1|ADR CASES SET 1
G.R. No. L-16398 December 14, 1921
A. CHAN LINTE, plaintiff-appellant,
vs.
LAW UNION AND ROCK INSURANCE CO., LTD., defendant-appellee.
A. CHAN LINTE, plaintiff-appellant,
vs.
TOKYO MARINE INSURANCE CO., LTD., defendant-appellee.
A. CHAN LINTE, plaintiff-appellant,
vs.
THE CHINE FIRE INSURANCE CO., LTD., defendant-appellee.
Crossfield & O'Brien for appellant.
Fisher & DeWitt for appellees.
JOHNS, J.:
The plaintiff is a resident adult of the Philippine Islands, and the defendants are fire insurance
companies duly licensed to do business here.
Plaintiff alleges that he was the owner of 30,992.50 kilos of hemp stored in the warehouse in
Calbayog, Province of Samar, Philippine Islands, which on the 25 of March, 1916, he requested
the defendant Law Union and Rock Insurance Co., Ltd., to insure against loss by fire in the sum of
P5,000, and upon the date it issued its policy No. 1,787,379 in favor of the plaintiff against such
loss until 4 o'clock p.m., of the 22nd of March, 1917, and that the policy was delivered to the
plaintiff in consideration of which he paid the company a premium of P87.50. that in consideration
of other previous payments, the policy was renewed from time to time and continued in force and
effect to and including March 22, 1919; that during the life of the policy the hemp was destroyed
by fire in the bodega where it was insured; that its value was P21,296.27; that he at once notified
the defendant of the loss, and in all other respects complied with the terms and conditions of the
policy, and made a demand for the payment of the full amount of the insurance. That defendant
refused and still refuses to pay the same or any part thereof, and plaintiff prays for judgment for
P5,000, with interest and costs.
In his amended complaint he alleges that after the commencement of the action, the defendant
requested that its liability should be submitted to arbitration, in accord with the provisions of the
policy, and that "plaintiff acceded to the requirement made by said defendant as aforesaid, but not
that the award of arbitration should be conclusive or final, or deprive the courts of jurisdiction, and
by agreement of both plaintiff and defendant Frank B. Ingersoll was named sole arbitrator, and
both parties informally presented evidence before him and he made return of arbitration to the
effect that said plaintiff had only seven bales of hemp destroyed in the fire of April 10, 1918, as
hereinbefore set forth, with which return the said plaintiff is dissatisfied, and comes to this court for
proper action under this amended complaint."1awphil.net
For answer the defendant alleges that, claiming a loss under the policy, the plaintiff made a claim
against the defendant for P5,000, that a difference arose between them as to the amount of the
alleged loss, and that, under the terms of the policy, an arbitrator was agreed upon and selected
by the mutual consent of both parties, for the purpose of deciding the alleged difference; that on
December 28, 1918, the arbitrator found that only seven bales of hemp of the grade "ovillo" were
destroyed.
For supplemental answer to the amended complaint, the defendant further alleges that on July 8,
1919, the arbitrator filed a supplemental report and award wherein he finds from the evidence
submitted that the local value of the seven bales of plaintiff's hemp destroyed by fire on April 10,
1918, was P608.34; that in addition to the defendant's policy, the same property was covered by
two other fire insurance polices, by each of which the property in question was insured to the
value of P5,000 against the loss; that defendant has offered and is now willing to pay plaintiff its
one-third of the loss in full satisfaction of its liability.
x x x           x x x          x x x
The other insurance companies are Tokyo Marine Insurance Co., Ltd., and the Chine Fire
Insurance Co., Ltd., defendants and appellees.
After the filing of the amended complaint, both parties agreed upon Frank B. Ingersoll as
arbitrator, and submitted to him the evidence pro and con. His first finding was made on
December 28, 1918, and on July 8, 1919, he filed a supplemental report in which he found the
value of the property destroyed to be P608.34.
It was stipulated "that the arbitration clauses of the policies of insurance issued by the Law Union
and Rock Insurance Co., Ltd., and the Chine Fire Insurance Co., Ltd., are in terms as follows, to
wit:
2|ADR CASES SET 1
"If any difference arises as to the amount of any loss or damage, such
difference shall independently of all other questions be referred to the decision
of an arbitrator, to be appointed in writing by the parties in difference, or, if they
cannot agree upon a single arbitrator, to the decision of two disinterested
persons as arbitrators, of whom one shall be appointed in writing by each of the
parties within two calendar months after having been required so to do in writing
by the other party. In case either party shall refuse or fail to appoint an arbitrator
within two calendar months after receipt of notice in writing requiring
appointment, the other party shall be at liberty to appoint a sole arbitrator; and
in case of disagreement between the arbitrators, the difference shall be referred
to the decision of an umpire who shall have been appointed by them in writing
before entering on the reference and who shall sit with the arbitrators and
preside at their meetings. The death of any party shall not revoke or affect the
authority or powers of the arbitrator, arbitrators or umpire respectively; and in
the event of the death of an arbitrator or umpire, another shall in each case be
appointed in his stead by the party or arbitrators (as the case may be), by whom
the arbitrator or umpire so dying was appointed. The costs of the reference and
of the award shall be in the discretion of the arbitrator, arbitrators or umpire
making the award. And it is hereby expressly stipulated and declared that it
shall be a condition precedent to any right of action or suit upon this policy that
the award by such arbitrator, arbitrators or umpire of the amount of the loss or
damage if disputed shall be first obtained."
That the arbitration clause in the policy issued by the Tokyo Marine Insurance Company,
Limited, is as follows, to wit:
If any difference shall arise with respect to any claim for loss or damage by fire and no
fraud be suspected, and the Company does not elect to rebuild, repair, reinstate or
replace same, such difference shall be submitted to arbitrators, indifferently chosen,
whose award, or that of their umpire, shall be conclusive.
Any liability arising out of the fire should be borne by the defendants in equal parts; that each of
them has offered in writing to pay the plaintiff its one-third of the amount of the plaintiff's loss, as
ascertained by the arbitrator.
It is understood that in making this stipulation plaintiff shall not be deemed to have
waived his right to contend, as a matter of law or fact, that the award of the arbitrator is
not conclusive upon him and that the arbitrator was without authority to supplement or
amend his findings after having once rendered decision; and that defendants have not
waived their right to contend that such arbitration is conclusive, and that no evidence of
the amount of the loss alleged to have been suffered by plaintiff should be considered,
but that his right to recover is limited to the amount of damage found by the arbitrator to
have been suffered by him.
On November 6, 1919, "it is hereby stipulated and agreed that the above entitled causes be and
they are hereby submitted to the court upon the evidence taken at the trial and the depositions
taken in Samar before the justice of the peace of the municipality of Calbayog, and by him
transmitted to the clerk of this court; provided, that nothing herein contained shall be construed as
a waiver of the contention of defendants that the award of the arbitrator is conclusive, and that no
evidence of the amount of the loss other than such award should be considered."
After the testimony was taken, the trial court rendered judgment against each of the defendants
for P202.78, and that plaintiff should pay the costs of the action, from which he appealed, claiming
that the court erred in holding that the decision of the arbitrator is conclusive or in any way binding
on the plaintiff; that the arbitrator's decision is in the main supported by the evidence; and that it
erred in not awarding judgment for the plaintiff, is prayed for in his complaint.
It will be noted that the policies of the Law Union and Rock Insurance Co., Ltd., and The Chine
Fire Insurance Co., Ltd., provide for arbitration and expressly stipulated "that it shall be a condition
precedent to any right of action or suit upon this policy that the award by such arbitrator,
arbitrators or umpire of the amount of the loss or damage if disputed shall be first obtained," and
that the action was brought without making any effort to adjust the loss by arbitration. The policy
of Tokyo Marine Insurance Co., Ltd., provides that in the event of a different it "shall be submitted
to arbitrators, indifferently chosen, whose award, or that of their umpire, shall be
conclusive."1awphil.net
After the action was brought, and upon the request of the defendant, an arbitrator was chosen to
whom the evidence of the loss was submitted. On December 28, 1918, he found that only seven
bales of hemp of the grade "ovillo" were destroyed, but did not then make any finding as to its
value. July 8, 1919, he made and filed a supplemental report in which he found that the value of
the hemp destroyed by the fire of April 10, 1918, was P608.34.
The plaintiff contends; First, that the arbitration clauses are null and void as against public policy;
second, that the award of the arbitrator of December 28, 1918, without finding the value of the
property destroyed, was final, and that on July 8, 1919, he had no authority to make a
supplemental finding as to the value of the property; and, third, that upon the evidence the court
should have found for the plaintiff. Upon the first point he cites the case of Wahl and
Wahl vs. Donaldson, Sims and Co. (2 Phil., 301), which apparently sustains his contention. That
3|ADR CASES SET 1
case holds that "a clause in a contract providing that all matters in dispute between the parties
shall be referred to arbitrators and to them alone is contrary to public policy and cannot oust the
courts of jurisdiction."
In Chang vs. Royal Exchange Assurance Corporation of London (8 Phil., 399), agreement was
very similar to the one here with the two defendants above quoted, and it was there held that such
a condition for arbitration is valid, and that, unless there was an effort to comply, no action could
be maintained.
In Allen vs. Province of Tayabas (38 Phil., 356), it is said:
. . . It would be highly improper for courts out of untoward jealousy to annul laws or
agreements which seek to oust the courts of their jurisdiction. . . . Unless the agreement
is such as absolutely to close the doors of the courts against the parties, which
agreement would be void. (Wahl and Wahl vs. Donaldson, Sims and Co. [1903], 2 Phil.,
301), 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. . . .
In the instant case, it will be noted that sometime after the action was commenced and upon the
request of the defendants, the plaintiff agreed to arbitrate under the terms and provisions of the
policies; that the parties mutually agreed upon an arbitrator; and that each appeared before him
and offered his or its evidence upon the questions in dispute. There is no claim or pretense that
the proceedings were not honestly and fairly conducted. Having formally agreed and submitted to
an arbitration after the action was commenced, it may well be doubted whether the plaintiff can at
this time question the validity of the proceedings, except upon the ground of fraud or mistake.
Ruling Case Law, vol. 2, p. 359, says that when the subject-matter of a pending suit is submitted
to arbitration without rule of court "there is a conflict among the authorities as to whether or not the
mere submission effects a discontinuance of the action. The majority rule is that the parties
themselves show an intent to discontinue the pending suit by substituting another tribunal, so that
a submission furnishes ground for a discontinuance."
On page 352 of the same volume, it is said:
Arbitration as a method of settling disputes and controversies is recognized at common
law. The award of the arbitrators is binding on the parties, but, in the absence of statute,
the successful party can only enforce his rights thereunder by a suit at law. Thus the only
gain by a common law arbitration is the substitution of the definite findings of the award
as the basis of a suit, in the place of the former unsettled rights of the parties. In an
action on the award the award itself is conclusive evidence of all matters therein
contained, provided the arbitrators have not exceeded the powers delegated to them by
the agreement of submission. The courts regard matters submitted as concluded by the
award, and in an action thereon they will not review the merits of the arbitrators' findings.
Corpus Juris, vol. 5, p. 16, says:
The statement of controversies by arbitration is an ancient practice at common law. In its
broad sense it is a substitution, by consent of parties, of another tribunal for the tribunals
provided by the ordinary processes of law; a domestic tribunal, as contradistinguished
from a regularly organized court proceeding according to the course of the common law,
depending upon the voluntary act of the parties disputant in the selection of judges of
their own choice. Its object is the final disposition, in a speedy and inexpensive way, of
the matters involved, so that they may not become the subject of future litigation
between the parties.
On page 20, it is said:
APPROVED METHOD OF SETTLEMENT; FAVORED BY CONSTRUCTION.
— Although arbitration was recognized at the common law as a mode of adjusting
matters in dispute, especially such as concerned personal chattels and personal wrongs,
yet, from efforts perceptible in the earlier cases to construe arbitration proceedings and
awards so as to defeat them, it would seem that they were not originally favored by the
courts. This hostility, however, has long since disappeared, and, by reason of the fact
that the proceeding represents a method of the parties' own choice and furnishes a more
expeditious and less expensive means of settling controversies than the ordinary course
of regular judicial proceedings, it is the policy of the law to favor arbitration. Therefore
every reasonable intendment will be indulged to give effect to such proceedings, and in
favor of the regularity and integrity of the arbitrators' acts.
On page 43, it is said:
Where a contract contains a stipulation, not that all questions arising thereunder, whether
as to the validity or effect of such contract, or otherwise, shall be submitted to arbitration,
but that the decision of arbitrators on a certain question or questions, such as the
quantity, quality, or price of materials or workmanship, the value of work, the amount of
loss or damage, or the like, shall be a condition precedent to the right of action on the
contract itself, no fixed sum being stated in the contract, such stipulation will be enforced,
4|ADR CASES SET 1

because the parties to a contract have a right to adopt whatever method they see fit for
determining such questions, and until the method adopted has been pursued, or some
sufficient reason given for not pursuing it, no action can be brought on the contract.
"Freedom to contract for arbitration to this extent," it has been said, "imports no invasion
of the province of the courts, and there is no ground upon which a right so essential to
the convenient transaction of modern business affairs can be denied," nor is such
agreement objectionable as being against public policy. In order to give effect to such an
agreement it must of course appear that the matter proposed to be referred is a
difference, within the meaning of the agreement.

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

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

Judgment is affirmed, with costs to the appellee. So ordered.

