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On May 15, 1987, he entered into an Owner-Contractor Agreement 4 (hereinafter

referred to as the Agreement) with respondent Laperal Realty Corporation


(hereinafter referred to as Laperal Realty) to render and provide complete (horizontal)
construction services on his land.

ADR Cases 1-Atty. Capellan


1.)Heirs of Augusto Salas vs. Laperal Realty Corporation, et al, G.R. No. 135362, 13
December 1999
2.)J Plus Asia Development Corporation vs. Utility Assurance Corporation, G.R. No.

On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of
respondent Laperal Realty to exercise general control, supervision and management
of the sale of his land, for cash or on installment basis.

199650, 26 June 2013


3.) Koppel, Inc. vs. Makati Rotary Club Foundation, Inc., G.R. No. 198075, 4
September 2013

On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to Nueva
Ecija. He never returned.

4.) LM Power Engineering Corp. vs. Capitol Industrial Construction Groups, G.R. No.
141833, 26 March 2003

On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati
City a verified petition for the declaration of presumptive death of her husband, Salas,
Jr., who had then been missing for more than seven (7) years. It was granted on
December 12, 1996. 5

5.) National Irrigation Administration vs. CA, G.R. No. 129169, 17 November 1999
6.) Tuna Processing, Inc. vs. Philippine Kingford, Inc., G.R. No. 185582, 29 February
2012
G.R. No. 135362 December 13, 1999

Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold
subdivided portions thereof to respondents Rockway Real Estate Corporation and
South Ridge Village, Inc. on February 22, 1990; to respondent spouses Abrajano and
Lava and Oscar Dacillo on June 27, 1991; and to respondents Eduardo Vacuna,
Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of whom are
hereinafter referred to as respondent lot buyers).

HEIRS OF AUGUSTO L. SALAS, JR., namely: TERESITA D. SALAS for herself


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

On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial Court
of Lipa City a Complaint 6for declaration of nullity of sale, reconveyance, cancellation
of contract, accounting and damages against herein respondents which was docketed
as Civil Case No. 98-0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to
Dismiss 7 on the ground that petitioners failed to submit their grievance to arbitration
as required under Article VI of the Agreement which provides:

DE LEON, JR., J.:


Art. VI. ARBITRATION.
1

Before us is a petition for review on certiorari of the Order of Branch 85 of the


Regional Trial Court of Lipa City 2dismissing petitioners' complaint 3 for rescission of
several sale transactions involving land owned by Augusto L. Salas, Jr., their
predecessor-in-interest, on the ground that they failed to first resort to arbitration.

All cases of dispute between CONTRACTOR and OWNER'S


representative shall be referred to the committee represented by:
a. One representative of the
OWNER;

Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas
spanning 1,484,354 square meters.

b. One representative of the


CONTRACTOR;

enforced them against the debtor 18 or in this case, against the heirs of the original
party to the Agreement. However, respondents Rockway Real Estate Corporation,
South Ridge Village, Inc., Maharami Development Corporation, spouses Abrajano,
spouses Lava, Oscar Dacillo, Eduardo Vacuna, Florante de la Cruz and Jesus
Vicente Capellan are not assignees of the rights of respondent Laperal Realty under
the Agreement to develop Salas, Jr.'s land and sell the same. They are, rather, buyers
of the land that respondent Laperal Realty was given the authority to develop and sell
under the Agreement. As such, they are not "assigns" contemplated in Art. 1311 of the
New Civil Code which provides that "contracts take effect only between the parties,
their assigns and heirs".

c. One representative
acceptable to both OWNER
and CONTRACTOR. 8
On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo filed
a Joint Answer with Counterclaim and Crossclaim 9 praying for dismissal of
petitioners' Complaint for the same reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing
petitioners' Complaint for non-compliance with the foregoing arbitration clause.

Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the value of
Salas, Jr.'s land when respondent Laperal Realty subdivided it and sold portions
thereof to respondent lot buyers. Thus, they instituted action 19 against both
respondent Laperal Realty and respondent lot buyers for rescission of the sale
transactions and reconveyance to them of the subdivided lots. They argue that
rescission, being their cause of action, falls under the exception clause in Sec. 2 of
Republic Act No. 876 which provides that "such submission [to] or contract [of
arbitration] shall be valid, enforceable and irrevocable, save upon such grounds as
exist at law for the revocation of any contract".

Hence this petition.


Petitioners argue, thus:
The petitioners' causes of action did not emanate from the OwnerContractor Agreement.
The petitioners' causes of action for cancellation of contract and
accounting are covered by the exception under the Arbitration Law.

The petitioners' contention is without merit. For while rescission, as a general rule, is
an arbitrable issue, 20 they impleaded in the suit for rescission the respondent lot
buyers who are neither parties to the Agreement nor the latter's assigns or heirs.
Consequently, the right to arbitrate as provided in Article VI of the Agreement was
never vested in respondent lot buyers.

Failure to arbitrate is not a ground for dismissal. 10


In a catena of cases 11 inspired by Justice Malcolm's provocative dissent in Vega
v. San Carlos Milling Co. 12, this Court has recognized arbitration agreements as
valid, binding, enforceable and not contrary to public policy so much so that when
there obtains a written provision for arbitration which is not complied with, the trial
court should suspend the proceedings and order the parties to proceed to arbitration
in accordance with the terms of their
agreement 13. Arbitration is the "wave of the future" in dispute resolution. 14 To brush
aside a contractual agreement calling for arbitration in case of disagreement between
parties would be a step backward. 15

Respondent Laperal Realty, as a contracting party to the Agreement, has the right to
compel petitioners to first arbitrate before seeking judicial relief. However, to split the
proceedings into arbitration for respondent Laperal Realty and trial for the respondent
lot buyers, or to hold trial in abeyance pending arbitration between petitioners and
respondent Laperal Realty, would in effect result in multiplicity of suits, duplicitous
procedure and unnecessary delay. On the other hand, it would be in the interest of
justice if the trial court hears the complaint against all herein respondents and
adjudicates petitioners' rights as against theirs in a single and complete proceeding.

Nonetheless, we grant the petition.

WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19,
1998 of Branch 85 of the Regional Trial Court of Lipa City is hereby NULLIFIED and
SET ASIDE. Said court is hereby ordered to proceed with the hearing of Civil Case
No. 98-0047.

A submission to arbitration is a contract. 16 As such, the Agreement, containing the


stipulation on arbitration, binds the parties thereto, as well as their assigns and
heirs. 17 But only they. Petitioners, as heirs of Salas, Jr., and respondent Laperal
Realty are certainly bound by the Agreement. If respondent Laperal Realty had
assigned its rights under the Agreement to a third party, making the former, the
assignor, and the latter, the assignee, such assignee would also be bound by the
arbitration provision since assignment involves such transfer of rights as to vest in the
assignee the power to enforce them to the same extent as the assignor could have

Costs against private respondents.


SO ORDERED

G.R. No. 199650

June 26, 2013

Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo,
concluded and agreed that as of 14 November 2008, the project is only
Thirty One point Thirty Nine Percent (31.39%) complete.

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,


vs.
UTILITY ASSURANCE CORPORATION, Respondent.

2) Furthermore, the value of construction materials allocated for the


completion of the project and currently on site has been determined and
agreed to be ONE MILLION FORTY NINE THOUSAND THREE HUNDRED
SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (P1,049,364.45)

DECISION
VILLARAMA, JR., J.:

3) The additional accomplishment of SSB, reflected in its reconciled and


consolidated 8th and 9th billings, is Three point Eighty Five Percent (3.85%)
with a gross value of P1,563,553.34 amount creditable to SSB after
deducting the withholding tax is P1,538,424.84

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, as amended, assailing the Decision1 dated January 27,2011 and
Resolution2 dated December 8, 2011 of the Court of Appeals (CA) in CA-G.R. SP No.
112808.

4) The unrecouped amount of the down payment is P2,379,441.53 after


deducting the cost of materials on site and the net billable amount reflected
in the reconciled and consolidated 8th and 9th billings. The uncompleted
portion of the project is 68.61% with an estimated value per construction
agreement signed isP27,880,419.52.9 (Emphasis supplied.)

The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation represented
by its Chairman, Joo Han Lee, and Martin E. Mabunay, doing business under the
name and style of Seven Shades of Blue Trading and Services, entered into a
Construction Agreement3 whereby the latter undertook to build the former's 72-room
condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf
& Resort in Boracay Island, Malay, Aklan. The project, costing P42,000,000.00, was
to be completed within one year or 365 days reckoned from the first calendar day
after signing of the Notice of Award and Notice to Proceed and receipt of down
payment (20% of contract price). The P8,400,000.00 down payment was fully paid on
January 14, 2008.4Payment of the balance of the contract price will be based on
actual work finished within 15 days from receipt of the monthly progress billings. Per
the agreed work schedule, the completion date of the project was December
2008.5 Mabuhay also submitted the required Performance Bond6 issued by
respondent Utility Assurance Corporation (UTASSCO) in the amount equivalent to
20% down payment or P8.4 million.

On November 19, 2008, petitioner terminated the contract and sent demand letters to
Mabunay and respondent surety. As its demands went unheeded, petitioner filed a
Request for Arbitration10 before the Construction Industry Arbitration Commission
(CIAC). Petitioner prayed that Mabunay and respondent be ordered to pay the sums
of P8,980,575.89 as liquidated damages and P2,379,441.53 corresponding to the
unrecouped down payment or overpayment petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other
revision works ordered by Joo Han Lee. He asserted that he actually had until April
30, 2009 to finish the project since the 365 days period of completion started only on
May 2, 2008 after clearing the retrofitted old structure. Hence, the termination of the
contract by petitioner was premature and the filing of the complaint against him was
baseless, malicious and in bad faith.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up
to the 7th monthly progress billing sent by Mabunay. As of September 16, 2008,
petitioner had paid the total amount of P15,979,472.03 inclusive of the 20% down
payment. However, as of said date, Mabunay had accomplished only 27.5% of the
project.7

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner
has no cause of action and the complaint states no cause of action against it. The
CIAC denied the motion to dismiss. Respondents motion for reconsideration was
likewise denied.13
In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Crossclaims,14 respondent argued that the performance bond merely guaranteed the 20%
down payment and not the entire obligation of Mabunay under the Construction
Agreement. Since the value of the projects accomplishment already exceeded the
said amount, respondents obligation under the performance bond had been fully
extinguished. As to the claim for alleged overpayment to Mabunay, respondent
contended that it should not be credited against the 20% down payment which was
already exhausted and such application by petitioner is tantamount to reviving an
obligation that had been legally extinguished by payment. Respondent also set up a
cross-claim against Mabunay who executed in its favor an Indemnity Agreement

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay
assisted by Arch. Elwin Olavario, and Joo Han Lee assisted by Roy V. Movido, the
following findings were accepted as true, accurate and correct:
III STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and evaluation of the project to
determine the actual percentage of accomplishment, the contracting parties,
assisted by their respective technical groups, SSB assisted by Arch. Elwin

whereby Mabunay undertook to indemnify respondent for whatever amounts it may


be adjudged liable to pay petitioner under the surety bond.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the
Performance Bond did not clearly state the limitation of the suretys liability. Pursuant
to Article 137718 of the Civil Code, the CA said that the provision should be construed
in favor of petitioner considering that the obscurely phrased provision was drawn up
by respondent and Mabunay. Further, the appellate court stated that respondent
could not possibly guarantee the down payment because it is not Mabunay who owed
the down payment to petitioner but the other way around. Consequently, the
completion by Mabunay of 31.39% of the construction would not lead to the
extinguishment of respondents liability. The P8.4 million was a limit on the amount of
respondents liability and not a limitation as to the obligation or undertaking it
guaranteed.

Both petitioner and respondent submitted their respective documentary and


testimonial evidence. Mabunay failed to appear in the scheduled hearings and to
present his evidence despite due notice to his counsel of record. The CIAC thus
declared that Mabunay is deemed to have waived his right to present evidence.15
On February 2, 2010, the CIAC rendered its Decision16 and made the following
award:
Accordingly, in view of our foregoing discussions and dispositions, the Tribunal
hereby adjudges, orders and directs:

However, the CA reversed the CIACs ruling that Mabunay had incurred delay which
entitled petitioner to the stipulated liquidated damages and unrecouped down
payment. Citing Aerospace Chemical Industries, Inc. v. Court of Appeals,19 the
appellate court said that not all requisites in order to consider the obligor or debtor in
default were present in this case. It held that it is only from December 24, 2008
(completion date) that we should reckon default because the Construction Agreement
provided only for delay in the completion of the project and not delay on a monthly
basis using the work schedule approved by petitioner as the reference point. Hence,
petitioners termination of the contract was premature since the delay in this case was
merely speculative; the obligation was not yet demandable.

