SECOND DIVISION
G.R. No. 198075 September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of
the Court of Appeals in C.A.-G.R. SP No. 116865.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-
conditioning products, was the registered owner of a parcel of land
located at Km. 16, South Superhighway, Parañaque City (subject
land).3 Within the subject land are buildings and other improvements
dedicated to the business of FKI.4
In 1975, FKI5 bequeathed the subject land (exclusive of the
improvements thereon) in favor of herein respondent Makati Rotary
Club Foundation, Incorporated by way of a conditional donation.6 The
respondent accepted the donation with all of its conditions. 7 On 26
May1975, FKI and the respondent executed a Deed of
Donation8 evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease
the subject land back to FKI under terms specified in their Deed of
Donation.9 With the respondent’s acceptance of the donation, a lease
agreement between FKI and the respondent was, therefore,
effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of
Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or
until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-
five (25) years is ₱40,126.00 per annum .11
The Deed of Donation also stipulated that the lease over the subject
property is renewable for another period of twenty-five (25) years "
upon mutual agreement" of FKI and the respondent.12 In which case,
the amount of rent shall be determined in accordance with item 2(g)
of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual
agreement and in case of disagreement the matter shall be referred
to a Board of three Arbitrators appointed and with powers in
accordance with the Arbitration Law of the Philippines, Republic Act
878, whose function shall be to decide the current fair market value of
the land excluding the improvements, provided, that, any increase in
the fair market value of the land shall not exceed twenty five percent
(25%) of the original value of the land donated as stated in paragraph
2(c) of this Deed. The rental for the second 25 years shall not exceed
three percent (3%) of the fair market value of the land excluding the
improvements as determined by the Board of Arbitrators.13
In October 1976, FKI and the respondent executed an Amended Deed
of Donation14 that reiterated the provisions of the Deed of Donation ,
including those relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of
Donation and Amended Deed of Donation , FKI was able to continue
in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation
and Amended Deed of Donation was set to expire, or on 23 May 2000,
FKI and respondent executed another contract of lease ( 2000 Lease
Contract )15 covering the subject land. In this 2000 Lease Contract,
FKI and respondent agreed on a new five-year lease to take effect on
the 26th of May 2000, with annual rents ranging from ₱4,000,000 for
the first year up to ₱4,900,000 for the fifth year. 16 The 2000 Lease
Contract also contained an arbitration clause enforceable in the event
the parties come to disagreement about the" interpretation,
application and execution" of the lease, viz :
19. Governing Law – The provisions of this 2000 Lease Contract shall
be governed, interpreted and construed in all aspects in accordance
with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2000 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.17 (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to
renew their lease for another five (5) years. This new lease (2005
Lease Contract )18 required FKI to pay a fixed annual rent of
₱4,200,000.19 In addition to paying the fixed rent, however, the 2005
Lease Contract also obligated FKI to make a yearly " donation " of
money to the respondent.20 Such donations ranged from ₱3,000,000
for the first year up to ₱3,900,000for the fifth year.21 Notably, the 2005
Lease Contract contained an arbitration clause similar to that in the
2000 Lease Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall
be governed, interpreted and construed in all aspects in accordance
with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2005 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.22 (Emphasis supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due
it per the 2005 Lease Contract.23 But in June of 2008, FKI sold all its
rights and properties relative to its business in favor of herein
petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and
petitioner executed an Assignment and Assumption of Lease and
Donation25 —wherein FKI, with the conformity of the respondent,
formally assigned all of its interests and obligations under the
Amended Deed of Donation and the 2005 Lease Contract in favor of
petitioner.
The following year, petitioner discontinued the payment of the rent
and " donation " under the 2005 Lease Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from
its belief that the rental stipulations of the 2005 Lease Contract, and
even of the 2000 Lease Contract, cannot be given effect because they
violated one of the" material conditions " of the donation of the subject
land, as stated in the Deed of Donation and Amended Deed of
Donation.26
According to petitioner, the Deed of Donation and Amended Deed of
Donation actually established not only one but two (2) lease
agreements between FKI and respondent, i.e. , one lease for the first
twenty-five (25)years or from 1975 to 2000, and another lease for the
next twenty-five (25)years thereafter or from 2000 to 2025. 27 Both
leases are material conditions of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second
twenty-five (25) year lease was not fixed in the Deed of Donation and
Amended Deed of Donation , both deeds nevertheless prescribed
rules and limitations by which the same may be determined. Such
rules and limitations ought to be observed in any succeeding lease
agreements between petitioner and respondent for they are, in
themselves, material conditions of the donation of the subject land. 28
In this connection, petitioner cites item 2(g) of the Deed of Donation
and Amended Deed of Donation that supposedly limits the amount of
rent for the lease over the second twenty-five (25) years to only " three
percent (3%) of the fair market value of the subject land excluding the
improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease
Contract and 2005 Lease Contract cannot be enforced as they are
clearly, in view of their exorbitant exactions, in violation of the
aforementioned threshold in item 2(g) of the Deed of Donation and
Amended Deed of Donation . Consequently, petitioner insists that the
amount of rent it has to pay thereon is and must still be governed by
the limitations prescribed in the Deed of Donation and Amended Deed
of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter)31 to
petitioner notifying the latter of its default " per Section 12 of the 2005
Lease Contract " and demanding for the settlement of the rent and "
donation " due for the year 2009. Respondent, in the same letter,
further intimated of canceling the 2005 Lease Contract should
petitioner fail to settle the said obligations. 32 Petitioner received the
First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent
expressing its disagreement over the rental stipulations of the 2005
Lease Contract — calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals
mandated by the Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled to
₱8,394,000.00, exclusive of interests, petitioner offered to pay only
₱80,502.79,35 in accordance with the rental provisions of the Deed of
Donation and Amended Deed of Donation.36 Respondent refused this
offer.37
On 25 September 2009, respondent sent another letter (Second
Demand Letter)38 to petitioner, reiterating its demand for the payment
of the obligations already due under the 2005 Lease Contract. The
Second Demand Letter also contained a demand for petitioner to "
immediately vacate the leased premises " should it fail to pay such
obligations within seven (7) days from its receipt of the letter. 39 The
respondent warned of taking " legal steps " in the event that petitioner
failed to comply with any of the said demands.40 Petitioner received
the Second Demand Letter on 26September 2009.41
Petitioner refused to comply with the demands of the respondent.
Instead, on 30 September 2009, petitioner filed with the Regional Trial
Court (RTC) of Parañaque City a complaint42 for the rescission or
cancellation of the Deed of Donation and Amended Deed of Donation
against the respondent. This case is currently pending before Branch
257 of the RTC, docketed as Civil Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer
case43 against the petitioner before the Metropolitan Trial Court
(MeTC) of Parañaque City. The ejectment case was raffled to Branch
77 and was docketed as Civil Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory
Counterclaim.44 In it, petitioner reiterated its objection over the rental
stipulations of the 2005 Lease Contract for being violative of the
material conditions of the Deed of Donation and Amended Deed of
Donation.45 In addition to the foregoing, however, petitioner also
interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction
over the instant unlawful detainer case in view of the
insufficiency of respondent’s demand.46 The First Demand
Letter did not contain an actual demand to vacate the
premises and, therefore, the refusal to comply there with
does not give rise to an action for unlawful detainer.47
2. Assuming that the MeTC was able to acquire jurisdiction,
it may not exercise the same until the disagreement
between the parties is first referred to arbitration pursuant
to the arbitration clause of the 2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it
can exercise, ejectment still would not lie as the 2005 Lease
Contract is void abinitio.49 The stipulation in the 2005 Lease
Contract requiring petitioner to give yearly " donations " to
respondent is a simulation, for they are, in fact, parts of the
rent. 50 Such grants were only denominated as " donations
" in the contract so that the respondent—anon-stock and
non-profit corporation—could evade payment of the taxes
otherwise due thereon.51
In due course, petitioner and respondent both submitted their position
papers, together with their other documentary
evidence.52 Remarkably, however, respondent failed to submit the
Second Demand Letter as part of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the
petitioner. While the MeTC refused to dismiss the action on the
ground that the dispute is subject to arbitration, it nonetheless sided
with the petitioner with respect to the issues regarding the
insufficiency of the respondent’s demand and the nullity of the 2005
Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x
x, without pronouncement as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This
appeal was assigned to Branch 274 of the RTC of Parañaque City
and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the
eviction of the petitioner from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed
Decision of the Metropolitan Trial Court, Branch 77, Parañaque City,
is hereby reversed, judgment is thus rendered in favor of the plaintiff-
appellant and against the defendant-appellee, and ordering the latter
–
(1) to vacate the lease[d] premises made subject of the
case and to restore the possession thereof to the plaintiff-
appellant;
(2) to pay to the plaintiff-appellant the amount of Nine
Million Three Hundred Sixty Two Thousand Four Hundred
Thirty Six Pesos (₱9,362,436.00), penalties and net of 5%
withholding tax, for the lease period from May 25, 2009 to
May 25, 2010 and such monthly rental as will accrue during
the pendency of this case;
(3) to pay attorney’s fees in the sum of ₱100,000.00 plus
appearance fee of ₱3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-appellee,
as these were built in good faith, the provisions of Art. 1678of the Civil
Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
 1. The respondent had adequately complied with the
requirement of demand as a jurisdictional precursor to an
unlawful detainer action.58 The First Demand Letter, in
substance, contains a demand for petitioner to vacate when
it mentioned that it was a notice " per Section12 of the 2005
Lease Contract."59 Moreover, the issue of sufficiency of the
respondent’s demand ought to have been laid to rest by the
Second Demand Letter which, though not submitted in
evidence, was nonetheless admitted by petitioner as
containing a" demand to eject " in its Answer with
Compulsory Counterclaim.60
2. The petitioner cannot validly invoke the arbitration clause
of the 2005 Lease Contract while, at the same time, impugn
such contract’s validity.61 Even assuming that it can,
petitioner still did not file a formal application before the
MeTC so as to render such arbitration clause
operational.62 At any rate, the MeTC would not be
