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Chan Linte v.

Law Union (1921)

Plaintiff alleges that he was the owner of 30,992.50 kilos of hemp stored in the warehouse which he requested the
defendant Law Union and Rock Insurance Co., Ltd., to insure against loss by fire in the sum of P5,000. that during the
life of the policy the hemp was destroyed by fire in the bodega where it was insured. he at once notified the defendant
of the loss, and in all other respects complied with the terms and conditions of the policy, and made a demand for the
payment of the full amount of the insurance. That defendant refused and still refuses to pay the same or any part
thereof, and plaintiff prays for judgment for P5,000, with interest and costs.

In his amended complaint he alleges that after the commencement of the action, the defendant requested that its
liability should be submitted to arbitration, in accord with the provisions of the policy, and that "plaintiff acceded to the
requirement made by said defendant as aforesaid, but not that the award of arbitration should be conclusive or final,
or deprive the courts of jurisdiction, and by agreement of both plaintiff and defendant Frank B. Ingersoll was named
sole arbitrator, and both parties informally presented evidence before him and he made return of arbitration to the
effect that said plaintiff had only seven bales of hemp destroyed in the fire.

For answer the defendant alleges that, claiming a loss under the policy, the plaintiff made a claim against the
defendant for P5,000, that a difference arose between them as to the amount of the alleged loss, and that, under the
terms of the policy, an arbitrator was agreed upon and selected by the mutual consent of both parties, for the purpose
of deciding the alleged difference.

For supplemental answer to the amended complaint, the defendant further alleges that on July 8, 1919, the arbitrator
filed a supplemental report and award wherein he finds from the evidence submitted that the local value of the seven
bales of plaintiff's hemp destroyed by fire on April 10, 1918, was P608.34; that in addition to the defendant's policy,
the same property was covered by two other fire insurance polices, by each of which the property in question was
insured to the value of P5,000 against the loss; that defendant has offered and is now willing to pay plaintiff its one-
third of the loss in full satisfaction of its liability.

The other insurance companies are Tokyo Marine Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd.,
defendants and appellees.

It will be noted that the policies of the Law Union and Rock Insurance Co., Ltd., and The Chine Fire Insurance Co., Ltd.,
provide for arbitration and expressly stipulated "that it shall be a condition precedent to any right of action or suit
upon this policy that the award by such arbitrator, arbitrators or umpire of the amount of the loss or damage if
disputed shall be first obtained," and that the action was brought without making any effort to adjust the loss by
arbitration. The policy of Tokyo Marine Insurance Co., Ltd., provides that in the event of a different it "shall be
submitted to arbitrators, indifferently chosen, whose award, or that of their umpire, shall be conclusive."


Ruling Case Law, vol. 2, p. 359, says that when the subject-matter of a pending suit is submitted to arbitration
without rule of court "there is a conflict among the authorities as to whether or not the mere submission effects a
discontinuance of the action. The majority rule is that the parties themselves show an intent to discontinue the
pending suit by substituting another tribunal, so that a submission furnishes ground for a discontinuance."

On page 352 of the same volume, it is said:

Arbitration as a method of settling disputes and controversies is recognized at common law. The award of the
arbitrators is binding on the parties, but, in the absence of statute, the successful party can only enforce his
rights thereunder by a suit at law. Thus the only gain by a common law arbitration is the substitution of the
definite findings of the award as the basis of a suit, in the place of the former unsettled rights of the parties.
In an action on the award the award itself is conclusive evidence of all matters therein contained, provided the
arbitrators have not exceeded the powers delegated to them by the agreement of submission. The courts
regard matters submitted as concluded by the award, and in an action thereon they will not review the merits
of the arbitrators' findings.

Corpus Juris, vol. 5, p. 16, says:

The statement of controversies by arbitration is an ancient practice at common law. In its broad sense it is a
substitution, by consent of parties, of another tribunal for the tribunals provided by the ordinary processes of
law; a domestic tribunal, as contradistinguished from a regularly organized court proceeding according to the
course of the common law, depending upon the voluntary act of the parties disputant in the selection of
judges of their own choice. Its object is the final disposition, in a speedy and inexpensive way, of the matters
involved, so that they may not become the subject of future litigation between the parties.

