Chung Fu vs.
CA Ruling:
Facts:
Petitioner Chung Fu Industries (Philippines) and private respondent Roblecor
Philippines, Inc. forged a construction agreement whereby respondent contractor
committed to construct and finish petitioner corporation’s industrial/factory
complex. In the event of disputes arising from the performance of subject contract,
it was stipulated therein that the issue(s) shall be submitted for resolution before a
single arbitrator chosen by both parties. Roblecor filed a petition for Compulsory
Arbitration with prayer for Temporary Restraining Order before respondent RTC to
claim the unsatisfied account and unpaid progress billings. Chung Fu moved to
dismiss the petition and further prayed for the quashing of the restraining order.
Subsequent negotiations between the parties eventually led to the formulation of
an arbitration agreement which, among others, provides: The parties mutually
agree that the decision of the arbitrator shall be final and unappealable.
Therefore, there shall be no further judicial recourse if either party disagrees with
the whole or any part of the arbitrator’s award. Respondent RTC approved the
arbitration agreement and thereafter, Engr. Willardo Asuncion was appointed as
the sole arbitrator. Arbitrator Asuncion ordered petitioner to immediately pay
respondent contractor and further declared the award as final and unappealable.
Roblecor then moved for the confirmation of said award which was accordingly
confirmed and a writ of execution granted to it. Meanwhile, Chung Fu moved to
remand the case for further hearing and asked for a reconsideration of the
judgment award claiming that Arbitrator Asuncion committed twelve (12) instances
of grave error by disregarding the provisions of the parties’ contract. Chung Fu’s
Motion was denied and similarly its motion for reconsiderationn. Chung Fu elevated
the case via a petition for certiorari  to respondent CA. The respondent appellate
court concurred with the findings and conclusions of respondent trial court. A
motion for reconsideration of said resolution was filed by petitioner, but was
similarly denied.
Issue:
Whether or not petitioners are estopped from questioning the arbitration award
allegedly in view of the stipulations in the parties’ arbitration agreement that “the
decision of the arbitrator shall be final and unappealable” and that “there shall be
no further judicial recourse if either party disagrees with the whole or any part of
the arbitrator’s award.”
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that
the finality of the arbitrators’ award is not absolute and without exceptions. Where
the conditions described in Articles 2038, 2039 and 2040 applicable to both
compromises and arbitrations are obtaining, the arbitrators’ award may be annulled
or rescinded. Additionally, under Sections 24 and 25 of the Arbitration Law, there
are grounds for vacating, modifying or rescinding an arbitrator’s award. Thus, if and
when the factual circumstances referred to in the above-cited provisions are
present, judicial review of the award is properly warranted.
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of
Court. It is to be borne in mind, however, that this action will lie only where a grave
abuse of discretion or an act without or in excess of jurisdiction on the part of the
voluntary arbitrator is clearly shown. It should be stressed, too, that voluntary
arbitrators, by the nature of their functions, act in a quasi-judicial capacity. It stands
to reason, therefore, that their decisions should not be beyond the scope of the
power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds,
most of which allege error on the part of the arbitrator in granting compensation
for various items which apparently are disputed by said petitioners. After closely
studying the list of errors, as well as petitioners’ discussion of the same in their
Motion to Remand Case For Further Hearing and Reconsideration and Opposition to
Motion for Confirmation of Award, we find that petitioners have amply made out a
case where the voluntary arbitrator failed to apply the terms and provisions of the
Construction Agreement which forms part of the law applicable as between the
parties, thus committing a grave abuse of discretion. Furthermore, in granting
unjustified extra compensation to respondent for several items, he exceeded his
powers — all of which would have constituted ground for vacating the award under
Section 24 (d) of the Arbitration Law.
Wherefore, the petition is granted. The Resolutions of the CA as well as the Orders
of respondent RTC are hereby SET ASIDE. Accordingly, this case is REMANDED to the
court of origin for further hearing on this matter. All incidents arising therefrom are
reverted to the status quo ante  until such time as the trial court shall have passed
upon the merits of this case.
 JORGE GONZALES and PANEL OF ARBITRATORS vs. CLIMAX MINING LTD., CLIMAX- In  La Naval Drug Corporation v. Court of Appeals, the Court held that R.A. No. 876
ARIMCO MINING CORP. and AUSTRALASIAN PHILIPPINES MINING INC., G.R. explicitly confines the court's authority only to the determination of whether or not
No.  161957, January 22, 2007 there is an agreement in writing providing for arbitration.  In the affirmative, the
statute ordains that the court shall issue an order "summarily directing the parties
Facts: This is a consolidation of two petitions rooted in the same disputed to proceed with the arbitration in accordance with the terms thereof."  If the court,
Addendum Contract entered into by the parties.   upon the other hand, finds that no such agreement exists, "the proceeding shall be
dismissed." The cited case also stressed that the proceedings are summary in
In one case, the Court held that the DENR Panel of Arbitrators had no jurisdiction nature.  
over the complaint for the annulment of the Addendum Contract on grounds of
fraud and violation of the Constitution and that the action should have been Implicit in the summary nature of the judicial proceedings is the separable or
brought before the regular courts as it involved judicial issues.   independent character of the arbitration clause or agreement.  
 