precluded from exercising its jurisdiction over an action for
unlawful detainer, over which, it has exclusive original
jurisdiction.63
3. The 2005 Lease Contract must be sustained as a valid
contract since petitioner was not able to adduce any
evidence to support its allegation that the same is
void.64 There was, in this case, no evidence that respondent
is guilty of any tax evasion.65
Aggrieved, the petitioner appealed to the Court of Appeals.
On 19 August 2011, the Court of Appeals affirmed66 the decision of
the RTC:
WHEREFORE , the petition is DENIED . The assailed Decision of the
Regional Trial Court of Parañaque City, Branch 274, in Civil Case No.
10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioner’s prayer for the
issuance of a Temporary Restraining Order68 staying the immediate
implementation of the decisions adverse to it.
OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of
Appeals all erred in overlooking the significance of the arbitration
clause incorporated in the 2005 Lease Contract . As the Court sees
it, that is a fatal mistake.
For this reason, We grant the petition.
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute
between the petitioner and respondent emanates from the rental
stipulations of the 2005 Lease Contract. The respondent insists upon
the enforce ability and validity of such stipulations, whereas,
petitioner, in substance, repudiates them. It is from petitioner’s
apparent breach of the 2005 Lease Contract that respondent filed the
instant unlawful detainer action.
One cannot escape the conclusion that, under the foregoing
premises, the dispute between the petitioner and respondent arose
from the application or execution of the 2005 Lease Contract .
Undoubtedly, such kinds of dispute are covered by the arbitration
clause of the 2005 Lease Contract to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall
be governed, interpreted and construed in all aspects in accordance
with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of
this 2005 Lease Contract shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be
binding upon FKI and respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any
disagreement" as to the " interpretation, application or execution " of
the 2005 Lease Contract ought to be submitted to arbitration.70 To the
mind of this Court, such stipulation is clear and is comprehensive
enough so as to include virtually any kind of conflict or dispute that
may arise from the 2005 Lease Contract including the one that
presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract
in this case carries with it certain legal effects. However, before
discussing what these legal effects are, We shall first deal with the
challenges posed against the application of such arbitration clause.
Challenges Against the Application of the
Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005
Lease Contract, the petitioner, as well as the MeTC, RTC and the
Court of Appeals, vouched for the non-application of the same in the
instant case. A plethora of arguments was hurled in favor of bypassing
arbitration. We now address them.
At different points in the proceedings of this case, the following
arguments were offered against the application of the arbitration
clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and
respondent is non-arbitrable as it will inevitably touch upon
the issue of the validity of the 2005 Lease Contract.71 It was
submitted that one of the reasons offered by the petitioner
in justifying its failure to pay under the 2005 Lease Contract
was the nullity of such contract for being contrary to law and
public policy.72 The Supreme Court, in Gonzales v. Climax
Mining, Ltd.,73 held that " the validity of contract cannot be
subject of arbitration proceedings " as such questions are "
legal in nature and require the application and interpretation
of laws and jurisprudence which is necessarily a judicial
function ." 74
2. The petitioner cannot validly invoke the arbitration clause
of the 2005 Lease Contract while, at the same time, impugn
such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause
whilst denying the validity of the 2005 Lease Contract ,
petitioner still did not file a formal application before the
MeTC so as to render such arbitration clause
operational.76 Section 24 of Republic Act No. 9285 requires
the party seeking arbitration to first file a " request " or an
application therefor with the court not later than the
preliminary conference.77
4. Petitioner and respondent already underwent Judicial
Dispute Resolution (JDR) proceedings before the
RTC.78 Hence, a further referral of the dispute to arbitration
would only be circuitous.79 Moreover, an ejectment case, in
view of its summary nature, already fulfills the prime
purpose of arbitration, i.e. , to provide parties in conflict with
an expedient method for the resolution of their
dispute.80 Arbitration then would no longer be necessary in
this case.81
None of the arguments have any merit.
First. As highlighted in the previous discussion, the disagreement
between the petitioner and respondent falls within the all-
encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such
disagreement, the validity of the 2005 Lease Contract, or at least, of
such contract’s rental stipulations would have to be determined, the
same would not render such disagreement non-arbitrable. The
quotation from Gonzales that was used to justify the contrary position
was taken out of context. A rereading of Gonzales would fix its
relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of
Arbitrators of the Mines and Geosciences Bureau (PA-MGB) seeking
the nullification of a Financial Technical Assistance Agreement and
other mining related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud
and unconstitutionality.83 The pivotal issue that confronted the Court
then was whether the PA-MGB has jurisdiction over that particular
arbitration complaint. Stated otherwise, the question was whether the
complaint for arbitration raises arbitrable issues that the PA-MGB can
take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-
MGB was devoid of any jurisdiction to take cognizance of the
complaint for arbitration, this Court pointed out to the provisions of
R.A. No. 7942, or the Mining Act of 1995, which granted the PA-MGB
with exclusive original jurisdiction only over mining disputes, i.e.,
disputes involving " rights to mining areas," "mineral agreements or
permits," and " surface owners, occupants, claim holders or
concessionaires" requiring the technical knowledge and experience
of mining authorities in order to be resolved. 84 Accordingly, since the
complaint for arbitration in Gonzales did not raise mining disputes as
contemplated under R.A. No. 7942 but only issues relating to the
validity of certain mining related agreements, this Court held that such
complaint could not be arbitrated before the PA-MGB.85 It is in this
context that we made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is
a disagreement between the parties as to some provisions of the
contract between them, which needs the interpretation and the
application of that particular knowledge and expertise possessed by
members of that Panel. It is not proper when one of the parties
repudiates the existence or validity of such contract or agreement on
the ground of fraud or oppression as in this case. The validity of the
contract cannot be subject of arbitration proceedings. Allegations of
fraud and duress in the execution of a contract are matters within the
jurisdiction of the ordinary courts of law. These questions are legal in
nature and require the application and interpretation of laws and
jurisprudence which is necessarily a judicial function. 86 (Emphasis
supplied)
The Court in Gonzales did not simply base its rejection of the
complaint for arbitration on the ground that the issue raised therein,
i.e. , the validity of contracts, is per se non-arbitrable. The real
consideration behind the ruling was the limitation that was placed by
R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral body
. Gonzales rejected the complaint for arbitration because the issue
raised therein is not a mining dispute per R.A. No. 7942 and it is for
this reason, and only for this reason, that such issue is rendered non-
arbitrable before the PA-MGB. As stated beforehand, R.A. No. 7942
clearly limited the jurisdiction of the PA-MGB only to mining
disputes.87
Much more instructive for our purposes, on the other hand, is the
recent case of Cargill Philippines, Inc. v. San Fernando Regal
Trading, Inc.88 In Cargill , this Court answered the question of whether
issues involving the rescission of a contract are arbitrable. The
respondent in Cargill argued against arbitrability, also citing therein
Gonzales . After dissecting Gonzales , this Court ruled in favor of
arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract
and the arbitration clause is conceded, the CA's decision declining
referral of the parties' dispute to arbitration is still correct. It claims that
its complaint in the RTC presents the issue of whether under the facts
alleged, it is entitled to rescind the contract with damages; and that
issue constitutes a judicial question or one that requires the exercise
of judicial function and cannot be the subject of an arbitration
proceeding. Respondent cites our ruling in Gonzales, wherein we held
that a panel of arbitrator is bereft of jurisdiction over the complaint for
declaration of nullity/or termination of the subject contracts on the
grounds of fraud and oppression attendant to the execution of the
addendum contract and the other contracts emanating from it, and
that the complaint should have been filed with the regular courts as it
involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the
Gonzales case to support its argument.90 (Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005
Lease Contract notwithstanding the fact that it assails the validity of
such contract. This is due to the doctrine of separability. 91
Under the doctrine of separability, an arbitration agreement is
considered as independent of the main contract.92 Being a separate
contract in itself, the arbitration agreement may thus be invoked
regardless of the possible nullity or invalidity of the main contract.93
Once again instructive is Cargill, wherein this Court held that, as a
further consequence of the doctrine of separability, even the very
party who repudiates the main contract may invoke its arbitration
clause.94
Third . The operation of the arbitration clause in this case is not at all
defeated by the failure of the petitioner to file a formal "request" or
application therefor with the MeTC. We find that the filing of a
"request" pursuant to Section 24 of R.A. No. 9285 is not the sole
means by which an arbitration clause may be validly invoked in a
pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is
brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer
the parties to arbitration unless it finds that the arbitration agreement
is null and void, inoperative or incapable of being performed.
[Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn,
implemented by Rules 4.1 to 4.3 of A.M. No. 07-11-08-SC or the
Special Rules of Court on Alternative Dispute Resolution (Special
ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed
in violation of the arbitration agreement, whether contained in an
arbitration clause or in a submission agreement, may request the
court to refer the parties to arbitration in accordance with such
agreement.
Rule 4.2. When to make request. - (A) Where the arbitration
agreement exists before the action is filed . - The request for referral
shall be made not later than the pre-trial conference. After the pre-trial
conference, the court will only act upon the request for referral if it is
made with the agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration
agreement at the time the case is filed but the parties subsequently
enter into an arbitration agreement, they may request the court to refer
their dispute to arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the
form of a motion, which shall state that the dispute is covered by an
arbitration agreement.
A part from other submissions, the movant shall attach to his motion
an authentic copy of the arbitration agreement.
The request shall contain a notice of hearing addressed to all parties
specifying the date and time when it would be heard. The party
making the request shall serve it upon the respondent to give him the
opportunity to file a comment or opposition as provided in the
immediately succeeding Rule before the hearing. [Emphasis ours;
italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It
reads: "a party to a pending action filed in violation of the arbitration
agreement x x x may request the court to refer the parties to arbitration
in accordance with such agreement."
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]