5|ADR CASES SET 1
G.R. No. L-21549             October 22, 1924
TEODORO VEGA, plaintiff-appellee,
vs.
THE SAN CARLOS MILLING CO., LTD., defendant-appellant.
Fisher, Dewitt, Perkins, & Brady, John R. McFie, Jr., Jesus Trinidad, and Powell & Hill for
appellant.
R. Nolan and Feria & La O for appellee.
ROMUALDEZ, J.:
This action is for the recovery of 32,959 kilos of centrifugal sugar, or its value, P6,252, plus the
payment of P500 damages and the costs.
The defendants filed an answer, and set up two special defenses, the first of which is at the same
time a counterclaim.
The Court of First Instance of Occidental Negros that tried the case, rendered judgment, the
dispositive part of which is as follows:
By virtue of these considerations, the court is of opinion that with respect to the
complaint, the plaintiff must be held to have a better right to the possession of the 32,959
kilos of centrifugal sugar manufactured in the defendants' central and the latter is
sentenced to deliver them to the plaintiff, and in default, the selling price thereof,
amounting to P5,981.06 deposited in the office of the clerk of the court. Plaintiff's claim
for damages is denied, because it has not been shown that the defendant caused the
plaintiff any damages. Plaintiff is absolved from defendant's counterclaim and declared
not bound to pay the such claimed therein. Plaintiff is also absolved from the
counterclaim of P1,000, for damages, it not having been proved that any damages were
caused and suffered by defendant, since the writ of attachment issued in this case was
legal and proper. Without pronouncement as to costs.
So ordered.
The defendant company appealed from this judgment, and alleges that the lower court erred in
having held itself with jurisdiction to take cognizance of and render judgment in the cause; in
holding that the defendant was bound to supply cars gratuitously to the plaintiff for the cane; in not
ordering the plaintiff to pay to the defendant the sum of P2,866 for the cars used by him, with
illegal interest on said sum from the filing of the counterclaim, and the costs, and that said
judgment is contrary to the weight of the evidence and the law.
The first assignment of error is based on clause 23 of the Mill's covenants and clause 14 of the
Planter's Covenant as they appear in Exhibit A, which is the same instrument as Exhibit 1.
Said clauses are as follows:
23. That it (the Mill — Party of the first part) will submit and all differences that may arise
between the Mill and the Planters to the decision of arbitrators, two of whom shall be
chosen by the Mill and two by the Planters, who in case of inability to agree shall select a
fifth arbitrator, and to respect and abide by the decision of said arbitrators, or any three of
them, as the case may be.
xxx     xxx     xxx
14. That they (the Planters--Parties of the second part) will submit any and all differences
that may arise between the parties of the first part and the parties of the second part of
the decision of arbitrators, two of whom shall be chosen by the said parties of the first
part and two by the said party of the second part, who in case of inability to agree, shall
select a fifth arbitrator, and will respect and abide by the decision of said arbitrators, or
any three of them, as the case may be.
It is an admitted fact that the differences which arose between the parties, and which are the
subject of the present litigation have not been submitted to the arbitration provided for in the
above quoted clauses.
Defendant contends that as such stipulations on arbitration are valid, they constitute a condition
precedent, to which the plaintiff should have resorted before applying to the courts, as he
prematurely did.
The defendant is right in contending that such covenants on arbitration are valid, but they are not
for the reason a bar to judicial action, in view of the way they are expressed:
6|ADR CASES SET 1
An agreement to submit to arbitration, not consummated by an award, is no bar to suit at
law or in equity concerning the subject matter submitted. And the rule applies both in
respect of agreements to submit existing differences and agreements to submit
differences which may arise in the future. (5 C. J., 42.)
And in view of the terms in which the said covenants on arbitration are expressed, it cannot be
held that in agreeing on this point, the parties proposed to establish the arbitration as a condition
precedent to judicial action, because these clauses quoted do not create such a condition either
expressly or by necessary inference.
Submission as Condition Precedent to Suit. — Clauses in insurance and other contracts
providing for arbitration in case of disagreement are very similar, and the question
whether submission to arbitration is a condition precedent to a suit upon the contract
depends upon the language employed in each particular stipulation. Where by the same
agreement which creates the liability, the ascertainment of certain facts by arbitrators is
expressly made a condition precedent to a right of action thereon, suit cannot be brought
until the award is made. But the courts generally will not construe an arbitration clause as
ousting them of their jurisdiction unless such construction is inevitable, and consequently
when the arbitration clause is not made a condition precedent by express words or
necessary implication, it will be construed as merely collateral to the liability clause, and
so no bar to an action in the courts without an award. (2 R. C. L., 362, 363.)
Neither does not reciprocal covenant No. 7 of said contract Exhibit A expressly or impliedly
establish the arbitration as a condition precedent. Said reciprocal covenant No. 7 reads:
7. Subject to the provisions as to arbitration, hereinbefore appearing, it is mutually
agreed that the courts of the City of Iloilo shall have jurisdiction of any and all judicial
proceedings that may arise out of the contractual relations herein between the party of
the first and the part is of the second part.
The expression "subject to the provisions as to arbitration, hereinbefore appearing" does not
declare such to be a condition precedent. This phrase does not read "subject to the arbitration,"
but "subject to the provisions as to arbitration hereinbefore appearing." And, which are these
"provisions as to arbitration hereinbefore appearing?" Undoubtedly clauses 23 and 14 quoted
above, which do not make arbitration a condition precedent.
We find no merit in the first assignment of error.
The second raises the most important question in this controversy, to wit: Whether or not the
defendant was obliged to supply the plaintiff which cars gratuitously for cane.
The Central, of course, bound itself according to the contract exhibit A in clause 3 of the
"Covenant by Mill," as follows:
3. That it will construct and thereafter maintain and operate during the term of this
agreement a steam or motor railway, or both, for plantation use in transporting sugar
cane, sugar and fertilizer, as near the center of the can ands as to contour of the lands
will permit paying due attention to grades and curves; that it will also construct branch
lines at such points as may be necessary where the present plantations are of such
shape that the main line cannot run approximately through the center of said plantations,
free of charge to the Planters, and will properly equip said railway with locomotives or
motors and cars, and will further construct a branch line from the main railway line, mill
and warehouses to the before mentioned wharf and will further construct yard
accomodations near the sugar mill. All steam locomotives shall be provided which
effective spark arresters. The railway shall be constructed upon suitable and properly
located right-of-way, through all plantations so as to give, as far as practicable, to each
plantations equal benefit thereof; said right-of-way to b two and one-half meters in width
on either said from the center of track on both main line and switches and branches.
By this covenant, the defendant, the defendant bound itself to construct branch lines of the railway
at such points on the estate as might be necessary, but said clause No. 3 can hardly be construed
to bind the defendant to gratuitously supply the plaintiff with cars to transport cane from his fields
to the branch lines agreed upon on its estate.
But on March 18, 1916, the defendant company, through its manager Mr. F. J. Bell, addressed the
following communication to the plaintiff:
DEAR SIR: In reply to yours of March 15th.
Yesterday I tried to come out to San Antonio to see you but the railway was full
of cars of San Jose and I could not get by with my car. I will try again as soon
as I finish shipping sugar. The steamer is expected today.
I had a switch built in the big cut on San Antonio for loading your cane near the
boundary of Santa Cruz. will not this sufficient? We have no another switch here
and I hope you can get along with the 3 you now have.
7|ADR CASES SET 1