Gonzales averred that the DENR Panel of Arbitrators Has jurisdiction because the The doctrine of separability or severability enunciates that an arbitration agreement
case involves a mining dispute that properly falls within the ambit of the Panel’s is independent of the main contract.  The arbitration agreement is to be treated as
authority. a separate agreement and the arbitration agreement does not automatically
  terminate when the contract of which it is part comes to an end. 
Respondents Climax Mining Ltd., et al., on the other hand, seek   
reconsideration/clarification on the decision holding that the case should not be The separability of the arbitration agreement is especially significant to the
brought for arbitration under R.A. No. 876. They argued that the arbitration clause determination of whether the invalidity of the main contract also nullifies the
in the Addendum Contract should be treated as an agreement independent of the arbitration clause. Indeed, the doctrine denotes that the invalidity of the main
other terms of the contract, and that a claimed rescission of the main contract does contract, also referred to as the “container” contract, does not affect the validity of
not avoid the duty to arbitrate.  the arbitration agreement. Irrespective of the fact that the main contract is invalid,
the arbitration clause/agreement still remains valid and enforceable.
 On another case, Gonzales challenged the order of the RTC requiring him to  
proceed with the arbitration proceedings while the complaint for the nullification of The validity of the contract containing the agreement to submit to arbitration does
the Addendum Contract was pending before the DENR Panel of Arbitrators.  He not affect the applicability of the arbitration clause itself.  A contrary ruling would
contended that any issue as to the nullity, inoperativeness, or incapability of suggest that a party’s mere repudiation of the main contract is sufficient to avoid
performance of the arbitration clause/agreement raised by one of the parties to the arbitration.  That is exactly the situation that the separability doctrine, as well as
alleged arbitration agreement must be determined by the court prior to referring jurisprudence applying it, seeks to avoid.  
them to arbitration.
The Court added that when it declared that the case should not be brought for
While Climax-Arimco contended that an application to compel arbitration under arbitration, it should be clarified that the case referred to is the case actually filed
Sec. 6 of R.A. No. 876 confers on the trial court only a limited and special by Gonzales before the DENR Panel of Arbitrators, which was for the nullification of
jurisdiction, i.e., a jurisdiction solely to determine (a) whether or not the parties the main contract on the ground of fraud, as it had already been determined that
have a written contract to arbitrate, and (b) if the defendant has failed to comply the case should have been brought before the regular courts involving as it did
with that contract.   judicial issues. 

Issue: Whether or not arbitration is proper even though issues of validity and
nullity of the Addendum Contract and, consequently, of the arbitration clause were
raised.

Ruling: Positive.
 guidance by this court in Batangas Transportation Company vs. Orlanes (52 Phil.,
455). If a route that was not entirely parallel in 1928 engendered ruinous
competition it is hard to understand why a more parallel route would not bring
improper competition in 1931. The Pasay Transportation Company, Inc., lays great
G.R. No. L-36893 February 24, 1933 stress upon the fact that its right to operate was not formally terminated, and
insists that it has a property right of value that can only be taken away after
MANILA ELECTRIC COMPANY, Petitioner-Appellant, vs. PASAY TRANSPORTATION hearing. (Bohol Land Transportation Co. vs. Jureidini, 53 Phil., 560.) It does not
COMPANY, INC., Respondent-Appellee. regard the other side of the picture that by receiving a grant it owes a duty to the
public to comply with the conditions and duties of the grant. It likewise treats of no
moment that it only used the permission in a meager way for a couple of days when
Ross, Lawrence & Selph and Guillermo Cabrera for appellant.
it asked for suspension and for almost three years it flouted and set at naught clear
Rivera and Francisco and L. D. Lockwood for appellee. 
instructions of the Public Service Commission to resume operation under the
penalty of having its certificate cancelled. It made no investment for equipment and
STREET,HULL, J.: risked nothing trying to develop business. On September 18, 1931, it had at most a
mere technical right (Reyes vs. Orlanes & Banaag Transit Co., G. R. No. 35562) 1 The
The Pasay Transportation Company was granted by an order of the Public Service commission without any hearing, did not permit the resumption of the service but,
Commission, dated October 5, 1928, a certificate of public convenience and in fact, authorized the inauguration of a new line and to call such an action a
necessity for the operation of an auto-truck service along certain streets in the City modification of the certificate heretofore issued is hardly a recital of the true facts.
of Manila between the Divisoria Market and Velasquez. After a few days partial The orders of the commission of September 22, 1931, being issued without any
operation the company requested permission of the Public Service Commission to hearing and without receipt of any evidence, must be vacated and set aside as this
suspend operation of that line on account of the ruinous competition it was court upon review can not state that they are reasonably supported by the
meeting from the Manila Electric Company. On December 29, 1928, the permission evidence. With costs against the respondent and appellee. 2 So ordered.
was granted with the statement that if within slightly over thirty days, namely
January 31, 1929, the Pasay Transportation Company has not resumed its service on
said line they would proceed to the cancellation of the certificate involved. No
further action was taken by either the Pasay Transportation Company or the Public
Service Commission until September 17, 1931, when the company notified the
commission that they were going to resume operation on this line. On the 18th of
September, 1931, the company asked for a modification of the route formerly given
to a route that virtually duplicates that maintained by the Manila Electric Company
for over two years preceding and also requested authority to reduce their fares.
Without any hearing the Public Service Commission on September 22, 1931,
granted the requests of the Pasay Transportation Company, and the next day the
Manila Electric Company filed a motion requesting the revocation of the approval of
the commission of September 22, 1931, and that the order of December 29, 1928
be enforced. This motion was denied and the Manila Electric Company brings the
case here for review.chanroblesvirtualawlibrary chanrobles virtual law library