In using the word " may " to qualify the act of filing a " request " under
Section 24 of R.A. No. 9285, the Special ADR Rules clearly did not
intend to limit the invocation of an arbitration agreement in a pending
suit solely via such "request." After all, non-compliance with an
arbitration agreement is a valid defense to any offending suit and, as
such, may even be raised in an answer as provided in our ordinary
rules of procedure.95
In this case, it is conceded that petitioner was not able to file a
separate " request " of arbitration before the MeTC. However, it is
equally conceded that the petitioner, as early as in its Answer with
Counterclaim ,had already apprised the MeTC of the existence of the
arbitration clause in the 2005 Lease Contract96 and, more
significantly, of its desire to have the same enforced in this
case.97 This act of petitioner is enough valid invocation of his right to
arbitrate. Fourth . The fact that the petitioner and respondent already
under went through JDR proceedings before the RTC, will not make
the subsequent conduct of arbitration between the parties
unnecessary or circuitous. The JDR system is substantially different
from arbitration proceedings.
The JDR framework is based on the processes of mediation,
conciliation or early neutral evaluation which entails the submission of
a dispute before a " JDR judge " who shall merely " facilitate
settlement " between the parties in conflict or make a " non-binding
evaluation or assessment of the chances of each party’s
case."98 Thus in JDR, the JDR judge lacks the authority to render a
resolution of the dispute that is binding upon the parties in conflict. In
arbitration, on the other hand, the dispute is submitted to an
arbitrator/s —a neutral third person or a group of thereof— who shall
have the authority to render a resolution binding upon the parties. 99
Clearly, the mere submission of a dispute to JDR proceedings would
not necessarily render the subsequent conduct of arbitration a mere
surplusage. The failure of the parties in conflict to reach an amicable
settlement before the JDR may, in fact, be supplemented by their
resort to arbitration where a binding resolution to the dispute could
finally be achieved. This situation precisely finds application to the
case at bench.
Neither would the summary nature of ejectment cases be a valid
reason to disregard the enforcement of the arbitration clause of the
2005 Lease Contract . Notwithstanding the summary nature of
ejectment cases, arbitration still remains relevant as it aims not only
to afford the parties an expeditious method of resolving their dispute.
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is
brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later that the pre-
trial conference, or upon the request of both parties thereafter, refer
the parties to arbitration unless it finds that the arbitration agreement
is null and void, in operative or incapable of being performed.
[Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action
should have been stayed;101 the petitioner and the respondent should
have been referred to arbitration pursuant to the arbitration clause of
the 2005 Lease Contract . The MeTC, however, did not do so in
violation of the law—which violation was, in turn, affirmed by the RTC
and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876
and 9285 renders invalid all proceedings it undertook in the ejectment
case after the filing by petitioner of its Answer with Counterclaim —
the point when the petitioner and the respondent should have been
referred to arbitration. This case must, therefore, be remanded to the
MeTC and be suspended at said point. Inevitably, the decisions of the
MeTC, RTC and the Court of Appeals must all be vacated and set
aside.
The petitioner and the respondent must then be referred to arbitration
pursuant to the arbitration clause of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision
that it is about to make. Nonetheless, this Court must make the same
if only to stress the point that, in our jurisdiction, bona fide arbitration
agreements are recognized as valid;102 and that laws,103 rules and
regulations104 do exist protecting and ensuring their enforcement as a
matter of state policy. Gone should be the days when courts treat
otherwise valid arbitration agreements with disdain and hostility, if not
outright " jealousy,"105 and then get away with it. Courts should instead
learn to treat alternative means of dispute resolution as effective
partners in the administration of justice and, in the case of arbitration
agreements, to afford them judicial restraint.106 Today, this Court only
performs its part in upholding a once disregarded state policy.
Civil Case No. CV 09-0346