On page 20, it is said:


Although arbitration was recognized at the common law as a mode of adjusting matters in dispute,
especially such as concerned personal chattels and personal wrongs, yet, from efforts perceptible in the earlier
cases to construe arbitration proceedings and awards so as to defeat them, it would seem that they were not
originally favored by the courts. This hostility, however, has long since disappeared, and, by reason of the fact
that the proceeding represents a method of the parties' own choice and furnishes a more expeditious and less
expensive means of settling controversies than the ordinary course of regular judicial proceedings, it is the
policy of the law to favor arbitration. Therefore every reasonable intendment will be indulged to give effect to
such proceedings, and in favor of the regularity and integrity of the arbitrators' acts.

On page 43, it is said:

Where a contract contains a stipulation, not that all questions arising thereunder, whether as to the validity or
effect of such contract, or otherwise, shall be submitted to arbitration, but that the decision of arbitrators on a
certain question or questions, such as the quantity, quality, or price of materials or workmanship, the value of
work, the amount of loss or damage, or the like, shall be a condition precedent to the right of action on the
contract itself, no fixed sum being stated in the contract, such stipulation will be enforced, because the parties
to a contract have a right to adopt whatever method they see fit for determining such questions, and until the
method adopted has been pursued, or some sufficient reason given for not pursuing it, no action can be
brought on the contract. "Freedom to contract for arbitration to this extent," it has been said, "imports no
invasion of the province of the courts, and there is no ground upon which a right so essential to the
convenient transaction of modern business affairs can be denied," nor is such agreement objectionable as
being against public policy. In order to give effect to such an agreement it must of course appear that the
matter proposed to be referred is a difference, within the meaning of the agreement.

In the instant case, there was no dispute about the policy of insurance or the fire. The only real difference was the
amount of the loss which plaintiff sustained, and that was the only question submitted to arbitration. In December, the
arbitrator found the amount of plaintiff's hemp which was destroyed, but did not find its value.

Hence the award on the question submitted was not complete or final. In the finding of the actual value of the hemp,
there was no change or revision of any previous finding. It was simply the completion by the arbitrator of an
unfinished work. No formal notice was served on the arbitrator, and he was not removed or discharged, and until such
time as his duties were fully performed, or he was discharged, he would have the legal right to complete his award.
The plaintiff, having agreed to arbitration after the action was commenced and submitted his proof to the arbitrator, in
the absence of fraud or mistake, is estopped and bound by the award. Where a plaintiff has commenced an action to
recover upon an insurance policy, and then voluntarily submits the amount of his loss to arbitration, he cannot ignore
or nullify the award and treat it as void upon the ground that he is dissatisfied with the decision.

Gilat v. UCPB General Insurance Co. (2014)

One Virtual placed with GILAT a purchase order for various telecommunications equipment (sic), accessories, spares,
services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty
Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a portion
thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the
prompt payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.s surety bond dated 3
December 1999, in favor of GILAT.

During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the
purchased products. All of the equipment (including the software components for which payment was secured by the
surety bond, was shipped by GILAT and duly received by One Virtual.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of
May 30, 2000 in accordance with the payment schedule, prompting GILAT to write the surety defendant UCPB a
demand letter . for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand
has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding
payment instalment, prompting GILAT to send a second demand letter for the payment of the full amount of
US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses. However, defendant UCPB failed to
settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint.

RTC ruled in favor of Gilat. CA vacated trial courts decision and ordered Gilat and One Virtual to proceed to arbitration,
, the outcome of which shall necessary bind the parties, including the surety, defendant-appellant United Coconut
Planters Bank General Insurance Co., Inc.


The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor
can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it
applies for this relief.23 This referral, however, can only be demanded by one who is a party to the arbitration
agreement.24 Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the CAs
order to arbitrate.

