award and the arbitration agreement. If the award or agreement is not made in any of the official languages, the
party shall supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not Covered by the New York Convention.The recognition and enforcement of foreign arbitral awards not covered by the New York Convention shall be done in
accordance with procedural rules to be promulgated by the Supreme Court. The Court may, on grounds of comity and reciprocity, recognize and enforce a non-convention award as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral award when confirmed by a court of a foreign country, shall be recognized and enforced as a foreign arbitral award and not as a judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial Court, shall be enforced in the same manner as final and executory decisions of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and enforcement of an arbitration agreement or for vacations, setting aside, correction or modification of an arbitral award, and any application with a court for
arbitration assistance and supervision shall be deemed as special proceedings and shall be filed with the Regional Trial Court (i) where arbitration proceedings are conducted; (ii) where the asset to be attached or levied upon, or the act to
be enjoined is located; (iii) where any of the parties to the dispute resides or has his place of business; or (iv) in the National Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding for recognition and enforcement of an arbitral award, the Court shall send notice to the parties at their address of record in the arbitration, or if any part cannot be
served notice at such address, at such partys last known address. The notice shall be sent al least fifteen (15) days before the date set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a judgment of a foreign court but as a foreign arbitral award, and when confirmed, are enforced as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is similar to judgments or awards given by some of our quasi-judicial bodies, like the National Labor Relations Commission and Mines Adjudication Board, whose final
judgments are stipulated to be final and binding, but not immediately executory in the sense that they may still be judicially reviewed, upon the instance of any party. Therefore, the final foreign arbitral awards are similarly situated in that they need first to be
confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific authority and jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided under Art. 34(2) of the UNCITRAL Model Law. Secs. 42 and 45
provide:
SEC. 42. Application of the New York Convention.The New York Convention shall govern the recognition and enforcement of arbitral awards covered by said Convention.
The recognition and enforcement of such arbitral awards shall be filed with the Regional Trial Court in accordance with the rules of procedure to be promulgated by the Supreme Court. Said procedural rules shall provide that
the party relying on the award or applying for its enforcement shall file with the court the original or authenticated copy of the award and the arbitration agreement. If the award or agreement is not made in any of the official languages, the
party shall supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an award has been made, the Regional Trial Court may, if it considers it proper, vacate its decision and may also, on the application of the party claiming recognition
or enforcement of the award, order the party to provide appropriate security.

xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign arbitration proceeding may oppose an application for recognition and enforcement of the arbitral award in accordance with the procedures and rules to be
promulgated by the Supreme Court only on those grounds enumerated under Article V of the New York Convention. Any other ground raised shall be disregarded by the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually agreed upon by the parties, still the foreign arbitral award is subject to judicial review by the RTC which can set aside, reject, or vacate it. In this sense,
what this Court held in Chung Fu Industries (Phils.), Inc. relied upon by KOGIES is applicable insofar as the foreign arbitral awards, while final and binding, do not oust courts of jurisdiction since these arbitral awards are not absolute and without exceptions as
they are still judicially reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether domestic or foreign, are subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards
The differences between a final arbitral award from an international or foreign arbitral tribunal and an award given by a local arbitral tribunal are the specific grounds or conditions that vest jurisdiction over our courts to review the awards.
For foreign or international arbitral awards which must first be confirmed by the RTC, the grounds for setting aside, rejecting or vacating the award by the RTC are provided under Art. 34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC pursuant to Sec. 23 of RA 876 [44] and shall be recognized as final and executory decisions of the RTC, [45] they may only be assailed before the RTC and vacated on the
grounds provided under Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party in cases where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award, thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision of the Regional Trial Court confirming, vacating, setting aside, modifying or correcting an arbitral award may be appealed to the Court of Appeals in accordance
with the rules and procedure to be promulgated by the Supreme Court.
The losing party who appeals from the judgment of the court confirming an arbitral award shall be required by the appellate court to post a counterbond executed in favor of the prevailing party equal to the amount of the award in
accordance with the rules to be promulgated by the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign arbitration as it bound itself through the subject contract. While it may have misgivings on the foreign arbitration done in Korea by the KCAB, it has available
remedies under RA 9285. Its interests are duly protected by the law which requires that the arbitral award that may be rendered by KCAB must be confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an arbitration clause, stipulating that the arbitral award is final and binding, does not oust our courts of jurisdiction as the international arbitral award, the award of which is not
absolute and without exceptions, is still judicially reviewable under certain conditions provided for by the UNCITRAL Model Law on ICA as applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which provides that the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and binding on the parties, and not contrary to public policy; consequently, being bound to the contract of arbitration, a party may not unilaterally rescind or terminate the contract
for whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles [47] and reiterated in succeeding cases, [48] that the act of treating a contract as rescinded on account of infractions by the other contracting party is valid albeit provisional as it can be
judicially assailed, is not applicable to the instant case on account of a valid stipulation on arbitration. Where an arbitration clause in a contract is availing, neither of the parties can unilaterally treat the contract as rescinded since whatever infractions or breaches
by a party or differences arising from the contract must be brought first and resolved by arbitration, and not through an extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on whether the equipment and machineries delivered and installed were properly installed and operational in the plant in Carmona, Cavite; the ownership of equipment and payment
of the contract price; and whether there was substantial compliance by KOGIES in the production of the samples, given the alleged fact that PGSMC could not supply the raw materials required to produce the sample LPG cylinders, are matters proper for
arbitration.Indeed, we note that on July 1, 1998, KOGIES instituted an Application for Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of the Contract as amended. Thus, it is incumbent upon PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion for Inspection of Things on September 21, 1998, as the subject matter of the motion is under the primary jurisdiction of the mutually agreed arbitral body, the KCAB
in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the inspection made on October 28, 1998, as ordered by the trial court on October 19, 1998, is of no worth as said Sheriff is not technically competent to ascertain
the actual status of the equipment and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the grant of the inspection of the equipment and machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration

Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price of USD 1,530,000 was for the whole plant and its installation is beyond the ambit of a Petition for Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for certiorari. [49] Whether or not there was full payment for the machineries and equipment and installation is indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the RTC in resolving the issue on the ownership of the plant when it is the arbitral body (KCAB) and not the RTC which has jurisdiction and authority over the said issue. The RTCs
determination of such factual issue constitutes grave abuse of discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties


Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for PGSMC to dismantle and transfer the equipment and machineries, we find it to be in order considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries might well be under the primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of RA 9285 has jurisdiction to hear and grant interim measures to
protect vested rights of the parties. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not incompatible with an arbitration agreement for a party to request, before constitution of the tribunal, from a Court to grant such measure . After constitution
of the arbitral tribunal and during arbitral proceedings, a request for an interim measure of protection, or modification thereof, may be made with the arbitral or to the extent that the arbitral tribunal has no power to act or is unable to
act effectivity, the request may be made with the Court. The arbitral tribunal is deemed constituted when the sole arbitrator or the third arbitrator, who has been nominated, has accepted the nomination and written communication of said
nomination and acceptance has been received by the party making the request.
(b) The following rules on interim or provisional relief shall be observed:
Any party may request that provisional relief be granted against the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application transmitted by reasonable means to the Court or arbitral tribunal as the case may be and the party against whom the relief is sought, describing in appropriate
detail the precise relief, the party against whom the relief is requested, the grounds for the relief, and the evidence supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in implementing or enforcing an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for all damages resulting from noncompliance, including all expenses, and reasonable attorney's fees, paid in obtaining the orders judicial enforcement. (Emphasis
ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to :
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself;
(c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall
exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were explicit that even the pendency of an arbitral proceeding does not foreclose resort to the courts for provisional reliefs. We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not foreclose resort to the courts for provisional reliefs. The Rules of the ICC, which governs the parties arbitral dispute, allows the application of a party to a judicial
authority for interim or conservatory measures. Likewise, Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the rights of any party to petition the court to take measures to safeguard and/or conserve any matter
which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise known as the Alternative Dispute Resolution Act of 2004, allows the filing of provisional or interim measures with the regular courts whenever the arbitral
tribunal has no power to act or to act effectively.[50]
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of protection.
Secondly, considering that the equipment and machineries are in the possession of PGSMC, it has the right to protect and preserve the equipment and machineries in the best way it can. Considering that the LPG plant was non-operational, PGSMC
has the right to dismantle and transfer the equipment and machineries either for their protection and preservation or for the better way to make good use of them which is ineluctably within the management discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment and machineries in Worths property is not to the best interest of PGSMC due to the prohibitive rent while the LPG plant as set-up is not operational. PGSMC was losing
PhP322,560 as monthly rentals or PhP3.87M for 1998 alone without considering the 10% annual rent increment in maintaining the plant.
Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the preservation or transfer of the equipment and machineries as an interim measure, yet on hindsight, the July 23, 1998 Order of the RTC allowing the transfer of the
equipment and machineries given the non-recognition by the lower courts of the arbitral clause, has accorded an interim measure of protection to PGSMC which would otherwise been irreparably damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount based on the contract. Moreover, KOGIES is amply protected by the arbitral action it has instituted before the KCAB, the award of which can be enforced in our
jurisdiction through the RTC. Besides, by our decision, PGSMC is compelled to submit to arbitration pursuant to the valid arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and transfer the subject equipment and machineries, it does not have the right to convey or dispose of the same considering the pending arbitral proceedings to settle the differences
of the parties. PGSMC therefore must preserve and maintain the subject equipment and machineries with the diligence of a good father of a family [51] until final resolution of the arbitral proceedings and enforcement of the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:


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

PRUDENTIAL GUARANTEE AND ASSURANCE INC.,


Petitioner,

- versus -

G.R. No. 177240


Present:
CARPIO MORALES, J.,
Chairperson,
BERSAMIN,
DEL CASTILLO,*
VILLARAMA, JR., and
SERENO, JJ.

ANSCOR LAND, INC.,


Promulgated:
Respondent.
September 8, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assails the Decision[1] dated April 28, 2006 of the Court of Appeals (CA) in CA-G.R. SP No. 72854 which modified the Decision [2] promulgated on
September 2, 2002 by the Construction Industry Arbitration Commission (CIAC) to the effect that herein petitioner Prudential Guarantee and Assurance Inc. (PGAI) was declared solidarily liable with its principal Kraft Realty and Development Corporation (KRDC)
under the performance bond.
The facts follow.
On August 2, 2000, Anscor Land, Inc. (ALI) and KRDC entered into a Construction Contract [3] for the construction of an 8-unit townhouse (project) located in Capitol Hills, Quezon City.
Under the contract, KRDC was to build and complete the project within 275 continuous calendar days from the date of receipt of a notice to proceed for the consideration of P18,800,000.00.
As part of its undertaking, KRDC submitted a surety bond amounting to P4,500,000.00 to secure the reimbursement of the down payment paid by ALI in case of failure to finish the project and a performance bond amounting to P4,700,000.00 to
guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project. The said bonds were issued in favor of ALI by herein petitioner PGAI.
Under the Performance Bond,[4] the parties agreed on a time-bar provision which states:
Furthermore, it is hereby agreed and understood that PRUDENTIAL GUARANTEE AND ASSURANCE INC., shall not be liable for any claim not discovered and presented to the company within ten days from the expiration of this bond or
from the occurrence of the default or failure of the principal, whichever is the earliest, and that the obligee hereby waives his right to file any claim against the Surety after the termination of the period of ten days above mentioned
after which time this bond shall definitely terminate and be deemed absolutely cancelled.
KRDC then received a notice to proceed on November 24, 1999. On October 16, 2000 or 325 days after KRDC received the notice to proceed, and 50 days beyond the contract date of completion, ALI sent PGAI a letter [5] notifying the latter that the
contract with KRDC was terminated due to very serious delays. The letter also informed PGAI that ALI may be making claims against the said bonds.
KRDC, through a letter on October 20, 2000, asked ALI to reconsider its decision to terminate the contract and requested that it be allowed to continue with the project. OnOctober 27, 2000, ALI replied[6] with regrets that it stands by its earlier decision
to terminate the construction contract.
Through a letter[7] dated November 29, 2001, or exactly one (1) year after the expiration date in the performance bond, ALI reiterated its claim against the performance bond issued by PGAI amounting to P3,852,800.84. PGAI however did not respond
to the letter.
On February 7, 2002, ALI commenced arbitration proceedings against KRDC and PGAI in the CIAC. PGAI answered with cross-claim contending that it was not a party to the construction contract and that the claim of ALI against the bonds was filed
beyond the expiration period.
On September 2, 2002, the CIAC rendered judgment [8] awarding a total of P7,552,632.74 to ALI and a total of P1,292,487.81 to KRDC. CIAC also allowed the offsetting of the awards to both parties which resulted to a net amount due to ALI
of P6,260,144.93 to be paid by KRDC. Meanwhile, the CIAC found PGAI liable for the reimbursement of the unliquidated portion of the down payment as a solidary liability under the surety bond in the amount of P1,771,264.06.[9]
In the same judgment, the CIAC absolved PGAI from a claim against the performance bond. It reasoned that ALI belatedly filed its claim on the performance bond. The CIAC accepted the view that the November 29, 2001 letter of ALI to PGAI was the
first and only claim on the performance bond, which was filed unquestionably beyond the allowed period for filing claims under the contract.
The CIAC ruled that the October 16, 2000 letter of ALI to PGAI did not constitute a proper claim under the performance bond. In so ruling, the CIAC relied on the tenor of the letter which used the phrase may be making claims against the said
bonds. The CIAC interpreted this phrase as tentative at best and far from a positive claim against PGAI. According to the CIAC, the letter merely informed PGAI of the termination of the construction contract between ALI and KRDC and in no sense did such
letter present a valid claim against the performance bond issued by PGAI.
ALI then filed a petition for review on October 3, 2002[10] with the CA questioning the decision of the CIAC to release PGAI from its solidary liability on the performance bond.
The CA found the petition meritorious in its questioned Decision [11] dated April 28, 2006, to wit:
WHEREFORE, the petition is GRANTED. The decretal portion of the decision is MODIFIED to the effect that PGAI is hereby pronounced solidarily liable with KRDC under the performance bond.
SO ORDERED.[12]
Petitioner PGAI now comes to this Court to seek relief.
Petitioner argues that the CIAC had no jurisdiction over the dispute as regards the claim of ALI against the performance bond because petitioner was not a party to the construction contract. It maintains that Executive Order (EO) No. 1008 [13] did not
vest jurisdiction on the CIAC to settle disputes between a party to a construction contract on one hand and a non-party on the other.
The petitioner contends that CIACs jurisdiction was limited to the construction industry and cannot extend to surety or guarantee contracts. By reason of the lack of jurisdiction of the CIAC over the dispute, the September 2, 2002 judgment[14] of the
CIAC was void with regard to the liability of PGAI.
As to the award made by the CIAC on ALIs claims, petitioner maintains that it cannot be held liable under the performance bond because clearly, under the time-bar provision in the said bond, the claim made by ALI in its letter to PGAI
dated November 29, 2001 was submitted one (1) year late. Petitioner points out that such letter was the first and only definite claim that ALI made against the performance bond and unfortunately, it was filed beyond the allowed period. Hence, the Decision of
the CA declaring PGAI solidarily liable with KRDC under the performance bond is erroneous and should be struck down.
On the other hand, respondent avers that the construction contract itself provided that the performance and surety bond shall be deemed part of the construction contract, to wit:
Article 1