Some of the planters are now using short switches made of 16-lb. portable
track. These can be placed on the main line at any place and cars run off into
the field and loaded. I think one on your hacienda would repay you in one
season.
The rain record can wait.
                              Sincerely yours,
SAN CARLOS MILLING CO., LTD.           (Sgd.) F.J. BELL          defendant for the delivery of the sugar in question, or its value. A discussion as to the retention of
"Manager"           this deposit to apply upon what is due by reason thereof made in the judgment appealed from, is
It is suggested to the plaintiff in this letter that he install a 16-lb. rail portable track switch, to be
used in connection with the main line, so the cars may run on it. It is not suggested that he
purchase cars, and the letter implies that the cars mentioned therein belong to the defendant.
As a result of this suggestion, the plaintiff bought a portable track which cost him about P10,000,
and after the track was laid, the defendant began to use it without comment or objection from the
latter, nor payment of any indemnity for over four years.
With this letter Exhibit D, and its conduct in regard to the same, the defendant deliberately and
intentionally induced the plaintiff to believe that by the latter purchasing the said portable track,
the defendant would allow the free use of its cars upon said track, thus inducing the plaintiff to act
in reliance on such belief, that is, to purchase such portable track, as in fact he did and laid it and
used it without payment, the cars belonging to the defendant.
This is an estoppel, and defendant cannot be permitted to gainsay its own acts and agreement.
The defendant cannot now demand payment of the plaintiff for such use of the cars. And this is
so, not because the fact of having supplied them was an act of pure liberality, to which having
once started it, the defendant was forever bound, which would be unreasonable, but because the
act of providing such cars was, under the circumstances of the case, of compliance of an
obligation to which defendant is bound on account of having induced the plaintiff to believe, and to
act and incur expenses on the strenght of this belief.
The question of whether or not the plaintiff was under the necessity of first showing a cooperative
spirit and conduct, does not affect the right which he thus acquired of using the cars in question
gratuitously.
We do not find sufficient reason to support the second assignment of error.
The point raised in the third assignment of error is a consequence of the second. If the plaintiff
was entitled, as we have said, to use the cars gratuitously, the defendant has no right to demand
any payment from him for the use of said cars.
The other assignments of error are consequences of the preceding ones.
We find nothing in the record to serve as a legal and sufficient bar to plaintiff's action against the
here necessary. The parties do not raise this question in the present instance. Furthermore, it has
not been proven that the plaintiff owes the defendant anything by reason of such deposit.
The judgment appealed from is hereby affirmed with the costs of this instance against the
appellant. So ordered.
Johnson, Street and Villamor, JJ., concur.
G.R. No. L-37878             November 25, 1932
MANILA ELECTRIC COMPANY, petitioner,
vs.
PASAY TRANSPORTATION COMPANY, INC., ET AL., respondents.
Ross, Lawrence & Selph for petitioner.
Rivera & Francisco for respondent Pasay Transportation Co.
P. A. Remigio for respondent E. B. Gutierrez. A. M. Zarate for respondent Raymundo
Transportation Co.
Vicente Ampil for respondent J. Ampil.
MALCOLM, J.:
The preliminary and basic question presented by the petition of the Manila Electric Company,
requesting the members of the Supreme Court, sitting as a board of arbitrators, to fix the terms
8|ADR CASES SET 1
upon which certain transportation companies shall be permitted to use the Pasig bridge of the
Manila Electric Company and the compensation to be paid to the Manila Electric Company by
such transportation companies, relates to the validity of section 11 of Act No. 1446 and to the
legal right of the members of the Supreme Court, sitting as a board of arbitrators, to act on the
petition. Act No. 1446 above referred to is entitled. "An Act granting a franchise to Charles M.
Swift to construct, maintain, and operate an electric railway, and to construct, maintain, and
operate an electric light, heat, and power system from a point in the City of Manila in an easterly
direction to the town of Pasig, in the Province of Rizal." Section 11 of the Act provides: "Whenever
any franchise or right of way is granted to any other person or corporation, now or hereafter in
existence, over portions of the lines and tracks of the grantee herein, the terms on which said
other person or corporation shall use such right of way, and the compensation to be paid to the
grantee herein by such other person or corporation for said use, shall be fixed by the members of
the Supreme Court, sitting as a board of arbitrators, the decision of a majority of whom shall be
final."
When the petition of the Manila Electric Company was filed in this court, it was ordered that the
petitioner be required to serve copies on the Attorney-General and the transportation companies
affected by the petition. Thereafter, the Attorney-General disclaimed any interest in the
proceedings, and opposition was entered to the petition by a number of public utility operators. On
the submission of memoranda after an oral hearing, the petition was made ready for resolution.
Examining the statutory provision which is here invoked, it is first noted that power is attempted to
be granted to the members of the Supreme Court sitting as a board of arbitrators and to the
Supreme Court as an entity. It is next seen that the decision of a majority of the members of the
Supreme Court is made final. And it is finally observed that the franchise granted the Manila
Electric Company by the Government of the Philippine Islands, although only a contract between
the parties to it, is now made to effect the rights of persons not signatories to the covenant.
The law calls for arbitration which represents a method of the parties' own choice. A submission to
arbitration is a contract. The parties to an arbitration agreement may not oust the courts of
jurisdiction of the matters submitted to arbitration. These are familiar rules which find support in
articles 1820 and 1821 of the Civil Code. Citation of authority is hardly necessary, except that it
should be recalled that in the Philippines, and in the United States for that matter, it has been held
that a clause in a contract, providing that all matters in dispute between the parties shall be
referred to arbitrators and to them alone, is contrary to public policy and cannot oust the courts of
jurisdiction (Wahl and Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301;
Puentebella vs. Negros Coal Co. [1927], 50 Phil., 69; Vega vs. San Carlos Milling Co. [1924], 51
Phil., 908; District of Columbia vs. Bailey [1897], 171 U. S., 161.)
We would not be understood as extending the principles governing arbitration and award too far.
Unless the arbitration agreement is such as absolutely to close the doors of the courts against the
parties, the courts should look with favor upon such amicable arrangements. We can also
perceive a distinction between a private contract for submission to arbitration and agreements to
arbitrate falling within the terms of a statute enacted for such purpose and affecting others than
the parties to a particular franchise. Here, however, whatever else may be said in extenuation, it
remains true that the decision of the board of arbitrators is made final, which if literally enforced
would leave a public utility, not a party to the contract authorized by Act No. 1446, without
recourse to the courts for a judicial determination of the question in dispute.
Counsel for the petitioner rely principally on the case of Tallassee Falls Mfg. Co. vs.
Commissioner's Court [1908], 158 Ala., 263. It was there held that an Act of a state legislature
authorizing the commissioners' court of a certain county to regulate and fix the rate of toll to be
charged by the owners of a bridge is not unconstitutional as delegating legislative power to the
courts. But that is not the question before us. Here the question is not one of whether or not there
has been a delegation of legislative authority to a court. More precisely, the issue concerns the
legal right of the members of the Supreme Court, sitting as a board of arbitrators the decision of a
majority of whom shall be final, to act in that capacity.
We run counter to this dilemma. Either the members of the Supreme Court, sitting as a board of
arbitrators, exercise judicial functions, or the members of the Supreme Court, sitting as board of
arbitrators, exercise administrative or quasi judicial functions. The first case would appear not to
fall within the jurisdiction granted the Supreme Court. Even conceding that it does, it would
presuppose the right to bring the matter in dispute before the courts, for any other construction
would tend to oust the courts of jurisdiction and render the award a nullity. But if this be the proper
construction, we would then have the anomaly of a decision by the members of the Supreme
Court, sitting as a board of arbitrators, taken therefrom to the courts and eventually coming before
the Supreme Court, where the Supreme Court would review the decision of its members acting as
arbitrators. Or in the second case, if the functions performed by the members of the Supreme
Court, sitting as a board of arbitrators, be considered as administrative or quasi judicial in nature,
that would result in the performance of duties which the members of the Supreme Court could not
lawfully take it upon themselves to perform. The present petition also furnishes an apt illustration
of another anomaly, for we find the Supreme Court as a court asked to determine if the members
of the court may be constituted a board of arbitrators, which is not a court at all.lawphil.net
The Supreme Court of the Philippine Islands represents one of the three divisions of power in our
government. It is judicial power and judicial power only which is exercised by the Supreme Court.
Just as the Supreme Court, as the guardian of constitutional rights, should not sanction
usurpations by any other department of the government, so should it as strictly confine its own
9|ADR CASES SET 1
sphere of influence to the powers expressly or by implication conferred on it by the Organic Act.
The Supreme Court and its members should not and cannot be required to exercise any power or
to perform any trust or to assume any duty not pertaining to or connected with the administering of
judicial functions.
The Organic Act provides that the Supreme Court of the Philippine Islands shall possess and
exercise jurisdiction as heretofore provided and such additional jurisdiction as shall hereafter be
prescribed by law (sec. 26). When the Organic Act speaks of the exercise of "jurisdiction" by the
Supreme Court, it could not only mean the exercise of "jurisdiction" by the Supreme Court acting
as a court, and could hardly mean the exercise of "jurisdiction" by the members of the Supreme
Court, sitting as a board of arbitrators. There is an important distinction between the Supreme
Court as an entity and the members of the Supreme Court. A board of arbitrators is not a "court"
in any proper sense of the term, and possesses none of the jurisdiction which the Organic Act
contemplates shall be exercised by the Supreme Court.lawph!l.net
In the last judicial paper from the pen of Chief Justice Taney, it was said:
The power conferred on this court is exclusively judicial, and it cannot be required or
authorized to exercise any other. . . . Its jurisdiction and powers and duties being defined
in the organic law of the government, and being all strictly judicial, Congress cannot
require or authorize the court to exercise any other jurisdiction or power, or perform any
other duty. . . . The award of execution is a part, and an essential part of every judgment
passed by a court exercising judicial power. It is no judgment, in the legal sense of the
term, without it. Without such an award the judgment would be inoperative and nugatory,
leaving the aggrieved party without a remedy. It would be merely an opinion, which
would remain a dead letter, and without any operation upon the rights of the parties,
unless Congress should at some future time sanction it, and pass a law authorizing the
court to carry its opinion into effect. Such is not the judicial power confided to this court,
in the exercise of its appellate jurisdiction; yet it is the whole power that the court is
allowed to exercise under this act of Congress. . . . And while it executes firmly all the
judicial powers entrusted to it, the court will carefully abstain from exercising any power
that is not strictly judicial in its character, and which is not clearly confided to it by the
Constitution. . . . (Gordon vs. United States [1864], 2 Wall., 561; 117 U. S., 697
Appendix.)
Confirming the decision to the basic question at issue, the Supreme Court holds that section 11 of
Act No. 1446 contravenes the maxims which guide the operation of a democratic government
constitutionally established, and that it would be improper and illegal for the members of the
Supreme Court, sitting as a board of arbitrators, the decision of a majority of whom shall be final,
to act on the petition of the Manila Electric Company. As a result, the members of the Supreme
Court decline to proceed further in the matter.
Avanceña, C.J., Street, Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and
Butte, JJ., concur
EN BANC
[G.R. No. L-9090. September 10, 1957.]
EASTBOARD NAVIGATION, LTD., Plaintiff-Appellant, v. JUAN YSMAEL and COMPANY,
INC., Defendant-Appellant.
Ross, Selph, Carrascoso & Janda and Delfin L. Gonzalez for the plaintiff and Appellant.
Claro M. Recto for the defendant and appellant.
SYLLABUS
1. CHARTER PARTY; COMPULSORY ARBITRATION, WHEN BIDDING UPON THE PARTIES;
CASE AT BAR. — The defendant corporation., through its president and general manager,
chartered plaintiff’s vessel to load a cargo of scrap iron in the Philippines for Buenos Aires. The
charter party agreement contained, besides the regular charter party printed form, a typewritten
clause providing a foreign compulsory arbitration in case of any dispute that may arise out of said
agreement. It appears that the defendant corporation, through its said president and general
manager, signed not only the printed portion of the charter party but the typewritten portion as
well, which contains the arbitration clause. Moreover, after a dispute as to the liability of the
defendant corporation arose, said president and general manager appointed lawyers in New York
to represent defendant corporation in the arbitration proceedings to be held in that state. Held: If
the defendant corporation did not really intend to submit its dispute with the plaintiff to arbitration,
the logical step it should have taken would be to repudiate the act of its president and general
manager, but far from doing so, it approved and ratified it by subsequent acts which clearly
indicate that it was agreeable to said arbitration. Consequently, said arbitration agreement is
binding on the defendant corporation, and the arbitration proceedings as well as the arbitration
decision rendered pursuant thereof, as confirmed by the District Court of New York, are valid;
hence enforceable in this jurisdiction.
2. ID.; ARBITRATION AGREEMENT VALID; ARBITRATION LAW IN THIS JURISDICTION
10 | A D R C A S E S S E T 1
STATED. — While there are authorities which hold that "a clause in a contract providing that all
matters in dispute between the parties shall be referred to arbitrators and to them, is contrary to
public and cannot oust the courts of jurisdiction" (Manila Electric Co. v. Pasay Transportation Co.,
57 Phil., 600, 603), however, there are authorities which favor" the more intelligent view that
arbitration, as an inexpensive speedy and amicable method of settling disputes, and as a means
of avoiding litigation, should receive every encouragement from the courts which may be
extended without contravening sound public policy or settled law" (3 Am. Jur., p. 835). congress
has officially adopted this modern view when it reproduced in the new Civil Code the provisions of
the Old Code on arbitration. And only recently it approved Republic Act No. 876 expressly
authorizing arbitration of future disputes.
3. FOREIGN CORPORATIONS; CAPACITY TO SUE EVEN WITHOUT A LICENSED. — A
foreign corporation has capacity to sue even without a license to transact business; if it is not
engaged in business in the Philippines. Isolated transactions do not constitute engaging in
business within the purview of Sections 68 and 69 of the Corporation Law so as to bar a foreign
corporation from seeking redress in the Philippine courts.
4. Foreign exchange TAX; CIRCUMSTANCES DEFEATING CLAIM FOR PAYMENT; ABOLITION
OF TAX. — Considering that the plaintiff failed to present any evidence that the defendant’s
refusal to pay the award is due to fraud or bad faith; that if there is any agreement to pay the
instant obligation in a currency other than the Philippine currency, the same is null and void as
contrary to public policy (Republic Act No. 529), and the most that it could be demanded is to pay
said obligation in Philippine currency to be measured in the prevailing rate of exchange at the time
the obligation was incurred (section 1, Idem.); that inasmuch as the decree of New York District
Court which is now sought to be enforced does not specify the place where the obligation should
be paid, and hence the judgment debtor, herein defendant, may discharge the same here in
Manila which is its domicile; Held: There is no valid reason for upholding the claim that the
defendant, should it be ordered to pay the award, the pay the foreign exchange tax required by
the law at the time the obligation fell due.
5. ATTORNEY’S FEES; WHEN THE PLAINTIFF MAY BE ENTITLED TO FEES. — In order that
the plaintiff may be entitled to attorney’s fees under Article 2208, sub-paragraph 5, of the new
Civil Code, it is necessary that it be proven that defendant acted "in gross and evident bad faith" in
refusing plaintiff’s claim. Since plaintiff did not present any evidence on this point the lower did not
err in denying its claim on this score.
DECISION
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Manila ordering defendant to
pay to plaintiff the sum of $53,037.89 as awarded by a board of arbitrators on June 20, 1950 and
confirmed by the District Court of New York, U. S. A. on August 15, 1950, with legal interest
thereon from December 5, 1950 until its payment, and the costs of suit.
The facts involved in this case which are necessary to be considered in this appeal are stated by
the trial court in its decision which we find to be substantially correct. They are: "On July 25, 1949,
Atkins, Kroll & Co., Inc., Manila, wrote defendant Juan Ysmael & Co., Inc., (letter Exh. 1) advising
that plaintiff Eastboard Navigation, Ltd., of Toronto, Canada, owners of the S/S Eastwater, ‘have
accepted your terms of payment and are agreed to charter the S/S Eastwater to Juan Ysmael &
Company, Inc., Manila, (to load cargo of scrap iron in the Philippines for Buenos Aires) under the
following terms and conditions: . . . (10) Clause Paramount: Terms and conditions for this Charter
Party not explicitly or otherwise stated in this letter of confirmation are to be as per general
conditions of regular Charter Party form. Will you kindly signify confirmation of the above terms by
signing the original and four copies of this letter? A formal copy of the Charter Party document will
be forwarded to you within a few days. Atkins, Kroll & Co., Inc., Manila, acting solely as agents for
and in behalf of the owners of the S/S Eastwater by cable or letter authority, sincerely hope we
may be of service to all parties concerned and that the cargo will go forward as scheduled in a
satisfactory manner.’ Defendant signed said letter thus, ‘For Charter Party: Juan Ysmael & Co.,
Inc., K. H. Hemady, President.’ On the same date, July 25, 1949, charter party agreement (Exhibit
A) was executed containing, besides the regular charter party printed form, a typewritten clause
reading: ‘Clauses Nos. 16 to 31 inclusive and U.S.A. Clause Paramount, War Risks Clauses 1
and 2, Now Jason Clause and Both-to-Blame Collision Clauses, as attached, to be considered as
fully incorporated herein and to form part of this Charter Party.’ Clause No. 29 reads as
follows:chanrob1es virtual 1aw library
‘It is mutually agreed that should any dispute arise between Owners and Charterers, the matter in
dispute shall be referred to three persons at New York for arbitration, one to be appointed by each
of the parties hereto, and the third by the two so chosen; their decision or that of any two of them,
shall be final, and for the purpose of enforcing any award, this agreement may be made a rule of
the Court. The arbitrators shall be commercial men. Should the two so chosen not be able to
agree who the third arbitrator should be, then the New York Produce Exchange is to appoint such
third Arbiter. The amount in dispute shall be placed in escrow at New York subject to the decision
of the arbitrators.’
11 | A D R C A S E S S E T 1
"On September 8, 1949, Atkins, Kroll & Co., Inc., Manila, again wrote defendant company as
follows (letter EXhibit 3):chanrob1es virtual 1aw library
‘We are today in receipt of the following cable instructions from our principals the Eastboard
Navigation Ltd., regarding the release of your bills of lading covering balance of your scrap iron
loaded at Manila:jgc:chanrobles.com.ph
"Re Yours sixth agree release bladings against full payment of freight and guarantee by Irving
Trust Newyork fifteen thousand dollars covering possible demurrage to be settled in accordance
with ruling of arbitration board Newyork please have Ysmael immediately nominate their
arbitrator"
‘In order to facilitate your negotiations of your documents with the Bank of America we shall
appreciate very much your putting up a guarantee by Irving Trust New York for the sum of US
$15,000.00 and to nominate the name of your arbitrator immediately.’
"On October 1, 1949, the Bank of America, Manila Office, wrote defendant company (letter Exhibit
3-A) as follows:chanrob1es virtual 1aw library
‘In accordance with verbal instructions of your President, Mr. K. Hemady, your draft for
$76,354.55 and attached documents were airmailed this morning to the above bank together with
the relative bills of lading which were surrendered to us by Atkins Kroll & Co., Inc., for account and