This Court notes that, on 30 September 2009, petitioner filed with the
A pivotal feature of arbitration as an alternative mode of dispute
RTC of Parañaque City, a complaint107 for the rescission or
resolution is that it is, first and foremost, a product of party autonomy
cancellation of the Deed of Donation and Amended Deed of Donation
or the freedom of the parties to " make their own arrangements to
against the respondent. The case is currently pending before Branch
resolve their own disputes."100 Arbitration agreements manifest not
257 of the RTC, docketed as Civil Case No. CV 09-0346.
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 This Court recognizes the great possibility that issues raised in Civil
auspices, in a more informal and less antagonistic environment under Case No. CV 09-0346 may involve matters that are rightfully arbitrable
the terms of their choosing. Needless to state, this critical feature can per the arbitration clause of the 2005 Lease Contract. However, since
never be satisfied in an ejectment case no matter how summary it the records of Civil Case No. CV 09-0346 are not before this Court,
may be. We can never know with true certainty and only speculate. In this light,
let a copy of this Decision be also served to Branch 257of the RTC of
Parañaque for its consideration and, possible, application to Civil
Having hurdled all the challenges against the application of the
Case No. CV 09-0346.
arbitration clause of the 2005 Lease Agreement in this case, We shall
now proceed with the discussion of its legal effects.
WHEREFORE, premises considered, the petition is hereby
GRANTED . Accordingly, We hereby render a Decision:
Legal Effect of the Application of the
Arbitration Clause
1. SETTING ASIDE all the proceedings undertaken by the
Metropolitan Trial Court, Branch 77, of Parañaque City in
Since there really are no legal impediments to the application of the
relation to Civil Case No. 2009-307 after the filing by
arbitration clause of the 2005 Contract of Lease in this case, We find
petitioner of its Answer with Counterclaim ;
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:
 2. REMANDING the instant case to the MeTC,
SUSPENDED at the point after the filing by petitioner of its
Answer with Counterclaim;

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of

Appeals in C.A.-G.R. SP No. 116865,

b. Decision dated 29 October 2010 of the

Regional Trial Court, Branch 274, of Parañaque
City in Civil Case No. 10-0255,

c. Decision dated 27 April 2010 of the

Metropolitan Trial Court, Branch 77, of
Parañaque City in Civil Case No. 2009-307; and

4. REFERRING the petitioner and the respondent to

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

Let a copy of this Decision be served to Branch 257 of the RTC of

Parañaque for its consideration and, possible, application to Civil
Case No. CV 09-0346.
G.R. No. 199650 June 26, 2013
J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,
vs.
UTILITY ASSURANCE CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
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.
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 ₱42,000,000.00, 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 ₱8,400,000.00 down payment
was fully paid on January 14, 2008.4 Payment 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 ₱8.4
million.
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
₱15,979,472.03 inclusive of the 20% down payment. However, as of
said date, Mabunay had accomplished only 27.5% of the project. 7
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
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.
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
(₱1,049,364.45)
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
₱1,563,553.34 amount creditable to SSB after deducting
the withholding tax is ₱1,538,424.84
4) The unrecouped amount of the down payment is
₱2,379,441.53 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 is
₱27,880,419.52.9 (Emphasis supplied.)
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
₱8,980,575.89 as liquidated damages and ₱2,379,441.53
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.
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.
Respondent’s motion for reconsideration was likewise denied. 13
In its Answer Ex Abundante Ad Cautelam With Compulsory
Counterclaims and Cross-claims,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 project’s accomplishment already
exceeded the said amount, respondent’s 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 whereby Mabunay undertook to
indemnify respondent for whatever amounts it may be adjudged liable
to pay petitioner under the surety bond.
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:
1. Respondents Mabunay and Utassco to jointly and
severally pay claimant the following:
a) ₱4,469,969.90, 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
b) ₱2,379,441.53 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.
It being understood that respondent Utassco’s liability shall
in no case exceed ₱8.4 million.
2. Respondent Mabunay to pay to claimant the amount of
₱98,435.89, which is respondent Mabunay’s share in the
 arbitration cost claimant had advanced, with legal interest
thereon from January 8, 2010 until fully paid.
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 ₱100,000.00
as attorney’s fees.
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.
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 surety’s 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
respondent’s liability. The ₱8.4 million was a limit on the amount of
respondent’s liability and not a limitation as to the obligation or
undertaking it guaranteed.
However, the CA reversed the CIAC’s 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, petitioner’s
termination of the contract was premature since the delay in this case
was merely speculative; the obligation was not yet demandable.
The dispositive portion of the CA Decision reads:
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.
SO ORDERED.20
Petitioner moved for reconsideration of the CA decision while
respondent filed a motion for partial reconsideration. Both motions
were denied.
The Issues
Before this Court petitioner seeks to reverse the CA insofar as it
denied petitioner’s 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.
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.
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
Our Ruling
On the procedural issues raised, we find no merit in petitioner’s
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:
SEC. 40. Confirmation of Award. – The confirmation of a domestic
arbitral award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the
same manner as final and executory decisions of the Regional Trial
Court.
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.
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.)
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
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:
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.
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 respondent’s liability under the Records showed that as early as April 2008, or within four months
Performance Bond. 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
Indeed, resolution of the issue of delay was crucial upon which
accomplishment even as petitioner constantly advised him of the
depends petitioner’s right to the liquidated damages pursuant to the
delays, as can be gleaned from the following notices of delay sent by
Construction Agreement. Contrary to the CIAC’s findings, the CA
petitioner’s engineer and construction manager, Engr. Sheila N.
opined that delay should be reckoned only after the lapse of the one-
Botardo:
year contract period, and consequently Mabunay’s liability for
liquidated damages arises only upon the happening of such condition.
April 30, 2008
We reverse the CA.
Seven Shades of Blue
Boracay Island
Default or mora on the part of the debtor is the delay in the fulfillment
Malay, Aklan
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
1âwphi1
Article 1169 of the Civil Code provides:
Attention : Mr. Martin Mabunay
General Manager
ART. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from Thru : Engr. Reynaldo Gapasin
them the fulfillment of their obligation.
Project : Villa Beatriz
xxxx
Subject : Notice of Delay

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.
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
Dear Mr. Mabunay:
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 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,
Engr. Sheila N. Botardo
Construction Manager – LMI/FEPI32

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
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 contractor’s liability for
damages.
October 15, 2008
xxxx
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you
have assigned on-site 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.