Formerly the Public Service Commission adopted the sound policy that duplicate
bus service through the crowded and narrow streets of the City of Manila would not
be in the public interest and permitted joint use of streets only when they were for
a short distance and merely incidental to the main route. In their present orders
they have, without any hearing and without taking any evidence whatsoever,
disregarded not only this sound principle, but also the principles laid down for their

EASTBOARD NAVIGATION v. JUAN YSMAEL CO., INC.
G.R. No. L-9090 | September 1, 1957
Doctrine: The law of the forum governs procedural matters (such as notice
requirements). The law of the state where a foreign judgment is sought to be
enforced cannot be invoked to impugn the validity of the proceedings where the
foreign judgment was made. Also, a foreign corporation has capacity to sue even
without a license to transact business if it is not engaged in business in the
Philippines.
Facts: Juan Ysmael Co., Inc (Philippine corporation), through K. H. Hemady (its
president and general manager), chartered Eastboard Navigation’s (Canadian
corporation) vessel to load a cargo of scrap iron in the Philippines for Buenos Aires.
The charter party agreement contained a typewritten clause providing for
compulsory arbitration in the state of New York, in case of any disputes that may
arise based on their agreement.
rice cargo from abroad to the Philippines. These 2 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 Eastboard from seeking redress in our
courts.
(2) The defense of Ysmael Co. that the Decree may not be enforced in the
Philippines is predicated on the alleged fact that it was never served with notice,
summons, or process relative to the submission of the award of the arbitrators to
New York court, invoking the U.S. Arbitration Act. The law invoked, however, does
not sustain Ysmael Co. pretense since the Arbitration Act does not necessarily
require that service of notice of the application for confirmation be made on the
adverse party himself (in case of a non-resident), it being sufficient that it be made
upon his attorney. In this case, a copy of notice of submission of the award to the
District Court of New York was served upon Ysmael Co.’s counsel who in due time
made of record their appearance and actually appeared when the case was heard. It
is also significant that Ysmael Co.’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 Ysmael Co. It cannot therefore defeat the effect of this
decision by alleging want of jurisdiction, or want of notice.

A dispute arose regarding the liability of Ysmael Co., Inc. for the payment of freight
and demurrage. An arbitration agreement was eventually executed in New York
between the 2 parties. The arbitration agreement was then presented by Eastboard
= to the U.S. District Court in New York for confirmation where said Court confirmed
and issued an Order and Final Decree.

Eastboard then brought this action in the Philippines to enforce the “Order and
Final Decree”. Ysmael Co. however argues that since Eastboard Navigation is a
foreign corporation without a license to do business in the Philippines, it has no
capacity to sue in this jurisdiction. Note that the stipulation of facts of the parties
stated that this transaction was the first business undertaken by Eastboard
Navigation in the Philippines.

Issues: (1) Whether Eastboard has capacity to sue in the Philippines? - YES
(2) Whether the court may enforce the Decree issued by the New York
District Court. - YES

Held: (1) While Eastboard 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 Eastboard in the Philippines, although on a previous occasion
Eastboard's vessel was chartered by the National Rice and Corn Corporation to carry
 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 sign the "Conditions of Contract" would not
affect the compliance with the formal requirements for arbitration agreements.

BF Corporation v. CA, 288 SCRA 267 (1998)

Facts:

Petitioner and respondent Shangri-la Properties entered into an agreement wherein

petitioner will construct the main structure of the EDSA Plaza Project. Petitioner
incurred delay in the construction work, which resulted in disagreements between
the parties as regards their respective liabilities under the contract.

Petitioner filed with the RTC of Pasig a complaint for collection of the balance due
under the construction agreement. Shangri-la filed a motion to suspend
proceedings alleging 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. 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.

ISSUE

Whether or not the contract between petitioner and respondent embodies an

arbitration clause in case of disagreement between the parties in the
implementation of contractual provisions.

HELD

Yes. The making of a contract or submission for arbitration described in Sec. 2 of

R.A. 876 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.

The formal requirements of an agreement to arbitrate are: (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 court.

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

LM Power Engineering Corporation vs. Capitol Industrial Construction Groups,
Inc. G.R. No. 141833 March 26, 2003)
FACTS: LM Power Engineering Corporation and Capitol Industrial Construction
Groups, Inc. entered into a “Subcontract Agreement” involving electrical work at the
Third Port of Zamboanga. Two years thereafter, Respondent took over some of the
work contracted to Petitioner. Allegedly, the latter had failed to finish it because of
its inability to procure materials.
When task was completed Petitioner billed Respondent in the amount of P6.7M.
Respondent, however, refused to pay and contested the accuracy of the amount of
advances and billable accomplishments listed by Petitioner. Respondent also took
refuge in the termination clause of the Agreement.  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.
Petitioner filed with the RTC of Makati a Complaint for Collection of the amount
representing the alleged balance due it under the Subcontract. Instead of
submitting an Answer, Respondent filed a Motion to Dismiss, alleging that the
Complaint was premature because there was no prior recourse to arbitration.
RTC denied the Motion to Dismiss 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. The RTC 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.
CA reversed on appeal the RTC ruling and ordered the referral of the case to
arbitration. The CA 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.
Petitioner elevated the case to SC.
ISSUES:
1. Whether or not there exists a controversy/dispute between Petitioner and
Respondent regarding the interpretation and implementation of the
Subcontract Agreement that requires prior recourse to voluntary
arbitration?;
2. In the affirmative, whether or not there is a need to file a request first with
the CIAC in order to vest it with jurisdiction to decide a construction
dispute?
RULING:
The Petition is unmeritorious; hence, DENIED.  The assailed Decision of the CA is
AFFIRMED.
1.
YES. SC sides with Respondent. The instant case involves technical discrepancies
that are better left to an arbitral body that has expertise in those areas.
2.
NO. SC is not persuaded with Petitioner’s contention. Section 1 of Article III of the
NEW Rules of Procedure Governing Construction Arbitration has dispensed with the
requirement to submit a request for arbitration. Recourse to the CIAC may now be
availed of whenever a contract “contains a clause for the submission of a future
controversy to arbitration.”
In the instant case, 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.”
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, the resolutions of which lies in the interpretation of the
provisions of the Subcontract Agreement:
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?
Being an inexpensive, speedy and amicable method of settling disputes,
arbitration — along with mediation, conciliation and negotiation — is encouraged
by the SC. 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.
2.
reiterated in National Irrigation Administration v. Court of Appeals [1999], from
which SC 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.”
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. And because it covers the
dispute between the parties in the present case, either of them may compel the
other to arbitrate.