CONTRACT DOCUMENTS
1.1 The following shall form part of this Contract and together with this Contract, are known as the Contract Documents:
a. Bid Proposal
xxxx
d. Notice to proceed
xxxx
j.
Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by the Developer) [15]
By reason of this express provision in the construction contract, respondent maintains that petitioner PGAI became a party to such contract when it submitted its Surety and Performance bonds. Consequently, petitioners argument that CIAC has not
acquired jurisdiction over PGAI because the latter was not a party to the construction contract, is untenable.
As to the alleged lack of jurisdiction of CIAC over the dispute arising from the surety contract, respondent cites EO No. 1008, which provides that any dispute connected with a construction contract comes within the original and exclusive jurisdiction of
the CIAC. The surety bond being an integral part of the construction contract, it is necessarily connected thereto which brings it under the jurisdiction of the CIAC.
On the issue of timeliness of the claim, respondent insists that its letter dated October 16, 2000 was for all intents and purposes a notification of termination of the construction contract and at the same time a notice to petitioner that respondent is in
fact making a claim on the performance bond. Contrary to PGAIs view that the November 29, 2001 letter was the first and only claim made, respondent asserts that the said letter was merely a reiteration of its earlier October 16, 2000 claim.
In fine, there are two (2) main issues for this Court to resolve, to wit:
I.
Whether or not the CIAC had jurisdiction over the dispute.
II.
Whether or not the respondent made its claim on the performance bond within the period allowed by the time-bar provision.
First Issue Jurisdiction of the CIAC
Section 4 of EO No. 1008 defines the jurisdiction of the CIAC:
Sec. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in thePhilippines, whether the dispute arises before or after
the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship; violation of the terms of agreement; interpretation and/or application of contractual time and delays; maintenance and
defects; payment, default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines. (Italics supplied.)
EO No. 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties that have agreed to submit their dispute to voluntary arbitration. Under the
aforequoted provision, it is apparent that a dispute must meet two (2) requirements in order to fall under the jurisdiction of the CIAC: first, the dispute must be somehow connected to a construction contract; and second, the parties must have agreed to submit
the dispute to arbitration proceedings.
As regards the first requirement, the Performance Bond issued by the petitioner was meant to guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project. A guarantee or a surety contract under
Article 2047[16] of the Civil Code of the Philippines is an accessory contract because it is dependent for its existence upon the principal obligation guaranteed by it. [17]
In fact, the primary and only reason behind the acquisition of the performance bond by KRDC was to guarantee to ALI that the construction project would proceed in accordance with the contract terms and conditions. In effect, the performance bond
becomes liable for the completion of the construction project in the event KRDC fails in its contractual undertaking.
Because of the performance bond, the construction contract between ALI and KRDC is guaranteed to be performed even if KRDC fails in its obligation. In practice, a performance bond is usually a condition or a necessary component of construction
contracts. In the case at bar, the performance bond was so connected with the construction contract that the former was agreed by the parties to be a condition for the latter to push through and at the same time, the former is reliant on the latter for its existence
as an accessory contract.
Although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal. The Performance Bond is significantly and substantially
connected to the construction contract that there can be no doubt it is the CIAC, under Section 4 of EO No. 1008, which has jurisdiction over any dispute arising from or connected with it.
On the second requirement that the parties to a dispute must have previously agreed to submit to arbitration, it is clear from Article 24 of the Construction Contract itself that the parties have indeed agreed to submit their disputes to arbitration, to wit:
Article 24
DISPUTES AND ARBITRATION
All disputes, controversies, or differences between the parties arising out of or in connection with this Contract, or arising out of or in connection with the execution of the WORK shall be settled in accordance with the procedures laid down
by the Construction Industry Arbitration Commission. The cost of arbitration shall be borne jointly by both CONTRACTOR and DEVELOPER on a fifty-fifty (50-50) basis. [18]
Petitioner however argues that such provision in the construction contract does not bind it because it is not a party to such contract and in effect did not give its consent to submit to arbitration in case of any dispute on the performance bond. Such
argument is untenable. The Performance Bond issued by petitioner states that PGAI agreed -To guarantee the supply of labor, materials, tools, equipment and necessary supervision to complete the construction of Proposed Sigma Townhouses of the Obligee as per Notice to Proceed dated November 23, 1999, copy of which is
hereto attached and made an integral part of this bond. [19]
When it executed the performance bond, PGAIs undertaking thereunder was that of a surety to the obligation of KRDC, the principal under the construction contract. PGAI should not be allowed now to insist that it had nothing to do with the
construction contract and should be viewed as a non-party. Since the liability of petitioner as surety is solidary with that of KRDC, it was properly impleaded as it would be the party ultimately answerable under the bond should KRDC be adjudged liable for
breach of contract.Furthermore, it is well settled that accessory contracts should not be read independently of the main contract. They should be construed together in order to arrive at their true meaning. [20] In Velasquez v. Court of Appeals, [21] the Court labeled
such rule as the complementary contracts construed together doctrine. It states:
That the complementary contracts construed together doctrine applies in this case finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, which in this case
was the loan agreement. This doctrine closely adheres to the spirit of Art. 1374 of the Civil Code which states that
Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.
In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the construction contract was clear as to arbitration in the event of disputes.Applying the said doctrine, we rule that the silence of the accessory contract in this
case could only be construed as acquiescence to the main contract. The construction contract breathes life into the performance bond. We are not ready to assume that the performance bond contains reservations with regard to some of the terms and
conditions in the construction contract where in fact it is silent. On the other hand, it is more reasonable to assume that the party who issued the performance bond carefully and meticulously studied the construction contract that it guaranteed, and if it had
reservations, it would have and should have mentioned them in the surety contract.

Second Issue Petitioners Liability Under the Performance Bond


On the second issue, the crux of the controversy revolves upon a letter dated October 16, 2000 sent by ALI to PGAI. It reads:
xxxx
This pertains to the contract between Kraft Realty Development Corp. and Anscor Land, Inc., which is covered by surety and performance bonds by your good company.
Please be advised that we are now terminating the contract of Kraft due to the breach by Kraft of the terms and conditions of the construction contract . More specifically, the project has accumulated very serious delays, in spite of the full
cooperation that this company has extended to Kraft.
Kindly refer to the attached letter of termination dated 16 October 2000.
Anscor Land [Inc.] may be making claims against the said bonds and in this regard, kindly coordinate with the following for any matter with which we can assist you with.
Engr. Teodelito de Vera
Anscor Land, Inc.
Tel. 812-7941 to 48 Fax 813-5301
Thank you for your kind attention.[22] (Italics supplied.)
The question really is whether or not the foregoing letter constituted a valid claim and effectively complied with the time-bar provision in the performance bond.
It is clear that ALI communicated two (2) important points to PGAI in the letter. First, that ALI is terminating the construction contract with KRDC and second, that ALI may be making a claim on the bonds issued by PGAI.
The time-bar provision in the Performance Bond provides that any claim against the bond should be discovered and presented to the company within ten days from the expiration of this bond or from the occurrence of the default or failure of the principal,
whichever is the earliest. The purpose of this provision in the performance bond is to give the issuer, in this case PGAI, notice of the claim at the earliest possible time and to afford the issuer sufficient time to evaluate, and examine the validity of the claim while
the evidence or indicators of breach are fresh. In the construction industry, time is precious, delay costs money and postponement in making a claim could cause additional expenses.
In line with the rationale behind the time-bar provision, we rule that the letter dated October 16, 2000 was a sufficient claim. The tenor of the letter adequately put PGAI on notice that ALI has terminated the contract because of serious delays tantamount to
breach by KRDC of its obligations. The letter timely informed PGAI that ALI was in fact terminating the construction contract and thereby giving rise to the obligation of PGAI under the performance bond. PGAI was informed within the time-bar provision and had
all the opportunity to conduct its evaluation and examination as to the validity of the termination.
The CA thus correctly ruled that:
The fact of contract termination had been made known to PGAI as early as October 16, 2000. This termination consequently meant that the principal KRDC would no longer be able to supplylabor, materials, tools, equipment and necessary
supervision to complete the project. It was at this time, therefore, that PGAIs obligation guaranteeing the project completion arose, although the amount of payment was still undetermined.
That ALI merely used the word may in expressing its intent to proceed against the bond does not make its claim any less categorical as argued by PGAI. The point is the very condition giving rise to the obligation to pay, i.e. KRDCs default
and the resulting contract termination, was clearly mentioned in the 16 October 2000 letter. The citation of this fact is more than sufficient to place PGAI in notice that ALI shall be making claims on the bonds.
xxxx
But the important consideration is that ALI, by its 16 October 2000 letter, was informing PGAI of the contract termination, the very condition for its liabilities under the performance bond to accrue. ALI had no other purpose in sending the
letter than to notify PGAI that it was intending to proceed against the performance bond . PGAI makes much out of ALIs failure to identify the particular bond against which it would be claiming. But the contract termination necessarily
implies that there would be hiatus in the supply of labor and materials.
Surely, no bond would answer for the non-implementation of contractual provisions other than the performance bond. Further, the surety bond only guarantees reimbursement of the portion of the downpayment and not the supply of labor,
materials and equipment.[23] (Emphasis supplied, italics in the original.)
In interpreting the time-bar provision, the absence of any ambiguity in the words used would lead to the conclusion that the generally accepted meaning of the words shall control. In the time-bar provision, the word claim does not give rise to any ambiguity in
interpretation and does not call for a stretched understanding.
In Finasia Investments and Finance Corporation v. Court of Appeals,[24] the Court had the occasion to rule that:
The word claim is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction over the defendant who owes a claim. [25] (Italics supplied.)
In the case at bar, the claim of ALI against PGAI arose from the failure of KRDC to perform its obligation under the construction contract. ALI therefore already had the claim or right to payment against PGAI in the maximum amount of P4,700,000.00 from the
moment KRDC failed to comply with its obligation. According to the time-bar provision, in order to enforce such claim or recover the said amount, ALI shall present its claim within ten (10) days from the occurrence of the default or failure of KRDC.
The October 16, 2000 letter was the presentation of the claim. ALIs intent to recover its claim was communicated clearly to PGAI. By informing PGAI of the termination of the contract with KRDC, ALI in effect presented a situation where PGAI is put on notice
that ALI in fact has a right to payment by virtue of the performance bond and it intends to recover it. Undeniably, ALI has substantially complied with the time-bar provision of the performance bond.
WHEREFORE, the petition is DENIED and the Decision dated April 28, 2006 of the Court of Appeals in CA-G.R. SP No. 72854 is hereby AFFIRMED.
With costs against the petitioner.
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 Certiorari 1 filed 6 November 2009 assailing the Decision 2 and Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision 4 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 Virtuals 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 Complaint 6 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 attorneys fees and litigation expenses.
Accordingly, defendants 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 petitioners 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 attorneys fees and litigation expenses.