1. Respondents Mabunay and Utassco to jointly and severally pay claimant


the following:
a) P4,469,969.90, as liquidated damages, plus legal interest
thereon at the rate of 6% per annum computed from the date of this
decision up to the time this decision becomes final, and 12% per
annum computed from the date this decision becomes final until
fully paid, and

The dispositive portion of the CA Decision reads:

b) P2,379,441.53 as unrecouped down payment plus interest


thereon at the rate of 6% per annum computed from the date of this
decision up to the time this decision becomes final, and 12% per
annum computed from the date this decision becomes final until
fully paid.

WHEREFORE, premises considered, the instant petition for review is GRANTED.


The assailed Decision dated 13 January 2010 rendered by the CIAC Arbitral Tribunal
in CIAC Case No. 03-2009 is hereby REVERSED and SET ASIDE. Accordingly, the
Writ of Execution dated 24 November 2010 issued by the same tribunal is hereby
ANNULLED and SET ASIDE.

It being understood that respondent Utasscos liability shall in no case


exceed P8.4 million.

SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while respondent filed a
motion for partial reconsideration. Both motions were denied.

2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which


is respondent Mabunays share in the arbitration cost claimant had
advanced, with legal interest thereon from January 8, 2010 until fully paid.

The Issues
3. Respondent Mabunay to indemnify respondent Utassco of the amounts
respondent Utassco will have paid to claimant under this decision, plus
interest thereon at the rate of 12% per annum computed from the date he is
notified of such payment made by respondent Utassco to claimant until fully
paid, and to pay Utassco P100,000.00 as attorneys fees.

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioners
claims under the Performance Bond and to reinstate in its entirety the February 2,
2010 CIAC Decision. Specifically, petitioner alleged that
A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING
THAT THE ALTERNATIVE DISPUTE RESOLUTION ACT AND THE
SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE
STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW
ARBITRAL AWARDS.

SO ORDERED.17
Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997
Rules of Civil Procedure, as amended.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE


ARBITRAL AWARD ON AN ISSUE THAT WAS NOT RAISED IN THE
ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT
ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE
PLEADINGS FILED BEFORE THE COURT.

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules)
promulgated by this Court and which took effect on October 30, 2009. Since R.A. No.
9285 explicitly excluded CIAC awards from domestic arbitration awards that need to
be confirmed to be executory, said awards are therefore not covered by Rule 11 of the
Special ADR Rules,24 as they continue to be governed by EO No. 1008, as amended
and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure
Governing Construction Arbitration25 provide for the manner and mode of appeal from
CIAC decisions or awards in Section 18 thereof, which reads:

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE


CASE OF AEROSPACE CHEMICAL INDUSTRIES, INC. v. COURT OF
APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH
CONSTRUCTION AGREEMENTS.21

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

Our Ruling

As to the alleged error committed by the CA in deciding the case upon an issue not
raised or litigated before the CIAC, this assertion has no basis. Whether or not
Mabunay had incurred delay in the performance of his obligations under the
Construction Agreement was the very first issue stipulated in the Terms of
Reference26(TOR), which is distinct from the issue of the extent of respondents
liability under the Performance Bond.

On the procedural issues raised, we find no merit in petitioners contention that with
the institutionalization of alternative dispute resolution under Republic Act (R.A.) No.
9285,22 otherwise known as the Alternative Dispute Resolution Act of 2004, the CA
was divested of jurisdiction to review the decisions or awards of the CIAC. Petitioner
erroneously relied on the provision in said law allowing any party to a domestic
arbitration to file in the Regional Trial Court (RTC) a petition either to confirm, correct
or vacate a domestic arbitral award.
We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review
awards or decisions of the CIAC in construction disputes. On the contrary, Section 40
thereof expressly declares that confirmation by the RTC is not required, thus:

Indeed, resolution of the issue of delay was crucial upon which depends petitioners
right to the liquidated damages pursuant to the Construction Agreement. Contrary to
the CIACs findings, the CA opined that delay should be reckoned only after the lapse
of the one-year contract period, and consequently Mabunays liability for liquidated
damages arises only upon the happening of such condition.

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

We reverse the CA.

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

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation
by reason of a cause imputable to the former. It is the non-fulfillment of an obligation
with respect to time.27

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

Article 1169 of the Civil Code provides:

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

ART. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive
jurisdiction over disputes arising from, or connected with, contracts entered into by
parties involved in construction in the Philippines, whether the dispute arises before
or after the completion of the contract, or after the abandonment or breach thereof. By
express provision of Section 19 thereof, the arbitral award of the CIAC is final and
unappealable, except on questions of law, which are appealable to the Supreme
Court. With the amendments introduced by R.A. No. 7902 and promulgation of the
1997 Rules of Civil Procedure, as amended, the CIAC was included in the
enumeration of quasijudicial agencies whose decisions or awards may be appealed
to the CA in a petition for review under Rule 43. Such review of the CIAC award may
involve either questions of fact, of law, or of fact and law.23

xxxx
It is a general rule that one who contracts to complete certain work within a certain
time is liable for the damage for not completing it within such time, unless the delay is
excused or waived.28
The Construction Agreement provides in Article 10 thereof the following conditions as
to completion time for the project

1. The CONTRACTOR shall complete the works called for under this
Agreement within ONE (1) YEAR or 365 Days reckoned from the 1st
calendar day after signing of the Notice of Award and Notice to Proceed and
receipt of down payment.

1wphi1

2. In this regard the CONTRACTOR shall submit a detailed work schedule


for approval by OWNER within Seven (7) days after signing of this
Agreement and full payment of 20% of the agreed contract price. Said
detailed work schedule shall follow the general schedule of activities and
shall serve as basis for the evaluation of the progress of work by
CONTRACTOR.29

Attention

: Mr. Martin Mabunay


General Manager

Thru

: Engr. Reynaldo Gapasin

Project

: Villa Beatriz

Subject

: Notice of Delay

Dear Mr. Mabunay:

In this jurisdiction, the following requisites must be present in order that the debtor
may be in default: (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.30

This is to formalize our discussion with your Engineers during our meeting last April
23, 2008 regarding the delay in the implementation of major activities based on your
submitted construction schedule. Substantial delay was noted in concreting works
that affects your roof framing that should have been 40% completed as of this date.
This delay will create major impact on your over-all schedule as the finishing works
will all be dependent on the enclosure of the building.

In holding that Mabunay has not at all incurred delay, the CA pointed out that the
obligation to perform or complete the project was not yet demandable as of
November 19, 2008 when petitioner terminated the contract, because the agreed
completion date was still more than one month away (December 24, 2008). Since the
parties contemplated delay in the completion of the entire project, the CA concluded
that the failure of the contractor to catch up with schedule of work activities did not
constitute delay giving rise to the contractors liability for damages.

In this regard, we recommend that you prepare a catch-up schedule and expedite the
delivery of critical materials on site. We would highly appreciate if you could attend
our next regular meeting so we could immediately address this matter. Thank you.
Very truly yours,

We cannot sustain the appellate courts interpretation as it is inconsistent with the


terms of the Construction Agreement. Article 1374 of the Civil Code requires that 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. Here, the
work schedule approved by petitioner was intended, not only to serve as its basis for
the payment of monthly progress billings, but also for evaluation of the progress of
work by the contractor. Article 13.01 (g) (iii) of the Construction Agreement provides
that the contractor shall be deemed in default if, among others, it had delayed without
justifiable cause the completion of the project "by more than thirty (30) calendar days
based on official work schedule duly approved by the OWNER."31

Engr. Sheila N. Botardo


Construction Manager LMI/FEPI32
October 15, 2008
xxxx
Dear Mr. Mabunay,

Records showed that as early as April 2008, or within four months after Mabunay
commenced work activities, the project was already behind schedule for reasons not
attributable to petitioner. In the succeeding months, Mabunay was still unable to catch
up with his accomplishment even as petitioner constantly advised him of the delays,
as can be gleaned from the following notices of delay sent by petitioners engineer
and construction manager, Engr. Sheila N. Botardo:

We have noticed continuous absence of all the Engineers that you have assigned onsite to administer and supervise your contracted work. For the past two (2) weeks,
your company does not have a Technical Representative manning the jobsite
considering the critical activities that are in progress and the delays in schedule that
you have already incurred. In this regard, we would highly recommend the immediate
replacement of your Project Engineer within the week.

April 30, 2008

We would highly appreciate your usual attention on this matter.


x x x x33

Seven Shades of Blue


Boracay Island
Malay, Aklan

November 5, 2008

xxxx

the latter incurred. This was followed by the claim against the Performance Bond
upon the respondent on December 18, 2008.

Dear Mr. Mabunay,


Petitioners claim against the Performance Bond included the liquidated damages
provided in the Construction Agreement, as follows:

This is in reference to your discussion during the meeting with Mr. Joohan Lee last
October 30, 2008 regarding the construction of the Field Office and Stock Room for
Materials intended for Villa Beatriz use only. We understand that you have committed
to complete it November 5, 2008 but as of this date there is no improvement or any
ongoing construction activity on the said field office and stockroom.

ARTICLE 12 LIQUIDATED DAMAGES:


12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to
complete the PROJECT within the period stipulated herein or within the period of
extension granted by the OWNER, plus One (1) Week grace period, without any
justifiable reason, the CONTRACTOR hereby agrees

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this
stockroom is badly needed. We will highly appreciate if this matter will be given your
immediate attention.

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent


to One Tenth of One Percent (1/10 of 1%) of the Contract Amount for each
day of delay after any and all extensions and the One (1) week Grace Period
until completed by the CONTRACTOR.

Thank you.
x x x x34

b. The CONTRACTOR, even after paying for the liquidated damages due to
unexecuted works and/or delays shall not relieve it of the obligation to
complete and finish the construction.

November 6, 2008
xxxx

Any sum which maybe payable to the OWNER for such loss may be deducted from
the amounts retained under Article 9 or retained by the OWNER when the works
called for under this Agreement have been finished and completed.

Dear Mr. Mabunay,


We would like to call your attention regarding the decrease in your manpower
assigned on site. We have observed that for the past three (3) weeks instead of
increasing your manpower to catch up with the delay it was reduced to only 8 workers
today from an average of 35 workers in the previous months.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from


the contractors collectibles without prior consent and concurrence by the
CONTRACTOR.

Please note that based on your submitted revised schedule you are already delayed
by approximately 57% and this will worsen should you not address this matter
properly.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby,
without necessity of any further act and deed, authorizes the OWNER to deduct any
amount that may be due under Item (a) above, from any and all money or amounts
due or which will become due to the CONTRACTOR by virtue of this Agreement
and/or to collect such amounts from the Performance Bond filed by the
CONTRACTOR in this Agreement.36 (Emphasis supplied.)

We are looking forward for [sic] your cooperation and continuous commitment in
delivering this project as per contract agreement.

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil
Code, which provide:

x x x x35
Subsequently, a joint inspection and evaluation was conducted with the assistance of
the architects and engineers of petitioner and Mabunay and it was found that as of
November 14, 2008, the project was only 31.39% complete and that the uncompleted
portion was 68.61% with an estimated value per Construction Agreement
asP27,880,419.52. Instead of doubling his efforts as the scheduled completion date
approached, Mabunay did nothing to remedy the delays and even reduced the
deployment of workers at the project site. Neither did Mabunay, at anytime, ask for an
extension to complete the project. Thus, on November 19, 2008, petitioner advised
Mabunay of its decision to terminate the contract on account of the tremendous delay

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract,
to be paid in case of breach thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall
be equitably reduced if they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the
one contemplated by the parties in agreeing upon the liquidated damages, the law
shall determine the measure of damages, and not the stipulation.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item
13.01, the OWNER may after giving fourteen (14) calendar days notice in writing to
the CONTRACTOR, enter upon the site and expel the CONTRACTOR therefrom
without voiding this Agreement, or releasing the CONTRACTOR from any of its
obligations, and liabilities under this Agreement. Also without diminishing or affecting
the rights and powers conferred on the OWNER by this Agreement and the OWNER
may himself complete the work or may employ any other contractor to complete the
work. If the OWNER shall enter and expel the CONTRACTOR under this clause, the
OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR
to compensate for all kinds of damages the OWNER may suffer. All expenses
incurred to finish the Project shall be charged to the CONTRACTOR and/or his bond.
Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of
execution, damages for the delay in the completion, if any, and all; other expenses
incurred by the OWNER have been ascertained which amount shall be deducted from
any money due to the CONTRACTOR on account of this Agreement. The
CONTRACTOR will not be compensated for any loss of profit, loss of goodwill, loss of
use of any equipment or property, loss of business opportunity, additional financing
cost or overhead or opportunity losses related to the unaccomplished portions of the
work.40 (Emphasis supplied.)