Section 1 of Article III of the NEW Rules of Procedure Governing

Construction Arbitration provides:

“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.”

As clearly explained in China Chang Jiang Energy Corporation (Philippines)

v. Rosal Infrastructure Builders et al. (an extended unsigned Resolution) and

Transfield Philippines, Inc. v. Luzon Hydro Corp.
GR No. 146717 (22 November 2004)
Tinga J. kmd
SUBJECT MATTER: Special Laws; Letters of Credit; Independence Principle
CASE SUMMARY:
Transfield, as a contractor, undertook to construct a hydro-electric power station
and complete the same on or before June 1, 2000. To secure the performance of its
obligation. Transfield opened 2 letters of credits from ANZ Banking Group and
Security Bank in favor of Luzon. Nonetheless, Transfield was unable to complete the
project on the target date allegedly due to force majeure. Both Transfield and Luzon
filed before separate arbitration tribunals, ICC and CIAC respectively, to determine
whether force majeure would justify the delay. Pending the arbitration proceeding,
Transfield filed a complaint for preliminary injunction against the respondent banks
to restrain them from paying on the securities and also against Luzon to prevent it
from calling on the securities. RTC issued a TRO but denied the application for writ
of preliminary injunction. CA affirmed RTC. N.B. When the TRO expired, Luzon was
able to withdraw from ANZ.
DOCTRINES:
Under the independence principle, banks assume no liability or responsibility for
the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
document, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person.
The independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract.
PARTIES:
Petitioner: Transfield Philippines, Inc. (Transfield)
Luzon Hydro Corporation (Luzon)
Respondents: Australia and New Zealand Banking Group Ltd. (ANZ)
Security Bank Corporation (SBC)
FACTS:
Transfield and Luzon entered into a Turnkey Contract whereby Transfield
undertook, as a contractor, to construct a 70-Megawatt hydro-electric power
station at the Bakun River in Benguet and Ilocos Sur.
The contract provides that:
(1) the target completion date of the project is on June 1, 2000, or such
date as may be agreed upon; and
(2) petitioner is entitled to claim extensions of time (EOT) for reasons
enumerated in the contract e.g. variations, force majeure, and delays
caused by Luzon itself.
It was also agreed upon that in case of dispute, the parties are bound to
settle their differences through mediation, conciliation and such other
means enumerated in the contract.
To secure the performance of the obligation, Transfield opened in favor of Luzon, 2
standby letters of credits with ANZ and SBC, each in the amount of US$8.99M.
Nonetheless, in the course of construction, Transfield sought various EOT to
complete the project. The request for extensions were allegedly due to force
majeure occasioned by typhoon Zeb, barricades, and demonstrations, which
prevented the on-time completion of the project.
Luzon denied Transfield’s requests for EOT.
Luzon filed a Request for Arbitration before the Construction Industry Arbitration
Commission (CIAC), while Transfield filed a Request for Arbitration before the
International Chamber of Commerce (ICC). These arbitration proceedings would
resolve the issues: (1)WON the alleged forcemajeure would justify the EOT sought
by Transfield, (2)WON Luzon had the right to terminate the contract for Transfield’s
failure to complete the project on target date.
Meanwhile, Transfield wrote letters to ANZ and SBC advising them of the arbitration
proceedings. Transfield asserted that Luzon had no right to call on the securities
until the resolution of the issued before CIAC and ICC. Transfield also warned the
banks that any transfer, release, or disposition of the securities in favor of Luzon
would constrain it to hold respondent banks liable for liquidated damages.
Despite the Transfield’s letters, the banks informed Transfield that they would pay
on the Securities if and when Luzon calls on them.
Transfield filed a complaint for injunction with prayer for TRO and writ of
preliminary injunction before the RTC. Transfield sought to restraint banks from
calling on the securities and the respondent banks from paying on the securities.
RTC –denied the application for writ of preliminary injunction. Applying the
“Independent Contract” principle, Luzon should be allowed to draw on the
securities for liquidated damages. Banks were mere custodians of the funds and
were obligated to transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims. Luzon, as the ultimate beneficiary,
may also invoke the “independent contract” principle.
CA - issued a TRO but failed to act on the application for preliminary injunction until
the TRO expired.
N.B. As soon as the TRO expired, Luzon went to ANZ bank and withdrew US$ 4.9M.
- CA affirmed RTC decisions; Luzon could call on the securities pursuant to the
first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit.
ISSUE/S:
1. WON the “Independence Principle” on Letter of Credit may be invoked by a
beneficiary. (YES)
2. WON injunction is the proper remedy to restrain the allegedly wrongful
draws on the securities. (NO)
Petitioner’s argument:
 RTC and CA improperly relied on the “independence principle” on the
letters of credit when this case falls within the “fraud exception rule”.
 Luzon knowing misinterpreted the existence of delay despite its knowledge
that the issue was still pending arbitration to be able to draw against the
securities.
 Luzon should be ordered to return proceeds of the securities.
 Injunction was the appropriate remedy obtainable from the local courts.
Respondent SBC’s argument:
 Invoking the independence principle, it was under no obligation to look
into the validity or accuracy of the certification submitted by Luzon or into
the latter’s capacity or entitlement to so certify.
Respondent ANZ’s argument:
 Its actions could not be regarded as unjustified in the view of the prevailing
independence principle under which it had no obligation to ascertain the
truth of Luzon’s allegations (Similar to SBC)
HOLDING/RATIO:
1. Yes, the beneficiary can invoke the independence principle.
In a letter of credit transaction where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions
of the credit are complied with, and particularly, the independence
principle liberates the issuing bank from the duty of ascertaining
compliance by the parties of the main contract. As it is, the independence
doctrine works for the benefit of both issuing bank and the beneficiary.
To say that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the letters of
credit are used in commercial transactions. Letters of credit are employed
by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties of the
original transaction. With the letter of credit, the party who obtained the
letter of credit may present it to the beneficiary as a security to convince
the latter to enter into the business transaction. On the other hand, the
beneficiary can be rest assured of being empowered to call on the letter of
credit as a security in case the commercial transaction does not push
through, or the party who presented the letter of credit fails to perform his
part.
Prior resolution of any dispute before beneficiary is entitled to call on the
letter of credit would convert it into a mere guarantee.
In this case, the Court ruled that ANZ and SBC banks were left with little or
no alternative but to honor the credit and that it was “ministerial for them
to honor the call for payment. Also, Luzon’s right to call on the securities
was rooted on the following provisions of the contract:
… provide security to the Employer in the form of 2 irrevocable
and confirmed standby letters of credit …
… if the contractor fails to comply, the contractor shall pay the
Employer by way of liquidated damages …
… Employer may deduct the amount of such damages by drawing
on the security …
2. No, injunction is not a remedy in this case.
Fraud is an exception to the independence principle and the remedy for
fraudulent abuse is injunction. However, injunction should not be granted
unless: (a) there is a clear proof of fraud; (b) the fraud constitutes
 fraudulent abuse of the independent purpose of the letter of credit and
not only fraud under the main agreement; and (c) irreparable injury might
follow if injunction is not granted or the recovery of damages would be
seriously damaged.
In this case, Transfield failed to show that it has a clear and unmistakable
right to restrain Luzon’s call on the securities. The contract was plain and
unequivocal in that it conferred upon Luzon the right to draw upon the
securities in case of default. Also, nothing in the contract would indicate
that all disputes regarding delay should first be settled through arbitration
before Luzon would be allowed to call upon the securities.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Notes:
 Letter of Credit is:
o Not strictly contractual because privity and meeting of the minds
are lacking.
o Not a contract of suretyship or guaranty because it entails a
primary liability following a default.
o Not a negotiable instrument because it is not payable to order or
bearer, and is generally conditional.
o A written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person
and assumes responsibility for payment of debt therefor to the
addressee.
Commercial credits Standby Credits
that he has performed his contract. performed the contract.
 In a standby type of letter of credit, the credit is payable upon certification of a
party’s nonperformance of the agreement.
 The independence principle assures the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or
not.
o Bank assumes no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of
any documents, or for the generals and/or particular conditions
stipulates in the documents.
 Independent nature maybe:
o Independence in toto – credit is independent from the underlying
agreement (e.g. standby letter of credit).
o Independence as to the justification aspect only – e.g in a
commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying
agreement.

Involve payment of money under a

contract of sale

Becomes payable upon Payable upon certification of a

presentation by the seller-
beneficiary of the documents that
show he has taken affirmative
steps to comply with the sales
agreement.
party’s nonperformance of the
agreement;
Documents that accompany the
beneficiary’s draft tend to show that
the applicant has not performed.