We cannot sustain the appellate court’s interpretation as it is We would highly appreciate your usual attention on this matter.
inconsistent with the terms of the Construction Agreement. Article
1374 of the Civil Code requires that the various stipulations of a x x x x33
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 November 5, 2008
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) xxxx
(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) Dear Mr. Mabunay,
calendar days based on official work schedule duly approved by the
OWNER."31 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.
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.
Thank you.
x x x x34
November 6, 2008
xxxx
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.
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.
We are looking forward for [sic] your cooperation and continuous
commitment in delivering this project as per contract agreement.
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 as
₱27,880,419.52. 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 the latter incurred. This was followed by the claim
against the Performance Bond upon the respondent on December 18,
2008.
Petitioner’s claim against the Performance Bond included the
liquidated damages provided in the Construction Agreement, as
follows:
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 –
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.
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.
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.
Liquidated Damage[s] payable to the OWNER shall be automatically
deducted from the contractors collectibles without prior consent and
concurrence by the CONTRACTOR.
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.)
Liability for liquidated damages is governed by Articles 2226 to 2228
of the Civil Code, which provide:
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.
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 petitioner’s claim for damages nor respondent’s 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:
ARTICLE 13 – DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the
part of the CONTRACTOR.
xxxx
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.
 (v.) has, to the detriment of good workmanship or in
defiance of the Owner’s instructions to the contrary, sublet
any part of the Agreement.
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.)
As already demonstrated, the contractor’s 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
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 contractor’s 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 contractor’s 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
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 (₱8.4 million).
The appellate court correctly rejected this theory of respondent when
it ruled that the Performance Bond guaranteed the full and faithful
compliance of Mabunay’s 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.
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) 72-Room Condotel, The
Lodgings inside Fairways and Bluewater, Boracay Island, Malay,
Aklan.
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.
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 ₱8,400,000.00
Philippine Currency.
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.)
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 Mabunay’s 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
The imposition of interest on the claims of petitioner is likewise in
order. As we held in Commonwealth Insurance Corporation v. Court
of Appeals46
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.
We are not persuaded. Petitioner’s argument is misplaced.
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.
Petitioner’s liability under the suretyship contract is different from its
liability under the law.1âwphi1 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 petitioner’s 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.)
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.
The Award made in the Decision dated February 2, 2010 of the
Construction Industry Arbitration Commission Is hereby
REINSTATED with the following MODIFICATIONS:
"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, ₱8,400,000.00, 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

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 ₱100,000.00
as attorney's fees.

SO ORDERED.

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.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 91228. March 22, 1993.
PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP
BROTHERS OCEANIC, INC., respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING
FROM CARRIAGE AND DELIVERY. — We agree with the court a
quo that the sales contract is comprehensive enough to include claims
for damages arising from carriage and delivery of the goods. As a
general rule, the seller has the obligation to transmit the goods to the
buyer, and concomitant thereto, the contracting of a carrier to deliver
the same.
2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME
COMMERCE; CHARTER PARTIES, CONSTRUED. — American
jurisprudence defines charter party as a contract by which an entire
ship or some principal part thereof is let by the owner to another
person for a specified time or use. Charter or charter parties are of
two kinds. Charter of demise or bareboat and contracts of
affreightment.
3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED.
— Under the demise or bareboat charter of the vessel, the charterer
will generally be considered as owner for the voyage or service
stipulated. The charterer mans the vessel with his own people and
becomes, in effect, the owner pro hac vice, subject to liability to others
for damages caused by negligence. To create a demise the owner of
a vessel must completely and exclusively relinquish possession,
anything short of such a complete transfer is a contract of
affreightment (time or voyage charter party) or not a charter party at
all.
4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT,
CONSTRUED. — A contract of affreightment is in which the owner of
the vessel leases part or all of its space to haul goods for others. It is
a contract for a special service to be rendered by the owner of the
vessel and under such contract the general owner retains the
possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for his
payment of the charter hire. If the charter is a contract of
affreightment, which leaves the general owner in possession of the
ship as owner for the voyage, the rights, responsibilities of ownership
rest on the owner and the charterer is usually free from liability to third
persons in respect of the ship.
5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS
SHIPPED ON BOARD A VESSEL. — Responsibility to third persons
for goods shipped on board a vessel follows the vessel's possession
and employment; and if possession is transferred to the charterer by
virtue of a demise, the charterer, and not the owner, is liable as carrier
on the contract of affreightment made by himself or by the master with
third persons, and is answerable for loss, damage or non-delivery of
goods received for transportation. An owner who retains possession
of the ship, though the hold is the property of the charterer, remains
liable as carrier and must answer for any breach of duty as to the care,
loading or unloading of the cargo.
6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION
THEREOF, CONSIDERED AND RESPECTED. — Whether the
liability of respondent should be based on the same contract or that
of the bill of lading, the parties are nevertheless obligated to respect
the arbitration provisions on the sales contract and/or the bill of lading.
Petitioner being a signatory and party to the sales contract cannot
escape from his obligation under the arbitration clause as stated
therein. Arbitration has been held valid and constitutional. Even before
the enactment of Republic Act No. 876, this Court has countenanced
the settlement of disputes through arbitration. The rule now is that
unless the agreement is such as absolutely to close the doors of the
courts against the parties, which agreement would be void, the courts
will look with favor upon such amicable arrangements and will only
interfere with great reluctance to anticipate or nullify the action of the
arbitrator. As pointed out in the case of Mindanao Portland Cement
Corp. v. McDough Construction Company of Florida 18 wherein the
plaintiff sued defendant for damages arising from a contract, the Court
said: "Since there obtains herein a written provision for arbitration as
well as failure on respondent's part to comply therewith, the court a
quo rightly ordered the parties to proceed to their arbitration in
accordance with the terms of their agreement (Sec. 6 Republic Act
876). Respondent's arguments touching upon the merits of the
dispute are improperly raised herein. They should be addressed to
the arbitrators. This proceeding is merely a summary remedy to
enforce the agreement to arbitrate. The duty of the court in this case
is not to resolve the merits of the parties' claims but only to determine
if they should proceed to arbitration or not. And although it has been
ruled that a privolous or patently baseless claim should not be ordered
to arbitration it is also recognized that the mere fact that a defense
exist against a claim does not make it frivolous or baseless."
7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS;
COMPLAINT; ANNEXES ATTACHED THEREOF, PART OF THE
RECORD. — Petitioner contend that the arbitration provision in the
bills of lading should not have been discussed as an issue in the
decision of the Court of Appeals since it was not raised as a special
or affirmative defense. The three bills of lading were attached to the
complaint as Annexes "A," "B," and "C," and are therefore parts
thereof and may be considered as evidence although not introduced
as such. Hence, it was then proper for the court a quo to discuss the
contents of the bills of lading, having been made part of the record.
DECISION
NOCON, J p:
This is a special civil action for certiorari and prohibition to annul and
set aside the Decision of the respondent Court of Appeals dated
November 16, 1989 1 reversing the order of the trial court and
dismissing petitioner's compliant in Civil Case No. 89-47403, entitled
Puromines, Inc. v. Maritime Factors, Inc. and Philipp Brothers
Oceanic, Inc.
Culled from the records of this case, the facts show that petitioner,
Puromines, Inc. (Puromines for brevity) and Makati Agro Trading, Inc.
(not a party in this case) entered into a contract with private
respondents Philipp Brothers Oceanic, Inc. for the sale of prilled Urea
in bulk. The Sales Contract No. S151.8.01018 provided, among
others an arbitration clause which states, thus:
"9. Arbitration
"Any disputes arising under this contract shall be settled by arbitration
in London in accordance with the Arbitration Act 1950 and any
statutory amendment or modification thereof. Each party is to appoint
an Arbitrator, and should they be unable to agree, the decision of an
Umpire appointed by them to be final. The Arbitrators and Umpire are
all to be commercial men and resident in London. This submission
may be made a rule of the High Court of Justice in England by either
party." 2
On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded
on board at Yuzhny, USSR a shipment of 15,500 metric tons prilled
Urea in bulk complete and in good order and condition for transport to
Iloilo and Manila, to be delivered to petitioner. Three bills of lading
were issued by the ship-agent in the Philippines, Maritime Factors
Inc., namely: Bill of Lading No. dated May 12, 1988 covering 10,000
metric tons for discharge Manila; Bill of Lading No. 2 of even date
covering 4,000 metric tons for unloading in Iloilo City; and Bill of
Lading No. 3, also dated May 12, 1988, covering 1,500 metric tons
likewise for discharged in Manila
The shipment covered by Bill of Lading No. 2 was discharged in Iloilo
City complete and in good order and condition. However, the
shipments covered by Bill of Lading Nos. 1 and 3 were discharged in
Manila in bad order and condition, caked, hardened and lumpy,
discolored and contaminated with rust and dirt. Damages were valued
at P683, 056. 29 including additional discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for
breach of contract of carriage against Maritime Factors Inc. (which
was not included as respondent in this petition) as ship-agent in the
Philippines for the owners of the vessel MV "Liliana Dimitrova," while
private respondent, Philipp Brothers Oceanic Inc., was impleaded as
charterer of the said vessel and proper party to accord petitioner
complete relief. Maritime Factors, Inc. filed its Answer 5 to the
complaint, while private respondent filed a motion to dismiss, dated
February 9, 1989, on the grounds that the complaint states no cause
of action; that it was prematurely filed; and that petitioner should
comply with the arbitration clause in the sales contract. 6
The motion to dismiss was opposed by petitioner contending the
inapplicability of the arbitration clause inasmuch as the cause of
action did not arise from a violation of the terms of the sales contract
but rather for claims of cargo damages where there is no arbitration
agreement. On April 26, 1989, the trial court denied respondent's
motion to dismiss in this wise:
"The sales contract in question states in part:
'Any disputes arising under this contract shall be settled by arbitration
. . .(emphasis supplied)
"A perusal of the facts alleged in the complaint upon which the
question of sufficiency of the cause of action of the complaint arose
from a breach of contract of carriage by the vessel chartered by the
defendant Philipp Brothers Oceanic, Inc. Thus, the aforementioned
arbitration clause cannot apply to the dispute in the present action
which concerns plaintiff's claim for cargo loss/damage arising from
breach of contract of carriage.
"That the defendant is not the ship owner or common carrier and
therefore plaintiff does not have legal right against it since every action
must be brought against the real party in interest has no merit either
for by the allegations in the complaint the defendant herein has been
impleaded as charterer of the vessel, hence, a proper party." 7
Elevating the matter to the Court of Appeals, petitioner's complaint
was dismissed. The appellate court found that the arbitration provision
in the sales contract and/or the bills of lading is applicable in the
present case. Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it
is broad enough to include the claim for damages arising from the
carriage and delivery of the goods subject-matter thereof.
"It is also noted that the bills of lading attached as Annexes 'A', 'B' and
'C' to the complaint state, in part, 'any dispute arising under this Bill of
Lading shall be referred to arbitration of the Maritime Arbitration
Commission at the USSR Chamber of Commerce and Industry, 6
Kuibyshevskaia Str., Moscow, USSR, in accordance with the rules of
procedure of said commission.'
Considering that the private respondent was one of the signatories to
the sales contract . . . all parties are obliged o respect the terms and
conditions of the said sales contract, including the provision thereof
on 'arbitration.' "
Hence, this petition The issue raised is: Whether the phrase "any
dispute arising under this contract" in the arbitration clause of the
sales contract covers a cargo claim against the vessel (owner and/or
charterers) for breach of contract of carriage.
Petitioner states in its complainants that Philipp Brothers "was the
charterer of the vessel MV 'Liliana Dimitrova' which transported the
shipment from Yuzhny USSR to Manila." Petitioner further alleged
that the caking and hardening, wetting and melting, and contamination
by rust and dirt of the damaged portions of the shipment were due to
the improper ventilation and inadequate storage facilities of the
vessel; that the wetting of the cargo was attributable to the failure of
the crew to close the hatches before and when it rained while the
shipment was being unloaded in the Port of Manila; and that as a
direct and natural consequence of the unseaworthiness and
negligence of the vessel (sic), petitioner suffered damages in the total
amount of P683, 056.29 Philippine currency." 8 (Emphasis supplied)
Moreover, in its Opposition to the Motion to Dismiss, petitioner said
that "[t]he cause of action of the complaint arose from breach of
contract of carriage by the vessel that was chartered by defendant
Philipp Brothers." 9
In the present petition, petitioner argues that the sales contract does
not include the contract of carriage which is a different contract
entered into by the carrier with the cargo owners. That it was an error
for the respondent court to touch upon the arbitration provision of the
bills lading in its decision inasmuch as the same was not raised as an
issue by private respondent who was not a party in the bills of lading
(emphasis Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is
comprehensive enough to include claims for damages arising from
carriage and delivery of the goods. As a general rule, the seller has
the obligation to transmit the goods to the buyer, and concomitant
thereto, the contracting of a carrier to deliver the same. Art. 1523 of
the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in
authorized or required to send the goods to the buyer, delivery of the
goods to a carrier, whether named by the buyer or not, for the purpose
of transmission to the buyer is deemed to be a delivery of the goods
to the buyer, except in the cases provided for in article 1503, first,
second and third paragraphs, or unless a contrary intent appear.
"Unless otherwise authorized by the buyer, the seller must take such
contract with the carrier on behalf of the buyer as may be reasonable,
having regard to the nature of the goods and the other circumstances
of the case. If the seller omit so to do, and the goods are lost or
damaged in course of transit, the buyer may decline to treat the
delivery to the carrier as a delivery to himself,, or may hold the seller
responsible in damages."
xxx xxx xxx
The disputed sales contact provides for conditions relative to the
delivery of goods, such as date of shipment, demurrage, weight as
determined by the bill of lading at load port and more particularly the
following provisions:
"3. Intention is to ship in one bottom, approximately 5,000 metrics tons
to Puromines and approximately 15,000 metric tons to Makati Agro.
However, Sellers to have right to ship material as partial shipment or
co-shipment in addition to above. In the event of co-shipment to a third
party within Philippines same to be discussed with and acceptable to
both Puromines and Makati Agro.
"4. Sellers to appoint neutral survey for Seller's account to conduct
initial draft survey at first discharge port and final survey at last
discharge port. Surveyors results to be binding and final. In the event
draft survey results show a quantity less than the combined Bills of
Lading quantity for both Puromines and Makati Agro, Sellers to refund
the difference. In the event that draft survey results show a quantity in
excess of combined Bills of Lading of quantity of both Puromines and
Makati Agro then Buyers to refund the difference.
"5. It is expressly and mutually agreed that neither Sellers nor vessel's
Owners have any liability to separate cargo or to deliver cargo
separately or to deliver minimum/maximum quantities stated on
individual Bills of Lading. At each port vessel is to discharge in
accordance with Buyers local requirements and it is Buyer's
responsibility to separate individual quantities required by each of
them at each port during or after discharged."
As argued by respondent on its motion to dismiss, "the (petitioner)
derives his right to the cargo from the bill of lading which is the contract
of affreightment together with the sales contract. Consequently, the
(petitioner) is bound by the provisions and terms of said bill of lading
and of the arbitration clause incorporated in the sales contract."
Assuming arguendo that the liability of respondent is not based on the
sales contract, but rather on the contract of carriage, being the
charterer of the vessel MV "Liliana Dimitrova," it would, therefore, be
material to show what kind of charter party the respondent had with
the shipowner to determine respondent's liability.
American jurisprudence defines charter party as a contract by which
an entire ship or some principal part thereof is let by the owner to
another person for a specified time or use. 10 Charter or charter
parties are of two kinds. Charter of demise or bareboat and contracts
of affreightment.
Under the demise or bareboat charter of the vessel, the charterer will that a frivolous or patently baseless claim should not be ordered to
generally be considered as owner for the voyage or service stipulated. arbitration it is also recognized that the mere fact that a defense exist
The charterer mans the vessel with his own people and becomes, in against a claim does not make it frivolous or baseless." 19
effect, the owner pro hac vice, subject to liability to others for damages
caused by negligence. 11 To create a demise the owner of a vessel
In the case of Bengson v. Chan, 20 We upheld the provision of a
must completely and exclusively relinquish possession, anything
contract which required the parties to submit their disputes to
short of such a complete transfer is a contract of affreightment (time
arbitration and We held as follows:
or voyage charter party) or not a charter party at all.