On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist
without a valid obligation.29 Thus, the surety may avail itself of all the defenses available to the principal debtor and
inherent in the debt30 that is, the right to invoke the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the principal debtor. This
undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal
contract.31 Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation,
its liability to the creditor or "promise" of the principal is said to be direct, primary and absolute; in other words, a
surety is directly and equally bound with the principal. 32 He becomes liable for the debt and duty of the principal
obligor, even without possessing a direct or personal interest in the obligations constituted by the latter.33Thus, a
surety is not entitled to a separate notice of default or to the benefit of excussion. 34 It may in fact be sued separately
or together with the principal debtor.35

After a thorough examination of the pieces of evidence presented by both parties, 36 the RTC found that petitioner had
delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its
obligation,37 triggering respondents liability to petitioner as the formers surety.1wphi1 In other words, the failure of
One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to
pursue respondent as the surety.

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the principal contract to
which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38 that "[the] acceptance [of a
surety agreement], however, does not change in any material way the creditors relationship with the principal debtor
nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only upon
the debtors default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor."
Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot
invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that contract. 39 An
arbitration agreement being contractual in nature,40 it is binding only on the parties thereto, as well as their assigns
and heirs.41

Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place "if at
least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter."
Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its
contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are contracted precisely to
mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a surety on the
same level as that of the principal debtor.44 The effect is that the creditor is given the right to directly proceed against
either principal debtor or surety. This is the reason why excussion cannot be invoked. 45 To require the creditor to
proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. At
any rate, as we have held in Palmares v. Court of Appeals,46 "if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor."

Stronghold Insurance Co. v. Sps Stroem (2015)

This case involves the proper invocation of the Construction Industry Arbitration Committee's (CIAC) jurisdiction
through an arbitration clause in a construction contract. The main issue here is whether the dispute liability of a
surety under a performance bond is connected to a construction contract and, therefore, falls under the exclusive
jurisdiction of the CIAC.
(Spouses Stroem) entered into an Owners-Contractor Agreement 4 with Asis-Leif & Company, Inc. (Asis-Leif) for the
construction of a two-storey house on the lot owned by Spouses Stroem.

pursuant to the agreement, Asis-Leif secured Performance Bond from Stronghold Insurance Company, Inc.
(Stronghold).6 Stronghold and Asis-Leif, through Ms. Ma. Cynthia Asis-Leif, bound themselves jointly and severally to
pay the Spouses Stroem the agreed amount in the event that the construction project is not completed.

Asis-Leif failed to finish the projecton time despite repeated demands of the Spouses Stroem. 8

Spouses Stroem subsequently rescinded the agreement. 9

Stronghold sent a letter to Asis-Leif requesting that the company settle its obligations withthe Spouses Stroem. No
response was received from Asis-Leif.

Spouses Stroem filed a Complaint for breach of contract and for sum of money with a claim for damages against Asis-
Leif, Ms. Cynthia Asis-Leif, and Stronghold. 14 Only Stronghold was served summons. Ms. Cynthia Asis-Leif allegedly
absconded and moved out of the country.15

Regional Trial Court rendered a judgment in favor of the Spouses Stroem. The trial court ordered Stronghold to pay
the Spouses Stroem P4,500,000.00 with 6% legal interest from the time of first demand. The Court of Appeals
affirmed with modification the trial courts Decision. It increased the amount of attorneys fees to P50,000.00.


On arbitration and the CIACs jurisdiction

Petitioner changed the theory of its case since its participation in the trial court proceedings. It raised the issue of lack
of jurisdiction in view of an arbitration agreement for the first time. Generally, parties may not raise issues for the first
time on appeal.50 Such practice is violative of the rules and due process and is frowned upon by the courts. However, it
is also well-settled that jurisdiction can never be waived or acquired by estoppel. 51 Jurisdiction is conferred by the
Constitution or by law.52 "Lack of jurisdiction of the court over an action or the subject matter of an action cannot be
cured by the silence, by acquiescence, or even by express consent of the parties." 53

Section 4 of Executive Order No. 100854 is clear in defining the exclusive jurisdiction of the CIAC:

SECTION 4. Jurisdiction The CIAC shall have original and exclusive jurisdiction over disputes arising from, or
connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute
arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may
involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to
submit the same to voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship;
violation of the terms of agreement; interpretation and/or application of contractual timeand delays; maintenance and
defects; payment, default of employer or contractor and changes in contract cost.