Beneficiary of commercial credit Beneficiary of the standby credit

must demonstrate by documents must certify that his obligor has not

DEL MONTE CORP. USA vs. CA
GR No. 136154 | Feb 7, 2001 | Petition for Review on Certiorari | Bellosillo
Petitioners: Del Monte Corp. USA, Paul Derby Jr., Daniel Collins & Luis
Hidalgo
Respondents: CA, Malabon RTC Branch 74 Judge Bienvenido Reyes,
Montebueno Marketing, Inc., Liong Liong C. Sy and Sabrosa Fodds, Inc.
Facts:
 1 July 1994 - in a Distributorship Agreement, Del Monte Corporation-USA
(DMC-USA) appointed Montebueno Marketing, Inc. (MMI) as the sole and
exclusive distributor of its Del Monte products in the Philippines for a
period of five (5) years, renewable for two (2) consecutive five (5) year
periods with the consent of the parties.   2. they had exhausted all possible avenues for an amicable resolution
 Said agreement provided for an arbitration clause, which states:
This Agreement shall be governed by the laws of the State of California
and/or, if applicable, the United States of America.   All disputes arising out
of or relating to this Agreement or the parties’ relationship, including the
termination thereof, shall be resolved by arbitration in the City of San
Francisco, State of California, under the Rules of the American Arbitration
Association.   The arbitration panel shall consist of three members, one of
whom shall be selected by DMC-USA, one of whom shall be selected by
MMI, and third of whom shall be selected by the other two members and
shall have relevant experience in the industry
 October 1994 - appointment of MMI as the sole and exclusive distributor
of Del Monte products in the Philippines was published in several
newspapers in the country.    Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary
 Immediately after its appointment, MMI appointed Sabrosa Foods, Inc.
(SFI), with the approval of DMC-USA, as MMI’s marketing arm to
concentrate on its marketing and selling function as well as to manage its
critical relationship with the trade.
 3 October 1996 - MMI, SFI and MMI’s Managing Director Liong Liong C. Sy
(LILY SY) filed a Complaint against DMC-USA, Managing Director of Del
Monte Corporation’s Export Sales Department Paul E. Derby, Jr., Regional
Director of Del Monte Corporation’s Export Sales Department Daniel
Collins, Head of Credit Services Department of Del Monte Corporation Luis
Hidalgo and Dewey Ltd. before Malabon RTC.
 MMI et al. predicated their complaint on the alleged violations by Del
Monte et al. of Articles 201, 212 and 233 of the Civil Code.
According to them, DMC-USA products continued to be brought into the
country by parallel importers despite the appointment of MMI as the sole
and exclusive distributor of Del Monte products thereby causing them
great embarrassment and substantial damage.  They alleged that the
products brought into the country by these importers were aged,
damaged, fake or counterfeit, so that in March 1995 they had to cause,
after prior consultation with Antonio Ongpin, Market Director for Special
Markets of Del Monte Philippines, Inc., the publication of a "warning to the
trade" paid advertisement in leading newspapers.    DMC-USA and Paul E.
Derby, Jr., apparently upset with the publication, instructed private
respondent MMI to stop coordinating with Antonio Ongpin and to
communicate directly instead with DMC-USA through Paul E. Derby, Jr.
 MMI et al. further averred that:
1. DMC-USA et al. knowingly and surreptitiously continued to deal with
the former in bad faith by involving disinterested third parties and by
proposing solutions which were entirely out of their control
and settlement of their grievances
3. as a result of the fraud, bad faith, malice and wanton attitude of DMC-
USA et al., they should be held responsible for all the actual expenses
incurred by MMI et al. in the delayed shipment of orders which
resulted in the extra handling thereof, the actual expenses and cost of
money for the unused Letters of Credit (LCs) and the substantial
opportunity losses due to created out-of-stock situations and
1
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.
2
to morals, good customs or public policy shall compensate the latter for the damage.
3
Art. 23. Even when an act or event causing damage to another's property was not due to the
fault or negligence of the defendant, the latter shall be liable for indemnity if through the act or
event he was benefited.
 unauthorized shipments of Del Monte-USA products to the Philippine
Duty Free Area and Economic Zone
4. the bad faith, fraudulent acts and willful negligence of DMC-USA et al.,
motivated by their determination to squeeze MMI et al. out of the
outstanding and on-going Distributorship Agreement in favor of
another party, had placed Lily Sy on tenterhooks since then
5. the shrewd and subtle manner with which DMC-USA et al. concocted
imaginary violations by MMI of the Distributorship Agreement in order
to justify the untimely termination thereof was a subterfuge
 21 October 1996 – DMC-USA et al. filed a Motion to Suspend Proceedings,
invoking the arbitration clause.
 RTC: deferred consideration of DMC-USA et al.’s Motion to Suspend
Proceedings as the grounds alleged therein did not constitute the
suspension of the proceedings considering that the action was for damages
with prayer for the issuance of Writ of Preliminary Attachment and not on
the Distributorship Agreement
 DMC-USA et al. filed a MR to which MMI et al. filed their
comment/opposition.
 DMC-USA et al. filed a reply. They later on filed a Motion to Admit
Supplemental Pleading.
 Said motion was admitted.
 As a result of the admission of the Supplemental Complaint, DMC-USA et
al. filed on 22 July 1997 a Manifestation adopting their Motion to Suspend
Proceedings of 17 October 1996 and Motion for Reconsideration of 14
January 1997.
 11 November 1997 - the Motion to Suspend Proceedings was denied by the
trial court on the ground that it "will not serve the ends of justice and to
allow said suspension will only delay the determination of the issues,
frustrate the quest of the parties for a judicious determination of their
respective claims, and/or deprive and delay their rights to seek redress.
 On appeal, the CA affirmed the RTC decision.
 Hence, this petition.
Issue:
WON the dispute between the parties warrants an order compelling them to submit
to arbitration [NO]
Ratio:
 There is no doubt that arbitration is valid and constitutional in our
jurisdiction. Even before the enactment of RA 876, this Court has
countenanced the settlement of disputes through arbitration.  Unless the
agreement is such as absolutely to close the doors of the courts against the
parties, which agreement would be void, the courts will look with favor
upon such amicable arrangement and will only interfere with great