On 18 October 2007, respondent appealed to the CA. 13 The appellate court rendered a Decision 14 in the following manner:
WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial courts 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. 15In 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 courts 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 Resolution 20 issued by the CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment 21 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 COURTS 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 CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code 25 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 debt 30 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 suretys 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. 33Thus, 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
respondents liability to petitioner as the formers surety.1wphi1 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 respondents 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 creditors 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 suretys role arises only upon the debtors 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. 9285 42 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 latters 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 latters 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 respondents 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 petitioners last demand on 24 January 2001.
In rejecting petitioners 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, respondents 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 respondents delay was indeed justified by the circumstances that is, One Virtuals advice regarding petitioners alleged breach of obligations. The lower courts 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. CA 63 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.1wphi1 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. 204689, January 21, 2015


STRONGHOLD INSURANCE COMPANY, INC., Petitioner, v. SPOUSES RUNE AND LEA STROEM,Respondents.
DECISION
LEONEN, J.:
For resolution is a Petition for Review1 under Rule 45 of the Rules of Court assailing the Decision 2dated November 20, 2012 of the Court of Appeals in CA-G.R. CV No. 96017. The Court of Appeals affirmed the Decision3 of the Regional Trial Court of Makati,
Branch 133 in Civil Case No. 02-1108 for collection of a sum of money.
This case involves the proper invocation of the Construction Industry Arbitration Committees (CIAC) jurisdiction through an arbitration clause in a construction contract. The main issue here is whether the dispute liability of a surety under a performance bond
is connected to a construction contract and, therefore, falls under the exclusive jurisdiction of the CIAC.
Spouses Rune and Lea Stroem (Spouses Stroem) entered into an Owners-Contractor Agreement 4 with Asis-Leif & Company, Inc. (Asis-Leif) for the construction of a two-storey house on the lot owned by Spouses Stroem. The lot was located at Lot 4A, Block
24, Don Celso Tuason Street, Valley Golf Subdivision, Barangay Mayamot, Antipolo, Rizal. 5chanroblesvirtuallawlibrary
On November 15, 1999, pursuant to the agreement, Asis-Leif secured Performance Bond No. LP/G(13)83056 in the amount of P4,500,000.00 from Stronghold Insurance Company, Inc. (Stronghold). 6 Stronghold and Asis-Leif, through Ms. Ma. Cynthia Asis-Leif,
bound themselves jointly and severally to pay the Spouses Stroem the agreed amount in the event that the construction project is not completed. 7chanroblesvirtuallawlibrary
Asis-Leif failed to finish the project on time despite repeated demands of the Spouses Stroem. 8chanroblesvirtuallawlibrary
Spouses Stroem subsequently rescinded the agreement. 9 They then hired an independent appraiser to evaluate the progress of the construction project. 10chanroblesvirtuallawlibrary

Appraiser Asian Appraisal Company, Inc.s evaluation resulted in the following percentage of completion: 47.53% of the residential building, 65.62% of the garage, and 13.32% of the swimming pool, fence, gate, and land
development.11chanroblesvirtuallawlibrary
On April 5, 2001, Stronghold sent a letter to Asis-Leif requesting that the company settle its obligations with the Spouses Stroem. No response was received from Asis-Leif.12chanroblesvirtuallawlibrary
On September 12, 2002, the Spouses Stroem filed a Complaint (with Prayer for Preliminary Attachment) 13 for breach of contract and for sum of money with a claim for damages against Asis-Leif, Ms. Cynthia Asis-Leif, and Stronghold. 14 Only Stronghold was
served summons. Ms. Cynthia Asis-Leif allegedly absconded and moved out of the country.15chanroblesvirtuallawlibrary
On July 13, 2010, the Regional Trial Court rendered a judgment in favor of the Spouses Stroem. The trial court ordered Stronghold to pay the Spouses Stroem ?4,500,000.00 with 6% legal interest from the time of first demand. 16 The dispositive portion of the
trial court Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, finding plaintiffs cause of action to be sufficiently established being supported by evidence on records, judgement is hereby rendered in favor of the plaintiff spouses Rune and Lea Stroem and against the defendant Stronghold Insurance
Company Incorporated ordering the latter to pay the plaintiff the sums of:chanRoblesvirtualLawlibrary
1) Php4,500,000.00 with six (6%) percent legal interest from the time of first demand and interest due shall earn legal interest from the time of judicial demand until fully paid.
2) Php35,000.00 by way of attorneys fees and other litigation expenses.
Defendant is further ordered to pay the costs of this suit.
SO ORDERED.17
Both Stronghold and the Spouses Stroem appealed to the Court of Appeals. 18chanroblesvirtuallawlibrary
The Court of Appeals affirmed with modification the trial courts Decision. It increased the amount of attorneys fees to ?50,000.00. 19chanroblesvirtuallawlibrary
The dispositive portion of the Court of Appeals Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, the appeal of Stronghold Company, Inc[.] is DISMISSED, while the appeal of spouses Rune and Lea Stroem is PARTLY GRANTED. The November 27, 2009 Decision of the Regional Trial Court of Makati City
is AFFIRMED withMODIFICATION that the award of attorneys fees is increased to P50,000.00
SO ORDERED.20
On March 20, 2013, this court required the Spouses Stroem to submit their Comment on the Petition. 21chanroblesvirtuallawlibrary
We noted the Spouses Stroems Comment on July 31, 2013. 22 We also required Stronghold to file its Reply to the Comment, 23 which was noted on December 9, 2013.24chanroblesvirtuallawlibrary
Stronghold argues that the trial court did not acquire jurisdiction over the case and, therefore, the Court of Appeals committed reversible error when it upheld the Decision of the Regional Trial Court. 25 The lower courts should have dismissed the case in view of
the arbitration clause in the agreement and considering that [Republic Act No. 876] explicitly confines the courts authority only to pass upon the issue of whether there is [an] agreement . . . 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. 26chanroblesvirtuallawlibrary
Moreover, the stipulations in said Agreement are part and parcel of the conditions in the bond. Were it not for such stipulations in said agreement, [Stronghold] would not have agreed to issue a bond in favor of the Spouses Stroem. The parties to the bond are
ALB/Ms. Asis-[L]eif, Spouses Stroem and [Stronghold] such that ALB/Ms. Asis-[L]eif never ceased to be a party to the surety agreement. 27chanroblesvirtuallawlibrary
In any case, Strongholds liability under the performance bond is limited only to additional costs for the completion of the project. 28 In addition, the Court of Appeals erred in holding that Stronghold changed its theory with regard to the notice requirement 29 and in
modifying the trial courts award of attorneys fees. 30chanroblesvirtuallawlibrary
On the other hand, the Spouses Stroem argue that Stronghold committed forum shopping warranting dismissal of the case. 31 According to the Spouses Stroem, Stronghold deliberately committed forum shopping when it filed the present petition despite the
pendency of the Spouses Stroems Motion for Partial Reconsideration of the Court of Appeals Decision dated November 20, 2012. 32chanroblesvirtuallawlibrary
More importantly, the Owners-Contractor Agreement is separate and distinct from the Bond. The parties to the Agreement are ALB/Ms. Asis-Leif and Spouses Stroem, while the parties to the Bond are Spouses Stroem and Stronghold. The considerations for
the two contracts are likewise distinct. Thus, the arbitration clause in the Agreement is binding only on the parties thereto, specifically ALB/Ms. Asis-Leif and Spouses Stroem[.] 33chanroblesvirtuallawlibrary
Contrary to Strongholds argument, Spouses Stroem argues that stronghold is liable for the full amount of the performance bond. The terms of the bond clearly show that Stronghold is liable as surety.34 Verily, notice to Stronghold is not required for its liability to
attach.35chanroblesvirtuallawlibrary
The issues for consideration are:chanRoblesvirtualLawlibrary
(1)
(2)