Excluded from the coverage of thislaw are disputes arising from employer-employee relationships which shall continue
to be covered by the Labor Code of the Philippines. (Emphasis supplied)

Similarly, Section 35 of RepublicAct No. 9285 or the Alternative Dispute Resolution Act of 2004 states:

SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and exclusive jurisdiction of the
Construction Industry Arbitration Commission (the "Commission") shall include those between or among parties to, or
who are otherwise bound by, an arbitration agreement, directly or by reference whether such parties are project
owner, contractor, subcontractor, quantity surveyor, bondsman or issuer of an insurance policy in a construction

The Commission shall continue to exercise original and exclusive jurisdiction over construction disputes although the
arbitration is "commercial" pursuant to Section 21 of this Act.

In Heunghwa Industry Co., Ltd., v. DJ Builders Corporation, 55 this court held that "there are two acts which may vest
the CIAC with jurisdiction over a construction dispute. One is the presence of an arbitration clause in a construction
contract, and the other is the agreement by the parties to submit the dispute to the CIAC." 56

This court has ruled that when a dispute arises from a construction contract, the CIAC has exclusive and original
jurisdiction.57 Construction has been defined as referring to "all on-site works on buildings or altering structures, from
land clearance through completion including excavation, erection and assembly and installation of components and
In this case, there is no dispute asto whether the Owners-Contractor Agreement between Asis-Leif and respondents is
a construction contract. Petitioner and respondents recognize that CIAC has jurisdiction over disputes arising from the

What is at issue in this case is the parties agreement, or lack thereof, to submit the case to arbitration. Respondents
argue that petitioner is not a party to the arbitration agreement. Petitioner did not consent to arbitration. It is only
respondent and Asis-Leif thatmay invoke the arbitration clause in the contract.

This court has previously held that a performance bond, which is meant "to guarantee the supply of labor,materials,
tools, equipment, and necessary supervision to complete the project[,]" 59 is significantly and substantially connected
to the construction contract and, therefore, falls under the jurisdiction of the CIAC.

Applying the "complementary-contracts-construed-together" doctrine, this court in Prudential held that the surety
willingly acceded to the terms of the construction contract despite the silence of the performance bond as to

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the construction
contract was clear as to arbitration in the event of disputes. Applying the said doctrine, we rule that the silence of the
accessory contract in this case could only be construed as acquiescence to the main contract. The construction
contract breathes life into the performance bond. We are not ready to assume that the performance bond contains
reservations with regard to some of the terms and conditions in the construction contract where in fact it is silent. On
the other hand, it is more reasonable to assume that the party who issued the performance bond carefully and
meticulously studied the construction contract that it guaranteed, and if it had reservations, it would have and should
have mentioned them in the surety contract.76 (Emphasis supplied)

This court, however, cannot apply the ruling in Prudential to the present case. Several factors militate against
petitioners claim.

The contractual stipulations in this case and in Prudential are different. The relevant provisions of the Owners-
Contractor Agreement in this case state:


The following documents prepared by the CONTRACTOR shall constitute an integral part of this contract as fully as if
hereto attached or herein stated, except asotherwise modified by mutual agreement of parties, and attached to this

Attachment 5.1 Working Drawings

Attachment 5.2 Outline Specifications

Attachment 5.3 Bill of Quantities

Attachment 5.4 CONTRACTOR Business License



7.1 Within 30 days of the signing of this agreement, CONTRACTOR shall provide to OWNERS a performance
bond, issued by a duly licensed authority acceptable to the OWNERS, and equal to the amount of PHP
4,500,000.00 (Four Million and Five Hundred Thousand Philippine Pesos),with the OWNERS as beneficiary.

7.2 The performance bond will guarantee the satisfactory and faithful performance by the CONTRACTOR of all
provisions stated within this contract.