A stipulation for liquidated damages is attached to an obligation in order to ensure


performance and has a double function: (1) to provide for liquidated damages, and (2)
to strengthen the coercive force of the obligation by the threat of greater responsibility
in the event of breach.37 The amount agreed upon answers for damages suffered by
the owner due to delays in the completion of the project.38 As a precondition to such
award, however, there must be proof of the fact of delay in the performance of the
obligation.39
Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of
the contractor to complete the project within the stipulated period or the extension
granted by the owner. However, this will not defeat petitioners claim for damages nor
respondents liability under the Performance Bond. Mabunay was clearly in default
considering the dismal percentage of his accomplishment (32.38%) of the work he
contracted on account of delays in executing the scheduled work activities and
repeated failure to provide sufficient manpower to expedite construction works. The
events of default and remedies of the Owner are set forth in Article 13, which reads:

As already demonstrated, the contractors default in this case pertains to his failure to
substantially perform the work on account of tremendous delays in executing the
scheduled work activities. Where a party to a building construction contract fails to
comply with the duty imposed by the terms of the contract, a breach results for which
an action may be maintained to recover the damages sustained thereby, and of
course, a breach occurs where the contractor inexcusably fails to perform
substantially in accordance with the terms of the contract.41

ARTICLE 13 DEFAULT OF CONTRACTOR:


13.01 Any of the following shall constitute an Event of Default on the part of the
CONTRACTOR.
xxxx

The plain and unambiguous terms of the Construction Agreement authorize petitioner
to confiscate the Performance Bond to answer for all kinds of damages it may suffer
as a result of the contractors failure to complete the building. Having elected to
terminate the contract and expel the contractor from the project site under Article 13
of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by Mabunay.
Such stipulation allowing the confiscation of the contractors performance bond
partakes of the nature of a penalty clause. A penalty clause, expressly recognized by
law, is an accessory undertaking to assume greater liability on the part of the obligor
in case of breach of an obligation. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages
caused by the breach. It is well-settled that so long as such stipulation does not
contravene law, morals, or public order, it is strictly binding upon the obligor.42

g. In case the CONTRACTOR has done any of the following:


(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or
has suspended the progress of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project by
more than thirty (30) calendar days based on official work schedule duly
approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the
construction works in accordance with the Agreement or is persistently or
flagrantly neglecting to carry out its obligations under the Agreement.

Respondent, however, insists that it is not liable for the breach committed by
Mabunay because by the terms of the surety bond it issued, its liability is limited to the
performance by said contractor to the extent equivalent to 20% of the down payment.
It stresses that with the 32.38% completion of the project by Mabunay, its liability was
extinguished because the value of such accomplishment already exceeded the sum
equivalent to 20% down payment (P8.4 million).

(v.) has, to the detriment of good workmanship or in defiance of the Owners


instructions to the contrary, sublet any part of the Agreement.

The appellate court correctly rejected this theory of respondent when it ruled that the
Performance Bond guaranteed the full and faithful compliance of Mabunays
obligations under the Construction Agreement, and that nowhere in law or
jurisprudence does it state that the obligation or undertaking by a surety may be
apportioned.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union
Gurantee Co. and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc., and more recently, in Republic vs. Court of Appeals and R & B
Surety and Insurance Company, Inc., we have sustained the principle that if a surety
upon demand fails to pay, he can be held liable for interest, even if in thus paying, its
liability becomes more than the principal obligation. The increased liability is not
because of the contract but because of the default and the necessity of judicial
collection.

The pertinent portions of the Performance Bond provide:


The conditions of this obligation are as follows:
Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE
CONSTRUCTION AND DEVELOPMENT, INC. to post a bond of the abovestated sum
to guarantee 20% down payment for the construction of Building 25 (Villa Beatriz) 72Room Condotel, The Lodgings inside Fairways and Bluewater, Boracay Island, Malay,
Aklan.

Petitioners liability under the suretyship contract is different from its liability under the
law.1wphi1 There is no question that as a surety, petitioner should not be made to
pay more than its assumed obligation under the surety bonds. However, it is clear
from the above-cited jurisprudence that petitioners liability for the payment of interest
is not by reason of the suretyship agreement itself but because of the delay in the
payment of its obligation under the said agreement.47 (Emphasis supplied; citations
omitted.)

Whereas, said contract required said Principal to give a good and sufficient bond in
the above-stated sum to secure the full and faithful performance on his part of said
contract.

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated
January 27, 2011 and Resolution dated December 8, 2011 of the Court of Appeals in
CA-G.R. SP No. 112808 are hereby REVERSED and SET ASIDE.

It is a special provision of this undertaking that the liability of the surety under this
bond shall in no case exceed the sum of P8,400,000.00 Philippine Currency.

The Award made in the Decision dated February 2, 2010 of the Construction Industry
Arbitration Commission Is hereby REINSTATED with the following MODIFICATIONS:

Now, Therefore, if the Principal shall well and truly perform and fulfill all the
undertakings, covenants, terms, conditions and agreements stipulated in said
contract, then this obligation shall be null and void; otherwise to remain in full force
and effect.43 (Emphasis supplied.)

"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal


hereby adjudges, orders and directs:
1) Respondent Utassco to pay to petitioner J Plus Asia Development
Corporation the full amount of the Performance Bond, P8,400,000.00,
pursuant to Art. 13 of the Construction Agreement dated December 24,
2007, with interest at the rate of 6% per annum computed from the date of
the filing of the complaint until the finality of this decision, and 12% per
annum computed from the date this decision becomes final until fully paid;
and

While the above condition or specific guarantee is unclear, the rest of the recitals in
the bond unequivocally declare that it secures the full and faithful performance of
Mabunays obligations under the Construction Agreement with petitioner. By its
nature, a performance bond guarantees that the contractor will perform the contract,
and usually provides that if the contractor defaults and fails to complete the contract,
the surety can itself complete the contract or pay damages up to the limit of the
bond.44 Moreover, the rule is that if the language of the bond is ambiguous or
uncertain, it will be construed most strongly against a compensated surety and in
favor of the obligees or beneficiaries under the bond, in this case petitioner as the
Project Owner, for whose benefit it was ostensibly executed.45

2) Respondent Mabunay to indemnify respondent Utassco of the amounts


respondent Utassco will have paid to claimant under this decision, plus
interest thereon at the rate of 12% per annum computed from the date he is
notified of such payment made by respondent Utassco to claimant until fully
paid, and to pay Utassco P100,000.00 as attorney's fees.

The imposition of interest on the claims of petitioner is likewise in order. As we held in


Commonwealth Insurance Corporation v. Court of Appeals46

SO ORDERED.

Petitioner argues that it should not be made to pay interest because its issuance of
the surety bonds was made on the condition that its liability shall in no case exceed
the amount of the said bonds.

With the above modifications, the Writ of Execution dated November 24, 2010 issued
by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and
UPHELD.

We are not persuaded. Petitioners argument is misplaced.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 198075

2. The amount of rent to be paid by FKI for the first twenty-five (25) years
is P40,126.00 per annum .11
September 4, 2013
The Deed of Donation also stipulated that the lease over the subject property is
renewable for another period of twenty-five (25) years " upon mutual agreement" of
FKI and the respondent.12 In which case, the amount of rent shall be determined in
accordance with item 2(g) of the Deed of Donation, viz:

KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,


vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.

g. The rental for the second 25 years shall be the subject of mutual agreement and in
case of disagreement the matter shall be referred to a Board of three Arbitrators
appointed and with powers in accordance with the Arbitration Law of the Philippines,
Republic Act 878, whose function shall be to decide the current fair market value of
the land excluding the improvements, provided, that, any increase in the fair market
value of the land shall not exceed twenty five percent (25%) of the original value of
the land donated as stated in paragraph 2(c) of this Deed. The rental for the second
25 years shall not exceed three percent (3%) of the fair market value of the land
excluding the improvements as determined by the Board of Arbitrators.13

DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of
Appeals in C.A.-G.R. SP No. 116865.
The facts:
The Donation

In October 1976, FKI and the respondent executed an Amended Deed of


Donation14 that reiterated the provisions of the Deed of Donation , including those
relating to the lease of the subject land.

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was


the registered owner of a parcel of land located at Km. 16, South Superhighway,
Paraaque City (subject land).3 Within the subject land are buildings and other
improvements dedicated to the business of FKI.4

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

In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in
favor of herein respondent Makati Rotary Club Foundation, Incorporated by way of a
conditional donation.6 The respondent accepted the donation with all of its
conditions.7 On 26 May1975, FKI and the respondent executed a Deed of
Donation8evidencing their consensus.

2000 Lease Contract


Two (2) days before the lease incorporated in the Deed of Donation and Amended
Deed of Donation was set to expire, or on 23 May 2000, FKI and respondent
executed another contract of lease ( 2000 Lease Contract )15covering the subject
land. In this 2000 Lease Contract, FKI and respondent agreed on a new five-year
lease to take effect on the 26th of May 2000, with annual rents ranging
from P4,000,000 for the first year up to P4,900,000 for the fifth year.16 The 2000
Lease Contract also contained an arbitration clause enforceable in the event the
parties come to disagreement about the" interpretation, application and execution" of
the lease, viz :

The Lease and the Amended Deed of Donation


One of the conditions of the donation required the respondent to lease the subject
land back to FKI under terms specified in their Deed of Donation.9 With the
respondents acceptance of the donation, a lease agreement between FKI and the
respondent was, therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were
as follows:

19. Governing Law The provisions of this 2000 Lease Contract shall be governed,
interpreted and construed in all aspects in accordance with the laws of the Republic
of the Philippines.

1. The period of the lease is for twenty-five (25) years,10 or until the 25th of
May 2000;

Any disagreement as to the interpretation, application or execution of this 2000 Lease


Contract shall be submitted to a board of three (3) arbitrators constituted in

10

accordance with the arbitration law of the Philippines. The decision of the majority of
the arbitrators shall be binding upon FKI and respondent.17 (Emphasis supplied)

respondent, i.e. , one lease for the first twenty-five (25)years or from 1975 to 2000,
and another lease for the next twenty-five (25)years thereafter or from 2000 to 2025.
27 Both leases are material conditions of the donation of the subject land.

2005 Lease Contract


Petitioner points out that while a definite amount of rent for the second twenty-five
(25) year lease was not fixed in the Deed of Donation and Amended Deed of
Donation , both deeds nevertheless prescribed rules and limitations by which the
same may be determined. Such rules and limitations ought to be observed in any
succeeding lease agreements between petitioner and respondent for they are, in
themselves, material conditions of the donation of the subject land.28

After the 2000 Lease Contract expired, FKI and respondent agreed to renew their
lease for another five (5) years. This new lease (2005 Lease Contract )18 required FKI
to pay a fixed annual rent of P4,200,000.19 In addition to paying the fixed rent,
however, the 2005 Lease Contract also obligated FKI to make a yearly " donation " of
money to the respondent.20 Such donations ranged from P3,000,000 for the first year
up to P3,900,000for the fifth year.21 Notably, the 2005 Lease Contract contained an
arbitration clause similar to that in the 2000 Lease Contract, to wit:

In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended
Deed of Donation that supposedly limits the amount of rent for the lease over the
second twenty-five (25) years to only " three percent (3%) of the fair market value of
the subject land excluding the improvements.29

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

For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005
Lease Contract cannot be enforced as they are clearly, in view of their exorbitant
exactions, in violation of the aforementioned threshold in item 2(g) of the Deed of
Donation and Amended Deed of Donation . Consequently, petitioner insists that the
amount of rent it has to pay thereon is and must still be governed by the limitations
prescribed in the Deed of Donation and Amended Deed of Donation.30

Any disagreement as to the interpretation, application or execution of this 2005 Lease


Contract shall be submitted to a board of three (3) arbitrators constituted in
accordance with the arbitration law of the Philippines. The decision of the majority of
the arbitrators shall be binding upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioners Refusal to Pay

The Demand Letters

From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005
Lease Contract.23 But in June of 2008, FKI sold all its rights and properties relative to
its business in favor of herein petitioner Koppel, Incorporated.24 On 29 August 2008,
FKI and petitioner executed an Assignment and Assumption of Lease and
Donation25 wherein FKI, with the conformity of the respondent, formally assigned all
of its interests and obligations under the Amended Deed of Donation and the 2005
Lease Contract in favor of petitioner.

On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner


notifying the latter of its default " per Section 12 of the 2005 Lease Contract " and
demanding for the settlement of the rent and " donation " due for the year 2009.
Respondent, in the same letter, further intimated of canceling the 2005 Lease
Contract should petitioner fail to settle the said obligations.32 Petitioner received the
First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its
disagreement over the rental stipulations of the 2005 Lease Contract calling them "
severely disproportionate," "unconscionable" and "in clear violation to the nominal
rentals mandated by the Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled to P8,394,000.00, exclusive
of interests, petitioner offered to pay only P80,502.79,35 in accordance with the rental
provisions of the Deed of Donation and Amended Deed of Donation.36 Respondent
refused this offer.37

The following year, petitioner discontinued the payment of the rent and " donation "
under the 2005 Lease Contract.
Petitioners refusal to pay such rent and "donation " emanated from its belief that the
rental stipulations of the 2005 Lease Contract, and even of the 2000 Lease Contract,
cannot be given effect because they violated one of the" material conditions " of the
donation of the subject land, as stated in the Deed of Donation and Amended Deed of
Donation.26

On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to


petitioner, reiterating its demand for the payment of the obligations already due under
the 2005 Lease Contract. The Second Demand Letter also contained a demand for

According to petitioner, the Deed of Donation and Amended Deed of Donation


actually established not only one but two (2) lease agreements between FKI and

11

petitioner to " immediately vacate the leased premises " should it fail to pay such
obligations within seven (7) days from its receipt of the letter.39 The respondent
warned of taking " legal steps " in the event that petitioner failed to comply with any of
the said demands.40 Petitioner received the Second Demand Letter on 26September
2009.41

In due course, petitioner and respondent both submitted their position papers,
together with their other documentary evidence.52 Remarkably, however, respondent
failed to submit the Second Demand Letter as part of its documentary evidence.