"The trial court sensibly said that 'all the causes of action alleged in
On the other hand, a contract of affreightment is in which the owner
the plaintiffs amended complaint are based upon the supposed
of the vessel leases part or all of its space to haul goods for others. It
violations committed by the defendants of the 'Contract of
is a contract for a special service to be rendered by the owner of the
Construction of a Building' and that 'the provisions of paragraph 15
vessel 12 and under such contract the general owner retains the
hereof leave a very little room for doubt that the said causes of action
possession, command and navigation of the ship, the charterer or
are embraced within the phrase 'any and all questions, disputes or
freighter merely having use of the space in the vessel in return for his
differences between the parties hereto relative to the construction of
payment of the charter hire. 13 If the charter is a contract of
the building,' which must be determined by arbitration of two persons
affreightment, which leaves the general owner in possession of the
and such determination by the arbitrators shall be 'final, conclusive
ship as owner for the voyage, the rights, responsibilities of ownership
and binding upon both parties unless they to court, in which the case
rest on the owner and the charterer is usually free from liability to third
the determination by arbitration is a condition precedent 'for taking any
persons in respect of the ship. 14
court action."

Responsibility to third persons for goods shipped on board a vessel

follows the vessel's possession and employment; and if possession is
transferred to the charterer by virtue of a demise, the charterer, and
not the owner, is liable as carrier on the contract of affreightment
made by himself or by the master with third persons, and is
answerable for loss, damage or non-delivery of goods received for
transportation. An owner who retains possession of the ship, though
the hold is the property of the charterer, remains liable as carrier and
must answer for any breach of duty as to the care, loading or
unloading of the cargo. 15
xxx xxx xxx
"We hold that the terms of paragraph 15 clearly express the intention
of the parties that all disputes between them should first be arbitrated
before court action can be taken by the aggrieved party." 21
Premises considered, We uphold the validity and applicability of the
arbitration clause as stated in Sales Contract No. S151.8.01018 to the
present dispute.

Assuming that in the present case, the charter party is a demise or

bareboat charter, then Philipp Brothers is liable to Puromines, Inc., WHEREFORE, petition is hereby DISMISSED and decision of the
subject to the terms and conditions of the sales contract. On the other court a quo is AFFIRMED.
hand, if the contract between respondent and the owner of the vessel
MV "Liliana Dimitrova" was merely that of affreightment, then it cannot SO ORDERED.
be held liable for the damages caused by the breach of contract of
carriage, the evidence of which is the bills of lading

In any case, whether the liability of respondent should be based on

the same contract or that of the bill of lading, the parties are
nevertheless obligated to respect the arbitration provisions on the
sales contract and/or the bill of lading. Petitioner being a signatory and
party to the sales contract cannot escape from his obligation under
the arbitration clause as stated therein.

Neither can petitioner contend that the arbitration provision in the bills
of lading should not have been discussed as an issue in the decision
of the Court of Appeals since it was not raised as a special or
affirmative defense. The three bills of lading were attached to the
complaint as Annexes "A," "B," and "C," and are therefore parts
thereof and may be considered as evidence although not introduced
as such. 16 Hence, it was then proper for the court a quo to discuss
the contents of the bills of lading, having been made part of the record.

Going back to the main subject of this case, arbitration has been held
valid and constitutional. Even before the enactment of Republic Act
No. 876, this Court has countenanced the settlement of disputes
through arbitration. The rule now is that unless the agreement is such
as absolutely to close the doors of the courts against the parties,
which agreement would be void, the courts will look with favor upon
such amicable arrangements and will only interfere with great
reluctance to anticipate or nullify the action of the arbitrator. 17

As pointed out in the case of Mindanao Portland Cement Corp. v.