Whether the dispute involves a construction contract;


Whether the CIAC has exclusive jurisdiction over the controversy between the parties;

(3)
(4)

Whether the Regional Trial Court should have dismissed the petition outright as required by law and jurisprudence and referred the matter to the CIAC; and
Whether petitioner Stronghold Insurance Company, Inc. is liable under Performance Bond No. LP/G(13)83056.
(a)
Whether petitioner Stronghold Insurance Company, Inc. is only liable as to the extent of any additional cost for the completion of the project due to any increase in prices for labor and materials.
(b)
Whether the case involves ordinary suretyship or corporate suretyship.

After considering the parties arguments and the records of this case, this court resolves to deny the Petition.
On forum-shopping
Respondents argue that petitioner committed forum shopping; hence, the case should have been dismissed outright.
Records show that petitioner received a copy of the Decision of the Court of Appeals on December 5, 2012. 36 Petitioner did not file a Motion for Reconsideration of the assailed Decision. It filed before this court a Motion for Extension of Time To File Petition for
Review requesting an additional period of 30 days from December 20, 2012 or until January 19, 2013 to file the Petition. 37chanroblesvirtuallawlibrary
Respondents filed their Motion for Partial Reconsideration of the Court of Appeals Decision on December 11, 2012. 38 They sought the modification of the Decision as to the amounts of moral damages, exemplary damages, attorneys fees, and costs of the
suit.39chanroblesvirtuallawlibrary
Respondents alleged in their Comment that as early as January 9, 2013, petitioner received a copy of the Court of Appeals Resolution requiring Comment on the Motion for Partial Reconsideration. 40 Still, petitioner did not disclose in its Verification and
Certification Against Forum Shopping the pendency of respondents Motion for Partial Reconsideration. 41chanroblesvirtuallawlibrary
For its part, petitioner claims that it did not commit forum shopping. It fully disclosed in its Petition that what it sought to be reviewed was the Decision dated November 20, 2012 of the Court of Appeals. Petitioner merely exercised its available remedy with
respect to the Decision of the Court of Appeals by filing [the] Petition. 42 What the rules mandate to be stated in the Certification Against Forum Shopping is the status of any other action. This other action involves the same issues and parties but is an entirely
different case.
Indeed, petitioner is guilty of forum shopping.
There is forum shopping when:chanRoblesvirtualLawlibrary
as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by appeal or certiorari) in another. The principle applies not only with respect to suits filed in the courts but also in connection with litigations commenced in the courts
while an administrative proceeding is pending[.] 43 (Citation omitted)
This court has enumerated the elements of forum-shopping: (a) identity of parties, or at least such parties as represent the same interests in both actions; (b) identity of rights asserted and reliefs prayed for, the reliefs being founded on the same facts; and (c)
the identity with respect to the two preceding particulars in the two cases is such that any judgment rendered in the pending cases, regardless of which party is successful, amount to res judicata in the other case.44chanroblesvirtuallawlibrary
Rule 42, Section 245 in relation to Rule 45, Section 4 of the Rules of Court mandates petitioner to submit a Certification Against Forum Shopping and promptly inform this court about the pendency of any similar action or proceeding before other courts or
tribunals. The rules purpose is to deter the unethical practice of pursuing simultaneous remedies in different forums, which wreaks havoc upon orderly judicial procedure. 46 Failure to comply with the rule is a sufficient ground for the dismissal of the
petition.47chanroblesvirtuallawlibrary
Records show that petitioners duly authorized officer certified the following on January 21, 2013:chanRoblesvirtualLawlibrary
4. I further certify that: (a) I have not commenced any other action or proceeding involving the same issues in the Supreme Court, Court of Appeals, or any other tribunal or agency; (b) to the best of my knowledge, no such action or proceeding is pending in the
Supreme Court, the Court of Appeals or different Divisions thereof, or any tribunal or agency; (c) if I should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different Divisions
thereof, or any other tribunal or agency, I undertake to promptly inform the aforesaid courts and such tribunal or agency of the fact within five (5) days therefrom. 48
Petitioner failed to carry out its duty of promptly informing this court of any pending action or proceeding before this court, the Court of Appeals, or any other tribunal or agency. This court cannot countenance petitioners disregard of the rules.
This court has held before that:chanRoblesvirtualLawlibrary
[u]ltimately, what is truly important to consider in determining whether forum-shopping exists or not is the vexation caused the courts and parties-litigant by a party who asks different courts and/or administrative agencies to rule on the same or related causes
and/or to grant the same or substantially the same reliefs, in the process creating the possibility of conflicting decisions being rendered by the different fora upon the same issue. 49 (Emphasis supplied)
On this basis, this case should be dismissed.
On arbitration and the CIACs jurisdiction
Petitioner changed the theory of its case since its participation in the trial court proceedings. It raised the issue of lack of jurisdiction in view of an arbitration agreement for the first time.
Generally, parties may not raise issues for the first time on appeal. 50 Such practice is violative of the rules and due process and is frowned upon by the courts. However, it is also well-settled that jurisdiction can never be waived or acquired by estoppel. 51
Jurisdiction is conferred by the Constitution or by law.52 Lack of jurisdiction of the court over an action or the subject matter of an action cannot be cured by the silence, by acquiescence, or even by express consent of the parties. 53chanroblesvirtuallawlibrary
Section 4 of Executive Order No. 100854 is clear in defining the exclusive jurisdiction of the CIAC:chanRoblesvirtualLawlibrary