Petitioner refused to comply with the demands of the respondent. Instead, on 30


September 2009, petitioner filed with the Regional Trial Court (RTC) of Paraaque
City a complaint42 for the rescission or cancellation of the Deed of Donation and
Amended Deed of Donation against the respondent. This case is currently pending
before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.

On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the
MeTC refused to dismiss the action on the ground that the dispute is subject to
arbitration, it nonetheless sided with the petitioner with respect to the issues regarding
the insufficiency of the respondents demand and the nullity of the 2005 Lease
Contract.54 The MeTC thus disposed:

The Ejectment Suit

WHEREFORE, judgment is hereby rendered dismissing the case x x x, without


pronouncement as to costs.

Rulings of the MeTC, RTC and Court of Appeals

On 5 October 2009, respondent filed an unlawful detainer case43 against the


petitioner before the Metropolitan Trial Court (MeTC) of Paraaque City. The
ejectment case was raffled to Branch 77 and was docketed as Civil Case No. 2009307.

SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was
assigned to Branch 274 of the RTC of Paraaque City and was docketed as Civil
Case No. 10-0255.

On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In


it, petitioner reiterated its objection over the rental stipulations of the 2005 Lease
Contract for being violative of the material conditions of the Deed of Donation and
Amended Deed of Donation.45 In addition to the foregoing, however, petitioner also
interposed the following defenses:

On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the
petitioner from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the
Metropolitan Trial Court, Branch 77, Paraaque City, is hereby reversed, judgment is
thus rendered in favor of the plaintiff-appellant and against the defendant-appellee,
and ordering the latter

1. The MeTC was not able to validly acquire jurisdiction over the instant
unlawful detainer case in view of the insufficiency of respondents
demand.46 The First Demand Letter did not contain an actual demand to
vacate the premises and, therefore, the refusal to comply there with does not
give rise to an action for unlawful detainer.47

(1) to vacate the lease[d] premises made subject of the case and to restore
the possession thereof to the plaintiff-appellant;

2. Assuming that the MeTC was able to acquire jurisdiction, it may not
exercise the same until the disagreement between the parties is first referred
to arbitration pursuant to the arbitration clause of the 2005 Lease Contract.48

(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred
Sixty Two Thousand Four Hundred Thirty Six Pesos (P9,362,436.00),
penalties and net of 5% withholding tax, for the lease period from May 25,
2009 to May 25, 2010 and such monthly rental as will accrue during the
pendency of this case;

3. Assuming further that the MeTC has jurisdiction that it can exercise,
ejectment still would not lie as the 2005 Lease Contract is void abinitio.49 The
stipulation in the 2005 Lease Contract requiring petitioner to give yearly "
donations " to respondent is a simulation, for they are, in fact, parts of the
rent. 50 Such grants were only denominated as " donations " in the contract
so that the respondentanon-stock and non-profit corporationcould evade
payment of the taxes otherwise due thereon.51

(3) to pay attorneys fees in the sum of P100,000.00 plus appearance fee
of P3,000.00;
(4) and costs of suit.

12

As to the existing improvements belonging to the defendant-appellee, as these were


built in good faith, the provisions of Art. 1678of the Civil Code shall apply.

On 5 September 2011, this Court granted petitioners prayer for the issuance of a
Temporary Restraining Order68staying the immediate implementation of the decisions
adverse to it.

SO ORDERED.57
OUR RULING
The ruling of the RTC is premised on the following ratiocinations:
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all
erred in overlooking the significance of the arbitration clause incorporated in the 2005
Lease Contract . As the Court sees it, that is a fatal mistake.

1. The respondent had adequately complied with the requirement of demand


as a jurisdictional precursor to an unlawful detainer action.58 The First
Demand Letter, in substance, contains a demand for petitioner to vacate
when it mentioned that it was a notice " per Section12 of the 2005 Lease
Contract."59 Moreover, the issue of sufficiency of the respondents demand
ought to have been laid to rest by the Second Demand Letter which, though
not submitted in evidence, was nonetheless admitted by petitioner as
containing a" demand to eject " in its Answer with Compulsory
Counterclaim.60

For this reason, We grant the petition.


Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the
petitioner and respondent emanates from the rental stipulations of the 2005 Lease
Contract. The respondent insists upon the enforce ability and validity of such
stipulations, whereas, petitioner, in substance, repudiates them. It is from petitioners
apparent breach of the 2005 Lease Contract that respondent filed the instant unlawful
detainer action.

2. The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contracts
validity.61 Even assuming that it can, petitioner still did not file a formal
application before the MeTC so as to render such arbitration clause
operational.62 At any rate, the MeTC would not be precluded from exercising
its jurisdiction over an action for unlawful detainer, over which, it has
exclusive original jurisdiction.63

One cannot escape the conclusion that, under the foregoing premises, the dispute
between the petitioner and respondent arose from the application or execution of the
2005 Lease Contract . Undoubtedly, such kinds of dispute are covered by the
arbitration clause of the 2005 Lease Contract to wit:

3. The 2005 Lease Contract must be sustained as a valid contract since


petitioner was not able to adduce any evidence to support its allegation that
the same is void.64 There was, in this case, no evidence that respondent is
guilty of any tax evasion.65

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

Aggrieved, the petitioner appealed to the Court of Appeals.


On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:

Any disagreement as to the interpretation, application or execution of this 2005 Lease


Contract shall be submitted to a board of three (3) arbitrators constituted in
accordance with the arbitration law of the Philippines. The decision of the majority of
the arbitrators shall be binding upon FKI and respondent.69 (Emphasis supplied)

WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial
Court of Paraaque City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx

The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement"
as to the " interpretation, application or execution " of the 2005 Lease Contract ought
to be submitted to arbitration.70 To the mind of this Court, such stipulation is clear and
is comprehensive enough so as to include virtually any kind of conflict or dispute that
may arise from the 2005 Lease Contract including the one that presently besets
petitioner and respondent.

SO ORDERED.67
Hence, this appeal.

13

The application of the arbitration clause of the 2005 Lease Contract in this case
carries with it certain legal effects. However, before discussing what these legal
effects are, We shall first deal with the challenges posed against the application of
such arbitration clause.

None of the arguments have any merit.


First. As highlighted in the previous discussion, the disagreement between the
petitioner and respondent falls within the all-encompassing terms of the arbitration
clause of the 2005 Lease Contract. While it may be conceded that in the arbitration of
such disagreement, the validity of the 2005 Lease Contract, or at least, of such
contracts rental stipulations would have to be determined, the same would not render
such disagreement non-arbitrable. The quotation from Gonzales that was used to
justify the contrary position was taken out of context. A rereading of Gonzales would
fix its relevance to this case.

Challenges Against the Application of the


Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the
petitioner, as well as the MeTC, RTC and the Court of Appeals, vouched for the nonapplication of the same in the instant case. A plethora of arguments was hurled in
favor of bypassing arbitration. We now address them.

In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the
Mines and Geosciences Bureau (PA-MGB) seeking the nullification of a Financial
Technical Assistance Agreement and other mining related agreements entered into by
private parties.82

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

Grounds invoked for the nullification of such agreements include fraud and
unconstitutionality.83 The pivotal issue that confronted the Court then was whether the
PA-MGB has jurisdiction over that particular arbitration complaint. Stated otherwise,
the question was whether the complaint for arbitration raises arbitrable issues that the
PA-MGB can take cognizance of.

1. The disagreement between the petitioner and respondent is non-arbitrable


as it will inevitably touch upon the issue of the validity of the 2005 Lease
Contract.71 It was submitted that one of the reasons offered by the petitioner
in justifying its failure to pay under the 2005 Lease Contract was the nullity of
such contract for being contrary to law and public policy.72 The Supreme
Court, in Gonzales v. Climax Mining, Ltd.,73held that " the validity of contract
cannot be subject of arbitration proceedings " as such questions are " legal
in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function ." 74

Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid
of any jurisdiction to take cognizance of the complaint for arbitration, this Court
pointed out to the provisions of R.A. No. 7942, or the Mining Act of 1995, which
granted the PA-MGB with exclusive original jurisdiction only over mining disputes, i.e.,
disputes involving " rights to mining areas," "mineral agreements or permits," and "
surface owners, occupants, claim holders or concessionaires" requiring the technical
knowledge and experience of mining authorities in order to be resolved.84 Accordingly,
since the complaint for arbitration in Gonzales did not raise mining disputes as
contemplated under R.A. No. 7942 but only issues relating to the validity of certain
mining related agreements, this Court held that such complaint could not be arbitrated
before the PA-MGB.85 It is in this context that we made the pronouncement now in
discussion:

2. The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contracts validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the
validity of the 2005 Lease Contract , petitioner still did not file a formal
application before the MeTC so as to render such arbitration clause
operational.76 Section 24 of Republic Act No. 9285 requires the party seeking
arbitration to first file a " request " or an application therefor with the court not
later than the preliminary conference.77

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

4. Petitioner and respondent already underwent Judicial Dispute Resolution


(JDR) proceedings before the RTC.78 Hence, a further referral of the dispute
to arbitration would only be circuitous.79 Moreover, an ejectment case, in
view of its summary nature, already fulfills the prime purpose of arbitration,
i.e. , to provide parties in conflict with an expedient method for the resolution
of their dispute.80 Arbitration then would no longer be necessary in this
case.81

14

legal in nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function.86 (Emphasis supplied)

Once again instructive is Cargill, wherein this Court held that, as a further
consequence of the doctrine of separability, even the very party who repudiates the
main contract may invoke its arbitration clause.94

The Court in Gonzales did not simply base its rejection of the complaint for arbitration
on the ground that the issue raised therein, i.e. , the validity of contracts, is per se
non-arbitrable. The real consideration behind the ruling was the limitation that was
placed by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral body .
Gonzales rejected the complaint for arbitration because the issue raised therein is not
a mining dispute per R.A. No. 7942 and it is for this reason, and only for this reason,
that such issue is rendered non-arbitrable before the PA-MGB. As stated beforehand,
R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB only to mining disputes.87

Third . The operation of the arbitration clause in this case is not at all defeated by the
failure of the petitioner to file a formal "request" or application therefor with the MeTC.
We find that the filing of a "request" pursuant to Section 24 of R.A. No. 9285 is not the
sole means by which an arbitration clause may be validly invoked in a pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a
matter which is the subject matter of an arbitration agreement shall, if at least one
party so requests not later that the pre-trial conference, or upon the request of both
parties thereafter, refer the parties to arbitration unless it finds that the arbitration
agreement is null and void, inoperative or incapable of being performed. [Emphasis
ours; italics original]

Much more instructive for our purposes, on the other hand, is the recent case of
Cargill Philippines, Inc. v. San Fernando Regal Trading, Inc.88 In Cargill , this Court
answered the question of whether issues involving the rescission of a contract are
arbitrable. The respondent in Cargill argued against arbitrability, also citing therein
Gonzales . After dissecting Gonzales , this Court ruled in favor of arbitrability.89 Thus,
We held:

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

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

RULE 4: REFERRAL TO ADR


Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the
arbitration agreement, whether contained in an arbitration clause or in a submission
agreement, may request the court to refer the parties to arbitration in accordance with
such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before
the action is filed . - The request for referral shall be made not later than the pre-trial
conference. After the pre-trial conference, the court will only act upon the request for
referral if it is made with the agreement of all parties to the case.

Such argument is misplaced and respondent cannot rely on the Gonzales case to
support its argument.90(Emphasis ours)

(B) Submission agreement . - If there is no existing arbitration agreement at the time


the case is filed but the parties subsequently enter into an arbitration agreement, they
may request the court to refer their dispute to arbitration at any time during the
proceedings.

Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract
notwithstanding the fact that it assails the validity of such contract. This is due to the
doctrine of separability.91
Under the doctrine of separability, an arbitration agreement is considered as
independent of the main contract.92Being a separate contract in itself, the arbitration
agreement may thus be invoked regardless of the possible nullity or invalidity of the
main contract.93

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

15

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

could finally be achieved. This situation precisely finds application to the case at
bench.