McDonough Construction Company of Florida 18 wherein the plaintiff
sued defendant for damages arising from a contract, the Court said:

"Since there obtains herein a written provision for arbitration as well

as failure on respondent's part to comply therewith, the court a quo
rightly ordered the parties to proceed to their arbitration in accordance
with the terms of their agreement (Sec. 6 Republic Act 876).
Respondent's arguments touching upon the merits of the dispute are
improperly raised herein. They should be addressed to the arbitrators.
This proceeding is merely a summary remedy to enforce the
agreement to arbitrate. The duty of the court in this case is not to
resolve the merits of the parties' claims but only to determine if they
should proceed to arbitration or not. And although it has been ruled
G.R. No. 96283 February 25, 1992
CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and
Officers namely: HUANG KUO-CHANG, HUANG AN-CHUNG,
JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE B.
AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA
TERESA SOLIVEN and VIRGILIO M. DEL ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding
Judge, Regional Trail Court of Makati [Branch 57]) and
ROBLECOR PHILIPPINES, INC., respondents.
ROMERO, J.:
This is a special civil action for certiorari seeking to annul the
Resolutions of the Court of Appeals* dated October 22, 1990 and
December 3, 1990 upholding the Orders of July 31, 1990 and August
23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil
Case No. 90-1335. Respondent Court of Appeals affirmed the ruling
of the trial court that herein petitioners, after submitting themselves for
arbitration and agreeing to the terms and conditions thereof, providing
that the arbitration award shall be final and unappealable, are
precluded from seeking judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries
(Philippines) (Chung Fu for brevity) and private respondent Roblecor
Philippines, Inc. (Roblecor for short) forged a construction
agreement 1 whereby respondent contractor committed to construct
and finish on December 31, 1989, petitioner corporation's
industrial/factory complex in Tanawan, Tanza, Cavite for and in
consideration of P42,000,000.00. In the event of disputes arising from
the performance of subject contract, it was stipulated therein that the
issue(s) shall be submitted for resolution before a single arbitrator
chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and
Roblecor entered into two (2) other ancillary contracts, to wit: one
dated June 23, 1989, for the construction of a dormitory and support
facilities with a contract price of P3,875,285.00, to be completed on or
before October 31, 1989; 2 and the other dated August 12, 1989, for
the installation of electrical, water and hydrant systems at the plant
site, commanding a price of P12.1 million and requiring completion
thereof one month after civil works have been finished. 3
However, respondent Roblecor failed to complete the work despite
the extension of time allowed it by Chung Fu. Subsequently, the latter
had to take over the construction when it had become evident that
Roblecor was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid
progress billings of P2,370,179.23, Roblecor on May 18, 1990, filed a
petition for Compulsory Arbitration with prayer for Temporary
Restraining Order before respondent Regional Trial Court, pursuant
to the arbitration clause in the construction agreement. Chung Fu
moved to dismiss the petition and further prayed for the quashing of
the restraining order.
Subsequent negotiations between the parties eventually led to the
formulation of an arbitration agreement which, among others,
provides:
2. The parties mutually agree that the arbitration
shall proceed in accordance with the following
terms and conditions: —
xxx xxx xxx
d. The parties mutually
agree that they will abide by
the decision of the arbitrator
including any amount that
may be awarded to either
party as compensation,
consequential damage
and/or interest thereon;
e. The parties mutually
agree that the decision of
the arbitrator shall be final
and unappealable.
Therefore, there shall be no
further judicial recourse if
either party disagrees with
the whole or any part of the
arbitrator's award.
f. As an exception to sub-
paragraph (e) above, the
parties mutually agree that
either party is entitled to
seek judicial assistance for
purposes of enforcing the
arbitrator's award;
xxx xxx xxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration agreement
thru its Order of May 30, 1990. Thereafter, Engr. Willardo Asuncion
was appointed as the sole arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to
immediately pay respondent contractor, the sum of P16,108,801.00.
He further declared the award as final and unappealable, pursuant to
the Arbitration Agreement precluding judicial review of the award.
Consequently, Roblecor moved for the confirmation of said award. On
the other hand, Chung Fu moved to remand the case for further
hearing and asked for a reconsideration of the judgment award
claiming that Arbitrator Asuncion committed twelve (12) instances of
grave error by disregarding the provisions of the parties' contract.
Respondent lower court denied Chung Fu's Motion to Remand thus
compelling it to seek reconsideration therefrom but to no avail. The
trial court granted Roblecor's Motion for Confirmation of Award and
accordingly, entered judgment in conformity therewith. Moreover, it
granted the motion for the issuance of a writ of execution filed by
respondent.
Chung Fu elevated the case via a petition for certiorari to respondent
Court of Appeals. On October 22,1990 the assailed resolution was
issued. The respondent appellate court concurred with the findings
and conclusions of respondent trial court resolving that Chung Fu and
its officers, as signatories to the Arbitration Agreement are bound to
observe the stipulations thereof providing for the finality of the award
and precluding any appeal therefrom.
A motion for reconsideration of said resolution was filed by petitioner,
but it was similarly denied by respondent Court of Appeals thru its
questioned resolution of December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
Respondents Court of Appeals and trial Judge
gravely abused their discretion and/or exceeded
their jurisdiction, as well as denied due process
and substantial justice to petitioners, — (a) by
refusing to exercise their judicial authority and
legal duty to review the arbitration award, and (b)
by declaring that petitioners are estopped from
questioning the arbitration award allegedly in
view of the stipulations in the parties' arbitration
agreement that "the decision of the arbitrator
shall be final and unappealable" and that "there
shall be no further judicial recourse if either party
 disagrees with the whole or any part of the
arbitrator's award."
Second
Respondent Court of Appeals and trial Judge
gravely abused their discretion and/or exceeded
their jurisdiction, as well as denied due process
and substantial justice to petitioner, by not
vacating and annulling the award dated 30 June
1990 of the Arbitrator, on the ground that the
Arbitrator grossly departed from the terms of the
parties' contracts and misapplied the law, and
thereby exceeded the authority and power
delegated to him. (Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the evolution of
arbitration as a mode of dispute settlement.
Because conflict is inherent in human society, much effort has been
expended by men and institutions in devising ways of resolving the
same. With the progress of civilization, physical combat has been
ruled out and instead, more specific means have been evolved, such
as recourse to the good offices of a disinterested third party, whether
this be a court or a private individual or individuals.
Legal history discloses that "the early judges called upon to solve
private conflicts were primarily the arbiters, persons not specially
trained but in whose morality, probity and good sense the parties in
conflict reposed full trust. Thus, in Republican
Rome, arbiter and judge (judex) were synonymous. The magistrate
or praetor, after noting down the conflicting claims of litigants, and
clarifying the issues, referred them for decision to a private person
designated by the parties, by common agreement, or selected by
them from an apposite listing (the album judicium) or else by having
the arbiter chosen by lot. The judges proper, as specially trained state
officials endowed with own power and jurisdiction, and taking
cognizance of litigations from beginning to end, only appeared under
the Empire, by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been
an accepted alternative to litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of
arbitration in the Philippines, it was nonetheless recognized in the
Spanish Civil Code; specifically, the provisions on compromises made
applicable to arbitrations under Articles 1820 and 1821.7 Although
said provisions were repealed by implication with the repeal of the
Spanish Law of Civil Procedure, 8 these and additional ones were
reinstated in the present Civil Code. 9
Arbitration found a fertile field in the resolution of labor-management
disputes in the Philippines. Although early on, Commonwealth Act 103
(1936) provided for compulsory arbitration as the state policy to be
administered by the Court of Industrial Relations, in time such a
modality gave way to voluntary arbitration. While not completely
supplanting compulsory arbitration which until today is practiced by
government officials, the Industrial Peace Act which was passed in
1953 as Republic Act No. 875, favored the policy of free collective
bargaining, in general, and resort to grievance procedure, in
particular, as the preferred mode of settling disputes in industry. It was
accepted and enunciated more explicitly in the Labor Code, which
was passed on November 1, 1974 as Presidential Decree No. 442,
with the amendments later introduced by Republic Act No. 6715
(1989).
Whether utilized in business transactions or in employer-employee
relations, arbitration was gaining wide acceptance. A consensual
process, it was preferred to orders imposed by government upon the
disputants. Moreover, court litigations tended to be time-consuming,
costly, and inflexible due to their scrupulous observance of the due
process of law doctrine and their strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the
courts toward arbitration agreements is slowly
crystallizing into definite and workable form. . . .
The rule now is that unless the agreement is such
as absolutely to close the doors of the courts
against the parties, which agreement would be
void, the courts will look with favor upon such
amicable arrangements and will only with great
reluctance interfere to anticipate or nullify the
action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in
general was acknowledged when Republic Act No. 876 (1953),
otherwise known as the Arbitration Law, was passed. "Said Act was
obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It
expressly declares that "the provisions of chapters one and two, Title
XIV, Book IV of the Civil Code shall remain in force." 11
In recognition of the pressing need for an arbitral machinery for the
early and expeditious settlement of disputes in the construction
industry, a Construction Industry Arbitration Commission (CIAC) was
created by Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve
their disputes via a particular mode, it is the regular courts that remain
the fora to resolve such matters. However, the parties may opt for
recourse to third parties, exercising their basic freedom to "establish
such stipulation, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy." 12 In such a case, resort to the
arbitration process may be spelled out by them in a contract in
anticipation of disputes that may arise between them. Or this may be
stipulated in a submission agreement when they are actually
confronted by a dispute. Whatever be the case, such recourse to an
extrajudicial means of settlement is not intended to completely deprive
the courts of jurisdiction. In fact, the early cases on arbitration carefully
spelled out the prevailing doctrine at the time, thus: ". . . a clause in a
contract providing that all matters in dispute between the parties shall
be referred to arbitrators and to them alone is contrary to public policy
and cannot oust the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator
or to submit an ongoing dispute to one is valid. Being part of a contract
between the parties, it is binding and enforceable in court in case one
of them neglects, fails or refuses to arbitrate. Going a step further, in
the event that they declare their intention to refer their differences to
arbitration first before taking court action, this constitutes a condition
precedent, such that where a suit has been instituted prematurely, the
court shall suspend the same and the parties shall be directed
forthwith to proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not
been selected by the parties. 15
Under present law, may the parties who agree to submit their disputes
to arbitration further provide that the arbitrators' award shall be final,
unappealable and executory?
Article 2044 of the Civil Code recognizes the validity of such
stipulation, thus:
Any stipulation that the arbitrators' award or
decision shall be final is valid, without prejudice
to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the
arbitral award "shall be final and inappealable except on questions of
law which shall be appealable to the Supreme Court." 16
Under the original Labor Code, voluntary arbitration awards or
decisions were final, unappealable and executory. "However,
voluntary arbitration awards or decisions on money claims, involving
an amount exceeding One Hundred Thousand Pesos (P100,000.00)
or forty-percent (40%) of the paid-up capital of the respondent
employer, whichever is lower, maybe appealed to the National Labor
Relations Commission on any of the following grounds: (a) abuse of
discretion; and (b) gross incompetence." 17 It is to be noted that the
appeal in the instances cited were to be made to the National Labor
Relations Commission and not to the courts.
With the subsequent deletion of the above-cited provision from the
Labor Code, the voluntary arbitrator is now mandated to render an
award or decision within twenty (20) calendar days from the date of
submission of the dispute and such decision shall be final and
executory after ten (10) calendar days from receipt of the copy of the
award or decision by the parties. 18
Where the parties agree that the decision of the arbitrator shall be final
and unappealable as in the instant case, the pivotal inquiry is whether
subject arbitration award is indeed beyond the ambit of the court's
power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the
Civil Code that the finality of the arbitrators' award is not absolute and
without exceptions. Where the conditions described in Articles 2038,
2039 and 2040 applicable to both compromises and arbitrations are
obtaining, the arbitrators' award may be annulled or
rescinded. 19 Additionally, under Sections 24 and 25 of the Arbitration
Law, there are grounds for vacating, modifying or rescinding an
arbitrator's award. 20 Thus, if and when the factual circumstances
referred to in the above-cited provisions are present, judicial review of
the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an
arbitrator's award to determine whether it is in accordance with law or
within the scope of his authority? How may the power of judicial review
be invoked?
This is where the proper remedy is certiorari under Rule 65 of the
Revised Rules of Court. It is to be borne in mind, however, that this
action will lie only where a grave abuse of discretion or an act without
or in excess of jurisdiction on the part of the voluntary arbitrator is
clearly shown. For "the writ of certiorari is an extra-ordinary remedy
and that certiorari jurisdiction is not to be equated with appellate
jurisdiction. In a special civil action of certiorari, the Court will not
engage in a review of the facts found nor even of the law as
interpreted or applied by the arbitrator unless the supposed errors of
fact or of law are so patent and gross and prejudicial as to amount to
a grave abuse of discretion or an exces de pouvoir on the part of the
arbitrator." 21
Even decisions of administrative agencies which are declared "final"
by law are not exempt from judicial review when so warranted. Thus,
in the case of Oceanic Bic Division (FFW), et al. v. Flerida Ruth P.
Romero, et al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making "final"
the decisions of certain administrative
agencies, we have taken cognizance of petitions
questioning these decisions where want of
jurisdiction, grave abuse of discretion, violation of
due process, denial of substantial justice or
erroneous interpretation of the law were brought
to our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of
their functions, act in a quasi-judicial capacity. 24 It stands to reason,
therefore, that their decisions should not be beyond the scope of the
power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the
following grounds, most of which allege error on the part of the
arbitrator in granting compensation for various items which apparently
are disputed by said petitioners:
1. The Honorable Arbitrator committed grave
error in failing to apply the terms and conditions
of the Construction Agreement, Dormitory
Contract and Electrical Contract, and in using
instead the "practices" in the construction
industry;
2. The Honorable Arbitrator committed grave
error in granting extra compensation to Roblecor
for loss of productivity due to adverse weather