8.1 Any dispute between the parties hereto which cannot be amicably settled shall be finally settled by arbitration in
accordance with the provision of Republic Act 876, of The Philippines, as amended by the Executive Order 1008 dated
February 4, 1985.77 (Emphasis in the original)

In contrast, the provisions of the construction contract in Prudential provide:

Article 1

1.1 The following shall form part of this Contractand together with this Contract, are known as the "Contract

a. Bid Proposal


d. Notice to proceed


j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by the
Developer)78 (Emphasis supplied)

This court in Prudential held that the construction contract expressly incorporated the performance bond into the
contract.79 In the present case, Article 7 of the Owners-Contractor Agreement merely stated that a performance bond
shall be issued in favor of respondents, in which case petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia Asis-Leif
shall pay P4,500,000.00 in the event that Asis-Leif fails to perform its duty under the Owners-Contractor
Agreement.80 Consequently, the performance bond merely referenced the contract entered into by respondents and
Asis-Leif, which pertained to Asis-Leifs duty toconstruct a two-storey residence building with attic, pool, and
landscaping over respondents property.81

To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is found.1wphi1 The construction
agreement was signed only by respondents and the contractor, Asis-Leif, as represented by Ms. Ma. Cynthia Asis-Leif.
It is basic that "[c]ontracts take effect only between the parties, their assigns and heirs[.]" 82 Not being a party to the
construction agreement, petitioner cannot invoke the arbitration clause. Petitioner, thus, cannot invoke the jurisdiction
of the CIAC.

Moreover, petitioners invocation of the arbitration clause defeats the purpose of arbitration in relation to the
construction business. The state has continuously encouraged the use of dispute resolution mechanisms to promote
party autonomy.83 In LICOMCEN, Incorporated v. Foundation Specialists, Inc.,84 this court upheld the CIAC's
jurisdiction in line with the state's policy to promote arbitration:

The CIAC was created through Executive Order No. 1008 (E. 0. 1008), in recognition of the need to establish an
arbitral machinery that would expeditiously settle construction industry disputes. The prompt resolution of problems
arising from or connected with the construction industry was considered of necessary and vital for the fulfillment of
national development goals, as the construction industry provides employment to a large segment of the national
labor force and is a leading contributor to the gross national product. 85 (Citation omitted)

However, where a surety in a. construction contract actively participates in a collection suit, it is estopped from raising
jurisdiction later. Assuming that petitioner is privy to the construction agreement, we cannot allow petitioner to invoke
arbitration at this late stage of the proceedings since to do so would go against the law's goal of prompt resolution of
cases in the construction industry.

In the recent case of Stronghold Insurance Company, Inc. v Spouses Rune and Lea Stroem (Stronghold),[1]the
Philippine Supreme Court held that a non-party to a construction agreement cannot invoke the arbitration clause

This involved an agreement for the construction of a house (Agreement). The Contractor, as required by the
Agreement, secured a performance bond (Bond) from petitioner Surety. The project was not finished on time
prompting the Owner to file a complaint in court against the Contractor and the Surety. When the case reached the
Supreme Court, the Surety argued that the dispute should have been brought to arbitration under the rules of the
Construction Industry Arbitration Commission (CIAC), in light of the arbitration clause in the Agreement. The
Supreme Court rejected this argument ruling that contracts take effect only between the parties, their assigns and
heirs and, not being a party to the Agreement, the Surety cannot invoke the arbitration clause and the jurisdiction of
the CIAC.

In the decision, the Supreme Court analyzed the earlier 2010 case of Prudential Guarantee and Assurance, Inc. v.
Anscor Land, Inc. (Prudential)[2] which upheld the impleading of the surety in an arbitration between the owner
and the contractor in that case, and recognized that both cases involved similar factual circumstances. The Supreme
Court, however, did not apply Prudential explaining that unlike the construction agreement in Prudential, which
expressly incorporated the performance bond into the contract, the Agreement in Stronghold merely referred to the
Bond issued by the Surety in this case.

Although the Stronghold ruling resulted to a positive outcome for arbitration, having upheld the basic doctrine that
only parties to an arbitration agreement are generally bound by it, the reasoning as to why Prudential was not
applicable may nevertheless be a source of confusion. Whether or not an agreement between an owner and a
contractor (which contains an arbitration agreement) incorporates or refers to a performance bond does not make
the issuer of a bond a party to the arbitration agreement. The reasoning of the Supreme Court in not
applying Prudential actually appears to undermine its main ruling that an arbitration agreement does not bind non-

While it is difficult to predict how the courts will subsequently apply Stronghold in relation to Prudential, it is
interesting to note that Stronghold is consistent with another recent case, Gilat Satellite Networks, Ltd. v. United
Coconut Planters Bank General Insurance Co., Inc. (Gilat),[3] where the Supreme Court also held that the existence
of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an
arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.
Both Stronghold and Gilat suggest that the Supreme Court is moving away from, although not reversing, the 2010
case of Prudential.