reluctance to anticipate or nullify the action of the arbitrator. Moreover, as
RA 876 expressly authorizes arbitration of domestic disputes, foreign
arbitration as a system of settling commercial disputes was likewise
recognized when the Philippines adhered to the United
Nations "Convention on the Recognition and the Enforcement of Foreign
Arbitral Awards of 1958" under the 10 May 1965 Resolution No. 71 of the
Philippine Senate, giving reciprocal recognition and allowing enforcement
of international arbitration agreements between parties of different
nationalities within a contracting state.
 A careful examination of the instant case shows that the arbitration clause
in the Distributorship Agreement between DMC-USA and MMI is valid and
the dispute between the parties is arbitrable.  However, this Court must
deny the petition.
 The Agreement between DMC-USA and MMI is a contract .  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, i.e., DMC-USA and its Managing
Director for Export Sales Paul E. Derby, Jr., and MMI and its Managing
Director LILY SY are bound by the Agreement and its arbitration clause as
they are the only signatories thereto.  
o Daniel Collins and Luis Hidalgo, and SFI, not parties to the Agreement
and cannot even be considered assigns or heirs of the parties, are not
bound by the Agreement and the arbitration clause therein.  
 Consequently, referral to arbitration in the State of California pursuant to
the arbitration clause and the suspension of the proceedings in Civil Case
No. 2637-MN pending the return of the arbitral award could be called
for but only as to DMC-USA and Paul E. Derby, Jr., and MMI and LILY SY,
and not as to the other parties in this case, in accordance with the recent
case of Heirs of Augusto L. Salas, Jr. v. Laperal Realty Corporation, which
superseded that of Toyota Motor Philippines Corp. v. Court of Appeals.
o In Toyota,  the Court ruled that "[t]he contention that the arbitration
clause has become dysfunctional because of the presence of third
parties is untenable ratiocinating that "[c]ontracts are respected as the
law between the contracting parties" and that "[a]s such, the parties
are thereby expected to abide with good faith in their contractual
commitments."
o However, in Salas, Jr., only parties to the Agreement, their assigns or
heirs have the right to arbitrate or could be compelled to
arbitrate.   The Court went further by declaring that in recognizing the
right of the contracting parties to arbitrate or to compel arbitration,
 the splitting of the proceedings to arbitration as to some of the
parties on one hand and trial for the others on the other hand, or the
suspension of trial pending arbitration between some of the parties,
should not be allowed as it would, in effect, result in multiplicity of
suits, duplicitous procedure and unnecessary delay.
 The object of arbitration is to allow the expeditious determination of a
dispute.
Clearly, the issue before us could not be speedily and efficiently resolved in
its entirety if we allow simultaneous arbitration proceedings and trial, or
suspension of trial pending arbitration.  Accordingly, the interest of justice
would only be served if the trial court hears and adjudicates the case in a
single and complete proceeding.
Dispositive: Petition denied.
Puromines vs Court of Appeals
Nocon, J:
Facts:
Pursuant to a contract of sale executed between Puromines Inc (petitioner)
and Philipp Brothers Oceanic, Inc., (private respondent) as charterer of M/V Liliana
Dimitrova, 3 Bills of Lading were executed bound for the Iloilo and Manila of 15,000
metric tons of prilled urea.
However, upon reaching the port of Manila it was found out that the
shipment (urea) were already contaminated with rust and dirt.
This prompted petitioner to file an action for breach of contract of carriage
against Maritime Factors, Inc as ship agent here in the Philippines for the owners of
M/V Liliana in the complaint moreover private respondent Philipp Brothers Oceanic
Inc., was impleaded as charterer of the said vessel.
Private respondent, Philipp Brothers, instead of filing its answer filed a
motion to dismiss on the ground of no cause of action. Private respondent also
avers that Puromines Inc. should comply with the arbitration clause provided for in
the sales contract.
Facts show that the sales contract executed between Puromines Inc., and
Philipp Brothers Oceanic, Inc., provides for an arbitration clause wherein it states
that:
“Any disputes arising under this contract shall be settled by arbitration in
London in accordance with the Arbitration Act 1950 and any statutory amendment
or modification thereof. Each party is to appoint an Arbitrator, and should they be
unable to agree, the decision of an Umpire appointed by the them be final. The
Arbitrators and Umpire are all to be commercial men and resident in London. This
submission may be made a rule of the High Court of Justice in England by either
party.”
Petitioner moved to oppose the said motion to dismiss alleging that the
arbitration clause is not applicable on the case because the complaint did not arise
from the violation of the terms and conditions of the sales contract but rather for
claims of cargo agreement.
The trial court ruled in favor of the petitioner. On appeal, the CA reversed
the decision of the trial court and found that the arbitration clause is applicable.
Hence this petition.
Issue: whether petitioner is bound by the arbitration clause in the sales contract.
RATIO:
Yes, petitioner is bound by the arbitration clause provided for in the
contract. Arbitration has been held valid and constitutional. Even before the
enactment of RA no. 876, the Supreme Court has countenanced the settlement of
disputes through arbitration. The rule now is that unless the agreement is such
absolutely close the doors of the courts against the parties, which agreement would
be void, the courts will look with favor upon such amicable arrangements and will
only interfere with great reluctance to anticipate or nullify the action of the
arbitrator.
At the case at bar, the sales contract is comprehensive enough to include
claims for damages arising from carriage and delivery of the goods. Puromines, Inc
derived his right to the cargo from the bill of lading which is the contract of
affreihtment together with the sales contract. Consequently, Puromines is bound by
the provisions and terms of the bill of lading and of the arbitration clause.
Moreover the court also ruled that, whether the liability of respondent
should be based on the sales contract or that of the bill of lading, the parties are
nevertheless obligated to respect the arbitration provisions on sales contract and/or
the bill of lading. Petitioner being a signatory and party to the sales contract cannot
escape from his obligation under the arbitration clause as stated therein.