conditions;
3. The Honorable Arbitrator committed grave
error in granting extra compensation to Roblecor
for loss due to delayed payment of progress
billings;
4. The Honorable Arbitrator committed grave
error in granting extra compensation to Roblecor
for loss of productivity due to the cement crisis;
5. The Honorable Arbitrator committed grave
error in granting extra compensation to Roblecor
for losses allegedly sustained on account of the
failed coup d'état;
6. The Honorable Arbitrator committed grave
error in granting to Roblecor the amount
representing the alleged unpaid billings of Chung
Fu;
7. The Honorable Arbitrator committed grave
error in granting to Roblecor the amount
representing the alleged extended overhead
expenses;
8. The Honorable Arbitrator committed grave
error in granting to Roblecor the amount
representing expenses for change order for site
development outside the area of responsibility of
Roblecor;
9. The Honorable Arbitrator committed grave
error in granting to Roblecor the cost of
warehouse No. 2;
10. The Honorable Arbitrator committed grave
error in granting to Roblecor extra compensation
for airduct change in dimension;
11. The Honorable Arbitrator committed grave
error in granting to Roblecor extra compensation
for airduct plastering; and
12. The Honorable Arbitrator committed grave
error in awarding to Roblecor attorney's fees.
After closely studying the list of errors, as well as petitioners'
discussion of the same in their Motion to Remand Case For Further
Hearing and Reconsideration and Opposition to Motion for
Confirmation of Award, we find that petitioners have amply made out
a case where the voluntary arbitrator failed to apply the terms and
provisions of the Construction Agreement which forms part of the law
applicable as between the parties, thus committing a grave abuse of
discretion. Furthermore, in granting unjustified extra compensation to
respondent for several items, he exceeded his powers — all of which
would have constituted ground for vacating the award under Section
24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the
case, despite prima facie showing of the existence of grounds
warranting judicial review, effectively deprived petitioners of their
opportunity to prove or substantiate their allegations. In so doing, the
trial court itself committed grave abuse of discretion. Likewise, the
appellate court, in not giving due course to the petition, committed
grave abuse of discretion. Respondent courts should not shirk from
exercising their power to review, where under the applicable laws and
jurisprudence, such power may be rightfully exercised; more so where
the objections raised against an arbitration award may properly
constitute grounds for annulling, vacating or modifying said award
under the laws on arbitration WHEREFORE, the petition is
GRANTED. The Resolutions of the Court of Appeals dated October
22, 1990 and December 3, 1990 as well as the Orders of respondent
Regional Trial Court dated July 31, 1990 and August 23, 1990,
including the writ of execution issued pursuant thereto, are hereby
SET ASIDE. Accordingly, this case is REMANDED to the court of
origin for further hearing on this matter. All incidents arising therefrom
are reverted to the status quo ante until such time as the trial court
shall have passed upon the merits of this case. No costs.
G.R. No. 139273 November 28, 2000
CALIFORNIA AND HAWAIIAN SUGAR COMPANY; PACIFIC
GULF MARINE, INC.; and C.F. SHARP & COMPANY, petitioners,
vs.
PIONEER INSURANCE AND SURETY
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the pre-1997 Rules of Court, a preliminary hearing on
affirmative defenses may be allowed when a motion to dismiss has
not been filed or when, having been filed, it has not been denied
unconditionally. Hence, if its resolution has merely been deferred, the
grounds it invokes may still be raised as affirmative defenses, and a
preliminary hearing thereon allowed.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the January 21, 1999 Decision of the Court
of Appeals1 (CA) in CA-GR SP No. 33723, as well as the July 6, 1999
CA Resolution2 denying reconsideration. The challenged Decision,
which sustained the Orders3 of the Regional Trial Court of Makati City,
disposed as follows:
"WHEREFORE, [there being] no grave abuse of discretion on the part
of public respondent, the instant petition is
hereby DISMISSED."4 (emphasis in the original)
The Facts
The facts, as summarized by the CA, are as follows:
"On November 27, 1990, the vessel MV "SUGAR ISLANDER" arrived
at the port of Manila carrying a cargo of soybean meal in bulk
consigned to several consignees, one of which was the Metro Manila
Feed Millers Association (Metro for [b]revity). Discharging of cargo
from vessel to barges commenced on November 30, 1990. From the
barges, the cargo was allegedly offloaded, rebagged and reloaded on
consignee’s delivery trucks. Respondent, however, claims that when
the cargo [was] weighed on a licensed truck scale a shortage of
255.051 metric tons valued at P1,621,171.16 was discovered. The
above-mentioned shipment was insured with private respondent
against all risk in the amount of P19,976,404.00. Due to the alleged
refusal of petitioners to settle their respective liabilities, respondent,
as insurer, paid the consignee Metro Manila Feed Miller’s Association.
On March 26, 1992, as alleged subrogee of Metro, private respondent
filed a complaint for damages against herein petitioners. Within the
reglementary period to file an Answer, petitioners filed a Motion to
Dismiss the complaint on the ground that respondent’s claim is
premature, the same being arbitrable. Private respondent filed its
Opposition thereto and petitioners filed their Reply to Opposition.
"On November 11, 1992, [the RTC] issued an Order deferring the
hearing on the Motion to Dismiss until the trial and directing petitioners
to file their Answer. Petitioners then moved to reconsider said Order
which was, however, denied by [the RTC] on the ground that the
reason relied upon by herein petitioners in its Motion to Dismiss and
Motion for Reconsideration [was] a matter of defense which they must
prove with their evidence.
"On August 20, 1993, petitioners filed their Answer with Counterclaim
and Crossclaim alleging therein that plaintiff, herein respondent, did
not comply with the arbitration clause of the charter party; hence, the
complaint was allegedly prematurely filed. The trial court set the case
for pre-trial on November 26, 1993.
"On November 15 and 16, 1993, petitioners filed a Motion to Defer
Pre-Trial and Motion to Set for Preliminary Hearing the Affirmative
Defense of Lack of Cause of Action for Failure to comply with
Arbitration Clause, respectively. Private respondent did not file an
Opposition to the said Motion to Set for Preliminary Hearing. On
December 28, 1993, [the RTC] issued an Order denying the Motion to
Set for Preliminary Hearing. On February 2, 1994 petitioners filed a
Motion for Reconsideration of the Order dated December 28, 1993.
On February 11, 1994, [the RTC] issued an Order denying petitioners’
Motion for Reconsideration. Hence, the instant petition."5
Ruling of the Court of Appeals
Affirming the trial court, the CA held that petitioners cannot rely on
Section 5, Rule 166 of the pre-1997 Rules of Court,7 because a Motion
to Dismiss had previously been filed. Further, it ruled that the
arbitration clause provided in the charter party did not bind
respondent. It reasoned as follows:
"Petitioners argue that [the RTC] committed grave abuse of discretion
amounting to lack or excess of jurisdiction in denying the preliminary
hearing of the affirmative defense of lack of cause of action for failure
to comply with the arbitration clause.
"Petitioners, in so filing the Motion to Set for Preliminary Hearing the
Affirmative Defense of Lack of Cause of Action for Failure to Comply
with Arbitration Clause, premised their alleged right to a preliminary
hearing on the provision of Section 5, Rule 16 of the Old Rules of
Court which provide[s]:
‘Sec. 5. Pleading grounds as affirmative defenses. Any of the grounds
for dismissal provided for in this rule, except improper venue, may be
pleaded as an affirmative defense and a preliminary hearing may be
had thereon as if a motion to dismiss had been filed.’
"Petitioners’ reliance on said provision is misplaced. The above-
mentioned provision contemplates a situation where no motion to
dismiss is filed. If a motion to dismiss has been filed, as in the case at
bar, Section 5, Rule 16 of the Old Rules of Court will not come into
play. Furthermore, the same provision gives the judge discretion
whether to set for preliminary hearing the grounds for affirmative
defenses. Respondent judge deferred the hearing and determination
of the Motion to Dismiss until the trial since the ground relied upon by
petitioners therein did not appear to be indubitable. Petitioners then
filed their Answer as ordered by the Court again raising as an
affirmative defense lack of cause of action for failure to comply with
[the] arbitration clause, praying for the dismissal of the complaint
against them, and filing afterwards a Motion to Set for Preliminary
Hearing the Affirmative Defense of lack of Cause of Action. In effect,
petitioners are asking the trial court to set aside its Order denying the
Motion to Dismiss and Order denying the Motion for Reconsideration
thereof.
"Petitioners cannot do this.
"The remedy of the aggrieved party in a denied motion to dismiss is
to file an answer and interpose as defense or defenses, the objection
or objections raised by him in said motion to dismiss, then proceed to
trial and, in case of adverse decision, to elevate the entire case by
appeal in due course. Petitioners could also resort to the extraordinary
legal remedies of certiorari, prohibition and mandamus to question the
denial of the motion to dismiss. As correctly ruled by the trial court in
its Order dated June 30, 1993, denying the Motion for
Reconsideration of the Order dated November 11, 1992 (denying the
Motion to Dismiss) the ground relied upon by petitioners is a matter of
defense which petitioners must prove with their evidence at the trial.
"Petitioners in asking the lower court to set the case for preliminary
hearing further argue that this would give the court and the parties a
shorter time to resolve the matter and the case without a full blown
trial. However, petitioners fail to realize that they themselves are
delaying the determination and resolution of the issues involved by
resorting to an improper remedy.
"On the issue raised by petitioners that private respondent’s claim is
premature for failure to comply with [the] arbitration clause, we hold
that the right of the respondent as subrogee, in filing the complaint
against herein petitions is not dependent upon the charter party relied
upon by petitioners; nor does it grow out of any privity contract or upon
written assignment of claim. It accrues simply upon payment of the
insurance claim by respondent as insurer to the insured. This was the
pronouncement by the Supreme Court in the case of Pan Malayan
Insurance Corp. vs. Court of Appeals 184 SCRA 54, to wit:
‘Payment by the insurer to the insured operates as an equitable
assignment to the former of all the remedies which the latter may have
against the third party whose negligence or wrongful (sic) caused the
loss. The right of subrogation is not dependent upon, nor does it grow
out of, any privity contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer.’"8
Hence, this recourse.9
The Issues
In their Memorandum, petitioners submit the following issues for our
consideration:10
"1. Whether or not insurer, as subrogee of the consignee,
is bound by the charter party which is incorporated and
referred to in the bill of lading.
2. Whether or not the motion to dismiss should be granted
on the ground that a condition precedent has not been
complied with, based on the arbitration clause incorporated
in the bill of lading.
3. Whether or not the Court of Appeals erred in holding that
the trial court did not commit grave abuse of discretion in
denying petitioners’ motion for preliminary hearing.
4. Whether or not the trial court can defer the resolution of
a motion to dismiss on the ground that the ground relied
upon is indubitable.
5. Whether or not the petitioners have resorted to an
improper remedy which makes them responsible for
delaying the case."
In the main, the two principal matters before us are: (1) the denial of
petitioners’ Motion for Preliminary Hearing and (2) the propriety of the
CA ruling regarding the arbitration clause.
The Court’s Ruling
The Petition is meritorious.
First Issue: Preliminary Hearing of Affirmative Defense
At the outset, we must emphasize that the crux of the present
controversy is the trial court’s Order denying petitioner’s Motion to Set
for Preliminary Hearing the affirmative defense of lack of cause of
action. Not questioned here is the said court’s Order holding in
abeyance the hearing of petitioner’s Motion to Dismiss.
Affirmative Defense May Be Raised
Still in effect when the case was before the trial court, Section 5, Rule
16 of the pre-1997 Rules of Court, reads:
"Sec. 5. Pleading grounds as affirmative defenses. - Any of the
grounds for dismissal provided for in this Rule, except improper
venue, may be pleaded as an affirmative defense, and a preliminary
hearing may be had thereon as if a motion to dismiss had been filed."
Respondent argues that the above provision cannot be applied,
because petitioners have already filed a Motion to Dismiss.
We disagree. Respondent relies on the amendments introduced in the
1997 Rules on Civil Procedure ("1997 Rules"), but ignores equally
relevant provisions thereof, as well as the clear intendment of the pre-
1997 Rules. True, Section 6, Rule 16 of the 1997 Rules,11 specifically
provides that a preliminary hearing on the affirmative defenses may
be allowed only when no motion to dismiss has been filed. Section 6,
however, must be viewed in the light of Section 3 of the same
Rule,12 which requires courts to resolve a motion to dismiss and
prohibits them from deferring its resolution on the ground of
indubitability. Clearly then, Section 6 disallows a preliminary hearing
of affirmative defenses once a motion to dismiss has been filed
because such defense should have already been resolved. In the
present case, however, the trial court did not categorically resolve
petitioners’ Motion to Dismiss, but merely deferred resolution
thereof.13
Indeed, the present Rules are consistent with Section 5, Rule 16 of
the pre-1997 Rules of Court, because both presuppose that no motion
to dismiss had been filed; or in the case of the pre-1997 Rules, if one
has been filed, it has not been unconditionally denied.14 Hence, the
ground invoked may still be pleaded as an affirmative defense even if
the defendant’s Motion to Dismiss has been filed but not definitely
resolved, or if it has been deferred as it could be under the pre-1997
Rules.15
Denial of the Motion for a Preliminary Hearing Was a Grave Abuse of
Discretion
The more crucial question that we must settle here is whether the trial
court committed grave abuse of discretion when it denied petitioners’
Motion for a Preliminary Hearing on their affirmative defense of lack
of cause of action. Undeniably, a preliminary hearing is not
mandatory, but subject to the discretion of the trial court.16 In the light
of the circumstances in this case, though, we find that the lower court
committed grave abuse of discretion in refusing to grant the Motion.
We note that the trial court deferred the resolution of petitioners’
Motion to Dismiss because of a single issue. It was apparently unsure
whether the charter party that the bill of lading referred to was indeed
the Baltimore Berth Grain Charter Party submitted by
petitioners.1âwphi1
Considering that there was only one question, which may even be
deemed to be the very touchstone of the whole case, the trial court
had no cogent reason to deny the Motion for Preliminary Hearing.
Indeed, it committed grave abuse of discretion when it denied a
preliminary hearing on a simple issue of fact that could have possibly
settled the entire case. Verily, where a preliminary hearing appears to
suffice, there is no reason to go on to trial. One reason why dockets
of trial courts are clogged is the unreasonable refusal to use a process
or procedure, like a motion to dismiss, which is designed to abbreviate
the resolution of a case.
Second Issue: The Arbitration Clause
The CA also erred when it held that the arbitration clause was not
binding on respondent. We reiterate that the crux of this case is
whether the trial court committed grave abuse of discretion in denying
the aforecited Motion. There was neither need nor reason to rule on
the applicability of the arbitration clause.
Be that as it may, we find the CA’s reasoning on this point faulty.
Citing Pan Malayan Insurance Corporation v. CA,17 it ruled that the
right of respondent insurance company as subrogee was not based
on the charter party or any other contract; rather, it accrued upon the
payment of the insurance claim by private respondent to the insured
consignee. There was nothing in Pan Malayan, however, that
prohibited the applicability of the arbitration clause to the subrogee.
That case merely discussed, inter alia, the accrual of the right of
subrogation and the legal basis therefor.18 This issue is completely
different from that of the consequences of such subrogation; that is,
the rights that the insurer acquires from the insured upon payment of
the indemnity.
WHEREFORE, the Petition is GRANTED and the appealed Decision
is hereby REVERSED. The case is REMANDED to the trial court for
preliminary hearing on petitioners’ affirmative defense. No costs.
SO ORDERED.