SECTION 4. Jurisdiction The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines , whether the dispute arises before or after the completion
of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship; violation of the terms of agreement; interpretation and/or application of contractual time and delays; maintenance and defects; payment,
default of employer or contractor and changes in contract cost.
Excluded from the coverage of this law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines. (Emphasis supplied)
Similarly, Section 35 of Republic Act No. 9285 or the Alternative Dispute Resolution Act of 2004 states:chanRoblesvirtualLawlibrary
SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and exclusive jurisdiction of the Construction Industry Arbitration Commission (the Commission) shall include those between or among parties to, or who are otherwise bound
by, an arbitration agreement, directly or by reference whether such parties are project owner, contractor, subcontractor, quantity surveyor, bondsman or issuer of an insurance policy in a construction project.
The Commission shall continue to exercise original and exclusive jurisdiction over construction disputes although the arbitration is commercial pursuant to Section 21 of this Act. (Emphasis supplied)
In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation,55 this court held that there are two acts which may vest the CIAC with jurisdiction over a construction dispute. One is the presence of an arbitration clause in a construction contract, and the other is
the agreement by the parties to submit the dispute to the CIAC. 56chanroblesvirtuallawlibrary
This court has ruled that when a dispute arises from a construction contract, the CIAC has exclusive and original jurisdiction. 57 Construction has been defined as referring to all on-site works on buildings or altering structures, from land clearance through
completion including excavation, erection and assembly and installation of components and equipment. 58chanroblesvirtuallawlibrary
In this case, there is no dispute as to whether the Owners-Contractor Agreement between Asis-Leif and respondents is a construction contract. Petitioner and respondents recognize that CIAC has jurisdiction over disputes arising from the agreement.
What is at issue in this case is the parties agreement, or lack thereof, to submit the case to arbitration. Respondents argue that petitioner is not a party to the arbitration agreement. Petitioner did not consent to arbitration. It is only respondent and Asis-Leif that
may invoke the arbitration clause in the contract.
This court has previously held that a performance bond, which is meant to guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project[,] 59 is significantly and substantially connected to the construction contract
and, therefore, falls under the jurisdiction of the CIAC. 60chanroblesvirtuallawlibrary
Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc.61 involved circumstances similar to the present case. In Prudential, property owner Anscor Land, Inc. (ALI) entered into a contract for the construction of an eight-unit townhouse located in Capitol
Hills, Quezon City with contractor Kraft Realty and Development Corporation (KRDC). 62 KRDC secured the completion of the construction project through a surety and performance bond issued by Prudential Guarantee and Assurance Inc.
(PGAI).63chanroblesvirtuallawlibrary
The delay in the construction project resulted in ALIs termination of the contract and claim against the performance bond. 64 ALI [subsequently] commenced arbitration proceedings against KRDC and PGAI in the CIAC. 65 PGAI, however, argued that it was not
a party to the construction contract.66chanroblesvirtuallawlibrary
The CIAC ruled that PGAI was not liable under the performance bond. 67 Upon review, the Court of Appeals held that PGAI was jointly and severally liable with KRDC under the performance bond. 68chanroblesvirtuallawlibrary
PGAI appealed the Court of Appeals Decision and claimed that CIAC did not have jurisdiction over the performance bond. 69 This court ruled:chanRoblesvirtualLawlibrary
A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is an accessory contract because it is dependent for its existence upon the principal obligation guaranteed by it.
In fact, the primary and only reason behind the acquisition of the performance bond by KRDC was to guarantee to ALI that the construction project would proceed in accordance with the contract terms and conditions. In effect, the performance bond becomes
liable for the completion of the construction project in the event KRDC fails in its contractual undertaking.
Because of the performance bond, the construction contract between ALI and KRDC is guaranteed to be performed even if KRDC fails in its obligation. In practice, a performance bond is usually a condition or a necessary component of construction contracts.
In the case at bar, the performance bond was so connected with the construction contract that the former was agreed by the parties to be a condition for the latter to push through and at the same time, the former is reliant on the latter for its existence as an
accessory contract.
Although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal. The Performance Bond is significantly and substantially connected to the
construction contract that there can be no doubt it is the CIAC, under Section 4 of EO No. 1008, which has jurisdiction over any dispute arising from or connected with it. 70 (Emphasis supplied, citations omitted)
At first look, the Owners-Contractor Agreement and the performance bond reference each other; the performance bond was issued pursuant to the construction agreement.
A performance bond is a kind of suretyship agreement. A suretyship agreement is an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of another
party, called the obligee.71 In the same vein, a performance bond is designed to afford the project owner security that the . . . contractor, will faithfully comply with the requirements of the contract . . . and make good [on the] damages sustained by the project
owner in case of the contractors failure to so perform. 72chanroblesvirtuallawlibrary
It is settled that the suretys solidary obligation for the performance of the principal debtors obligation is indirect and merely secondary. 73 Nevertheless, the suretys liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal. 74chanroblesvirtuallawlibrary

Verily, [i]n enforcing a surety contract, the complementary-contracts-construed-together doctrine finds application. According to this principle, an accessory contract must be read in its entirety and together with the principal agreement. 75 Article 1374 of the
Civil Code provides:chanRoblesvirtualLawlibrary
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.
Applying the complementary-contracts-construed-together doctrine, this court in Prudential held that the surety willingly acceded to the terms of the construction contract despite the silence of the performance bond as to arbitration:chanRoblesvirtualLawlibrary
In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the construction contract was clear as to arbitration in the event of disputes. Applying the said doctrine, we rule that the silence of the accessory contract in this
case could only be construed as acquiescence to the main contract. The construction contract breathes life into the performance bond. We are not ready to assume that the performance bond contains reservations with regard to some of the terms and
conditions in the construction contract where in fact it is silent. On the other hand, it is more reasonable to assume that the party who issued the performance bond carefully and meticulously studied the construction contract that it guaranteed, and if it had
reservations, it would have and should have mentioned them in the surety contract. 76 (Emphasis supplied)
This court, however, cannot apply the ruling in Prudential to the present case. Several factors militate against petitioners claim.
The contractual stipulations in this case and in Prudential are different. The relevant provisions of the Owners-Contractor Agreement in this case state:chanRoblesvirtualLawlibrary
ARTICLE 5. THE CONTRACT DOCUMENTS
The following documents prepared by the CONTRACTOR shall constitute an integral part of this contract as fully as if hereto attached or herein stated, except as otherwise modified by mutual agreement of parties, and attached to this agreement.
Attachment 5.1
Attachment 5.2
Attachment 5.3
Attachment 5.4

Working Drawings
Outline Specifications
Bill of Quantities
CONTRACTOR Business License

. . . .cralawred
ARTICLE 7. PERFORMANCE (SURETY) BOND
7.1 Within 30 days of the signing of this agreement, CONTRACTOR shall provide toOWNERS a performance bond, issued by a duly licensed authority acceptable to theOWNERS, and equal to the amount of PHP 4,500,000.00 (Four Million and Five Hundred
Thousand Philippine Pesos), with the OWNERS as beneficiary.
7.2 The performance bond will guarantee the satisfactory and faithful performance by the CONTRACTOR of all provisions stated within this contract.
ARTICLE 8. ARBITRATION
8.1 Any dispute between the parties hereto which cannot be amicably settled shall be finally settled by arbitration in accordance with the provision of Republic Act 876, of The Philippines, as amended by the Executive Order 1008 dated
February 4, 1985.77 (Emphasis in the original)
In contrast, the provisions of the construction contract in Prudential provide:chanRoblesvirtualLawlibrary
Article 1
CONTRACT DOCUMENTS
1.1 The following shall form part of this Contract and together with this Contract, are known as the Contract Documents:chanRoblesvirtualLawlibrary
a. Bid Proposal
....
d. Notice to proceed
....
j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by the Developer) 78 (Emphasis supplied)
This court in Prudential held that the construction contract expressly incorporated the performance bond into the contract. 79 In the present case, Article 7 of the Owners-Contractor Agreement merely stated that a performance bond shall be issued in favor of
respondents, in which case petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia Asis-Leif shall pay P4,500,000.00 in the event that Asis-Leif fails to perform its duty under the Owners-Contractor Agreement. 80 Consequently, the performance bond merely
referenced the contract entered into by respondents and Asis-Leif, which pertained to Asis-Leifs duty to construct a two-storey residence building with attic, pool, and landscaping over respondents property. 81chanroblesvirtuallawlibrary

