 California & Hawaiian Sugar Co. v. Pioneer Insurance & Surety Corp., G.R. No. 139273.

28
November 2000

FACTS

"On November 27, 1990, the vessel MV "SUGAR ISLANDER" arrived at the port of Manila carrying a
cargo of soybean meal in bulk consigned to several consignees, one of which was the Metro Manila Feed
Millers Association (Metro for [b]revity). Discharging of cargo from vessel to barges commenced on
November 30, 1990. From the barges, the cargo was allegedly offloaded, rebagged and reloaded on
consignee’s delivery trucks. Respondent, however, claims that when the cargo [was] weighed on a
licensed truck scale a shortage of 255.051 metric tons valued at P1,621,171.16 was discovered. The
above-mentioned shipment was insured with private respondent against all risk in the amount of
P19,976,404.00. Due to the alleged refusal of petitioners to settle their respective liabilities, respondent,
as insurer, paid the consignee Metro Manila Feed Miller’s Association. On March 26, 1992, as alleged
subrogee of Metro, private respondent filed a complaint for damages against herein petitioners. Within the
reglementary period to file an Answer, petitioners filed a Motion to Dismiss the complaint on the ground
that respondent’s claim is premature, the same being arbitrable. Private respondent filed its Opposition
thereto and petitioners filed their Reply to Opposition.

"On November 11, 1992, [the RTC] issued an Order deferring the hearing on the Motion to Dismiss until
the trial and directing petitioners to file their Answer. Petitioners then moved to reconsider said Order
which was, however, denied by [the RTC] on the ground that the reason relied upon by herein petitioners
in its Motion to Dismiss and Motion for Reconsideration [was] a matter of defense which they must prove
with their evidence.

"On August 20, 1993, petitioners filed their Answer with Counterclaim and Crossclaim alleging therein that
plaintiff, herein respondent, did not comply with the arbitration clause of the charter party; hence, the
complaint was allegedly prematurely filed. The trial court set the case for pre-trial on November 26, 1993.

"On November 15 and 16, 1993, petitioners filed a Motion to Defer Pre-Trial and Motion to Set for
Preliminary Hearing the Affirmative Defense of Lack of Cause of Action for Failure to comply with
Arbitration Clause, respectively. Private respondent did not file an Opposition to the said Motion to Set for
Preliminary Hearing. On December 28, 1993, [the RTC] issued an Order denying the Motion to Set for
Preliminary Hearing. On February 2, 1994 petitioners filed a Motion for Reconsideration of the Order
dated December 28, 1993. On February 11, 1994, [the RTC] issued an Order denying petitioners’ Motion
for Reconsideration. Hence, the instant petition." 5

CA affirmed the trial court and pronounced that the ground relied upon by petitioners is a matter of
defense which petitioners must prove with their evidence at the trial. Further, the CA ruled that the
arbitration clause provided in the charter party did not bind respondent. The right of the respondent as
subrogee, in filing the complaint against herein petitioner is not dependent upon the charter party relied
upon by petitioners; nor does it grow out of any privity contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by respondent as insurer to the insured. (Basically,
the charter contract was not assigned, the insurer became subrogee by operation of law when it paid the
insurance claim)

ISSUE: Whether or not insurer, as subrogee of the consignee, is bound by the charter party (which has
arbitration clause) which is incorporated and referred to in the bill of lading.

RULING: [Issue was not answered. SC merely noted citation of Pan Malayan case was wrong]
[A preliminary hearing on the affirmative defenses may be allowed even if the defendant’s Motion to
Dismiss has been filed but not definitely resolved, or if it has been deferred as it could be under the pre-
1997 Rules.]

There was neither need nor reason to rule on the applicability of the arbitration clause.

Be that as it may, we find the CA’s reasoning on this point faulty. Citing Pan Malayan Insurance
Corporation v. CA, it ruled that the right of respondent insurance company as subrogee was not based on
the charter party or any other contract; rather, it accrued upon the payment of the insurance claim by
private respondent to the insured consignee. There was nothing in Pan Malayan, however, that prohibited
the applicability of the arbitration clause to the subrogee. That case merely discussed, inter alia, the
accrual of the right of subrogation and the legal basis therefor. This issue is completely different from that
of the consequences of such subrogation; that is, the rights that the insurer acquires from the insured
upon payment of the indemnity.