by order of Eastboard Navigation, Ltd. of Toronto.
‘The documents, which were sent for collection, cover the third and last shipment under the
assignment made to you by Mr. Hector Corvera under the terms of the subject credit and
cover:chanrob1es virtual 1aw library
x       x       x
‘Deposit account Demurrage under Arbitration — $15,000.
x       x       x
‘We have requested the Irving Trust Company to advise us by cable when the above amounts
have been paid. In the event of non-payment, we have requested that they deliver the bills of
lading to the Eastboard Navigation Ltd., under cable advice.
‘We expect to be able to report to you on the above-described collection sometime next week.’
"On December 3, 1949, defendant Company wrote the Bank of America (Manila) (letter Exhibit 3-
B) as follows:chanrob1es virtual 1aw library
‘Please transmit by telegraphic transfer to Irving Trust Company, New York, the amount of Ten
Thousand Dollars ($10,000), for the account of Eastboard Navigation Ltd., Toronto, Canada, to be
held as deposit for demurrage due the SS Eastwater, together with the $15,000 previously
remitted to them. The amount shall be held pending result of the arbitration of the dispute
between this Company and Eastboard Navigation.’
"The dispute mentioned in its preceding letter having arisen, under date of April 5, 1950, the
defendant cabled Attys. Manning, Harnisch and Hollinger of New York City as follows: ‘Through
recommendation of Mr. Morris Lipsett we request you kindly present our case before Arbitration
Board re charter vessel S/S Eastwater Writing" (Exhibit 2). And in its letter Exhibit 2-B of the same
date to said attorneys, defendant confirmed its request as follows:chanrob1es virtual 1aw library
‘Our good friend, Mr. Morris E. Lipsett, of the Lipsett Pacific Corporation, 80 Wall Street, New
York, has highly recommended your law firm to us to present our case to the arbitration in a case
we have with the Eastboard Navigation Co., Ltd., in connection with our charter of their vessel the
S/S Eastwater. May we, therefore, request you to act as such attorney for us, and you may bill us
accordingly for your services in the matter.
‘We have already spent a considerable sum on this case, not to mention the inconvenience it has
caused us, and we are most anxious that the matter be terminated as soon as possible.
‘Pertinent papers and documents regarding the matter have been turned over to Mr. Lipsett, and
we have requested him to turn those over to you for your purposes. Should you, however, need
further information regarding the matter, or should you need our assistance at this end, please
feel free to ask us.’
"On May 23, 1959, Messrs, Manning, Harnisch and Hollinger, acting as attorneys for defendant
Juan Ysmael & Co., Inc., executed with the attorney for plaintiff Eastboard Navigation Ltd.,
arbitration agreement (Exhibit B) which reads:chanrob1es virtual 1aw library
‘We, the undersigned, hereby mutually covenant and agree to submit, and hereby do submit to
Charles I. Lambert, Richard Nathan and Donald E. Simmons, as Arbitrators, for their adjudication
and award, a controversy existing between us relating to the liability if any, of the undersigned,
Juan Ysmael & Co., Inc., charterers to the undersigned, Eastboard Navigation, Ltd., owners of the
S/S Eastwater, for demurrage, discharging expenses, wharfage, extra meals agency fees, crew
12 | A D R C A S E S S E T 1
overtime and miscellaneous expenses, under charter party of the S/S Eastwater dated July 25th,
1949.
‘And we mutually covenant and promise that the award to be made by said Arbitrators or by a
majority of them, shall be well and faithfully kept and observed by us, and by each of us.
‘And it is hereby further mutually agreed that a judgment of the United States District Court for the
Southern District of New York shall be rendered upon the award made pursuant to this
submission.
‘WITNESS, our hands this 23rd day of May, 1950.’
"Pursuant to said arbitration agreement, the three arbitrators in New York City passed upon the
differences between the plaintiff and the defendant ‘after having heard and received evidence
submitted by both sides’, and rendered their arbitration decision (Exhibit C). This arbitration
decision was presented by plaintiff to the U.S. District Court, Southern District of New York, for
confirmation, (Admiralty No. A165-362) and said Court confirmed the said arbitration decision in
its Order and Final Decree of August 15, 1950, (Exhibit D) ordering ‘that the aforesaid award of
arbitrators be and the same hereby is in all respects confirmed’, and ‘that the said movant,
Eastboard Navigation, Ltd., recover of and from the said respondent, Juan Ysmael & Company,
Inc., the sum of $53,037.89, with interest thereon from the 20th day of June, 1950, amounting to
$488.24, together with the movant’s costs taxed in the sum of $40.00 and amounting in all to the
sum of $53,566.13 with interest thereon until paid.’"
Plaintiff brought this action to enforce the aforesaid "Order and Final Decree" pursuant to Section
48, Rule 39 of the Rules of Court which, among others, provides "In case of a judgment against a
person, the judgment is presumptive evidence of a right as between the parties and their
successors in interest by a subsequent title; but the judgment may be repelled by evidence of a
want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or
fact."cralaw virtua1aw library
Defendant, in its answer, set up the defense that said judgment cannot be enforced in this
jurisdiction because (a) when the New York District Court acted on the case it did not have
jurisdiction over the person of defendant; and (b) the proceeding where said judgment was
rendered was summary, there was no trial on the merits and defendant did not give its consent
thereto. Defendant contends that that judgment does not come within the purview of Section 48,
Rule 39, of the Rules of Court.
During the hearing, the parties agreed as to the following facts. That defendant is a corporation
the stock of which is held as follows: Magdalena Hemady, 8,459 shares; K. H. Hemady, 6,939
shares; Felipe Ysmael, 770 shares; Carlos Kemel Ysmael, 830 shares; Juan Ysmael y Cortes, 1
share; and Gabriel Ysmael, 1 share or a total of 17,000 shares; that plaintiff, during the time
material to this case, was not licensed to transact business in the Philippines; that this is the first
business transaction made locally by plaintiff, although previously plaintiff’s vessel was chartered
by the National Rice and Corn Corporation to carry rice cargo to the Philippines, the charter party
thereto being dated April 5, 1949; that the charter party Exhibit A is one approved by the
Documentary Council of the Baltic and White Sea Conference and that one of its standard
stipulation is a clause regarding arbitration; that K. H. Hemady, now deceased, as president and
general manager of defendant, for 25 years had entered into numerous other contracts with third
parties in representation of defendant all of which were never ratified nor repudiated by its Board
of Directors; that one of the arbitrators Richard Nathan was appointed by defendant corporation,
another one Donald E. Simmons was appointed by plaintiff, and these two appointed a third one
Charles P. Lambert; and that the defense that K. H. Hemady was not authorized by the Board of
Directors of defendant corporation to enter into the arbitration agreement was raised for the first
time in these proceedings, which means that it was not raised in the arbitration proceedings in
New York, nor in the proceedings held to confirm the award in the U. S. District Court of the
Southern District of New York. In addition to this stipulation of facts, plaintiff and defendant
submitted documentary evidence.
The lower court rendered judgment affirming the decree of the New York District Court and
ordering that it be enforced, from which defendant appealed. Plaintiff likewise appealed but only
on the score that the court did not declare defendant liable for the amount of the foreign exchange
tax due on the judgment and for the fees it agreed to pay to its counsel for this litigation. We will
discuss separately the issues involved in this joint appeal.
It is plaintiff-appellant’s contention that, if the decision of the lower court is affirmed, it will have to
pay the foreign exchange tax on the amount awarded therein if the same is to be remitted to its
home office at Ontario, Canada; that it should have been exempted from said tax had defendant
paid the award immediately after it had been confirmed by the U. S. New York District Court
because at that time Republic Act No. 601 had not yet been enacted; and that because of
defendant’s undue refusal to pay the same which gave rise to said tax liability, plaintiff will have to
shoulder the same. This is a loss which defendant shall pay, plaintiff contends, under Article 1107
of the old Civil Code.
In the first place, there is no clear proof on record that defendant’s refusal to pay the award is due
to fraud or bad faith. Plaintiff failed to present any evidence in this regard. On the contrary, the
stand of defendant does not seem to be entirely groundless as evidenced by the several defenses
it set up in its answer which give a clear perspective of the reasons why it declined to pay the
award which plaintiff demands. In the second place, it would appear that, if there is any
agreement to pay the instant obligation in a currency other than the Philippine currency, the same
13 | A D R C A S E S S E T 1
is null and void as contrary to public policy (Republic Act No. 529), and the most that it could be
demanded is to pay said obligation in Philippine currency to be measured in the prevailing rate of
exchange at the time the obligation was incurred (section 1, Idem.) . Finally, inasmuch as the
decree of the New York District Court which is now sought to be enforced does not specify the
place where the obligation should be paid, the judgment debtor, herein defendant, may discharge
the same here in Manila which is its domicile. We find therefore no valid reason for upholding the
claim that defendant, should it be ordered to pay the award, pay the foreign exchange tax
required by law at the time the obligation fell due. At any rate, this question would appear now to
be moot for the reason that said tax has already been abolished (Republic Act No. 1394).
The next issue raised by plaintiff-appellant refers to the failure of the lower court to award to it the
fees which it agreed to pay to its counsel in connection with the present litigation under Article
2208, sub-paragraph 5, of the new Civil Code. The alleged sub- paragraph allows a winning party
to recover attorneys fees "where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff’s plainly valid, just and demandable claim." From this it would appear that to
entitle plaintiff to attorneys’ fees on this ground, it is necessary that it be proven that defendant
acted "in gross and evident bad faith" in refusing plaintiff’s claim. Since, as we have already
stated, plaintiff did not present any evidence on this point, the lower court did not err in denying
plaintiff’s claim on this score.
Coming now to the appeal of defendant, we may restate the main issues raised in its assignment
of errors as follows: (a) whether or not defendant agreed to submit to compulsory arbitration its
dispute with plaintiff in the charter party agreement executed between them, and, in the
affirmative, whether such agreement is valid in this jurisdiction; (b) whether or not the arbitration
agreement Exhibit B, is binding on defendant and, in the affirmative, whether or not the arbitration
proceedings as well as the arbitrators’ decision, are valid and binding on defendant; (c) whether or
not, on the assumption that said proceedings and decisions are valid, the decree of the U. S.
District Court, Southern District of New York, sitting as Admiralty Court, is valid and enforceable in
this jurisdiction; and (d) whether or not plaintiff, being a foreign corporation without license to
transact business in the Philippines, has capacity to sue in this jurisdiction.
(a) It should be recalled that as a confirmation of the correspondence had between plaintiff’s
agents in the Philippines and defendant, represented by its President K. H. Hemady, the former
sent a letter advising the latter that plaintiff had accepted its offer to charter plaintiff’s vessel S/S
Eastwater to load cargo of scrap iron in the Philippines for Buenos Aires under certain terms and
conditions therein enumerated (Exhibit 1). In this letter it is stated that the "terms and conditions
for this charter party not expressly or otherwise stated in this letter of confirmation are to be as per
general conditions of regular charter party form", a formal copy of which would be forwarded to
defendant. This was done, and the form above referred to is Exhibit A which was duly signed by
plaintiff, through its president, and by defendant, through its president and general manager, K. H.
Hemady. This document is in printed form with the blanks properly filled out, at the bottom of
which appears a typewritten clause which states, "Clauses Nos. 16 to 31 inclusive and U. S. A.
Clause Paramount, War Risks Clauses 1 and 2, Now Jason Clause and Both-to-Blame Collision
Clauses, as attached, to be considered as fully incorporated herein and to form part of this
Charter Party." (Italics supplied) Both the printed form and the typewritten sheet containing
Clauses Nos. 16 to 31 inclusive, were signed by the contracting parties. Clause 29 in the
typewritten form refers to the arbitration agreement, and reads as follows:jgc:chanrobles.com.ph
"29. It is mutually agreed that should any dispute arise between Owners and the Charterers, the
matter in dispute shall be referred to three persons at New York for arbitration, one to be
appointed by each of the parties hereto, and the third by the two so chosen; their decision or that
of any two of them, shall be final, and for the purpose of enforcing any award, this agreement may
be made a rule of the Court. The Arbitrators shall be commercial men. Should the two so chosen
not be able to agree who the third Arbitrator should be, then the New York Produce Exchange is
to appoint such third Arbiter. The amount in dispute shall be placed in escrow at New York,
subject to the decision of the arbitrators."cralaw virtua1aw library
It is now contended that while K. H. Hemady had signed Exhibit A which contains a typewritten
clause at the end of the document, as well as the typewritten sheets attached thereto, wherein is
embodied Clause 29 which refers to the arbitration agreement, the fact however is that Hemady
signed said papers without reading the same and solely on the assumption that they merely
formalized the terms and conditions already agreed upon in the letter of confirmation Exhibit 1. It
is emphasized that Hemady never intended to submit any dispute that may arise out of its charter
party to compulsory arbitration, much less to recognize the findings or award of the arbitrators that
may be appointed by the parties as final and not subject to review by our courts. It is further
contended that Hemady signed the document Exhibit A with the understanding that the same
would merely supplement with its "general conditions" the terms and conditions not stated in the
letter of confirmation Exhibit 1, and the typewritten clause attached to the document Exhibit A,
specially that which provides for foreign arbitration, refers to special conditions which were not
intended by the parties nor included in the preliminary negotiation conducted between them. This
stand of Hemady, it is contended, is further corroborated by the fact that when he received from
his lawyers the arbitration agreement Exhibit B, he refused to sign it because it was never his
intention to submit his dispute with plaintiff to compulsory arbitration.
There are many circumstances on record which discredit this claim of defendant-appellant. To
begin with, it appears that the charter party agreement Exhibit A is one the original of which was
approved by the Documentary Council of the Baltic and White Sea Conference in 1922 and one of
its standard clauses is the arbitration clause and as such the latter, though in typewritten form, is
considered as integral part of the agreement. This fact was admitted by defendant’s counsel. In
the second place, Hemady, as it would appear, signed not only the printed portion of the charter
14 | A D R C A S E S S E T 1
party agreement, but the typewritten portion as well, which contains the arbitration clause, and it
cannot be believed that a businessman of long experience as he was, would affix his signature to
a document involving a very important transaction without knowing its contents and would do so
only on the assumption that it contained mere formalized statements of the terms and conditions
of the letter of confirmation Exhibit 1. Moreover, if Hemady did not intend to submit his dispute
with plaintiff to arbitration as defendant now contends, why did he appoint Messrs. Manning,
Harnisch and Hollinger as lawyer to represent defendant corporation in the arbitration
proceedings to be held in New York? (Exhibits 2 and 2-B) Why did he instruct the Bank of
America on two different occasions to transmit to the Irving Trust Company of New York the total
sum of $25,000 to be "held pending result of the arbitration of the dispute between this company
(Ysmael) and Eastboard Navigation, Ltd.?" (Exhibit 3-B) If defendant corporation did not really
intend to submit its dispute with the plaintiff to arbitration, the logical step it should have taken
would be to repudiate the act of its President Hemady, but far from doing so, it approved and
ratified it by subsequent acts which clearly indicate that it was agreeable to said arbitration.
(b) The claim that the arbitration proceedings conducted in New York as well as the award of the
arbitrators cannot bind defendant corporation for the reason that the same were conducted
without its authority or contrary to its instructions, is also untenable. It is true that when
defendant’s counsel sent the document Exhibit B to its President K. H. Hemady for his signature,
the latter returned it without his signature but that defendant’s counsel nevertheless signed the
document in behalf of defendant and submitted it to the Board of Arbitrators, and this act is now
alleged as one undertaken without defendant’s authority or one that would indicate that defendant
did not agree to submit the dispute to arbitration. But there is one circumstance which justifies the
action taken by defendant’s counsel in New York. Note that said document Exhibit B is mistakenly
termed "arbitration agreement", for it is not so. A perusal thereof would show that it is a mere
agreement to submit the dispute to the arbitrators for arbitration and award. Such is necessary for
there could be no valid arbitration and award if the arbitrators would not know what to arbitrate
and decide. The arbitration agreement is Clause 29 of the charter party Exhibit A. The fact that
Hemady returned said document Exhibit B unsigned is of no significance for such is a mere
implementation of the authority already previously given by defendant to its counsel Messrs.
Manning, Harnisch and Hollinger "to present our case to the arbitrators in a case we have with the
Eastboard Navigation Co., Ltd., in connection with our charter of their vessel the "S/S Eastwater,"
contained in its letter dated April 5, 1950 (Exhibit 2-B). The signing of said document Exhibit B by
defendant’s counsel is therefore perfectly within the scope of the authority given them by
defendant corporation.
But defendant insists that the decision of the arbitrators is not binding upon it because (1) none of
the arbitrators who acted thereon in accordance with the arbitration agreement had been
appointed by defendant, and (2) even if the appointment of Attys. Manning, Harnisch and
Hollinger to represent defendant before the arbitration board would be considered as an authority
to submit their dispute to arbitration, the decision of the arbitration board is nevertheless void
because it was not in accordance with the condition of said submission — that the arbitrators
consider only claims or awards not in excess of $25,000.
The claim that none of the three arbitrators who acted on the dispute was appointed by defendant,
or under its authority, is untenable, for the same is disproved by the evidence. Thus, during the
trial of this case the parties agreed as to certain facts which appear to be not disputed among
them being that one of the arbitrators who acted in New York on the case, Richard Nathan, was
appointed by authority of defendant corporation, and this appears to be supported by the decision
of the New York District Court. Thus, in said decision it appears that when the case was called for
hearing both parties were represented by counsel who submitted documentary evidence among
which (1) copy of the authorization signed by defendant corporation empowering one Morris E.
Lipsett to appoint a substitute arbitrator in its behalf, (2) copy of a letter of said Morris E. Lipsett
designating Richard Nathan as arbitrator, and (3) copy of the letter of Richard Nathan accepting
his appointment as arbitrator (Exhibit D). Note that Mr. Morris E. Lipsett is the same person who,
according to K. H. Hemady, recommended Messrs. Manning, Harnisch and Hollinger to be his
lawyers in the arbitration case in New York and that because he was his good friend Hemady
accepted his recommendation (Exhibit 2-B). On the strength of this evidence, we cannot therefore
take seriously the contention that the person, Richard Nathan, who acted as arbitrator in behalf of
respondent, did so without the authority of the latter.
Of course, defendant now contends that the decision of the arbitrators can have no binding effect
on it because it was rendered without first obtaining its written conformity or approval, or without
its lawyer having first submitted the matter to it for consultation, in accordance with the instruction
it has given in its letter dated April 20, 1950 (Exhibit 2-C), but certainly, such instruction, if any, is
preposterous under the circumstances, for to allow that to prevail would be to defeat the very
purpose of the arbitration. The proceeding would be purposeless for no award can be obtained if
the same should be made dependent upon the instruction or approval of any of the parties.
The contention that defendant corporation has limited its agreement to arbitrate to an amount not
exceeding $25,000 cannot also be sustained. Such claim is not borne out by the evidence for
neither the cable nor the letter which defendant sent to its lawyers in New York contains any