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

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

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

A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is,


first and foremost, a product of party autonomy or the freedom of the parties to "
make their own arrangements to resolve their own disputes."100 Arbitration
agreements manifest not only the desire of the parties in conflict for an expeditious
resolution of their dispute. They also represent, if not more so, the parties mutual
aspiration to achieve such resolution outside of judicial auspices, in a more informal
and less antagonistic environment under the terms of their choosing. Needless to
state, this critical feature can never be satisfied in an ejectment case no matter how
summary it may be.

In using the word " may " to qualify the act of filing a " request " under Section 24 of
R.A. No. 9285, the Special ADR Rules clearly did not intend to limit the invocation of
an arbitration agreement in a pending suit solely via such "request." After all, noncompliance with an arbitration agreement is a valid defense to any offending suit and,
as such, may even be raised in an answer as provided in our ordinary rules of
procedure.95

Having hurdled all the challenges against the application of the arbitration clause of
the 2005 Lease Agreement in this case, We shall now proceed with the discussion of
its legal effects.

In this case, it is conceded that petitioner was not able to file a separate " request " of
arbitration before the MeTC. However, it is equally conceded that the petitioner, as
early as in its Answer with Counterclaim ,had already apprised the MeTC of the
existence of the arbitration clause in the 2005 Lease Contract96 and, more
significantly, of its desire to have the same enforced in this case.97 This act of
petitioner is enough valid invocation of his right to arbitrate. Fourth . The fact that the
petitioner and respondent already under went through JDR proceedings before the
RTC, will not make the subsequent conduct of arbitration between the parties
unnecessary or circuitous. The JDR system is substantially different from arbitration
proceedings.

Legal Effect of the Application of the


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

The JDR framework is based on the processes of mediation, conciliation or early


neutral evaluation which entails the submission of a dispute before a " JDR judge "
who shall merely " facilitate settlement " between the parties in conflict or make a "
non-binding evaluation or assessment of the chances of each partys case."98 Thus in
JDR, the JDR judge lacks the authority to render a resolution of the dispute that is
binding upon the parties in conflict. In arbitration, on the other hand, the dispute is
submitted to an arbitrator/s a neutral third person or a group of thereof who shall
have the authority to render a resolution binding upon the parties.99

R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought
upon an issue arising out of an agreement providing for the arbitration thereof, the
court in which such suit or proceeding is pending, upon being satisfied that the issue
involved in such suit or proceeding is referable to arbitration, shall stay the action or
proceeding until an arbitration has been had in accordance with the terms of the
agreement: Provided, That the applicant for the stay is not in default in proceeding
with such arbitration.[Emphasis supplied]
R.A. No. 9285

Clearly, the mere submission of a dispute to JDR proceedings would not necessarily
render the subsequent conduct of arbitration a mere surplusage. The failure of the
parties in conflict to reach an amicable settlement before the JDR may, in fact, be
supplemented by their resort to arbitration where a binding resolution to the dispute

Section 24. Referral to Arbitration. - A court before which an action is brought in a


matter which is the subject matter of an arbitration agreement shall, if at least one
party so requests not later that the pre-trial conference, or upon the request of both

16

parties thereafter, refer the parties to arbitration unless it finds that the arbitration
agreement is null and void, in operative or incapable of being performed. [Emphasis
supplied]

Paraaque for its consideration and, possible, application to Civil Case No. CV 090346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly,
We hereby render a Decision:

It is clear that under the law, the instant unlawful detainer action should have been
stayed;101 the petitioner and the respondent should have been referred to arbitration
pursuant to the arbitration clause of the 2005 Lease Contract . The MeTC, however,
did not do so in violation of the lawwhich violation was, in turn, affirmed by the RTC
and Court of Appeals on appeal.

1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial


Court, Branch 77, of Paraaque City in relation to Civil Case No. 2009-307
after the filing by petitioner of its Answer with Counterclaim ;

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

2. REMANDING the instant case to the MeTC, SUSPENDED at the point


after the filing by petitioner of its Answer with Counterclaim;
3. SETTING ASIDE the following:
a. Decision dated 19 August 2011 of the Court of Appeals in C.A.G.R. SP No. 116865,

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

b. Decision dated 29 October 2010 of the Regional Trial Court,


Branch 274, of Paraaque City in Civil Case No. 10-0255,

This Court is not unaware of the apparent harshness of the Decision that it is about to
make. Nonetheless, this Court must make the same if only to stress the point that, in
our jurisdiction, bona fide arbitration agreements are recognized as valid;102 and that
laws,103 rules and regulations104 do exist protecting and ensuring their enforcement as
a matter of state policy. Gone should be the days when courts treat otherwise valid
arbitration agreements with disdain and hostility, if not outright " jealousy,"105 and then
get away with it. Courts should instead learn to treat alternative means of dispute
resolution as effective partners in the administration of justice and, in the case of
arbitration agreements, to afford them judicial restraint.106 Today, this Court only
performs its part in upholding a once disregarded state policy.

c. Decision dated 27 April 2010 of the Metropolitan Trial Court,


Branch 77, of Paraaque City in Civil Case No. 2009-307; and
4. REFERRING the petitioner and the respondent to arbitration pursuant to
the arbitration clause of the 2005 Lease Contract, repeatedly included in the
2000 Lease Contract and in the 1976 Amended Deed of Donation.
Let a copy of this Decision be served to Branch 257 of the RTC of Paraaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.

Civil Case No. CV 09-0346


No costs.
This Court notes that, on 30 September 2009, petitioner filed with the RTC of
Paraaque City, a complaint107 for the rescission or cancellation of the Deed of
Donation and Amended Deed of Donation against the respondent. The case is
currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 090346.

SO ORDERED.
[G.R. No. 141833. March 26, 2003]
LM POWER ENGINEERING CORPORATION, petitioner, vs. CAPITOL INDUSTRIAL
CONSTRUCTION GROUPS, INC., respondent.

This Court recognizes the great possibility that issues raised in Civil Case No. CV 090346 may involve matters that are rightfully arbitrable per the arbitration clause of the
2005 Lease Contract. However, since the records of Civil Case No. CV 09-0346 are
not before this Court, We can never know with true certainty and only speculate. In
this light, let a copy of this Decision be also served to Branch 257of the RTC of

DECISION

17

In its Order[12] dated September 15, 1987, the RTC denied the Motion on the
ground that the dispute did not involve the interpretation or the implementation of the
Agreement and was, therefore, not covered by the arbitral clause.[13]

PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation,
negotiation and conciliation -- are encouraged by the Supreme Court. By enabling
parties to resolve their disputes amicably, they provide solutions that are less timeconsuming, less tedious, less confrontational, and more productive of goodwill and
lasting relationships.[1]

After trial on the merits, the RTC [14] ruled that the take-over of some work items
by respondent was not equivalent to a termination, but a mere modification, of the
Subcontract. The latter was ordered to give full payment for the work completed by
petitioner.

The Case
Ruling of the Court of Appeals
[2]

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of


Court, seeking to set aside the January 28, 2000 Decision of the Court of
Appeals[3] (CA) in CA-GR CV No. 54232. The dispositive portion of the Decision reads
as follows:

On appeal, the CA reversed the RTC and ordered the referral of the case to
arbitration. The appellate court held as arbitrable the issue of whether respondents
take-over of some work items had been intended to be a termination of the original
contract under Letter K of the Subcontract. It ruled likewise on two other issues:
whether petitioner was liable under the warranty clause of the Agreement, and
whether it should reimburse respondent for the work the latter had taken over.[15]

WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are
ORDERED to present their dispute to arbitration in accordance with their Sub-contract
Agreement. The surety bond posted by [respondent] is [d]ischarged.[4]

Hence, this Petition.[16]


The Facts
The Issues
On February 22, 1983, Petitioner LM Power Engineering Corporation and
Respondent Capitol Industrial Construction Groups Inc. entered into a Subcontract
Agreement involving electrical work at the Third Port of Zamboanga.[5]

In its Memorandum, petitioner raises the following issues for the Courts
consideration:
A

On April 25, 1985, respondent took over some of the work contracted to
petitioner.[6] Allegedly, the latter had failed to finish it because of its inability to procure
materials.[7]

Whether or not there exist[s] a controversy/dispute between petitioner and respondent


regarding the interpretation and implementation of the Sub-Contract Agreement dated
February 22, 1983 that requires prior recourse to voluntary arbitration;

Upon completing its task under the Contract, petitioner billed respondent in the
amount of P6,711,813.90.[8] Contesting the accuracy of the amount of advances and
billable accomplishments listed by the former, the latter refused to pay. Respondent
also took refuge in the termination clause of the Agreement. [9] That clause allowed it
to set off the cost of the work that petitioner had failed to undertake -- due to
termination or take-over -- against the amount it owed the latter.

B
In the affirmative, whether or not the requirements provided in Article III [1] of CIAC
Arbitration Rules regarding request for arbitration ha[ve] been complied with[.] [17]

Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of
Makati (Branch 141) a Complaint[10] for the collection of the amount representing the
alleged balance due it under the Subcontract. Instead of submitting an Answer,
respondent filed a Motion to Dismiss, [11] alleging that the Complaint was premature,
because there was no prior recourse to arbitration.

The Courts Ruling


The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable

18

Petitioner claims that there is no conflict regarding the interpretation or the


implementation of the Agreement. Thus, without having to resort to prior arbitration, it
is entitled to collect the value of the services it rendered through an ordinary action for
the collection of a sum of money from respondent. On the other hand, the latter
contends that there is a need for prior arbitration as provided in the Agreement. This
is because there are some disparities between the parties positions regarding the
extent of the work done, the amount of advances and billable accomplishments, and
the set off of expenses incurred by respondent in its take-over of petitioners work.

time extension is granted by [the Ministry of Public Works and Highways] to the
CONSORTIUM.[20]
Because of the delay, respondent alleges that it took over some of the work
contracted to petitioner, pursuant to the following provision in the Agreement:
K. TERMINATION OF AGREEMENT
[Respondent] has the right to terminate and/or take over this Agreement for any of
the following causes:

We side with respondent. Essentially, the dispute arose from the parties
ncongruent positions on whether certain provisions of their Agreement could be
applied to the facts. The instant case involves technical discrepancies that are better
left to an arbitral body that has expertise in those areas. In any event, the inclusion of
an arbitration clause in a contract does not ipso facto divest the courts of jurisdiction
to pass upon the findings of arbitral bodies, because the awards are still judicially
reviewable under certain conditions.[18]

xxxxxxxxx
6. If despite previous warnings by [respondent], [petitioner] does not
execute the WORK in accordance with this Agreement, or persistently or
flagrantly neglects to carry out [its] obligations under this Agreement. [21]

In the case before us, the Subcontract has the following arbitral clause:

Supposedly, as a result of the take-over, respondent incurred expenses in


excess of the contracted price. It sought to set off those expenses against the amount
claimed by petitioner for the work the latter accomplished, pursuant to the following
provision:

6. The Parties hereto agree that any dispute or conflict as regards to interpretation
and implementation of this Agreement which cannot be settled between
[respondent] and [petitioner] amicably shall be settled by means of arbitration x x
x.[19]

If the total direct and indirect cost of completing the remaining part of the WORK exceed the
sum which would have been payable to [petitioner] had it completed the WORK, the amount
of such excess [may be] claimed by [respondent] from either of the following:

Clearly, the resolution of the dispute between the parties herein requires a
referral to the provisions of their Agreement. Within the scope of the arbitration clause
are discrepancies as to the amount of advances and billable accomplishments, the
application of the provision on termination, and the consequent set-off of expenses.

1. Any amount due [petitioner] from [respondent] at the time of the termination of this
Agreement.[22]

A review of the factual allegations of the parties reveals that they differ on the
following questions: (1) Did a take-over/termination occur? (2) May the expenses
incurred by respondent in the take-over be set off against the amounts it owed
petitioner? (3) How much were the advances and billable accomplishments?

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


accomplishments involves an evaluation of the manner in which the parties
completed the work, the extent to which they did it, and the expenses each of them
incurred in connection therewith. Arbitrators also need to look into the computation of
foreign and local costs of materials, foreign and local advances, retention fees and
letters of credit, and taxes and duties as set forth in the Agreement. These data can
be gathered from a review of the Agreement, pertinent portions of which are
reproduced hereunder:

The resolution of the foregoing issues lies in the interpretation of the provisions
of the Agreement. According to respondent, the take-over was caused by petitioners
delay in completing the work. Such delay was in violation of the provision in the
Agreement as to time schedule:

C. CONTRACT PRICE AND TERMS OF PAYMENT

G. TIME SCHEDULE

xxxxxxxxx

[Petitioner] shall adhere strictly to the schedule related to the WORK and
complete the WORK within the period set forth in Annex C hereof. NO time
extension shall be granted by [respondent] to [petitioner] unless a corresponding

19

such clause is susceptible of an interpretation that covers the asserted dispute, an


order to arbitrate should be granted.[28] Any doubt should be resolved in favor of
arbitration.[29]

All progress payments to be made by [respondent] to [petitioner] shall be subject


to a retention sum of ten percent (10%) of the value of the approved
quantities. Any claims by [respondent] on [petitioner] may be deducted by
[respondent] from the progress payments and/or retained amount. Any excess from
the retained amount after deducting [respondents] claims shall be released by
[respondent] to [petitioner] after the issuance of [the Ministry of Public Works and
Highways] of the Certificate of Completion and final acceptance of the WORK by
[the Ministry of Public Works and Highways].

Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is arbitrable, the
failure to file a formal request for arbitration with the Construction Industry Arbitration
Commission (CIAC) precluded the latter from acquiring jurisdiction over the
question. To bolster its position, petitioner even cites our ruling in Tesco Services
Incorporated v. Vera.[30] We are not persuaded.

xxxxxxxxx
D. IMPORTED MATERIALS AND EQUIPMENT
[Respondent shall open the letters of credit for the importation of equipment and
materials listed in Annex E hereof after the drawings, brochures, and other
technical data of each items in the list have been formally approved by [the
Ministry of Public Works and Highways]. However, petitioner will still be fully
responsible for all imported materials and equipment.

Section 1 of Article II of the old Rules of Procedure Governing Construction


Arbitration indeed required the submission of a request for arbitration, as follows:
SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to
have recourse to arbitration by the Construction Industry Arbitration Commission (CIAC)
shall submit its Request for Arbitration in sufficient copies to the Secretariat of the CIAC;
PROVIDED, that in the case of government construction contracts, all administrative
remedies available to the parties must have been exhausted within 90 days from the time the
dispute arose.

All expenses incurred by [respondent], both in foreign and local currencies in


connection with the opening of the letters of credit shall be deducted from the
Contract Prices.
xxxxxxxxx

Tesco was promulgated by this Court, using the foregoing provision as


reference.

N. OTHER CONDITIONS

On the other hand, Section 1 of Article III of the new Rules of Procedure
Governing Construction Arbitration has dispensed with this requirement and recourse
to the CIAC may now be availed of whenever a contract contains a clause for the
submission of a future controversy to arbitration, in this wise:

xxxxxxxxx
2. All customs duties, import duties, contractors taxes, income taxes, and other
taxes that may be required by any government agencies in connection with this
Agreement shall be for the sole account of [petitioner]. [23]

SECTION 1. Submission to CIAC Jurisdiction An arbitration clause in a construction contract


or a submission to arbitration of a construction dispute shall be deemed an agreement to
submit an existing or future controversy to CIAC jurisdiction, notwithstanding the reference to
a different arbitration institution or arbitral body in such contract or submission. When a
contract contains a clause for the submission of a future controversy to arbitration, it is not
necessary for the parties to enter into a submission agreement before the claimant may invoke
the jurisdiction of CIAC.

Being an inexpensive, speedy and amicable method of settling disputes,


arbitration -- along with mediation, conciliation and negotiation -- is encouraged by
the Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens
the resolution of disputes, especially of the commercial kind. [25] It is thus regarded as
the wave of the future in international civil and commercial disputes. [26] Brushing aside
a contractual agreement calling for arbitration between the parties would be a step
backward.[27]
[24]

The foregoing amendments in the Rules were formalized by CIAC Resolution


Nos. 2-91 and 3-93.[31]

Consistent with the above-mentioned policy of encouraging alternative dispute


resolution methods, courts should liberally construe arbitration clauses. Provided

20

The difference in the two provisions was clearly explained in China Chang Jiang
Energy Corporation (Philippines) v. Rosal Infrastructure Builders et al. [32] (an extended
unsigned Resolution) and reiterated inNational Irrigation Administration v. Court of
Appeals,[33] from which we quote thus:

DAVIDE, JR., C.J.:


In this special civil action for certiorari under Rule 65 of the Rules of Court, the
National Irrigation Administration (hereafter NIA), seeks to annul and set aside the
Resolutions[1]of the Court of Appeals in CA-GR. SP No. 37180 dated 28 June 1996 and 24
February
1997,
which
dismissed
respectively
NIAs
petition
for certiorari and prohibition against the Construction Industry Arbitration Commission
(hereafter CIAC), and the motion for reconsideration thereafter filed.

Under the present Rules of Procedure, for a particular construction contract to fall within the
jurisdiction of CIAC, it is merely required that the parties agree to submit the same to
voluntary arbitration Unlike in the original version of Section 1, as applied in the Tesco case,
the law as it now stands does not provide that the parties should agree to submit disputes
arising from their agreement specifically to the CIAC for the latter to acquire jurisdiction over
the same. Rather, it is plain and clear that as long as the parties agree to submit to voluntary
arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties
will not be precluded from electing to submit their dispute before the CIAC because this right
has been vested upon each party by law, i.e., E.O. No. 1008.[34]

Records show that in a competitive bidding held by NIA in August 1978, Hydro
Resources Contractors Corporation (hereafter HYDRO) was awarded Contract MPI-C-2 for
the construction of the main civil works of the Magat River Multi-Purpose Project. The
contract provided that HYDRO would be paid partly in Philippine pesos and partly in U.S.
dollars. HYDRO substantially completed the works under the contract in 1982 and final
acceptance by NIA was made in 1984. HYDRO thereafter determined that it still had an
account receivable from NIA representing the dollar rate differential of the price escalation for
the contract.[2]

Clearly, there is no more need to file a request with the CIAC in order to vest it
with jurisdiction to decide a construction dispute.

After unsuccessfully pursuing its case with NIA, HYDRO, on 7 December 1994, filed
with the CIAC a Request for Adjudication of the aforesaid claim. HYDRO nominated six
arbitrators for the arbitration panel, from among whom CIAC appointed Engr. Lauro M.
Cruz. On 6 January 1995, NIA filed its Answer wherein it questioned the jurisdiction of the
CIAC alleging lack of cause of action, laches and estoppel in view of HYDROs alleged failure
to avail of its right to submit the dispute to arbitration within the prescribed period as provided
in the contract. On the same date, NIA filed a Compliance wherein it nominated six arbitrators,
from among whom CIAC appointed Atty. Custodio O. Parlade, and made a counterclaim
for P1,000,000 as moral damages; at least P100,000 as exemplary damages; P100,000 as
attorneys fees; and the costs of the arbitration. [3]

The arbitral clause in the Agreement is a commitment on the part of the parties
to submit to arbitration the disputes covered therein. Because that clause is binding,
they are expected to abide by it in good faith. [35] And because it covers the dispute
between the parties in the present case, either of them may compel the other to
arbitrate.[36]
Since petitioner has already filed a Complaint with the RTC without prior recourse to
arbitration, the proper procedure to enable the CIAC to decide on the dispute is to request
the stay or suspension of such action, as provided under RA 876 [the Arbitration Law].[37]
WHEREFORE,
the
Petition
is DENIED and
Decision AFFIRMED. Costs against petitioner.

the

The two designated arbitrators appointed Certified Public Accountant Joven B. Joaquin
as Chairman of the Arbitration Panel. The parties were required to submit copies of the
evidence they intended to present during the proceedings and were provided the draft Terms of
Reference.[4]

assailed

SO ORDERED.

At the preliminary conference, NIA through its counsel Atty. Joy C. Legaspi of the
Office of the Government Corporate Counsel, manifested that it could not admit the
genuineness of HYDROs evidence since NIAs records had already been destroyed. NIA
requested an opportunity to examine the originals of the documents which HYDRO agreed to
provide.[5]

[G.R. No. 129169. November 17, 1999]


NATIONAL IRRIGATION ADMINISTRATION (NIA), petitioner, vs. HONORABLE
COURT OF APPEALS (4th Division), CONSTRUCTION INDUSTRY
ARBITRATION
COMMISSION,
and
HYDRO
RESOURCES
CONTRACTORS CORPORATION, respondents.

After reaching an accord on the issues to be considered by the arbitration panel, the
parties scheduled the dates of hearings and of submission of simultaneous memoranda. [6]

DECISION

21

On 13 March 1995, NIA filed a Motion to Dismiss [7]alleging lack of jurisdiction over the
disputes. NIA contended that there was no agreement with HYDRO to submit the dispute to
CIAC for arbitration considering that the construction contract was executed in 1978 and the
project completed in 1982, whereas the Construction Industry Arbitration Law creating CIAC
was signed only in 1985; and that while they have agreed to arbitration as a mode of
settlement of disputes, they could not have contemplated submission of their disputes to
CIAC. NIA further argued that records show that it had not voluntarily submitted itself to
arbitration by CIAC citing TESCO Services, Inc. v. Hon. Abraham Vera, et al., [8] wherein it
was ruled:

E.O. NO. 1008 IS A SUBSTANTIVE LAW, NOT MERELY PROCEDURAL AS RULED BY


THE CIAC.

CIAC did not acquire jurisdiction over the dispute arising from the sub-contract agreement
between petitioner TESCO and private respondent LAROSA. The records do not show that
the parties agreed to submit the disputes to arbitration by the CIAC xxxx. While both parties
in the sub-contract had agreed to submit the matter to arbitration, this was only between
themselves, no request having been made by both with the CIAC. Hence, as already stated, the
CIAC, has no jurisdiction over the dispute. xxxx. Nowhere in the said article (sub-contract)
does it mention the CIAC, much less, vest jurisdiction with the CIAC.

D
AN INDORSEMENT OF THE AUDITOR GENERAL DECIDING A CONTROVERSY IS A
DECISION BECAUSE ALL THE ELEMENTS FOR JUDGMENT ARE THERE; THE
CONTROVERSY, THE AUTHORITY TO DECIDE AND THE DECISION. IF IT IS NOT
APPEALED SEASONABLY, THE SAME BECOMES FINAL.

NIA HAS TIMELY RAISED THE ISSUE OF JURISDICTION. IT DID NOT WAIVE NOR
IS IT ESTOPPED FROM ASSAILING THE SAME.
F
THE LEGAL DOCTRINE THAT JURISDICTION IS DETERMINED BY THE STATUTE
IN FORCE AT THE TIME OF THE COMMENCEMENT OF THE ACTION DOES NOT
ONLY APPLY TO THE INSTANT CASE.[11]

On 11 April 1995, the arbitral body issued an order [9] which deferred the determination
of the motion to dismiss and resolved to proceed with the hearing of the case on the merits as
the grounds cited by NIA did not seem to be indubitable. NIA filed a motion for
reconsideration of the aforesaid Order. CIAC in denying the motion for reconsideration ruled
that it has jurisdiction over the HYDROs claim over NIA pursuant to E.O 1008 and that the
hearing should proceed as scheduled.[10]

The Court of Appeals, after finding that there was no grave abuse of discretion on the
part of the CIAC in issuing the aforesaid Orders, dismissed the petition in its Resolution dated
28 June 1996. NIAs motion for reconsideration of the said decision was likewise denied by the
Court of Appeals on 26 February 1997.

On 26 May 1996, NIA filed with the Court of Appeals an original action
of certiorari and prohibition with prayer for restraining order and/or injunction, seeking to
annul the Orders of the CIAC for having been issued without or in excess of jurisdiction. In
support of its petition NIA alleged that:

On 2 June 1997, NIA filed before us an original action for certiorari and prohibition
with urgent prayer for temporary restraining order and writ of preliminary injunction, praying
for the annulment of the Resolutions of the Court of Appeals dated 28 June 1996 and 24
February 1997. In the said special civil action, NIA merely reiterates the issues it raised before
the Court of Appeals. [12]

A
RESPONDENT CIAC HAS NO AUTHORITY OR JURIDICTION TO HEAR AND TRY
THIS DISPUTE BETWEEN THE HEREIN PARTIES AS E.O. NO. 1008 HAD NO
RETROACTIVE EFFECT.

We take judicial notice that on 10 June 1997, CIAC rendered a decision in the main case
in favor of HYDRO.[13] NIA assailed the said decision with the Court of Appeals. In view of
the pendency of the present petitions before us the appellate court issued a resolution dated 26
March 1998 holding in abeyance the resolution of the same until after the instant petitions
have been finally decided.[14]

B
THE DISPUTE BETWEEN THE PARTIES SHOULD BE SETTLED IN ACCORDANCE
WITH GC NO. 25, ART. 2046 OF THE CIVIL CODE AND R.A. NO. 876 THE
GOVERNING LAWS AT THE TIME CONTRACT WAS EXECUTED AND TERMINATED.

At the outset, we note that the petition suffers from a procedural defect that warrants its
outright dismissal. The questioned resolutions of the Court of Appeals have already become
final and executory by reason of the failure of NIA to appeal therefrom. Instead of filing this
petition for certiorari under Rule 65 of the Rules of Court, NIA should have filed a timely
petition for review under Rule 45.