DENR v. UPCI (2015)

The Special ADR Rules, as far as practicable, should be made to apply not only to the proceedings on confirmation but
also to the confirmed awards execution.

The Department of Environment and Natural Resources (DENR), through the Land Management Bureau (LMB),
entered into an Agreement for Consultancy Services with United Planners Consultants, Inc. (UPCI) in connection with
an LMB's project. Under the Consultancy Agreement, DENR committed to pay a total contract price of P4,337,141.00.
UPCI completed the work required, however, DENR was able to pay only 47% of the total contract price. For failure to
pay its obligation under the Consultancy Agreement despite repeated demands, UPCI instituted a complaint against
DENR before the Regional Trial Court (RTC). Upon motion of UPCI, the case was subsequently referred to arbitration
pursuant to the arbitration clause of the Consultancy Agreement. The parties agreed to adopt the CIAC Revised Rules
Governing Construction Arbitration (CIAC Rules) to govern the arbitration proceedings. They further agreed to submit
their respective draft decisions in lieu of memoranda of arguments on or before April 21, 2010, among others.

The Arbitral Award ruled in favor of UPCI. When DENR filed a Motion for Reconsideration before the RTC, the Arbitral
Award was confirmed by the RTC. The RTC also denied DENRs motion to quash the writ of execution of the Arbitral
Award. The Court of Appeals denied DENRs petition for certiorari, applying the Special Alternative Dispute Resolution
(ADR) Rules.

ISSUE: May the Special ADR Rules be applied even until the execution of the Arbitral Award, even if the Special Rules
are silent as to execution of a confirmed arbitral award?


Yes. While it appears that the Special ADR Rules remain silent on the procedure for the execution of a confirmed
arbitral award, it is the Courts considered view that the Rules procedural mechanisms cover not only aspects of
confirmation but necessarily extend to a confirmed awards execution in light of the doctrine of necessary implication
which states that every statutory grant of power, right or privilege is deemed to include all incidental power, right or

As the Court sees it, execution is but a necessary incident to the Courts confirmation of an arbitral award. To construe
it otherwise would result in an absurd situation whereby the confirming court previously applying the Special ADR
Rules in its confirmation of the arbitral award would later shift to the regular Rules of Procedure come execution.
Irrefragably, a courts power to confirm a judgment award under the Special ADR Rules should be deemed to include
the power to order its execution for such is but a collateral and subsidiary consequence that may be fairly and logically
inferred from the statutory grant to regional trial courts of the power to confirm domestic arbitral awards.

All the more is such interpretation warranted under the principle of ratio legis est anima which provides that a statute
must be read according to its spirit or intent, for what is within the spirit is within the statute although it is not within
its letter, and that which is within the letter but not within the spirit is not within the statute. Accordingly, since the
Special ADR Rules are intended to achieve speedy and efficient resolution of disputes and curb a litigious culture,
every interpretation thereof should be made consistent with these objectives.

LANUZA v. BF Corp. and Shangrila

In cases alleging solidary liability with the corporation or praying for the piercing of the corporate veil, parties who are
normally treated as distinct individuals should be made to participate in the arbitration proceedings in order to
determine if such distinction should indeed be disregarded and, if so, to determine the extent of their liabilities

BF Corporation entered into agreements with Shangri-La wherein it undertook to construct for the latter a mall and a
multilevel parking structure along EDSA. Shangri-La had been consistent in paying BF Corporation until the former
started defaulting in payment.Despite repeated demands, Shangri-La refused to pay the balance owed to the latter. BF
Corporation filed a collection complaint against Shangri-La and its Board of Directors including Gerardo Lanuza, Jr. and
Antonio O. Olbes, who were already resigned as members of Shangri-Las board of directors. BF Corporation alleged
that the Board of Directors were in bad faith and they should be held solidarily liable with Shangri-La for its obligations
and the damages that BF Corporation incurred as a result of Shangri-Las default