statement limiting their authority to represent it to disputes not exceeding $25,000. In other words,
there is no evidence whatsoever in the record showing that Mr. Hemady understood, or was made
to understand, that the arbitration proceeding "would be conducted solely for the purpose of
friendly adjustment of disputes limited to and not exceeding the amount of $25,000." Moreover,
the aforesaid deposit merely represents an estimate of the amounts that may accrue to plaintiff for
demurrage pursuant to the charter agreement while the vessel was in transit from Manila to
Buenos Aires and does not include any additional demurrage that may be incurred while the
vessel is docked in Buenos Aires waiting for the unloading of the cargo. To sustain defendant’s
15 | A D R C A S E S S E T 1
contention would be to defeat the purpose of the arbitration which is to settle all disputes that may
arise out of the contract in connection with the voyage. It cannot therefore be pretended that the
arbitrators acted beyond the scope of their authority.
As a corollary to the question regarding the existence of an arbitration agreement, defendant
raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute from
the jurisdiction of the courts in which the parties are domiciled or where the dispute occurred. It is
true that there are authorities which hold that "a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone, is contrary to public
policy and cannot oust the courts of jurisdiction" (Manila Electric Co. v. Pasay Transportation Co.,
57 Phil., 600, 603), however, there are authorities which favor "the more intelligent view that
arbitration, as an inexpensive, speedy and amicable method of settling disputes, and as a means
of avoiding litigation, should receive every encouragement from the courts which may be
extended without contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress
has officially adopted this modern view when it reproduced in the new Civil Code the provisions of
the old Code on Arbitration. And only recently it approved Republic Act No. 876 expressly
authorizing arbitration of future disputes. Thus section 2 of said Act
provides:jgc:chanrobles.com.ph
"SEC. 2. Persons and matters subject to arbitration. — Two or more persons or parties may
submit to the arbitration of one or more arbitrators any controversy existing between them at the
time of the submission and which may be the subject of an action, or the parties to any contract
may in such contract agree to settle by arbitration a controversy thereafter arising between them.
Such submission or contract shall be valid, enforceable and irrevocable, save upon such grounds
as exist at law for the revocation of any contract."cralaw virtua1aw library
Considering this declared policy of Congress in favor of arbitration of all kinds of disputes, and the
fact that, according to the explanatory note of Republic Act No. 876, "to afford the public a cheap
and expeditious procedure of settling not only commercial but other kinds of controversies most of
the states of the American Union have adopted statutes providing for arbitration, and American
businessmen are reported to have enthusiastically accepted the innovation because of its obvious
advantages over the ordinary court procedure", we find no plausible reason for holding that the
arbitration agreement in question, simply because it refers to a future dispute, is null and void as
being against public policy. (Italics supplied.)
(c) It is contended that the decision rendered by the U. S. District court of New York sitting as an
Admiralty Court, which ratified the award made by the arbitrators, has no binding effect on
defendant corporation, nor can it be enforced in this jurisdiction, for the reason that when said
court acted on the case it did not acquire jurisdiction over said defendant. And this claim is
predicated on the alleged fact that defendant was never served with notice, summons, or process
relative to the submission of the award of the arbitrators to said court, invoking in support of this
contention the U. S. Arbitration Act of February 12, 1925 under which the New York District Court
confirmed the arbitrators’ award. But we find that the law thus invoked does not sustain
defendant’s pretense, for the same, in case of a non-resident, does not necessarily require that
service of notice of the application for confirmation be made on the adverse party himself, it being
sufficient that it be made upon his attorney (July 30, 1947, c. 392, section 1, 61 Stat. 669, p. 4
Exhibit E). This is precisely what was done in this case. Copy of the notice of submission of the
award to the District Court of New York was served upon defendant’s counsel who in due time
made of record their appearance and actually appeared when the case was heard. This is clearly
stated in the decision of said court (Exhibit D). It is significant that respondent’s counsel never
impugned the jurisdiction of the court over defendant nor did they ever plead before it that they
were bereft of authority to represent defendant. Defendant cannot therefore in this instance defeat
the effect of this decision by alleging want of jurisdiction, or want of notice, as provided for in
section 48, Rule 39 of our Rules of Court.
(d) While plaintiff is a foreign corporation without license to transact business in the Philippines, it
does not follow that it has no capacity to bring the present action. Such license is not necessary
because it is not engaged in business in the Philippines. In fact, the transaction herein involved is
the first business undertaken by plaintiff in the Philippines, although on a previous occasion
plaintiff’s vessel was chartered by the National Rice and Corn Corporation to carry rice cargo from
abroad to the Philippines. These two isolated transactions do not constitute engaging in business
in the Philippines within the purview of Sections 68 and 69 of the Corporation Law so as to bar
plaintiff from seeking redress in our courts. (Marshall-Wells Co. v. Henry W. Elser & Co. 49 Phil.,
70; Pacific Vegetable Oil Corporation v. Angel O. Singson, G. R. No. L- 7917, April 29, 1955.)
Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.
16 | A D R C A S E S S E T 1
G.R. No. 120105 March 27, 1998
BF CORPORATION, petitioner,
vs.
COURT OF APPEALS, SHANGRI-LA PROPERTIES, INC., RUFO B. COLAYCO, ALFREDO C.
RAMOS, MAXIMO G. LICAUCO III and BENJAMIN C. RAMOS, respondents.
ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the
construction of the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la
Properties, Inc. embodies an arbitration clause in case of disagreement between the parties in the
implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby
the latter engaged the former to construct the main structure of the "EDSA Plaza Project," a
shopping mall complex in the City of Mandaluyong. The construction work was in progress when
SPI decided to expand the project by engaging the services of petitioner again. Thus, the parties
entered into an agreement for the main contract works after which construction work began.
However, petitioner incurred delay in the construction work that SPI considered as "serious and
substantial."1 On the other hand, according to petitioner, the construction works "progressed in
faithful compliance with the First Agreement until a fire broke out on November 30, 1990
damaging Phase I" of the Project.2 Hence, SPI proposed the re-negotiation of the agreement
between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated
as "Agreement for the Execution of Builder's Work for the EDSA Plaza Project." Said agreement
would cover the construction work on said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner "failed to complete the construction works and abandoned the
project."3 This resulted in disagreements between the parties as regards their respective liabilities
under the contract. On July 12, 1993, upon SPI's initiative, the parties' respective representatives
met in conference but they failed to come to an agreement.4
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a
complaint for collection of the balance due under the construction agreement. Named defendants
therein were SPI and members of its board of directors namely, Alfredo C. Ramos, Rufo B.
Calayco, Antonio B. Olbes, Gerardo O. Lanuza, Jr., Maximo G. Licauco III and Benjamin C.
Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of
filing an answer. The motion was anchored on defendants' allegation that the formal trade
contract for the construction of the project provided for a clause requiring prior resort to arbitration
before judicial intervention could be invoked in any dispute arising from the contract. The following
day, SPI submitted a copy of the conditions of the contract containing the arbitration clause that it
failed to append to its motion to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties
although they entered into an agreement defining their rights and obligations in undertaking the
project. It emphasized that the agreement did not provide for arbitration and therefore the court
could not be deprived of jurisdiction conferred by law by the mere allegation of the existence of an
arbitration clause in the agreement between the parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing
contract between petitioner and SPI. It alleged that suspension of proceedings would not
necessarily deprive the court of its jurisdiction over the case and that arbitration would expedite
rather than delay the settlement of the parties' respective claims against each other.
In a rejoinder to SPI's reply, petitioner reiterated that there was no arbitration clause in the
contract between the parties. It averred that granting that such a clause indeed formed part of the
contract, suspension of the proceedings was no longer proper. It added that defendants should be
declared in default for failure to file their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioner's admission of the due execution
of the "Articles of Agreement." Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI
president, and Bayani Fernando, president of petitioner appear, while page D/7 shows that the
agreement is a public document duly notarized on November 15, 1991 by Notary Public Nilberto
R. Briones as document No. 345, page 70, book No. LXX, Series of 1991 of his notarial register.5
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court6 denied the
motion to suspend proceedings, thus:
17 | A D R C A S E S S E T 1
It appears from the said document that in the letter-agreement dated May 30,
1991 (Annex C, Complaint), plaintiff BF and defendant Shangri-La Properties,
Inc. agreed upon the terms and conditions of the Builders Work for the EDSA
Plaza Project (Phases I, II and Carpark), subject to the execution by the parties
of a formal trade contract. Defendants have submitted a copy of the alleged
trade contract, which is entitled "Contract Documents For Builder's Work Trade
Contractor" dated 01 May 1991, page 2 of which is entitled "Contents of
Contract Documents" with a list of the documents therein contained, and
Section A thereof consists of the abovementioned Letter-Agreement dated May
30, 1991. Section C of the said Contract Documents is entitled "Articles of
Agreement and Conditions of Contract" which, per its Index, consists of Part A
(Articles of Agreement) and B (Conditions of Contract). The said Articles of
Agreement appears to have been duly signed by President Rufo B. Colayco of
Shangri-La Properties, Inc. and President Bayani F. Fernando of BF and their
witnesses, and was thereafter acknowledged before Notary Public Nilberto R.
Briones of Makati, Metro Manila on November 15, 1991. The said Articles of
Agreement also provides that the "Contract Documents" therein listed "shall be
deemed an integral part of this Agreement", and one of the said documents is
the "Conditions of Contract" which contains the Arbitration Clause relied upon
by the defendants in their Motion to Suspend Proceedings.
This Court notes, however, that the 'Conditions of Contract' referred to, contains the following
provisions:
3. Contract Document.
Three copies of the Contract Documents referred to in the
Articles of Agreement shall be signed by the parties to the
contract  and distributed to the Owner and the Contractor for
their safe keeping." (emphasis supplied).
And it is significant to note further that the said "Conditions of Contract" is not
duly signed by the parties on any page thereof — although it bears the initials of
BF's representatives (Bayani F. Fernando and Reynaldo M. de la Cruz) without
the initials thereon of any representative of Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract
was not duly executed or signed by the parties, and the failure of the
defendants to submit any signed copy of the said document, this Court
entertains serious doubt whether or not the arbitration clause found in the said
Conditions of Contract is binding upon the parties to the Articles of Agreement."
(Emphasis supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it
was "too late in the day for defendants to invoke arbitration." It quoted the following provision of
the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the
other party to the contract and a copy filed with the Project Manager. The
demand for arbitration shall be made within a reasonable time after the dispute
has arisen and attempts to settle amicably have failed; in no case, however,
shall the demand he made be later than the time of final payment except as
otherwise expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the
project was to be completed by October 31, 1991. Thereafter, the contractor would pay P80,000
for each day of delay counted from November 1, 1991 with "liquified (sic) damages up to a
maximum of 5% of the total contract price."
The lower court also found that after the project was completed in accordance with the agreement
that contained a provision on "progress payment billing," SPI "took possession and started
operations thereof by opening the same to the public in November, 1991." SPI, having failed to
pay for the works, petitioner billed SPI in the total amount of P110,883,101.52, contained in a
demand letter sent by it to SPI on February 17, 1993. Instead of paying the amount demanded,
SPI set up its own claim of P220,000,000.00 and scheduled a conference on that claim for July
12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by
defendants, it is required that "Notice of the demand for arbitration of a dispute
shall be filed in writing with the other party . . . . in no case . . . . later than the
time of final payment . . . "which apparently, had elapsed, not only because
defendants had taken possession of the finished works and the plaintiff's billings
for the payment thereof had remained pending since November, 1991 up to the
filing of this case on July 14, 1993, but also for the reason that defendants have
failed to file any written notice of any demand for arbitration during the said long
period of one year and eight months, this Court finds that it cannot stay the
18 | A D R C A S E S S E T 1
proceedings in this case as required by Sec. 7 of Republic Act No. 876,
because defendants are in default in proceeding with such arbitration.
The lower court denied SPI's motion for reconsideration for lack of merit and directed it and the
other defendants to file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the
Rules of Court before the Court of Appeals. Said appellate court granted the petition, annulled
and set aside the orders and stayed the proceedings in the lower court. In so ruling, the Court of
Appeals held:
The reasons given by the respondent Court in denying petitioners' motion to
suspend proceedings are untenable.
1. The notarized copy of the articles of agreement attached as Annex A to
petitioners' reply dated August 26, 1993, has been submitted by them to the
respondent Court (Annex G, petition). It bears the signature of petitioner Rufo B.
Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani
Fernando, president of respondent Corporation (Annex G-1, petition). At page
D/4 of said articles of agreement it is expressly provided that the conditions of
contract are "deemed an integral part" thereof (page 188, rollo). And it is at
pages D/42 to D/44 of the conditions of contract that the provisions for
arbitration are found (Annexes G-3 to G-5, petition, pp. 227-229). Clause No. 35
on arbitration specifically provides:
Provided always that in case any dispute or difference shall
arise between the Owner or the Project Manager on his
behalf and the Contractor, either during the progress or after
the completion or abandonment of the Works as to the
construction of this Contract or as to any matter or thing of
whatsoever nature arising thereunder or in connection
therewith (including any matter or being left by this Contract
to the discretion of the Project Manager or the withholding by
the Project Manager of any certificate to which the Contractor
may claim to be entitled or the measurement and valuation
mentioned in clause 30 (5) (a) of these Conditions' or the
rights and liabilities of the parties under clauses 25, 26, 32 or
33 of these Conditions), the Owner and the Contractor hereby
agree to exert all efforts to settle their differences or dispute
amicably. Failing these efforts then such dispute or difference
shall be referred to Arbitration in accordance with the rules
and procedures of the Philippine Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear
only the initials of respondent Corporation's representatives, Bayani Fernando
and Reynaldo de la Cruz, without that of the representative of petitioner
Shangri-La Properties, Inc. does not militate against its effectivity. Said
petitioner having categorically admitted that the document, Annex A to its reply
dated August 26, 1993 (Annex G, petition), is the agreement between the
parties, the initial or signature of said petitioner's representative to signify
conformity to arbitration is no longer necessary. The parties, therefore, should
be allowed to submit their dispute to arbitration in accordance with their
agreement.
2. The respondent Court held that petitioners "are in default in proceeding with
such arbitration." It took note of "the fact that under the supposed Arbitration
Clause invoked by defendants, it is required that "Notice of the demand for
arbitration of a dispute shall be filed in writing with the other party . . . in no case
. . . later than the time of final payment," which apparently, had elapsed, not
only because defendants had taken possession of the finished works and the
plaintiff's billings for the payment thereof had remained pending since
November, 1991 up to the filing of this case on July 14, 1993, but also for the
reason that defendants have failed to file any written notice of any demand for
arbitration during the said long period of one year and eight months, . . . ."
Respondent Court has overlooked the fact that under the arbitration
clause —
Notice of the demand for arbitration dispute shall be filed in
writing with the other party to the contract and a copy filed
with the Project Manager. The demand for arbitration shall be
made within a reasonable time after the dispute has arisen
and attempts to settle amicably had failed; in no case,
however, shall the demand be made later than the time of
final payment except as otherwise expressly stipulated in the
contract (emphasis supplied)
19 | A D R C A S E S S E T 1
quoted in its order (Annex A, petition). As the respondent Court there said, after
the final demand to pay the amount of P110,883,101.52, instead of paying,
petitioners set up its own claim against respondent Corporation in the amount of
P220,000,000.00 and set a conference thereon on July 12, 1993. Said
conference proved futile. The next day, July 14, 1993, respondent Corporation
filed its complaint against petitioners. On August 13, 1993, petitioners wrote to
respondent Corporation requesting arbitration. Under the circumstances, it
cannot be said that petitioners' resort to arbitration was made beyond
reasonable time. Neither can they be considered in default of their obligation to
respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A remedy is appeal, the action for certiorari will not be
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY
WRIT OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL WAS
AVAILABLE TO RESPONDENTS.
B and mandamus are available only when "there is no appeal or any plain,
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF
DISCRETION IN THE FACTUAL FINDINGS OF THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO
AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID
ENTER INTO THE AGREEMENT TO
ARBITRATE, RESPONDENTS ARE
ALREADY IN DEFAULT IN INVOKING
THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the
motion to suspend proceedings "is a resolution of an incident on the merits." As such, upon the
continuation of the proceedings, the lower court would appreciate the evidence adduced in their
totality and thereafter render a decision on the merits that may or may not sustain the existence of
an arbitration clause. A decision containing a finding that the contract has no arbitration clause
can then be elevated to a higher court "in an ordinary appeal" where an adequate remedy could
be obtained. Hence, to petitioner, the Court of Appeals should have dismissed the petition
for certiorari because the remedy of appeal would still be available to private respondents at the
proper time.7
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy
of appeal is succinctly reiterated in Ongsitco v. Court of Appeals8 as follows:
. . . . Countless times in the past, this Court has held that "where appeal is the
proper remedy, certiorari will not lie." The writs of certiorari and prohibition are
remedies to correct lack or excess of jurisdiction or grave abuse of discretion
equivalent to lack of jurisdiction committed by a lower court. "Where the proper
entertained. . . . Certiorari is not a remedy for errors of judgment. Errors of
judgment are correctible by appeal, errors of jurisdiction are reviewable
by certiorari."
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition
speedy and adequate remedy in the ordinary course of law . . . ." That is why
they are referred to as "extraordinary." . . . .
The Court has likewise ruled that "certiorari will not be issued to cure errors in proceedings or
correct erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any
alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors
of judgment which are reviewable by timely appeal and not by a special civil action of certiorari."9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction
of the lower court over the controversy, the issue posed basically is whether the lower court
prematurely assumed jurisdiction over it. If the lower court indeed prematurely assumed