 Mindanao Portland Cement Corporation v. McDonough Construction Co. of Florida, G.R. No. L-
23390, 24 April 1967

FACTS:
Petitioner Mindanao Portland Cement Corporation and respondent McDonough Construction Company of
Florida, U.S.A., executed a contract for the construction by McDonough of a dry Portland cement plant
at Iligan City.  In a separate contract, Turnbull, Inc. - the "engineer" referred to in the construction contract
- was engaged to design and manage the construction of the plant, supervise the construction, schedule
deliveries and the construction work as well as check and certify all contractors' progress and fiscal
requests for payment.
Alterations in the plans and specifications were subsequently made and extensions of time for the
termination of the project were granted.
Differences later arose.  Mindanao Portland claimed from McDonough damages in the amount of more
than P2,000,000 allegedly occasioned by the delay in the project's completion.  McDonough in turn asked
for more than P450,000 from Mindanao Portland for alleged losses due to cost of extra work and
overhead as of April 1962.  A conference was held on or about May 29, 1962 between Mindanao Portland
and Turnbull, Inc., on one hand, and McDonough on the other, to settle the differences aforementioned,
but no satisfactory results were reached.
Mindanao Portland sent written invitations to arbitrate, invoking a provision in their contract regarding
arbitration of disputes.
Instead of answering said invitations, McDonough, with Turnbull, Inc.'s approval, submitted to Mindanao
Portland for payment its final statement of work accomplished, asking for P403,700 as unpaid balance of
the consideration of the contract.
Mindanao Portland filed the present action in the CFI of Manila to compel McDonough to arbitrate with it
concerning alleged disputes arising from their contract.  
McDonough filed, its answer and denied the alleged existence of disagreement between the parties.  And
as special defense, it alleged that its claim for P403,700 was not disputed and that the respective claims
for damages should be resolved by Turnbull, Inc., pursuant to the exception in the arbitration clause of the
construction contract.
CFI ruled that there is dispute arising from the contract and thus it ordered petitioner and respondent to
proceed to arbitration in accordance with the terms of their contract. Hence, the appeal.
ISSUE: whether under these facts respondent is duty-bound to submit to arbitration?
RULING: YES
The provision of the contract on "Arbitration of Disagreements" (par. 39) says:
"39.  In the event of disagreement between the Owner and the Contractor in respect of the
rights or obligations of either of the parties hereunder except the interpretation of the plans
and specifications and questions concerning the sufficiency of materials, the time,
sequence and method of performing the work, which questions are to be finally
determined by the Engineer, they shall submit the matter to arbitration, the Owner
choosing one arbitrator, the Contractor one, and the two so chosen shall select a
third.  The decision of such arbitrators or a majority of them shall be made in writing to
both parties and when so made shall be binding upon the parties hereto."  (Underscoring
supplied)
Respondent, herein appellant, contends first, that there is no showing of disagreement; and second, that
if there is, the same falls under the exception, to be resolved by the engineer.
As to the first point, the fact of disagreement has been determined by the court below upon the stipulation
of facts and documentary evidence submitted.  In this appeal involving pure questions of law, the above
finding should not be disturbed.  Furthermore, the existence of disagreement is plainly shown in the
record.  Respondent admits the existence of petitioner's claim but denies its merit
Regarding the second point, the parties agreed by way of exception that disagreements with respect to
the following matters shall be finally resolved by the engineer, instead of being submitted to
arbitration:  (1) The interpretation of plans and specifications; (2) sufficiency of materials; and (3) the time,
sequence and method of performing the work.
The disputes involved here, on the other hand, are on (1) the proper computation of the total
contract price, including the cost of additional or extra works; and (2) the liability for alleged delay in
completing the project and for alleged losses due to change in the plans and specifications.
To none of the exceptions then do the disagreements in question belong; the rule of arbitration therefore
applies.  The parties in fact also stipulated in their contract, under "EXTRA WORK", that the cost of extra
work to be paid shall be subject to negotiation. This negates the proposition that Turnbull, Inc.'s cost
estimates appearing in Addenda 2, 3 and 7 are final and conclusive.
The reason, moreover, for the exceptions - interpretation of plans and specifications; sufficiency of mate-
rials; sequence, time and method of performing the work - is the need to decide these matters
immediately, since the progress of the work would await their determination.  The same is not true as to
matters relating to the liability for delay in the project's completion; these are questions that the engineer
does not have to resolve before the project can go on.  Consequently, We view that it is not included in
the exceptions, as indeed the related provisions of their agreement indicate.
Since there obtains herein a written provision for arbitration as well as failure on respondent's part to
comply therewith, the court a quo rightly ordered the parties to proceed to arbitration in accordance with
the terms of their agreement (Sec. 6, Republic Act 876).  Respondent's arguments touching upon the
merits of the dispute are improperly raised herein.  They should be addressed to the arbitrators.  This
proceeding is merely a summary remedy to enforce the agreement to arbitrate.  The duty of the court in
this case is not to resolve the merits of the parties' claims but only to determine if they should proceed to
arbitration or not.  