To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is found. The construction agreement was signed only by respondents and the contractor, Asis-Leif, as represented by Ms. Ma. Cynthia Asis-Leif. It is basic that [c]ontracts take
effect only between the parties, their assigns and heirs[.] 82 Not being a party to the construction agreement, petitioner cannot invoke the arbitration clause. Petitioner, thus, cannot invoke the jurisdiction of the CIAC.
Moreover, petitioners invocation of the arbitration clause defeats the purpose of arbitration in relation to the construction business. The state has continuously encouraged the use of dispute resolution mechanisms to promote party autonomy.83
In LICOMCEN, Incorporated v. Foundation Specialists, Inc., 84 this court upheld the CIACs jurisdiction in line with the states policy to promote arbitration:chanRoblesvirtualLawlibrary
The CIAC was created through Executive Order No. 1008 (E.O. 1008), in recognition of the need to establish an arbitral machinery that would expeditiously settle construction industry disputes. The prompt resolution of problems arising from or connected with
the construction industry was considered of necessary and vital for the fulfillment of national development goals, as the construction industry provides employment to a large segment of the national labor force and is a leading contributor to the gross national
product.85 (Citation omitted)
However, where a surety in a construction contract actively participates in a collection suit, it is estopped from raising jurisdiction later. Assuming that petitioner is privy to the construction agreement, we cannot allow petitioner to invoke arbitration at this late
stage of the proceedings since to do so would go against the laws goal of prompt resolution of cases in the construction industry.
WHEREFORE, the petition is DENIED. The case is DISMISSED. Petitioners counsel is STERNLY WARNED that a repetition or similar violation of the rule on Certification Against Forum Shopping will be dealt with more severely.
SO ORDERED.

G.R. No. 91228. March 22, 1993.


PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC, INC., respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND DELIVERY. We agree with the court a quo that the sales contract is comprehensive enough to include claims for damages arising from carriage and delivery of the
goods. As a general rule, the seller has the obligation to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier to deliver the same.
2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER PARTIES, CONSTRUED. American jurisprudence defines charter party as a contract by which an entire ship or some principal part thereof is let by the owner to
another person for a specified time or use. Charter or charter parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.
3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. Under the demise or bareboat charter of the vessel, the charterer will generally be considered as owner for the voyage or service stipulated. The charterer mans the vessel with his own
people and becomes, in effect, the owner pro hac vice, subject to liability to others for damages caused by negligence. To create a demise the owner of a vessel must completely and exclusively relinquish possession, anything short of such a complete transfer
is a contract of affreightment (time or voyage charter party) or not a charter party at all.
4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. A contract of affreightment is in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for a special service to be rendered by the owner of
the vessel and under such contract the general owner retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter hire. If the charter is a contract of
affreightment, which leaves the general owner in possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on the owner and the charterer is usually free from liability to third persons in respect of the ship.
5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A VESSEL. Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and employment; and if possession is transferred to
the charterer by virtue of a demise, the charterer, and not the owner, is liable as carrier on the contract of affreightment made by himself or by the master with third persons, and is answerable for loss, damage or non-delivery of goods received for transportation.
An owner who retains possession of the ship, though the hold is the property of the charterer, remains liable as carrier and must answer for any breach of duty as to the care, loading or unloading of the cargo.
6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED AND RESPECTED. Whether the liability of respondent should be based on the same contract or that of the bill of lading, the parties are nevertheless obligated to
respect the arbitration provisions on the sales contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract cannot escape from his obligation under the arbitration clause as stated therein. Arbitration has been held valid and
constitutional. Even before the enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes through arbitration. The rule now is that unless the agreement is such as absolutely to close the doors of the courts against the parties,
which agreement would be void, the courts will look with favor upon such amicable arrangements and will only interfere with great reluctance to anticipate or nullify the action of the arbitrator. As pointed out in the case of Mindanao Portland Cement Corp. v.
McDough Construction Company of Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said: "Since there obtains herein a written provision for arbitration as well as failure on respondent's part to comply therewith, the
court a quo rightly ordered the parties to proceed to their arbitration in accordance with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's arguments touching upon the merits of the dispute are improperly raised herein. They should be
addressed to the arbitrators. This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the parties' claims but only to determine if they should proceed to arbitration or not.
And although it has been ruled that a privolous or patently baseless claim should not be ordered to arbitration it is also recognized that the mere fact that a defense exist against a claim does not make it frivolous or baseless."

7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED THEREOF, PART OF THE RECORD. Petitioner contend that the arbitration provision in the bills of lading should not have been discussed as an issue in the
decision of the Court of Appeals since it was not raised as a special or affirmative defense. The three bills of lading were attached to the complaint as Annexes "A," "B," and "C," and are therefore parts thereof and may be considered as evidence although not
introduced as such. Hence, it was then proper for the court a quo to discuss the contents of the bills of lading, having been made part of the record.
DECISION
NOCON, J p:
This is a special civil action for certiorari and prohibition to annul and set aside the Decision of the respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial court and dismissing petitioner's compliant in Civil Case No. 89-47403,
entitled Puromines, Inc. v. Maritime Factors, Inc. and Philipp Brothers Oceanic, Inc.
Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines for brevity) and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with private respondents Philipp Brothers Oceanic, Inc. for the sale of
prilled Urea in bulk. The Sales Contract No. S151.8.01018 provided, among others an arbitration clause which states, thus:
"9. Arbitration
"Any disputes arising under this contract shall be settled by arbitration in London in accordance with the Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is to appoint an Arbitrator, and should they be unable to agree, the
decision of an Umpire appointed by them to be final. The Arbitrators and Umpire are all to be commercial men and resident in London. This submission may be made a rule of the High Court of Justice in England by either party." 2
On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny, USSR a shipment of 15,500 metric tons prilled Urea in bulk complete and in good order and condition for transport to Iloilo and Manila, to be delivered to petitioner. Three
bills of lading were issued by the ship-agent in the Philippines, Maritime Factors Inc., namely: Bill of Lading No. dated May 12, 1988 covering 10,000 metric tons for discharge Manila; Bill of Lading No. 2 of even date covering 4,000 metric tons for unloading in
Iloilo City; and Bill of Lading No. 3, also dated May 12, 1988, covering 1,500 metric tons likewise for discharged in Manila
The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good order and condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were discharged in Manila in bad order and condition, caked, hardened and
lumpy, discolored and contaminated with rust and dirt. Damages were valued at P683, 056. 29 including additional discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of carriage against Maritime Factors Inc. (which was not included as respondent in this petition) as ship-agent in the Philippines for the owners of the vessel MV "Liliana
Dimitrova," while private respondent, Philipp Brothers Oceanic Inc., was impleaded as charterer of the said vessel and proper party to accord petitioner complete relief. Maritime Factors, Inc. filed its Answer 5 to the complaint, while private respondent filed a
motion to dismiss, dated February 9, 1989, on the grounds that the complaint states no cause of action; that it was prematurely filed; and that petitioner should comply with the arbitration clause in the sales contract. 6
The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration clause inasmuch as the cause of action did not arise from a violation of the terms of the sales contract but rather for claims of cargo damages where there is no
arbitration agreement. On April 26, 1989, the trial court denied respondent's motion to dismiss in this wise:
"The sales contract in question states in part:
'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)
"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the cause of action of the complaint arose from a breach of contract of carriage by the vessel chartered by the defendant Philipp Brothers Oceanic, Inc. Thus, the
aforementioned arbitration clause cannot apply to the dispute in the present action which concerns plaintiff's claim for cargo loss/damage arising from breach of contract of carriage.
"That the defendant is not the ship owner or common carrier and therefore plaintiff does not have legal right against it since every action must be brought against the real party in interest has no merit either for by the allegations in the complaint the defendant
herein has been impleaded as charterer of the vessel, hence, a proper party." 7
Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The appellate court found that the arbitration provision in the sales contract and/or the bills of lading is applicable in the present case. Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to include the claim for damages arising from the carriage and delivery of the goods subject-matter thereof.
"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state, in part, 'any dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime Arbitration Commission at the USSR Chamber of Commerce and
Industry, 6 Kuibyshevskaia Str., Moscow, USSR, in accordance with the rules of procedure of said commission.'
Considering that the private respondent was one of the signatories to the sales contract . . . all parties are obliged o respect the terms and conditions of the said sales contract, including the provision thereof on 'arbitration.' "

Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this contract" in the arbitration clause of the sales contract covers a cargo claim against the vessel (owner and/or charterers) for breach of contract of carriage.
Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV 'Liliana Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner further alleged that the caking and hardening, wetting and melting, and
contamination by rust and dirt of the damaged portions of the shipment were due to the improper ventilation and inadequate storage facilities of the vessel; that the wetting of the cargo was attributable to the failure of the crew to close the hatches before and
when it rained while the shipment was being unloaded in the Port of Manila; and that as a direct and natural consequence of the unseaworthiness and negligence of the vessel (sic), petitioner suffered damages in the total amount of P683, 056.29 Philippine
currency." 8 (Emphasis supplied)
Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of the complaint arose from breach of contract of carriage by the vessel that was chartered by defendant Philipp Brothers." 9
In the present petition, petitioner argues that the sales contract does not include the contract of carriage which is a different contract entered into by the carrier with the cargo owners. That it was an error for the respondent court to touch upon the arbitration
provision of the bills lading in its decision inasmuch as the same was not raised as an issue by private respondent who was not a party in the bills of lading (emphasis Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is comprehensive enough to include claims for damages arising from carriage and delivery of the goods. As a general rule, the seller has the obligation to transmit the goods to the buyer, and concomitant
thereto, the contracting of a carrier to deliver the same. Art. 1523 of the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery
of the goods to the buyer, except in the cases provided for in article 1503, first, second and third paragraphs, or unless a contrary intent appear.
"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller omit so to do, and the
goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself,, or may hold the seller responsible in damages."
xxx xxx xxx
The disputed sales contact provides for conditions relative to the delivery of goods, such as date of shipment, demurrage, weight as determined by the bill of lading at load port and more particularly the following provisions:
"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and approximately 15,000 metric tons to Makati Agro. However, Sellers to have right to ship material as partial shipment or co-shipment in addition to above. In the event of coshipment to a third party within Philippines same to be discussed with and acceptable to both Puromines and Makati Agro.
"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first discharge port and final survey at last discharge port. Surveyors results to be binding and final. In the event draft survey results show a quantity less than the combined
Bills of Lading quantity for both Puromines and Makati Agro, Sellers to refund the difference. In the event that draft survey results show a quantity in excess of combined Bills of Lading of quantity of both Puromines and Makati Agro then Buyers to refund the
difference.
"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability to separate cargo or to deliver cargo separately or to deliver minimum/maximum quantities stated on individual Bills of Lading. At each port vessel is to discharge in
accordance with Buyers local requirements and it is Buyer's responsibility to separate individual quantities required by each of them at each port during or after discharged."
As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo from the bill of lading which is the contract of affreightment together with the sales contract. Consequently, the (petitioner) is bound by the provisions and terms of
said bill of lading and of the arbitration clause incorporated in the sales contract."
Assuming arguendo that the liability of respondent is not based on the sales contract, but rather on the contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would, therefore, be material to show what kind of charter party the
respondent had with the shipowner to determine respondent's liability.
American jurisprudence defines charter party as a contract by which an entire ship or some principal part thereof is let by the owner to another person for a specified time or use. 10 Charter or charter parties are of two kinds. Charter of demise or bareboat and
contracts of affreightment.
Under the demise or bareboat charter of the vessel, the charterer will generally be considered as owner for the voyage or service stipulated. The charterer mans the vessel with his own people and becomes, in effect, the owner pro hac vice, subject to liability to
others for damages caused by negligence. 11 To create a demise the owner of a vessel must completely and exclusively relinquish possession, anything short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a
charter party at all.
On the other hand, a contract of affreightment is in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for a special service to be rendered by the owner of the vessel 12 and under such contract the general owner
retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter hire. 13 If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on the owner and the charterer is usually free from liability to third persons in respect of the ship. 14

Responsibility to third persons for goods shipped on board a vessel follows the vessel's possession and employment; and if possession is transferred to the charterer by virtue of a demise, the charterer, and not the owner, is liable as carrier on the contract of
affreightment made by himself or by the master with third persons, and is answerable for loss, damage or non-delivery of goods received for transportation. An owner who retains possession of the ship, though the hold is the property of the charterer, remains
liable as carrier and must answer for any breach of duty as to the care, loading or unloading of the cargo. 15
Assuming that in the present case, the charter party is a demise or bareboat charter, then Philipp Brothers is liable to Puromines, Inc., subject to the terms and conditions of the sales contract. On the other hand, if the contract between respondent and the owner
of the vessel MV "Liliana Dimitrova" was merely that of affreightment, then it cannot be held liable for the damages caused by the breach of contract of carriage, the evidence of which is the bills of lading
In any case, whether the liability of respondent should be based on the same contract or that of the bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on the sales contract and/or the bill of lading. Petitioner being a signatory
and party to the sales contract cannot escape from his obligation under the arbitration clause as stated therein.
Neither can petitioner contend that the arbitration provision in the bills of lading should not have been discussed as an issue in the decision of the Court of Appeals since it was not raised as a special or affirmative defense. The three bills of lading were attached
to the complaint as Annexes "A," "B," and "C," and are therefore parts thereof and may be considered as evidence although not introduced as such. 16 Hence, it was then proper for the court a quo to discuss the contents of the bills of lading, having been made
part of the record.
Going back to the main subject of this case, arbitration has been held valid and constitutional. Even before the enactment of Republic Act No. 876, this Court has countenanced the settlement of disputes through arbitration. The rule now is that unless the
agreement is such as absolutely to close the doors of the courts against the parties, which agreement would be void, the courts will look with favor upon such amicable arrangements and will only interfere with great reluctance to anticipate or nullify the action of
the arbitrator. 17
As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction Company of Florida 18 wherein the plaintiff sued defendant for damages arising from a contract, the Court said:
"Since there obtains herein a written provision for arbitration as well as failure on respondent's part to comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration in accordance with the terms of their agreement (Sec. 6 Republic Act
876). Respondent's arguments touching upon the merits of the dispute are improperly raised herein. They should be addressed to the arbitrators. This proceeding is merely a summary remedy to enforce the agreement to arbitrate. The duty of the court in this
case is not to resolve the merits of the parties' claims but only to determine if they should proceed to arbitration or not. And although it has been ruled that a frivolous or patently baseless claim should not be ordered to arbitration it is also recognized that the
mere fact that a defense exist against a claim does not make it frivolous or baseless." 19
In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the parties to submit their disputes to arbitration and We held as follows:
"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended complaint are based upon the supposed violations committed by the defendants of the 'Contract of Construction of a Building' and that 'the provisions of paragraph 15
hereof leave a very little room for doubt that the said causes of action are embraced within the phrase 'any and all questions, disputes or differences between the parties hereto relative to the construction of the building,' which must be determined by arbitration
of two persons and such determination by the arbitrators shall be 'final, conclusive and binding upon both parties unless they to court, in which the case the determination by arbitration is a condition precedent 'for taking any court action."
xxx xxx xxx
"We hold that the terms of paragraph 15 clearly express the intention of the parties that all disputes between them should first be arbitrated before court action can be taken by the aggrieved party." 21
Premises considered, We uphold the validity and applicability of the arbitration clause as stated in Sales Contract No. S151.8.01018 to the present dispute.
WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.
SO ORDERED.