22

There is no doubt that the Court of Appeals has jurisdiction over the special civil action
for certiorari under Rule 65 filed before it by NIA. The original jurisdiction of the Court of
Appeals over special civil actions forcertiorari is vested upon it under Section 9(1) of B.P.
129. This jurisdiction is concurrent with the Supreme Court [15] and with the Regional Trial
Court.[16]

For obvious reasons the rules forbid recourse to a special civil action for certiorari if
appeal is available, as the remedies of appeal and certiorari are mutually exclusive and not
alternative or successive. [27] Although there are exceptions to the rules, none is present in the
case at bar. NIA failed to show circumstances that will justify a deviation from the general rule
as to make available a petition for certiorari in lieu of taking an appropriate appeal.

Thus, since the Court of Appeals had jurisdiction over the petition under Rule 65, any
alleged errors committed by it in the exercise of its jurisdiction would be errors of judgment
which are reviewable by timely appeal and not by a special civil action of certiorari.[17] If the
aggrieved party fails to do so within the reglementary period, and the decision accordingly
becomes final and executory, he cannot avail himself of the writ of certiorari, his predicament
being the effect of his deliberate inaction. [18]

Based on the foregoing, the instant petition should be dismissed.


In any case, even if the issue of technicality is disregarded and recourse under Rule 65 is
allowed, the same result would be reached since a review of the questioned resolutions of the
CIAC shows that it committed no grave abuse of discretion.
Contrary to the claim of NIA, the CIAC has jurisdiction over the controversy. Executive
Order No.1008, otherwise known as the Construction Industry Arbitration Law which was
promulgated on 4 February 1985, vests upon CIAC original and exclusive jurisdiction over
disputes arising from, or connected with contracts entered into by parties involved in
construction in the Philippines, whether the dispute arises before or after the completion of the
contract, or after the abandonment or breach thereof. The disputes may involve government or
private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to
submit the same to voluntary arbitration.[28]

The appeal from a final disposition of the Court of Appeals is a petition for review under
Rule 45 and not a special civil action under Rule 65 of the Rules of Court, now Rule 45 and
Rule 65, respectively, of the 1997 Rules of Civil Procedure. [19] Rule 45 is clear that decisions,
final orders or resolutions of the Court of Appeals in any case, i.e., regardless of the nature of
the action or proceedings involved, may be appealed to this Court by filing a petition for
review, which would be but a continuation of the appellate process over the original case.
[20]
Under Rule 45 the reglementary period to appeal is fifteen (15) days from notice of
judgment or denial of motion for reconsideration. [21]

The complaint of HYDRO against NIA on the basis of the contract executed between
them was filed on 7 December 1994, during the effectivity of E.O. No. 1008. Hence, it is well
within the jurisdiction of CIAC. The jurisdiction of a court is determined by the law in force at
the time of the commencement of the action. [29]

In the instant case the Resolution of the Court of Appeals dated 24 February 1997
denying the motion for reconsideration of its Resolution dated 28 June 1997 was received by
NIA on 4 March1997. Thus, it had until 19 March 1997 within which to perfect its
appeal. NIA did not appeal. What it did was to file an original action for certiorari before this
Court, reiterating the issues and arguments it raised before the Court of Appeals.

NIAs argument that CIAC had no jurisdiction to arbitrate on contract which preceded its
existence is untenable. E.O. 1008 is clear that the CIAC has jurisdiction over all disputes
arising from or connected with construction contract whether the dispute arises before or after
the completion of the contract. Thus, the date the parties entered into a contract and the date of
completion of the same, even if these occurred before the constitution of the CIAC, did not
automatically divest the CIAC of jurisdiction as long as the dispute submitted for arbitration
arose after the constitution of the CIAC. Stated differently, the jurisdiction of CIAC is over the
dispute, not the contract; and the instant dispute having arisen when CIAC was already
constituted, the arbitral board was actually exercising current, not retroactive, jurisdiction. As
such, there is no need to pass upon the issue of whether E.O. No. 1008 is a substantive or
procedural statute.

For the writ of certiorari under Rule 65 of the Rules of Court to issue, a petitioner must
show that he has no plain, speedy and adequate remedy in the ordinary course of law against
its perceived grievance.[22] A remedy is considered plain, speedy and adequate if it will
promptly relieve the petitioner from the injurious effects of the judgment and the acts of the
lower court or agency.[23] In this case, appeal was not only available but also a speedy and
adequate remedy.
Obviously, NIA interposed the present special civil action of certiorari not because it is
the speedy and adequate remedy but to make up for the loss, through omission or oversight, of
the right of ordinary appeal. It is elementary that the special civil action of certiorari is not and
cannot be a substitute for an appeal, where the latter remedy is available, as it was in this
case. A special civil action under Rule 65 of the Rules of Court will not be a cure for failure to
timely file a petition for review on certiorari under Rule 45 of the Rules of Court. [24] Rule 65
is an independent action that cannot be availed of as a substitute for the lost remedy of an
ordinary appeal, including that under Rule 45, [25] especially if such loss or lapse was
occasioned by ones own neglect or error in the choice of remedies. [26]

NIA also contended that the CIAC did not acquire jurisdiction over the dispute since it
was only HYDRO that requested for arbitration. It asserts that to acquire jurisdiction over a
case, as provided under E.O. 1008, the request for arbitration filed with CIAC should be made
by both parties, and hence the request by one party is not enough.

23

however, be pointed that under the new rules, [36] deferment of the resolution is no longer
permitted. The court may either grant the motion to dismiss, deny it, or order the amendment
of the pleading.

It is undisputed that the contracts between HYDRO and NIA contained an arbitration
clause wherein they agreed to submit to arbitration any dispute between them that may arise
before or after the termination of the agreement.Consequently, the claim of HYDRO having
arisen from the contract is arbitrable. NIAs reliance with the ruling on the case of Tesco
Services Incorporated v. Vera,[30] is misplaced.

WHEREFORE, the instant petition is DISMISSED for lack of merit. The Court of
Appeals is hereby DIRECTED to proceed with reasonable dispatch in the disposition of C.A.
G.R. No. 44527 and include in the resolution thereof the issue of laches and prescription.

The 1988 CIAC Rules of Procedure which were applied by this Court in Tesco case had
been duly amended by CIAC Resolutions No. 2-91 and 3-93, Section 1 of Article III of which
read as follows:

SO ORDERED.

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


submission to arbitration of a construction contract or a submission to arbitration of a
construction dispute shall be deemed an agreement to submit an existing or future controversy
to CIAC jurisdiction, notwithstanding the reference to a different arbitration institution or
arbitral body in such contract or submission. When a contract contains a clause for the
submission of a future controversy to arbitration, it is not necessary for the parties to enter into
a submission agreement before the claimant may invoke the jurisdiction of CIAC.

TUNA PROCESSING, INC.,


Petitioner,

G.R. No. 185582


Present:
CARPIO, J.,
Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.

-versus-

Under the present Rules of Procedure, for a particular construction contract to fall within
the jurisdiction of CIAC, it is merely required that the parties agree to submit the same to
voluntary arbitration. Unlike in the original version of Section 1, as applied in the Tesco case,
the law as it now stands does not provide that the parties should agree to submit disputes
arising from their agreement specifically to the CIAC for the latter to acquire jurisdiction over
the same. Rather, it is plain and clear that as long as the parties agree to submit to voluntary
arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties
will not be precluded from electing to submit their dispute before the CIAC because this right
has been vested upon each party by law, i.e., E.O. No. 1008.[31]

PHILIPPINE KINGFORD, INC.,


Respondent.

Promulgated:
February 29, 2012

Moreover, it is undeniable that NIA agreed to submit the dispute for arbitration to the
CIAC. NIA through its counsel actively participated in the arbitration proceedings by filing an
answer with counterclaim, as well as its compliance wherein it nominated arbitrators to the
proposed panel, participating in the deliberations on, and the formulation of, the Terms of
Reference of the arbitration proceeding, and examining the documents submitted by HYDRO
after NIA asked for the originals of the said documents. [32]

x-----------------------------------------------------------------------------------------x
DECISION

As to the defenses of laches and prescription, they are evidentiary in nature which could
not be established by mere allegations in the pleadings and must not be resolved in a motion to
dismiss. Those issues must be resolved at the trial of the case on the merits wherein both
parties will be given ample opportunity to prove their respective claims and defenses. [33] Under
the rule[34] the deferment of the resolution of the said issues was, thus, in order. An allegation
of prescription can effectively be used in a motion to dismiss only when the complaint on its
face shows that indeed the action has already prescribed. [35] In the instant case, the issue of
prescription and laches cannot be resolved on the basis solely of the complaint. It must,

PEREZ, J.:

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

24

5. Bank account. TPI shall open and maintain bank accounts in the United
States, which will be used exclusively to deposit funds that it will
collect and to disburse cash it will be obligated to spend in connection
with the implementation of this Agreement.

In this Petition for Review on Certiorari under Rule 45,[1] petitioner Tuna
Processing, Inc. (TPI), a foreign corporation not licensed to do business in the Philippines,

the assailed Resolution, the RTC dismissed petitioners Petition for Confirmation, Recognition,

6. Ownership of TPI. TPI shall be owned by the Sponsors and


Licensor. Licensor shall be assigned one share of TPI for the purpose of
being elected as member of the board of directors. The remaining shares
of TPI shall be held by the Sponsors according to their respective equity
shares. [9]

and Enforcement of Foreign Arbitral Award[3] against respondent Philippine Kingford, Inc.

xxx

prays that the Resolution[2] dated 21 November 2008 of the Regional Trial Court (RTC) of
Makati City be declared void and the case be remanded to the RTC for further proceedings. In

(Kingford), a corporation duly organized and existing under the laws of the Philippines, [4] on
The parties likewise executed a Supplemental Memorandum of Agreement [10] dated 15 January

the ground that petitioner lacked legal capacity to sue. [5]

2003 and an Agreement to Amend Memorandum of Agreement [11] dated 14 July 2003.
The Antecedents
Due to a series of events not mentioned in the petition, the licensees, including
On 14 January 2003, Kanemitsu Yamaoka (hereinafter referred to as the licensor),

respondent Kingford, withdrew from petitioner TPI and correspondingly reneged on their

co-patentee of U.S. Patent No. 5,484,619, Philippine Letters Patent No. 31138, and Indonesian

obligations.[12]Petitioner submitted the dispute for arbitration before the International Centre

Patent No. ID0003911 (collectively referred to as the Yamaoka Patent), [6] and five (5)

for Dispute Resolution in the State of California, United States and won the case against

Philippine tuna processors, namely, Angel Seafood Corporation, East Asia Fish Co., Inc.,

respondent.[13] Pertinent portions of the award read:

Mommy Gina Tuna Resources, Santa Cruz Seafoods, Inc., and respondent Kingford

13.1 Within thirty (30) days from the date of transmittal of this Award to the
Parties, pursuant to the terms of this award, the total sum to be paid
by RESPONDENT KINGFORD to CLAIMANT TPI, is the sum ofONE
MILLION SEVEN HUNDRED FIFTY THOUSAND EIGHT
HUNDRED FORTY SIX DOLLARS AND TEN CENTS
($1,750,846.10).
(A) For
breach
of
the MOA by
not
paying
past
due
assessments, RESPONDENT KINGFORD shall pay CLAIMANT the
total sum of TWO HUNDRED TWENTY NINE THOUSAND THREE
HUNDRED AND FIFTY FIVE DOLLARS AND NINETY CENTS
($229,355.90) which is 20% of MOA assessments since September 1,
2005[;]

(collectively referred to as the sponsors/licensees) [7] entered into a Memorandum of Agreement


(MOA),[8] pertinent provisions of which read:
1.

Background and objectives. The Licensor, co-owner of U.S.Patent No.


5,484,619, Philippine Patent No. 31138, and Indonesian Patent No.
ID0003911 xxx wishes to form an alliance with Sponsors for purposes of
enforcing his three aforementioned patents, granting licenses under those
patents, and collecting royalties.
The Sponsors wish to be licensed under the aforementioned patents in
order to practice the processes claimed in those patents in the United
States, the Philippines, and Indonesia, enforce those patents and collect
royalties in conjunction with Licensor.

(B) For breach of the MOA in failing to cooperate with CLAIMANT


TPI in fulfilling the objectives of the MOA, RESPONDENT
KINGFORD shall pay CLAIMANT the total sum of TWO HUNDRED
SEVENTY ONE THOUSAND FOUR HUNDRED NINETY
DOLLARS AND TWENTY CENTS ($271,490.20)[;][14] and

xxx
4. Establishment of Tuna Processors, Inc. The parties hereto agree to the
establishment of Tuna Processors, Inc. (TPI), a corporation established
in the State of California, in order to implement the objectives of this
Agreement.

(C) For violation of THE LANHAM ACT and infringement of


the YAMAOKA 619 PATENT, RESPONDENT KINGFORD shall

25

pay CLAIMANT the total sum of ONE MILLION TWO HUNDRED


FIFTY THOUSAND DOLLARS AND NO CENTS ($1,250,000.00). xxx

Sec. 133. Doing business without a license. - No foreign


corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.

xxx[15]

To enforce the award, petitioner TPI filed on 10 October 2007 a Petition for
Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before the RTC of
Makati City. The petition was raffled to Branch 150 presided by Judge Elmo M. Alameda.