jurisdiction over the case, then it becomes an error of jurisdiction which is a proper subject of a
petition for certiorari before the Court of Appeals. And if the lower court does not have jurisdiction
over the controversy, then any decision or order it may render may be annulled and set aside by
the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of
the existence of the arbitration clause, which is a question of fact. In the instant case, the lower
20 | A D R C A S E S S E T 1
court found that there exists an arbitration clause. However, it ruled that in contemplation of law,
said arbitration clause does not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the
Arbitration Clause does not in fact exist. On its face, the the question is one of fact which is not
proper in a petition for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question
of fact, the Court of Appeals interpreted the construction of the subject contract documents
containing the Arbitration Clause in accordance with Republic Act No. 876 (Arbitration Law) and
existing jurisprudence which will be extensively discussed hereunder. In effect, the issue posed
before the Court of Appeals was likewise a question of law. Being a question of law, the private
respondents rightfully invoked the special civil action of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being
questioned by the petitioners before this Court. But at the heart of said issue is the question of
whether there exists an Arbitration Clause because if an Arbitration Clause does not exist, then
private respondents took the wrong mode of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper
mode of appeal, which, incidentally, is a question of law, then it has to answer the core issue of
whether there exists an Arbitration Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will
result in a manifest failure or miscarriage of justice, the provisions of the Rules of Court which are
technical rules may be relaxed. 10 As we shall show hereunder, had the Court of Appeals
dismissed the petition for certiorari, the issue of whether or not an arbitration clause exists in the
contract would not have been resolved in accordance with evidence extant in the record of the
case. Consequently, this would have resulted in a judicial rejection of a contractual provision
agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the
contract between petitioner and private respondents is a legal issue that must be determined in
this petition for review on certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question,
asserts that in contemplation of law there could not have been one considering the following
points. First, the trial court found that the "conditions of contract" embodying the arbitration clause
is not duly signed by the parties. Second, private respondents misrepresented before the Court of
Appeals that they produced in the trial court a notarized duplicate original copy of the construction
agreement because what were submitted were mere photocopies thereof. The contract(s)
introduced in court by private respondents were therefore "of dubious authenticity" because: (a)
the Agreement for the Execution of Builder's Work for the EDSA Plaza Project does not contain
an arbitration clause, (b) private respondents "surreptitiously attached as Annexes "G-3" to "G-5"
to their petition before the Court of Appeals but these documents are not parts of the Agreement
of the parties as "there was no formal trade contract executed," (c) if the entire compilation of
documents "is indeed a formal trade contract," then it should have been duly notarized, (d) the
certification from the Records Management and Archives Office dated August 26, 1993 merely
states that "the notarial record of Nilberto Briones . . . is available in the files of (said) office
as Notarial Registry Entry only," (e) the same certification attests that the document entered in the
notarial registry pertains to the Articles of Agreement only without any other accompanying
documents, and therefore, it is not a formal trade contract, and (f) the compilation submitted by
respondents are a "mere hodge-podge of documents and do not constitute a single intelligible
agreement."
In other words, petitioner denies the existence of the arbitration clause primarily on the ground
that the representatives of the contracting corporations did not sign the "Conditions of Contract"
that contained the said clause. Its other contentions, specifically that insinuating fraud as regards
the alleged insertion of the arbitration clause, are questions of fact that should have been
threshed out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the
parties' contract. Republic Act No. 876 provides for the formal requisites of an arbitration
agreement as follows:
Sec. 4. Form of arbitration agreement. — A contract to arbitrate a controversy
thereafter arising between the parties, as well as a submission to arbitrate an
existing controversy, shall be in writing and subscribed by the party sought to
be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two
hereof, providing for arbitration of any controversy, shall be deemed a consent
of the parties of the province or city where any of the parties resides, to enforce
such contract of submission. (Emphasis supplied.).
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in
writing and (b) it must be subscribed by the parties or their representatives. There is no denying
that the parties entered into a written contract that was submitted in evidence before the lower
21 | A D R C A S E S S E T 1
court. To "subscribe" means to write underneath, as one's name; to sign at the end of a
document. 11 That word may sometimes be construed to mean to give consent to or to attest.12
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied
with in the contract in question. The Articles of Agreement, which incorporates all the other
contracts and agreements between the parties, was signed by representatives of both parties and
duly notarized. The failure of the private respondent's representative to initial the "Conditions of
Contract" would therefor not affect compliance with the formal requirements for arbitration
agreements because that particular portion of the covenants between the parties was included by
reference in the Articles of Agreement.
Petitioner's contention that there was no arbitration clause because the contract incorporating said
provision is part of a "hodge-podge" document, is therefore untenable. A contract need not be
contained in a single writing. It may be collected from several different writings which do not
conflict with each other and which, when connected, show the parties, subject matter, terms and
consideration, as in contracts entered into by correspondence. 13 A contract may be encompassed
in several instruments even though every instrument is not signed by the parties, since it is
sufficient if the unsigned instruments are clearly identified or referred to and made part of the
signed instrument or instruments. Similarly, a written agreement of which there are two copies,
one signed by each of the parties, is binding on both to the same extent as though there had been
only one copy of the agreement and both had signed it. 14
The flaw in petitioner's contentions therefore lies in its having segmented the various components
of the whole contract between the parties into several parts. This notwithstanding, petitioner
ironically admits the execution of the Articles of Agreement. Notably, too, the lower court found
that the said Articles of Agreement "also provides that the 'Contract Documents' therein listed
'shall be deemed an integral part of this Agreement,' and one of the said documents is the
'Conditions of Contract' which contains the Arbitration Clause.'" It is this Articles of Agreement that
was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani F.
Fernando, president of petitioner corporation. The same agreement was duly subscribed before
notary public Nilberto R. Briones. In other words, the subscription of the principal agreement
effectively covered the other documents incorporated by reference therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents
were not in default in invoking the provisions of the arbitration clause which states that "(t)he
demand for arbitration shall be made within a reasonable time after the dispute has arisen and
attempts to settle amicably had failed." Under the factual milieu, private respondent SPI should
have paid its liabilities tinder the contract in accordance with its terms. However,
misunderstandings appeared to have cropped up between the parties ostensibly brought about by
either delay in the completion of the construction work or by force majeure or the fire that partially
gutted the project. The almost two-year delay in paying its liabilities may not therefore be wholly
ascribed to private respondent SPI.
Besides, private respondent SPI's initiative in calling for a conference between the parties was a
step towards the agreed resort to arbitration. However, petitioner posthaste filed the complaint
before the lower court. Thus, while private respondent SPI's request for arbitration on August 13,
1993 might appear an afterthought as it was made after it had filed the motion to suspend
proceedings, it was because petitioner also appeared to act hastily in order to resolve the
controversy through the courts.
The arbitration clause provides for a "reasonable time" within which the parties may avail of the
relief under that clause. "Reasonableness" is a relative term and the question of whether the time
within which an act has to be done is reasonable depends on attendant circumstances. 15 This
Court finds that under the circumstances obtaining in this case, a one-month period from the time
the parties held a conference on July 12, 1993 until private respondent SPI notified petitioner that
it was invoking the arbitration clause, is a reasonable time. Indeed, petitioner may not be faulted
for resorting to the court to claim what was due it under the contract. However, we find its denial
of the existence of the arbitration clause as an attempt to cover up its misstep in hurriedly filing
the complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case.
Section 7 of Republic Act No. 876 provides that proceedings therein have only been stayed. After
the special proceeding of arbitration 16 has been pursued and completed, then the lower court may
confirm the award 17 made by the arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even
before the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. 18 Republic Act No. 876 was adopted to supplement the
New Civil Code's provisions on arbitration. 19 Its potentials as one of the alternative dispute
resolution methods that are now rightfully vaunted as "the wave of the future" in international
relations, is recognized worldwide. To brush aside a contractual agreement calling for arbitration
in case of disagreement between the parties would therefore be a step backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the
petition for certiorari DENIED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.
22 | A D R C A S E S S E T 1
23 | A D R C A S E S S E T 1
G.R. No. 141833            March 26, 2003
LM POWER ENGINEERING CORPORATION, petitioner,
vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS, INC., respondent.
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation, negotiation and
conciliation -- are encouraged by the Supreme Court. By enabling parties to resolve their disputes
amicably, they provide solutions that are less time-consuming, less tedious, less confrontational,
and more productive of goodwill and lasting relationships.1
The Case
Before us is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court, seeking to
set aside the January 28, 2000 Decision of the Court of Appeals3 (CA) in CA-GR CV No. 54232.
The dispositive portion of the Decision reads as follows:
"WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The
parties are ORDERED to present their dispute to arbitration in accordance with their
Sub-contract Agreement. The surety bond posted by [respondent] is [d]ischarged."4
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol
Industrial Construction Groups Inc. entered into a "Subcontract Agreement" involving electrical
work at the Third Port of Zamboanga.5
On April 25, 1985, respondent took over some of the work contracted to petitioner.6 Allegedly, the
latter had failed to finish it because of its inability to procure materials.7
Upon completing its task under the Contract, petitioner billed respondent in the amount of
P6,711,813.90.8 Contesting the accuracy of the amount of advances and billable
accomplishments listed by the former, the latter refused to pay. Respondent also took refuge in
the termination clause of the Agreement.9 That clause allowed it to set off the cost of the work that
petitioner had failed to undertake -- due to termination or take-over -- against the amount it owed
the latter.
Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati (Branch 141)
a Complaint10 for the collection of the amount representing the alleged balance due it under the
Subcontract. Instead of submitting an Answer, respondent filed a Motion to Dismiss,11 alleging that
the Complaint was premature, because there was no prior recourse to arbitration.
In its Order12 dated September 15, 1987, the RTC denied the Motion on the ground that the
dispute did not involve the interpretation or the implementation of the Agreement and was,
therefore, not covered by the arbitral clause.13
After trial on the merits, the RTC14 ruled that the take-over of some work items by respondent was
not equivalent to a termination, but a mere modification, of the Subcontract. The latter was
ordered to give full payment for the work completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The
appellate court held as arbitrable the issue of whether respondent’s take-over of some work items
had been intended to be a termination of the original contract under Letter "K" of the Subcontract.
It ruled likewise on two other issues: whether petitioner was liable under the warranty clause of
the Agreement, and whether it should reimburse respondent for the work the latter had taken
over.15
Hence, this Petition.16
The Issues
In its Memorandum, petitioner raises the following issues for the Court’s consideration:
"A
Whether or not there exist[s] a controversy/dispute between petitioner and respondent regarding
the interpretation and implementation of the Sub-Contract Agreement dated February 22, 1983
that requires prior recourse to voluntary arbitration;
"B
24 | A D R C A S E S S E T 1
In the affirmative, whether or not the requirements provided in Article III 1 of CIAC Arbitration
Rules regarding request for arbitration ha[ve] been complied with[.]"17
The Court’s Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the implementation of the
Agreement. Thus, without having to resort to prior arbitration, it is entitled to collect the value of
the services it rendered through an ordinary action for the collection of a sum of money from
respondent. On the other hand, the latter contends that there is a need for prior arbitration as
provided in the Agreement. This is because there are some disparities between the parties’
positions regarding the extent of the work done, the amount of advances and billable
accomplishments, and the set off of expenses incurred by respondent in its take-over of
petitioner’s work.
We side with respondent. Essentially, the dispute arose from the parties’ ncongruent positions on
whether certain provisions of their Agreement could be applied to the facts. The instant case
involves technical discrepancies that are better left to an arbitral body that has expertise in those
areas. In any event, the inclusion of an arbitration clause in a contract does not ipso facto divest
the courts of jurisdiction to pass upon the findings of arbitral bodies, because the awards are still
judicially reviewable under certain conditions.18
In the case before us, the Subcontract has the following arbitral clause:
"6. The Parties hereto agree that any dispute or conflict as regards to interpretation and
implementation of this Agreement which cannot be settled between [respondent] and
[petitioner] amicably shall be settled by means of arbitration x x x."19
Clearly, the resolution of the dispute between the parties herein requires a referral to the
provisions of their Agreement. Within the scope of the arbitration clause are discrepancies as to
the amount of advances and billable accomplishments, the application of the provision on
termination, and the consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they differ on the following questions:
(1) Did a take-over/termination occur? (2) May the expenses incurred by respondent in the take-
over be set off against the amounts it owed petitioner? (3) How much were the advances and
billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the provisions of the Agreement.
According to respondent, the take-over was caused by petitioner’s delay in completing the work.
Such delay was in violation of the provision in the Agreement as to time schedule:
"G. TIME SCHEDULE
"[Petitioner] shall adhere strictly to the schedule related to the WORK and complete the
WORK within the period set forth in Annex C hereof. NO time extension shall be granted
by [respondent] to [petitioner] unless a corresponding time extension is granted by [the
Ministry of Public Works and Highways] to the CONSORTIUM."20
Because of the delay, respondent alleges that it took over some of the work contracted to
petitioner, pursuant to the following provision in the Agreement:
"K. TERMINATION OF AGREEMENT
"[Respondent] has the right to terminate and/or take over this Agreement for any of the
following causes:
x x x           x x x           x x x
‘6. If despite previous warnings by [respondent], [petitioner] does not execute
the WORK in accordance with this Agreement, or persistently or flagrantly
neglects to carry out [its] obligations under this Agreement."21
Supposedly, as a result of the "take-over," respondent incurred expenses in excess of the
contracted price. It sought to set off those expenses against the amount claimed by petitioner for
the work the latter accomplished, pursuant to the following provision:
"If the total direct and indirect cost of completing the remaining part of the WORK exceed
the sum which would have been payable to [petitioner] had it completed the WORK, the
amount of such excess [may be] claimed by [respondent] from either of the following:
‘1. Any amount due [petitioner] from [respondent] at the time of the termination of this
Agreement."22
25 | A D R C A S E S S E T 1
The issue as to the correct amount of petitioner’s advances and billable accomplishments
involves an evaluation of the manner in which the parties completed the work, the extent to which
they did it, and the expenses each of them incurred in connection therewith. Arbitrators also need
to look into the computation of foreign and local costs of materials, foreign and local advances,
retention fees and letters of credit, and taxes and duties as set forth in the Agreement. These data
can be gathered from a review of the Agreement, pertinent portions of which are reproduced
hereunder:
"C. CONTRACT PRICE AND TERMS OF PAYMENT
x x x           x x x           x x x
"All progress payments to be made by [respondent] to [petitioner] shall be subject to a
retention sum of ten percent (10%) of the value of the approved quantities. Any claims by
[respondent] on [petitioner] may be deducted by [respondent] from the progress
payments and/or retained amount. Any excess from the retained amount after deducting
[respondent’s] claims shall be released by [respondent] to [petitioner] after the issuance
of [the Ministry of Public Works and Highways] of the Certificate of Completion and final
acceptance of the WORK by [the Ministry of Public Works and Highways].
x x x           x x x           x x x
"D. IMPORTED MATERIALS AND EQUIPMENT
"[Respondent shall open the letters of credit for the importation of equipment and
materials listed in Annex E hereof after the drawings, brochures, and other technical data
of each items in the list have been formally approved by [the Ministry of Public Works
and Highways]. However, petitioner will still be fully responsible for all imported materials
and equipment.
"All expenses incurred by [respondent], both in foreign and local currencies in connection
with the opening of the letters of credit shall be deducted from the Contract Prices.
x x x           x x x           x x x
"N. OTHER CONDITIONS
x x x           x x x           x x x
"2. All customs duties, import duties, contractor’s taxes, income taxes, and other taxes
that may be required by any government agencies in connection with this Agreement
shall be for the sole account of [petitioner]."23
Being an inexpensive, speedy and amicable method of settling disputes,24 arbitration -- along with
mediation, conciliation and negotiation -- is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind.25 It is thus regarded as the "wave of the future" in international civil and
commercial disputes.26 Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.27
Consistent with the above-mentioned policy of encouraging alternative dispute resolution
methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible
of an interpretation that covers the asserted dispute, an order to arbitrate should be granted.28 Any
doubt should be resolved in favor of arbitration.29
Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal
request for arbitration with the Construction Industry Arbitration Commission (CIAC) precluded the
latter from acquiring jurisdiction over the question. To bolster its position, petitioner even cites our
ruling in Tesco Services Incorporated v. Vera.30 We are not persuaded.
Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration indeed
required the submission of a request for arbitration, as follows:
"SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to
have recourse to arbitration by the Construction Industry Arbitration Commission (CIAC)
shall submit its Request for Arbitration in sufficient copies to the Secretariat of the CIAC;
PROVIDED, that in the case of government construction contracts, all administrative
remedies available to the parties must have been exhausted within 90 days from the time
the dispute arose."
Tesco was promulgated by this Court, using the foregoing provision as reference.
On the other hand, Section 1 of Article III of the new Rules of Procedure Governing Construction
Arbitration has dispensed with this requirement and recourse to the CIAC may now be availed of
26 | A D R C A S E S S E T 1