Shangri-La and the members of its Board of Directors filed a motion to suspend the proceedings for failure of BF
Corporation to submit the dispute to arbitration. On appeal, the Court of Appeals ordered the submission of the
dispute to arbitration in accordance with the arbitration clause provided in their contract. Lanuza and Olbers filed a
comment praying that they be excluded from the arbitration proceedings for being non-parties to Shangri-Las and BF
Corporations agreement. The CA found them to be necessary parties in the arbitration proceedings

ISSUE: Should Lanuza and Olbes be made parties to the arbitration proceedings, pursuant to the arbitration clause
provided in the contract between Shangri-La and BF Corporation despite the fact that they are only third parties to it?

RULING: Yes. As a general rule, a corporations representative who did not personally bind himself or herself to an
arbitration agreement cannot be forced to participate in arbitration proceedings made pursuant to an agreement
entered into by the corporation. He or she is generally not considered a party to that agreement. However, there are
instances when the distinction between personalities of directors, officers, and representatives, and of the corporation,
are disregarded. The Court calls this piercing the veil of corporate fiction.

Piercing the corporate veil is warranted when the separate personality of a corporation is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues. It is also warranted in alter ego cases where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the
corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too, become
liable as if they were the corporation.

Koppel Inc. v. Makati Rotary Club (2013)

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered owner of a parcel
of land. Within the subject land are buildings and other improvements dedicated to the business of FKI. 4

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

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

2. The amount of rent to be paid by FKI for the first twenty-five (25) years is P40,126.00 per annum .11

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

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

2000 Lease Contract

Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation was set to expire,
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. 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

2005 Lease Contract

After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another five (5) years. This
new lease (2005 Lease Contract )

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. Notably, the 2005 Lease Contract contained an arbitration clause similar to that in the
2000 Lease Contract

The Assignment and Petitioners Refusal to Pay

in June of 2008, FKI sold all its rights and properties relative to its business in favor of herein petitioner Koppel. FKI
and petitioner executed an Assignment and Assumption of Lease and Donation 25 wherein FKI, with the conformity of
the respondent, formally assigned all of its interests and obligations under the Amended Deed of Donation and the
2005 Lease Contract in favor of petitioner.

The following year, petitioner discontinued the payment of the rent and " donation " under the 2005 Lease Contract.

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

According to Petitioner, the Deed of Donation and Amended Deed of Donation actually established not only one but
two (2) lease agreements between FKI and Respondent

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.

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.

The Demand Letters

Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009, petitioner filed
with the Regional Trial Court a complaint42 for the rescission or cancellation of the Deed of Donation and Amended
Deed of Donation against the respondent.

The Ejectment Suit

On 5 October 2009, respondent filed an unlawful detainer case 43 against the petitioner before the Metropolitan Trial
Court (MeTC) .

the MeTC rendered judgment 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.

The Respondent appealed to the RTC which reversed the MeTCs decision.

Aggrieved, the Petitioner appealed to the CA which affirmed the decision of the RTC.

Hence, the present Petition for Review on Certiorari under Rule 45.


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

1. The disagreement between the Petitioner and Respondent is non-arbitrable as it will inevitably touch upon the
issue of the validity of the 2005 Lease Contract. 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. The Supreme Court, in Gonzales v. Climax Mining, Ltd. [2005], held
that the validity of contract cannot be subject of arbitration proceedings as such questions are legal in
nature and require the application and interpretation of laws and jurisprudence which is necessarily a judicial

2. The Petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the same time,
impugn such contracts validity.

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. 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.

4. Petitioner and Respondent already underwent JDR proceedings before the RTC. Hence, a further referral of the
dispute to arbitration would only be circuitous. 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. Arbitration then would no longer be necessary in this case.


YES. None of the above-mentioned arguments have any merit. The MeTC, RTC and CA all erred in overlooking the
significance of the arbitration clause incorporated in the 2005 Lease Contract. As the SC sees it, that is a fatal

Hence, the Petition is GRANTED and thus 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.