It is pursuant to the aforequoted provision that the court a quo dismissed the petition. Thus:
Herein plaintiff TPIs Petition, etc. acknowledges that it is a foreign
corporation established in the State of California and was given the exclusive
right to license or sublicense the Yamaoka Patent and was assigned the
exclusive right to enforce the said patent and collect corresponding royalties
in the Philippines. TPI likewise admits that it does not have a license to do
business in the Philippines.

At Branch 150, respondent Kingford filed a Motion to Dismiss. [16] After the court
denied the motion for lack of merit,[17] respondent sought for the inhibition of Judge Alameda
and moved for the reconsideration of the order denying the motion. [18] Judge Alameda

There is no doubt, therefore, in the mind of this Court that TPI has
been doing business in the Philippines, but sans a license to do so issued by
the concerned government agency of the Republic of the Philippines, when it
collected royalties from five (5) Philippine tuna processors[,] namely[,]
Angel Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina Tuna
Resources, Santa Cruz Seafoods, Inc. and respondent Philippine Kingford,
Inc. This being the real situation, TPI cannot be permitted to maintain or
intervene in any action, suit or proceedings in any court or administrative
agency of the Philippines. A priori, the Petition, etc. extant of the plaintiff
TPI should be dismissed for it does not have the legal personality to sue in
the Philippines.[21]

inhibited himself notwithstanding [t]he unfounded allegations and unsubstantiated assertions


in the motion.[19] Judge Cedrick O. Ruiz of Branch 61, to which the case was re-raffled, in turn,
granted respondents Motion for Reconsideration and dismissed the petition on the ground that
the petitioner lacked legal capacity to sue in the Philippines. [20]

Petitioner TPI now seeks to nullify, in this instant Petition for Review on Certiorari
under Rule 45, the order of the trial court dismissing its Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award.

The petitioner counters, however, that it is entitled to seek for the recognition and
enforcement of the subject foreign arbitral award in accordance with Republic Act No. 9285

Issue

(Alternative Dispute Resolution Act of 2004),[22] the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards drafted during the United Nations Conference on

The core issue in this case is whether or not the court a quo was correct in so

International Commercial Arbitration in 1958 (New York Convention), and the UNCITRAL

dismissing the petition on the ground of petitioners lack of legal capacity to sue.

Model Law on International Commercial Arbitration (Model Law),[23] as none of these


specifically requires that the party seeking for the enforcement should have legal capacity to

Our Ruling

sue. It anchors its argument on the following:


The petition is impressed with merit.

In the present case, enforcement has been effectively refused on a ground not
found in the [Alternative Dispute Resolution Act of 2004], New York
Convention, or Model Law. It is for this reason that TPI has brought this
matter before this most Honorable Court, as it [i]s imperative to clarify
whether the Philippines international obligations and State policy to

The Corporation Code of the Philippines expressly provides:

26

strengthen arbitration as a means of dispute resolution may be defeated by


misplaced technical considerations not found in the relevant laws. [24]

grounds available to the party opposing an application for recognition and enforcement of the

Simply put, how do we reconcile the provisions of the Corporation Code of the

arbitral award.[30]

Philippines on one hand, and the Alternative Dispute Resolution Act of 2004, the New York
Inasmuch as the Alternative Dispute Resolution Act of 2004, a municipal

Convention and theModel Law on the other?

law, applies in the instant petition, we do not see the need to discuss compliance with
international obligations under the New York Convention and the Model Law. After all, both

In several cases, this Court had the occasion to discuss the nature and applicability

already form part of the law.

of the Corporation Code of the Philippines, a general law, viz-a-viz other special laws. Thus,
in Koruga v. Arcenas, Jr.,[25] this Court rejected the application of the Corporation Code and

In particular, the Alternative Dispute Resolution Act of 2004 incorporated the New

applied the New Central Bank Act. It ratiocinated:

York Convention in the Act by specifically providing:


Korugas invocation of the provisions of the Corporation Code is
misplaced. In an earlier case with similar antecedents, we ruled that:
The Corporation Code, however, is a general law
applying to all types of corporations, while the New Central
Bank Act regulates specifically banks and other financial
institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter
shall
prevail generalia
specialibus
non
derogant. (Emphasis supplied)[26]

SEC. 42. Application of the New York Convention. - The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by the said Convention.
xxx
SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a
foreign arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedural rules to
be promulgated by the Supreme Court only on those grounds enumerated
under Article V of the New York Convention. Any other ground raised shall
be disregarded by the regional trial court.

Further, in the recent case of Hacienda Luisita, Incorporated v. Presidential Agrarian Reform
Council,[27] this Court held:

It also expressly adopted the Model Law, to wit:

Without doubt, the Corporation Code is the general law providing


for the formation, organization and regulation of private corporations. On the
other hand, RA 6657 is the special law on agrarian reform. As between a
general and special law, the latter shall prevailgeneralia specialibus non
derogant.[28]

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 xxx.

Following the same principle, the Alternative Dispute Resolution Act of 2004 shall

Now, does a foreign corporation not licensed to do business in the Philippines have

apply in this case as the Act, as its title - An Act to Institutionalize the Use of an Alternative

legal capacity to sue under the provisions of the Alternative Dispute Resolution Act of

Dispute Resolution System in the Philippines and to Establish the Office for Alternative

2004? We answer in the affirmative.

Dispute Resolution, and for Other Purposes - would suggest, is a law especially enacted to
actively promote party autonomy in the resolution of disputes or the freedom of the party to
make their own arrangements to resolve their disputes. [29] It specifically provides exclusive

27

Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the opposing
party in an application for recognition and enforcement of the arbitral award may raise only

Rule 13.1 of the Special Rules provides that [a]ny party to a foreign arbitration may

those grounds that were enumerated under Article V of the New York Convention, to wit:

petition the court to recognize and enforce a foreign arbitral award. The contents of such
petition are enumerated in Rule 13.5. [32] Capacity to sue is not included. Oppositely, in the

Article V

Rule on local arbitral awards or arbitrations in instances where the place of arbitration is in the

1. Recognition and enforcement of the award may be refused, at the request


of the party against whom it is invoked, only if that party furnishes to the
competent authority where the recognition and enforcement is sought, proof
that:
(a) The parties to the agreement referred to in article II were, under the law
applicable to them, under some incapacity, or the said agreement is not
valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was made;
or
(b) The party against whom the award is invoked was not given proper
notice of the appointment of the arbitrator or of the arbitration proceedings
or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to arbitration, provided that, if
the decisions on matters submitted to arbitration can be separated from
those not so submitted, that part of the award which contains decisions on
matters submitted to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was
not in accordance with the agreement of the parties, or, failing such
agreement, was not in accordance with the law of the country where the
arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set
aside or suspended by a competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if
the competent authority in the country where recognition and enforcement
is sought finds that:
(a) The subject matter of the difference is not capable of settlement by
arbitration under the law of that country; or
(b) The recognition or enforcement of the award would be contrary to the
public policy of that country.

Philippines,[33] it is specifically required that a petition to determine any question concerning


the existence, validity and enforceability of such arbitration agreement [34] available to the
parties before the commencement of arbitration and/or a petition for judicial relief from the
ruling of the arbitral tribunal on a preliminary question upholding or declining its
jurisdiction[35] after arbitration has already commenced should state [t]he facts showing that
the persons named as petitioner or respondent have legal capacity to sue or be sued. [36]

Indeed, it is in the best interest of justice that in the enforecement of a


foreign arbitral award, we deny availment by the losing party of the rule that bars foreign
corporations not licensed to do business in the Philippines from maintaining a suit in our
courts. When a party enters into a contract containing a foreign arbitration clause and, as in
this case, in fact submits itself to arbitration, itbecomes bound by the contract, by the
arbitration and by the result of arbitration, conceding thereby the capacity of the other party to
enter into the contract, participate in the arbitration and cause the implementation of the
result. Although not on all fours with the instant case, also worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P. Romero in her Dissenting Opinion
in Asset Privatization Trust v. Court of Appeals,[37] to wit:
xxx Arbitration, as an alternative mode of settlement, is gaining
adherents in legal and judicial circles here and abroad. If its tested
mechanism can simply be ignored by an aggrieved party, one who, it must
be stressed, voluntarily and actively participated in the arbitration
proceedings from the very beginning, it will destroy the very essence of
mutuality inherent in consensual contracts.[38]

Clearly, not one of these exclusive grounds touched on the capacity to sue of the party seeking
the recognition and enforcement of the award.

Clearly, on the matter of capacity to sue, a foreign arbitral award should be respected
not because it is favored over domestic laws and procedures, but because Republic Act No.

Pertinent provisions of the Special Rules of Court on Alternative Dispute Resolution,


[31]

9285 has certainly erased any conflict of law question.

which was promulgated by the Supreme Court, likewise support this position.

28

[I]t must be remembered that [the principle of hierarchy of


courts] generally applies to cases involving conflicting factual
allegations. Cases which depend on disputed facts for decision cannot be
brought immediately before us as we are not triers of facts. [44] A strict
application of this rule may be excused when the reason behind the rule is
not present in a case, as in the present case, where the issues are not factual
but purely legal. In these types of questions, this Court has the ultimate say
so that we merely abbreviate the review process if we, because of the
unique circumstances of a case, choose to hear and decide the legal issues
outright.[45]

Finally, even assuming, only for the sake of argument, that the court a quo correctly
observed that the Model Law, not the New York Convention, governs the subject arbitral
award,[39]petitioner may still seek recognition and enforcement of the award in Philippine
court, since the Model Law prescribes substantially identical exclusive grounds for refusing
recognition or enforcement.[40]
Premises considered, petitioner TPI, although not licensed to do business in the
Philippines, may seek recognition and enforcement of the foreign arbitral award in accordance

Moreover, the novelty and the paramount importance of the issue herein raised should be

with the provisions of the Alternative Dispute Resolution Act of 2004.

seriously considered.[46] Surely, there is a need to take cognizance of the case not only to guide
the bench and the bar, but if only to strengthen arbitration as a means of dispute resolution,
and uphold the policy of the State embodied in the Alternative Dispute Resolution Act of 2004,

II

to wit:
The remaining arguments of respondent Kingford are likewise unmeritorious.

Sec. 2. Declaration of Policy. - It is hereby declared the policy of


the State to actively promote party autonomy in the resolution of disputes or
the freedom of the party to make their own arrangements to resolve their
disputes. Towards this end, the State shall encourage and actively promote
the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. xxx

First. There is no need to consider respondents contention that petitioner TPI


improperly raised a question of fact when it posited that its act of entering into a MOA should
not be considered doing business in the Philippines for the purpose of determining capacity to
sue. We reiterate that the foreign corporations capacity to sue in the Philippines is not material

Fourth. As regards the issue on the validity and enforceability of the foreign arbitral

insofar as the recognition and enforcement of a foreign arbitral award is concerned.

award, we leave its determination to the court a quo where its recognition and enforcement is
being sought.

Second. Respondent cannot fault petitioner for not filing a motion for
reconsideration of the assailed Resolution dated 21 November 2008 dismissing the case. We

Fifth. Respondent claims that petitioner failed to furnish the court of origin a copy of

have, time and again, ruled that the prior filing of a motion for reconsideration is not required

the motion for time to file petition for review on certiorari before the petition was filed with

in certiorari under Rule 45.[41]

this Court.[47] We, however, find petitioners reply in order. Thus:


26. Admittedly, reference to Branch 67 in petitioner TPIs Motion
for Time to File a Petition for Review on Certiorari under Rule 45 is a
typographical error. As correctly pointed out by respondent Kingford, the
order sought to be assailed originated from Regional Trial Court, Makati
City, Branch 61.

Third. While we agree that petitioner failed to observe the principle of hierarchy of
courts, which, under ordinary circumstances, warrants the outright dismissal of the case, [42] we
opt to relax the rules following the pronouncement in Chua v. Ang,[43] to wit:

27. xxx Upon confirmation with the Regional Trial Court, Makati
City, Branch 61, a copy of petitioner TPIs motion was received by the

29

Metropolitan Trial Court, Makati City, Branch 67. On 8 January 2009, the
motion was forwarded to the Regional Trial Court, Makati City, Branch 61.

WHEREFORE, the Resolution dated 21 November 2008 of the Regional Trial

[48]

Court,

Branch

61,

Makati

City

in

Special

Proceedings

No.

M-6533

is

hereby REVERSED and SET ASIDE.The case is REMANDED to Branch 61 for further
All considered, petitioner TPI, although a foreign corporation not licensed to do

proceedings.

business in the Philippines, is not, for that reason alone, precluded from filing the Petition for
SO ORDERED.

Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before a Philippine


court.

30