whenever a contract "contains a clause for the submission of a future controversy to arbitration,"
in this wise:
"SECTION 1. Submission to CIAC Jurisdiction — An arbitration clause in a construction
contract or a submission to arbitration of a construction dispute shall be deemed an
agreement to submit an existing or future controversy to CIAC jurisdiction,
notwithstanding the reference to a different arbitration institution or arbitral body in such
contract or submission. When a contract contains a clause for the submission of a future
controversy to arbitration, it is not necessary for the parties to enter into a submission
agreement before the claimant may invoke the jurisdiction of CIAC."
Since petitioner has already filed a Complaint with the RTC without prior recourse to arbitration,
the proper procedure to enable the CIAC to decide on the dispute is to request the stay or
suspension of such action, as provided under RA 876 [the Arbitration Law].37
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91 and 3-
93.31

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

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

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

The arbitral clause in the Agreement is a commitment on the part of the parties to submit to
arbitration the disputes covered therein. Because that clause is binding, they are expected to
abide by it in good faith.35 And because it covers the dispute between the parties in the present
case, either of them may compel the other to arbitrate.36
27 | A D R C A S E S S E T 1
G.R. No. 174938               October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a
contract entered into by the corporation they represent if there are allegations of bad faith or
malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5,
2006 resolution. The Court of Appeals affirmed the trial court's decision holding that petitioners, as
director, should submit themselves as parties tothe arbitration proceedings between BF
Corporation and Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-
Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O.
Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered
into agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a
multilevel parking structure along EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3 However, by October 1991, Shangri-La started defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction
of the buildings using its own funds and credit despite Shangri-La’s default.5 According to BF
Corporation, ShangriLa misrepresented that it had funds to pay for its obligations with BF
Corporation, and the delay in payment was simply a matter of delayed processing of BF
Corporation’s progress billing statements.6
BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly took
possession of the buildings while still owing BF Corporation an outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance
owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-
La’s affairs. Therefore, they should be held jointly and severally liable with Shangri-La for its
obligations as well as for the damages that BF Corporation incurred as a result of Shangri-La’s
default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s failure
to submit its dispute to arbitration, in accordance with the arbitration clauseprovided in its contract,
quoted in the motion as follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or the
Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising there under or inconnection therewith (including any
matter or thing left by this Contract to the discretion of the Project Manager or the withholding by
the Project Manager of any certificate to which the Contractor may claim to be entitled or the
measurement and valuation mentioned in clause 30(5)(a) of these Conditions or the rights and
liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the
Contractor hereby agree to exert all efforts to settle their differences or dispute amicably. Failing
these efforts then such dispute or difference shall be referred to arbitration in accordance with the
rules and procedures of the Philippine Arbitration Law.
x x x           x x x          x x x
(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may have
against the other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13
In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14
28 | A D R C A S E S S E T 1
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory
counter claim against BF Corporation and crossclaim against Shangri-La.15 They alleged that they
had resigned as members of Shangri-La’s board of directors as of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III,
and Benjamin Ramos filed a petition for certiorari with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration.18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari
with this court.19 On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing
that the dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation
and Shangri-La failed to agree as to the law that should govern the arbitration proceedings.21 On
October 27, 1998, the trial court issued the order directing the parties to conduct the proceedings
in accordance with Republic Act No. 876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both
seeking to clarify the term, "parties," and whether Shangri-La’s directors should be included in the
arbitration proceedings and served with separate demands for arbitration.23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they
be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF
Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon
all defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors
were interested parties who "must also be served with a demand for arbitration to give them the
opportunity to ventilate their side of the controversy, safeguard their interest and fend off their
respective positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the trial
court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings despite
being third parties to the contract between Shangri-La and BF Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari.
The Court of Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration
proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and that as
directors of the defendant corporation, [they], in accordance with Art. 1217 of the Civil Code,
stand to be benefited or injured by the result of the arbitration proceedings, hence, being
necessary parties, they must be joined in order to have complete adjudication of the controversy.
Consequently, if [they were] excluded as parties in the arbitration proceedings and an arbitral
award is rendered, holding [Shangri-La] and its board of directors jointly and solidarily liable to
private respondent BF Corporation, a problem will arise, i.e., whether petitioners will be bound
bysuch arbitral award, and this will prevent complete determination of the issues and resolution of
the controversy.31
The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . .
would be contrary to the policy against multiplicity of suits."32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January
19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are
AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution.35
The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF Corporation
and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or obligations.36 The
corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are
solidarily liable with Shangri-La.37 Neither did they bind themselves personally nor did they
undertake to shoulder Shangri-La’s obligations should it fail in its obligations.38 BF Corporation
also failed to establish fraud or bad faith on their part.39
29 | A D R C A S E S S E T 1
Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40 Provisions including arbitration stipulations should bind only the parties.41 Based on
our arbitration laws, parties who are strangers to an agreement cannot be compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.43 Compelling them to submit to arbitration is against this purpose and
may be tantamount to stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III,
Alfredo C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable for
Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-La, only
they should be affected by the contract’s stipulation.47 BF Corporation also failed to specifically
allege the unlawful acts of the directors that should make them solidarily liable with Shangri-La for
its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the corporation[.]"49 BF
Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code.50 Section 31 makes directors solidarily
liable for fraud, gross negligence, and bad faith.51 Petitioners are not really third parties to the
agreement because they are being sued as Shangri-La’s representatives, under Section 31 of the
Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary liability,
they are necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the
arbitration proceedings should also be done in the interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF
Corporation’s claims against them.56 Petitioners stated that "[they] were included by the Arbitral
Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection
thereto. . . ."57 They also stated that "[their] unwilling participation in the arbitration case was done
ex abundante ad cautela, as manifested therein on several occasions."58 Petitioners informed the
court that they already manifested with the trial court that "any action taken on [the Arbitral
Tribunal’s decision] should be without prejudice to the resolution of [this] case."59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners
and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments
that they should not be held liable for Shangri-La’s default and made parties to the arbitration
proceedings because only BF Corporation and Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability
under Section 31 of the Corporation Code. Shangri-La added that their exclusion from the
arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated in.61 Moreover, BF Corporation
assailed only the correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-
La’s directors from liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required
memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims
were already dismissed with finality, and the claims against them were likewise dismissed with
finality, they no longer have any interest orpersonality in the arbitration case. Thus, there is no
longer any need to resolve the present Petition, which mainly questions the inclusion of petitioners
in the arbitration proceedings."64 The court’s decision in this case will no longer have any effect on
the issue of petitioners’ inclusion in the arbitration proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that principles
may be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon.
Enage,66 this court disregarded the fact that petitioner in that case already escaped from prison
and ruled on the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted,
still, as set forth at the opening of this opinion, the fact that this case is moot and academic should
not preclude this Tribunal from setting forth in language clear and unmistakable, the obligation of
fidelity on the part of lower court judges to the unequivocal command of the Constitution that
excessive bail shall not be required.67
30 | A D R C A S E S S E T 1
This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the
distinction between Shangri-La’s personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through their
choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as
early as 1949. It was later institutionalized by the approval of Republic Act No. 876,70 which
expressly authorized, made valid, enforceable, and irrevocable parties’ decision to submit their
controversies, including incidental issues, to arbitration. This court recognized this policy in
Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant
raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute from
the jurisdiction of the courts in which the parties are domiciled or where the dispute occurred. It is
true that there are authorities which hold that "a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone, is contrary to public
policy and cannot oust the courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation
Co., 57 Phil., 600, 603), however, there are authorities which favor "the more intelligent view that
arbitration, as an inexpensive, speedy and amicable method of settling disputes, and as a means
of avoiding litigation, should receive every encouragement from the courts which may be
extended without contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress
has officially adopted the modern view when it reproduced in the new Civil Code the provisions of
the old Code on Arbitration. And only recently it approved Republic Act No. 876 expressly
authorizing arbitration of future disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are
liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc.,73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with
mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in international civil and
commercial disputes. Brushing aside a contractual agreement calling for arbitration between the
parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution
methods, courts should liberally construe arbitration clauses. Provided such clause is susceptible
of an interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any
doubt should be resolved in favor of arbitration.74 (Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations
that would render effective an arbitration clause was later expressed in Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and actively
promote the use of Alternative Dispute Resolution (ADR) as an important means to achieve
speedy and impartial justice and declog court dockets. As such, the State shall provide means for
the use of ADR as an efficient tool and an alternative procedure for the resolution of appropriate
cases. Likewise, the State shall enlist active private sector participation in the settlement of
disputes through ADR. This Act shall be without prejudice to the adoption by the Supreme Court
of any ADR system, such as mediation, conciliation, arbitration, or any combination thereof as a
means of achieving speedy and efficient means of resolving cases pending before all courts in the
Philippines which shall be governed by such rules as the Supreme Court may approve from time
to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the
policy of the law in favor of arbitration.Where action is commenced by or against multiple parties,
one or more of whomare parties who are bound by the arbitration agreement although the civil
action may continue as to those who are not bound by such arbitration agreement. (Emphasis
supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for purposes
ofavoiding litigation and expediting resolution of the dispute, that interpretation shall be adopted.
Petitioners’ main argument arises from the separate personality given to juridical persons vis-à-vis
their directors, officers, stockholders, and agents. Since they did not sign the arbitration
agreement in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration
31 | A D R C A S E S S E T 1
Tribunal in accordance with the arbitration agreement. Moreover, they had already resigned as
directors of Shangri-Laat the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and
distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law.76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the
legal sense, is an individual with a personality that is distinct and separate from other persons
including its stockholders, officers, directors, representatives,77 and other juridical entities. The law
vests in corporations rights,powers, and attributes as if they were natural persons with physical
existence and capabilities to act on their own.78 For instance, they have the power to sue and
enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of a
corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has
the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and
powers through itsdirectors, officers, or agents, who are all natural persons. A corporation cannot
sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations, incurred through
official acts of its representatives, are its own. A stockholder, director, or representative does not
become a party to a contract just because a corporation executed a contract through that
stockholder, director or representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that
an arbitration clause shall not apply to persons who were neither parties to the contract nor
assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on
arbitration, binds the parties thereto, as well as their assigns and heirs. But only they.80 (Citations
omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
32 | A D R C A S E S S E T 1
The provision to submit to arbitration any dispute arising therefrom and the relationship of the
parties is part of that contract and is itself a contract. As a rule, contracts are respected as the law
between the contracting parties and produce effect as between them, their assigns and heirs.
Clearly, only parties to the Agreement . . . are bound by the Agreement and its arbitration clause
as they are the only signatories thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84
As a general rule, therefore, a corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she is generally not considered a
party to that agreement.
However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate
fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used
as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues."85 It is also warranted in
alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation."86
When corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain circumstances are
its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed inhim in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or members,
and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or
her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action."89
When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should
be treated as one. Without a trial, courts and tribunals have no basis for determining whether the
veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge.
Thus, the courts or tribunals must first determine whether circumstances exist towarrant the courts
33 | A D R C A S E S S E T 1
or tribunals to disregard the distinction between the corporation and the persons representing it.
The determination of these circumstances must be made by one tribunal or court in a proceeding
participated in by all parties involved, including current representatives of the corporation, and
those persons whose personalities are impliedly the sameas the corporation. This is because
when the court or tribunal finds that circumstances exist warranting the piercing of the corporate
veil, the corporate representatives are treated as the corporation itself and should be held liable
for corporate acts. The corporation’s distinct personality is disregarded, and the corporation is
seen as a mere aggregation of persons undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging
malice orbad faith on their part in directing the affairs of the corporation, complainants are
effectively alleging that the directors and the corporation are not acting as separate entities. They
are alleging that the acts or omissions by the corporation that violated their rights are also the
directors’ acts or omissions.90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate veilbe
pierced because the cause of action between the corporation and the directors is the same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting the
cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one suit for
a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the
basis of the same cause of action, the filing of one or a judgment upon the merits in any one is
available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be indistinct
that we rule that petitioners may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we
are not overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration
principle that only parties to an arbitration agreement may be compelled to submit to arbitration. In
that case, this court recognizedthat persons other than the main party may be compelled to
submit to arbitration, e.g., assignees and heirs. Assignees and heirs may be considered parties to
an arbitration agreement entered into by their assignor because the assignor’s rights and
obligations are transferred to them upon assignment. In other words, the assignor’s rights and
obligations become their own rights and obligations. In the same way, the corporation’s
obligations are treated as the representative’s obligations when the corporate veil is pierced.
Moreover, in Heirs of Augusto Salas, this court affirmed its policy against multiplicity of suits and
unnecessary delay. This court said that "to split the proceeding into arbitration for some parties
and trial for other parties would "result in multiplicity of suits, duplicitous procedure and
unnecessary delay."91 This court also intimated that the interest of justice would be best observed
if it adjudicated rights in a single proceeding.92 While the facts of that case prompted this court to
direct the trial court to proceed to determine the issues of thatcase, it did not prohibit courts from
allowing the case to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the
incidental issue of whether piercing of the corporate veil is warranted, should be determined in a
single proceeding. Such finding would determine if the corporation is merely an aggregation of
persons whose liabilities must be treated as one with the corporation.
However, when the courts disregard the corporation’s distinct and separate personality from its
directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons composing or representing
it. Courts merely discount the distinction and treat them as one, in relation to a specific act, in
order to extend the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine ifsuch distinction should indeed be
disregarded and, if so, to determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove
the existence of circumstances that render petitioners and the other directors solidarily liable. It
ruled that petitioners and Shangri-La’s other directors were not liable for the contractual
obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s decision was made with the
participation of petitioners, albeit with their continuing objection. In view of our discussion above,
we rule that petitioners are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.
34 | A D R C A S E S S E T 1