As pointed out in the case of Mindanao Portland Cement Corp. vs Mc
Donough Construction Company of Florida the court ruled:
“With a written provision for arbitration as well as failure on respondent's part to
comply, parties must proceed to their arbitration in accordance with the terms of
their agreement (Sec. 6, RA 876). Proceeding in court is merely a summary remedy
to enforce the agreement to arbitrate. The duty of the court in this case is not to
resolve the merits of the parties' claims but only to determine if they should
proceed to arbitration or not . And although it has been ruled that a frivolous or
patently baseless claim should not be ordered to arbitration it is also recognized
that the mere fact that a defense exist against a claim does not make it frivolous or
baseless.
WHEREFORE, the decision of the CA is affirmed, petition is dismissed.
Korea Technologies Co. Ltd vs Lerma
GR No. 143581 January 7, 2008
Facts: Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation
which is engaged in the supply and installation of Liquefied Petroleum Gas (LPG)
Cylinder manufacturing plants, while private respondent Pacific General Steel
Manufacturing Corp. (PGSMC) is a domestic corporation. On March 5, 1997, PGSMC
and KOGIES executed a Contract whereby KOGIES would set up an LPG Cylinder
Manufacturing Plant in Carmona, Cavite. The contract was executed in the
Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment for
Contract No. KLP-970301 dated March 5, 1997 amending the terms of payment. The
contract and its amendment stipulated that KOGIES will ship the machinery and
facilities necessary for manufacturing LPG cylinders for which PGSMC would pay
USD 1,224,000. KOGIES would install and initiate the operation of the plant for
which PGSMC bound itself to pay USD 306,000 upon the plant’s production of the
11-kg. LPG cylinder samples. Thus, the total contract price amounted to USD
1,530,000. On October 14, 1997, PGSMC entered into a Contract of Lease with
Worth Properties, Inc. (Worth) for use of Worth’s 5,079-square meter property with
a 4,032-square meter warehouse building to house the LPG manufacturing plant.
The monthly rental was PhP 322,560 commencing on January 1, 1998 with a 10%
annual increment clause. Subsequently, the machineries, equipment, and facilities
for the manufacture of LPG cylinders were shipped, delivered, and installed in the
Carmona plant. PGSMC paid KOGIES USD 1,224,000. However, gleaned from the
Certificate executed by the parties on January 22, 1998, after the installation of the
plant, the initial operation could not be conducted as PGSMC encountered financial
difficulties affecting the supply of materials, thus forcing the parties to agree that
KOGIES would be deemed to have completely complied with the terms and
conditions of the March 5, 1997 contract. For the remaining balance of USD306,000
for the installation and initial operation of the plant, PGSMC issued two postdated
checks: (1) BPI Check No. 0316412 dated January 30, 1998 for PhP 4,500,000; and
(2) BPI Check No. 0316413 dated March 30, 1998 for PhP 4,500,000. When KOGIES
deposited the checks, these were dishonored for the reason PAYMENT STOPPED.
Thus, on May 8, 1998, KOGIES sent a demand letter to PGSMC threatening criminal
action for violation of Batas Pambansa Blg. 22 in case of nonpayment. On the same
date, the wife of PGSMCs President faxed a letter dated May 7, 1998 to KOGIES
President who was then staying at a Makati City hotel. She complained that not only
did KOGIES deliver a different brand of hydraulic press from that agreed upon but it
had not delivered several equipment parts already paid for.
Issue: Whether or not the arbitration clause in the contract of the parties should
govern.
Held: Yes. Established in this jurisdiction is the rule that the law of the place where
the contract is made governs. Lex loci contractus. The contract in this case was
perfected here in the Philippines. Therefore, our laws ought to govern. Nonetheless,
Art. 2044 of the Civil Code sanctions the validity of mutually agreed arbitral clause
or the finality and binding effect of an arbitral award. Art. 2044 provides, Any
stipulation that the arbitrators award or decision shall be final, is valid, without
prejudice to Articles 2038, 2039 and 2040.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It
has not been shown to be contrary to any law, or against morals, good customs,
public order, or public policy. There has been no showing that the parties have not
dealt with each other on equal footing. We find no reason why the arbitration
clause should not be respected and complied with by both parties. In Gonzales v.
Climax Mining Ltd., we held that submission to arbitration is a contract and that a
clause in a contract providing that all matters in dispute between the parties shall
be referred to arbitration is a contract. Again in Del Monte Corporation-USA v.
Court of Appeals, we likewise ruled that [t]he provision to submit to arbitration any
dispute arising therefrom and the relationship of the parties is part of that contract
and is itself a contract.
Having said that the instant arbitration clause is not against public policy, we come
to the question on what governs an arbitration clause specifying that in case of any
dispute arising from the contract, an arbitral panel will be constituted in a foreign
country and the arbitration rules of the foreign country would govern and its award
shall be final and binding.
Thus, it can be gleaned that the concept of a final and binding arbitral award is
similar to judgments or awards given by some of our quasi-judicial bodies, like the
National Labor Relations Commission and Mines Adjudication Board, whose final
judgments are stipulated to be final and binding, but not immediately executory in
the sense that they may still be judicially reviewed, upon the instance of any party.
Therefore, the final foreign arbitral awards are similarly situated in that they need
first to be confirmed by the RTC.