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. To the mind of the 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 Contractincluding the one that presently besets Petitioner and Respondent.

First. 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 case that was used to
justify the contrary position was taken out of context.

The pivotal issue that confronted the Court in the Gonzales casewas whether the complaint for arbitration raises
arbitrable issues that the Panel of Arbitrators of the Mines and Geosciences Bureau (PA-MGB) can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to take
cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or the Mining Act
of 1995, which granted the PA-MGB with exclusive original jurisdiction only over mining disputes, i.e., disputes
involving rights to mining areas, mineral agreements or permits, and surface owners, occupants, claimholders or
concessionaires requiring the technical knowledge and experience of mining authorities in order to be resolved.
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, SC held that such complaint
could not be arbitrated before the PA-MGB. It is in this context that SC made the pronouncement now in discussion:

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

SC 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.

Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc. v. San
Fernando Regal Trading, Inc [2011]. In Cargill, SC 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, SC ruled in favor of arbitrability. Thus, SC held:

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

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

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.

Under the doctrine of separability, an arbitration agreement is considered as independent of the main contract. Being
a separate contract in itself, the arbitration agreement may thus be invoked regardless of the possible nullity or
invalidity of the main contract.

Once again instructive is Cargill, wherein SC 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.

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. SC finds that the filing of a request pursuant to Section 24
of R.A. No. 9285 is notthe 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 requestsnot later that the pre-trial conference, or upon the
request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed. [Emphasis ours; italics original]

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


Rule 4.1. Who makes the request. A party to a pending action filed in violation of the arbitration agreement,
whether contained in an arbitration clause or in a submission agreement, may request the court to refer the parties to
arbitration in accordance with such agreement.

Rule 4.2. When to make request. (A) Where the arbitration agreement exists before the action is filed. The
request for referral shall be made not later than the pre-trial conference. After the pre-trial conference, the court will
only act upon the request for referral if it is made with the agreement of all parties to the case.

(B) Submission agreement. If there is no existing arbitration agreement at the time the case is filed but the parties
subsequently enter into an arbitration agreement, they may request the court to refer their dispute to arbitration at
any time during the proceedings.

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

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

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

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

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

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 Contractand, more significantly, of its desire to
have the same enforced in this case. This act of Petitioner is enough valid invocation of his right to arbitrate.

Fourth. The fact that the Petitioner and Respondent already underwent through JDR proceedings before the RTC, will
not make the subsequent conduct of arbitration between the parties unnecessary or circuitous. The JDR system is
substantially different from arbitration proceedings.

The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation which entails the
submission of a dispute before a JDR judge who shall merely facilitate settlement between the parties in conflict or
make a non-binding evaluation or assessment of the chances of each partys case. 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/sa neutral third person or a group of thereofwho shall have
the authority to render a resolution binding upon the parties.

Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the subsequent conduct of
arbitration a mere surplusage. The failure of the parties in conflict to reach an amicable settlement before the JDR
may, in fact, be supplemented by their resort to arbitration where a binding resolution to the dispute could finally be
achieved. This situation precisely finds application to the case at bench.

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

A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost, a product
of party autonomy or the freedom of the parties to make their own arrangements to resolve their own disputes.
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.

Legal Effect of the Application of the Arbitration Clause

Since there really are no legal impediments to the application of the arbitration clause of the 2005 Contract of Lease in
this case, We find that the instant unlawful detainer action was instituted in violation of such clause. The Law,
therefore, should have governed the fate of the parties and this suit:
R.A. No. 876

Section 7. Stay of civil action. If any suit or proceeding be brought upon an issue arising out of an agreement
providing for the arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until an
arbitration has been had in accordance with the terms of the agreement: Provided, That the applicant for the stay is
not in default in proceeding with such arbitration. [Emphasis supplied]

R.A. No. 9285

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

It is clear that under the law, the instant unlawful detainer action should have been stayed; 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.

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 Counterclaimthe point when the
Petitioner and the Respondent should have been referred to arbitration. This case must, therefore, be remanded to the
MeTC and be suspended at said point. Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be
vacated and set aside.

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