SO ORDERED.
35 | A D R C A S E S S E T 1
G.R. No. L-12283            July 25, 1918
ARTHUR F. ALLEN, plaintiff-appellee,
vs.
THE PROVINCE OF TAYABAS, defendant-appellant.
Provincial Fiscal of Tayabas Crispin Oben for appellant.
Lawrence & Ross for appellee.
MALCOLM, J.:
On April 18, 1914, the Province of Tayabas, represented by the Director of Public Works, and
Arthur F, Allen, contractor, entered into a contract whereby the contractor agreed to construct five
reenforced concrete bridges for P39,200. This contract was in the usual form. One provision was
that the bridges were to be constructed "in accordance with the said advertisements, instructions
to bidders, general conditions, plans, specifications, proposal, and this agreement." Other
paragraphs of the contract concerned the method and rate of payment for extras.
Four of the bridges were accepted by the Government and paid for. The dispute between the
parties arose as to the fifth bridge, No. 53.3 and as to certain extras. As to this bridge, the
Province of Tayabas paid to the contractor P4,360 on account of the contract price thereof, but
refused to pay the balance of P2,840 because plaintiff had deviated from the specifications and
because the work was defective. The province further refused to pay for certain extras. To recover
the balance upon the contract was the purpose of the contractor in bringing action for P9,685
(amended complaint), alleged to be due him by the Province of Tayabas. The common averments
of the six causes of action were: (1) Residence; (2) the contract; (3) the faithful compliance "with
all the terms and conditions of the said contract" on the part of the contractor, and completion and
delivery of the bridges in question; (4) refusal of defendant to pay plaintiff the balance due for
bridge No. 53.3 for certain extras, and as damages, although frequently requested to do so.
Defendant demurred to the complaint on the ground that it did not state facts sufficient to
constitute a cause of action, because: (a) The approval of the Governor-General to the contract
had not been given as contemplated by section 2 of the Provincial Government Act (No. 83) and
(b) the certificate for payment had not been accomplished by the Director of Public Works or the
district engineer as provided by section 6, of Act No. 1401, as amended. The demurrer was
overruled. Thereupon defendant answered, renewing as a special defense the grounds of the
demurrer, alleging defective work on the part of the plaintiff, and admitting a total of P2,454.78,
the amount certified by the Director of Public Works and the district engineer, as due the plaintiff.
The trial court gave judgment for the plaintiff-contractor for P4,905, with legal interest from July
14, 1914, and costs. Defendant moved for a new trial, which was denied, duly excepted and
perfected a bill of exceptions to this court.
Appellant's assignments of error relate to the findings of fact and two main issues of law. We pass
the facts for the moment, and two main issues of law. We pass the facts for the moment, to
discuss the legal questions.
The first contention of appellant is that the Province of Tayabas is not obligated to pay the
contractor anything because the contract was not approved by the Governor-General. This
position is absolutely untenable. The law in force when the contract entered into and when the
action was tried, section 2, Act No. 83, as amended by Act No. 1600, made the approval of the
Governor-General a prerequisite only to the purchase and conveyance of real estate by a
province. The grammatical construction of the English text, which is controlling, makes this
perfectly clear. Moreover, the law now in force (Administrative Code of 1917, section 2068) has
removed any possibility of doubt and has at the same time revealed legislative intention, by
placing the requirement for the Governor-General's approval of transfers of real estate by
provinces in a section separate and distinct from the section of the Code giving the corporate
powers of provinces.
The remaining legal issue merits more extended consideration. Appellant's contention is that the
certificate by the district engineer and the Director of Public Works must be obtained before suit
can be brought on a contract; that the findings of these officials are conclusive; and that the
complaint must contain an averment to this effect. Appellee's reply must contain an averment to
this effect. Appellee's reply is that neither the law nor the contract requires the submission to
arbitration of disputes between the Government and the contractor, and that a mere
administrative procedure incident to payment has been established.
Act No. 1401, as amended by Act No. 1752, was in force when this action was instituted. The
same provisions are now found in slightly altered phraseology in section 1917-1923 of the
Administrative Code of 1917. The law gives a district engineer supervision over all contacts
connected with public works, which exceed the estimated cost of P500. Section 6 of Act No. 1401,
as amended by section 3 of Act No. 1752, reads:
No payments, partial or final, shall be made on any public works without a certificate on
the vouchers therefor to the effect that the work for which payment is contemplated has
been accomplished, inspected, and accepted. Such certificate for work under the
supervision of the district engineer shall be signed by him or his duly authorized
36 | A D R C A S E S S E T 1
representative. For work not under his supervision such certificate shall be signed by the
provincial treasurer.
Section 1922 of the Administrative Code of 1917, reads:
No payment, partial or final, shall be made on any public work of construction or repair
without a certificate on the voucher therefor to the effect that the work for which payment
is contemplated has been accomplished in accordance with the terms of the contract and
has been duly inspected and accepted. Such certificate shall be signed by a duly
authorized representative of the Director of Public Works having full knowledge of the
facts in the case.
Contractors are of course bound to take notice of the provisions of the law relating to contracts.
Statutory requirements cannot be departed from for the accommodation of either party to a
contract. As a matter of acts, in the present instance, this obligation is intensified in so far as the
contractor is concerned for the instructions to bidders contains this clause: "The contractor shall
comply with all existing or future laws, the municipal or provincial building ordinances and
regulations in so far as the same are binding upon or affect the parties hereto, the work, or those
engaged thereon." (No. 23).
The instructions to bidders, a part of the contract, under the heading of "Payments," also contains
the following:
51. Payments will be made monthly, based upon the estimates of work satisfactorily
completed and accepted by the Director during the preceding month. Upon such
estimates the Province of Tayabas, P.I. shall pay to the contractor a sum equal to ninety
(90) per cent thereof up to and until such time as the total work shall have been
completed or the contract canceled, as herein provided.
52. The acceptance of the work from time to time for the purpose of making partial
payments, shall not be considered as a final acceptance of the work in question.
53. Whenever the contract, in the opinion of the Director, shall be completely performed
on the part of the contractor, the Director shall proceed promptly to measure the work
and shall make out and certify the final estimates and acceptance for the same. The
province shall then, excepting for cause herein specified, pay to the contractor promptly
after the execution of said certificate the remainder which shall be found due, excepting
therefrom such sum or sums as may be lawfully retained under any of the provisions of
this contract; Provided, That nothing herein contained shall be construed to waive the
right of the Director, hereby reserved, to reject the whole or any portion of the aforesaid
work should the same be found to have been constructed in violation of any of the
conditions or covenant of this contract.
Both the law and the contract provide in mandatory language for a certificate of acceptance by the
Director of Public Works or his representative before any payment shall be made on any public
work for the Government.
Contracts of this character, giving into the hands of a third person or of the purchaser the power of
acceptance or non-acceptance, are not unusual. Courts have frequently upheld them. The law
regards the parties as competent to contract in this manner. Municipal and provincial contracts,
being on the same footing as those of natural persons, may not be breached with impunity. That
mutuality exists in undoubted. The party who deliberately enters into such an agreement, whether
wisely or unwisely, must abide by it. The public corporation, in the absence of a showing of fraud
or concealment, is estopped by the approval of its officer who is authorized to accept the work,
from contesting the contractor's right to the contract price. (City of Omaha vs. Hammond [1876],
94 U.S., 98; City Street Improvement Co. vs. City of Marysville, [1909], 155 cal., 419.) Likewise,
the contractor must not only deliver a product with which the party of the second party ought to be
satisfied, but with which he must be satisfied, or he is not bound to accept it. The rule is well-
settled that in the absence of fraud or of such gross mistake as would necessarily imply bad faith,
contractors with public corporations are concluded by the decisions of engineers or like officers
where the contract contains such a stipulation. The public corporation can rely on the provision in
a contract that performance by the other party shall be approved by or satisfactory to it, or a
particular officer, board or committee. (Second Nat. Bank vs. Pan-American Bridge Co. [1910],
183 Fed., 391, reviewing Federal decisions; Silsby Manuf'g Co. vs. Town of Chico [1885], 24
Fed., 893; 23 L.R.A. [1910], 322, Notes.)
A leading example is the case of Sweeney vs. United States ([1883], 109 U.S., 618), in which a
contractor sought to recover from the United States the price of wall built by him around the
National Cemetery. The contract provided that the wall shall be received and become the property
of the United States after the officer or civil engineer, to be designated by the Government to
inspect the work, should certify that it was in all respects such as the contractor agreed to
construct. The officer designated for that purpose refused to so certify on the ground that neither
the material nor the workmanship was such as the contract required. As the officer exercised an
honest judgment in making his inspection and as there was on his part neither fraud nor such
grave mistake as implied bad faith, it was adjudged that the contractor had no cause of action on
the contract against the United States.
37 | A D R C A S E S S E T 1
The old common law rule required a strict or literal performance of contracts. The modern rule
sanctions a substantial performance of contractual relations. The law now looks to the spirit of the
contract and not to its letter. Even though a plaintiff is not entirely free from fault or omission, the
courts will not turn him away if he has in good faith mad substantial performance. Of course the
terms of the contract may be such that the contract has agreed that the another shall have the
absolute and unreviewable right to reject the article or work if not satisfied with it; in such case the
contractor shall abide by his word. But when the terms, or the nature of the contract, or the
circumstances are such as to make it doubtful, whether the contractor has made any such unwise
agreement, the courts will ordinarily construe the contract as an "agreement to do the thing in
such way as reasonably ought to satisfy the defendant." (Parlin & Orendorff Co. vs. City of
Greenville [1904], 127 Fed., 55; Swain vs. Seamens [1870], 9 Wall., 254.) Thus, it has been held
that the provision of a contract to perform work for the city requiring the contractor to obtain the
certificate of the city engineer that the work has been done in accordance with the contract and
the approval of such work by certain boards or committees, before he is entitled to payment
therefor, does not deprive him of the right to recover for the work, if it has been done in substantial
conformity to the contract, because the city's officers arbitrarily or unreasonably refuse the
certificate and approval called for. (City of Elizabeth vs. Fitzgerald [1902], 200 U.S., 611.)
Substantial performance and the unfounded refusal of the certificate of approval can be proved in
various ways. Thus, acceptance and occupancy of the building by the owner amounts to an
acknowledgment that the work has been performed substantially as required by the contract.
(Campbell and Go-Tauco vs. Behn, Meyer & co. [1904], 3 Phil., 590 affirmed on appeal to the
United States Supreme Court [1905], 200 U.S., 611.) Other circumstances, as partial payment,
also show acquiescence on the part of purchaser.
Appellee speaks of the provisions of the law and the portions of the contract in questions as
possibly constituting an arbitration agreement. We deem these provisions to be more correctly
labeled a condition precedent to the contractor's right to obtain payment; the condition is for the
satisfaction of the Government. Nevertheless, considered as species of abitration, it was a
convenient and proper method, duly agreed upon between the parties, to determine questions
that would necessarily arise in the performance of the contract, about which men might honestly
differ. It would be highly improper, for courts out of untoward jealousy of their jurisdiction. The
New York theory of refusal to uphold such agreements, because of the opinion that they violate
the spirit of the laws creating the courts, is hardly agreed to by more progressive jurisdictions.
(See U.S. Asphalt Refining Co. vs. Trinidad Lake Petroleum Co. [1915], 222 Fed., 1006.) Unless
the agreement is such as absolutely to close the doors of the courts against the parties, which
agreement would be void (Wahl and Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301), courts
will look with favor upon such amicable arrrangements and will only with great reluctance interfere
to anticipate or nullify the action of the arbitrator. For instance, a policy of fire insurance, contained
a clause providing that in the event of a loss under the policy, unless the company shall deny all
liability, as a condition precedent to the bringing of any suit by the insured upon the policy, the
latter should first submit the question of liability and indemnity to arbitration. Such a condition, the
Supreme Court of the Philippines held in Chang vs. Royal Exchange Assurance Corporation of
London ([1907], 8 Phil., 399), is a valid one in law, and unless it be first complied with, no action
can be brought.
What then are the remedies of the contractor? In the first place he has his administrative remedy,
which is to complete the work substantially according to the contract and ask for the approval of
the proper official. If such officer refuse or culpably neglect to perform a ministerial duty, such as
making out the warrant, it is possible that mandamus will lie to coerce the officer. A stipulation
requiring the approval of some one as a condition to a recovery by the contractor would not bar
the party of his remedies by action at law. The right to redress in the courts where substantial
compliance with the terms of a contract are set forth, and where the proof discloses the
withholding of the certificate by an officer for insufficient reasons, should not be taken away by
inference or anything short of a district agreement to waive it. (Aetna Indemnity Co. vs. Waters
[1909], 110 Md., 673.) As a condition precedent to action by the courts, fraud or bad faith on the
part of the responsible Government official, or arbitrary or unreasonable refusal of the certificate
or approval must be alleged and proved.
To concentrate our facts and legal principles — we find the contractor supported by one expert
insisting that the work and the materials actually conform to the specifications; and we have this
as resolutely denied by competent Government engineers. We find substantial performance of the
contract not proved to the satisfaction of the Government's technical adviser, but proved to the
satisfaction of the trial court. Ordinarily, we would not review the facts unless the findings of the
trial court are plainly and manifestly contrary to the proof. But here it was incumbent on the trial
court to take about the same view of the findings of the Government's engineers as the appellate
court would take of the findings of the trial court, or that any court would take of the findings of
customs boards, assessors, and the like. In order to set aside the action of the Director of Public
Works or his authorized representative, fraud or bad faith on the part of these engineers must be
established. Has this been proved? The judge in the course of his decision incidentally remarked:
"It may as well be said here that there appears to have been a great deal of ill-feeling between
plaintiff and the engineer in charge of this construction." Is this observation in connection with the
testimony of the plaintiff and of one engineer sufficient to demonstrate fraud or bad faith? We
think not. In other words we believe that the contractor cannot maintain an action for the stipulated
price when the engineer has in good faith, in pursuance of the contract, withheld his certificate.
The decision of the responsible engineer cannot be subjected to the revisory power of the courts
without doing violence to the terms of the contract and the law.
38 | A D R C A S E S S E T 1

The Province of Tayabas, having accepted bridge No. 53.2, should of course pay the balance
due, or P2,840. It should not be permitted to deduct the cost of the test of the bridge, P900.12, for
this is a legal question for resolution by the courts, and the contract contains no such stipulation.
(See Ripley vs. U.S. [1912], 223 U.S., 695.) But the findings of the Government engineers on all
the other points covered by causes of action 2, 3, 4, 5 and 6 are deemed to be conclusive, fraud
or bad faith not having been proved. Thus, we have P2,840, plus P269.10, plus P214.80, plus P6,
plus P25, or P3,354.90 due plaintiff.

One point made by appellant is that the demurrer to the complaint was improperly overruled. An
elementary principle of pleading heretofore approved by this court in Government of Philippine
Islands vs. Inchausti & Co. ([1913], 24 Phil., 315) is brought to our notice, namely: "If the plaintiff's
right of action depends upon a condition precedent he must allege and prove the fulfillment of the
condition or a legal excuse for its non-fulfillment. And if he omits such allegation, his declaration,
complaint, or petition, will be bad on demurrer." Undoubtedly, the complaint should have alleged
either the performance of the condition precedent, approval by the Director of Public Works or the
District Engineer, or a good and sufficient excuse for not obtaining it. It is possible that if sitting in
first instance, we would so hold with defendant, but on appeal such a backward sweep would
avail nothing but delay. Moreover, the complaint contains the general averment that the plaintiff
fully and faithfully complied with all the terms and conditions of the said contract, while some
months subsequent to the filing of the complaint but previous to the trial, the defendant accepted
the bridge. A failure to allege a condition precedent or a legal reason for dispensing with it may be
cured by the issues tendered by the answer and the proof. (Donegan vs. Houston [1907], 5 Cal.
App., 626.)

To summarize, we are of opinion and so hold that the law makes the approval of the Governor-
General a prerequisite only to the purchase or conveyance of real property by a province; that the
provisions of the law and the form of the contract, usually followed in this jurisdiction, providing for
the certificate of approval by the Director of Public Works or his representative, are in the nature
of a condition precedent, which must be alleged and proved, and that this certificate is conclusive
in the absence of a showing of fraud or bad faith.

Judgment shall be modified so that the plaintiff shall recover from the defendant P3,354.90 with
legal interest thereon from July 14, 1914, until paid, without special finding as to costs in either
instance. So ordered.