 Associated Bank v. Court of Appeals, G.R. No. 107918, 14 June 1994

In a complaint for Violation of the Negotiable Instrument Law and Damages, plaintiffs 1 seek the recovery
of the amount of P900,913.60 which defendant bankcharged against their current account by virtue of the
sixteen (16) checks drawn by them despite the apparent alterations therein with respect to the name of
the payee, that is, the name Filipinas Shell was erased and substituted with Ever Trading and DBL
Trading by their supervisor Jeremias Cabrera, without their knowledge and consent.

Answering the complaint, defendant Associated Bank claimed that the subject checks appeared to have
been regularly issued and free from any irregularity which would excite or arouse any suspicion or warrant
their dishonor when the same were negotiated and honored by it; that it observed and exercised the
required diligence, care and the prescribed standard verification procedures before finally accepting and
honoring the subject checks and that the proximate cause of plaintiffs’ loss, if any, was their own laxity,
negligence and lack of control, due care and diligence in the conduct of their business affairs.

With leave of court, defendant Associated Bank filed a Third-Party Complaint against Philippine
Commercial International Bank, Far East Bank & Trust Company, Security Bank and Trust Company and
Citytrust Banking Corporation for reimbursement, contribution, indemnity from said third-party defendants
for being the collecting banks of the subject checks and by virtue of their bank guarantee for all checks
sent for clearing to the Philippine Clearing House Corporation (PCHC), as provided for in Section 17,
(PCHC), as provided for in Section 17, PCHC Clearing House Rules and Regulations.

In its Answer to the Third-Party Complaint, Citytrust Banking Corporation averred that the subject checks
appeared to be complete and regular on their face with no indication that an original payee’s name was
erased and superimposed with another; that plaintiffs’ fault and negligence in failing to examine their
monthly bank statements, together with the returned checks and their own check stubs, put them under
estoppel and cannot recover the proceeds of the checks against it, an innocent third-party, and plaintiff
must suffer the loss as their negligence was the proximate cause thereof; and that third party plaintiff is
barred from recovering from it base on the provisions of Sections 20 and 21 of the Philippine Clearing
Rules and Regulations.

Philippine Commercial International Bank alleged that the subject check was complete and regular on its
face and was paid by it only upon presentment to the drawee bank for clearing who, upon examination
thereof, found the same to be complete and regular on its face; that it was only after said check was
cleared by third-party plaintiff for payment that it allowed the payee to withdraw the proceeds of the check
from its account; that the cause of action of the third-party plaintiff is barred by estoppel and/or laches for
its failure to return the check to it within the period provided for under Clearing House Rules and
Regulations; that this Court has no jurisdiction over the suit as it and third-party plaintiff are members of
the Philippine Clearing House and bound by the Rules and Regulations thereof providing for arbitration.

A Motion To Dismiss was filed by Security Bank and Trust Company on the grounds that third-party
plaintiff failed to resort to arbitration as provided for in Section 36 of the Clearing House Rules and
Regulations of the Philippine Clearing House Corporation, and that it was released from any liability with
the acceptance by third-party plaintiff of the subject check.

On the other hand, third-party plaintiff maintains that this Court has jurisdiction over the suit as the
provisions of the Clearing House Rules and Regulations are applicable only if the suit or action is
between participating member banks, whereas the plaintiffs are private persons and the third-party
complaint between participating member banks is only a consequence of the original action initiated by
the plaintiffs.

The trial court dismissed the third-party complaint for lack of jurisdiction citing Section 36 of the Clearing
House Rules and Regulations of the PCHC providing for settlement of disputes and controversies
involving any check or item cleared through the body with the PCHC. It ruled — citing the Arbitration
Rules of Procedure — that the decision or award of the PCHC through its arbitration committee/arbitrator
is appealable only on questions of law to any of the Regional Trial Courts in the National Capital Region
where the head office of any of the parties is located.  On the plaintiffs’ contention that jurisdiction vests
with the court only if the suit or action is between participating member banks without the involvement of
private parties the trial court held:The third-party complaint concerning a dispute or controversy among
clearing participants involving the subject checks cleared through PCHC is actually independent of,
separate and distinct from the plaintiff’s complaint. CCA affirmed. Hence, the appeal to the SC.

ISSUE: Which between the RTC and PCHC Arbitration Committee has jurisdiction over the third-party
complaint?

RULING: PCHC Arbitration Committee has jurisdiction.

The Clearing House Rules and Regulations on Arbitration of the Philippine Clearing House Corporation
are clearly applicable to petitioner and private respondents, third party plaintiff and defendants,
respectively, in the court below. Petitioner Associated Bank’s third party complaint in the trial court was
one for reimbursement, contribution and indemnity against the Philippine Commercial and Industrial Bank
(PCIB), the Far East Bank and Trust, Co. (FEBTC), Security Bank and Trust Co. (SBTC), and the
CityTrust Banking Corporation (CTBC), in connection with petitioner’s having honored sixteen checks
which said respondent banks supposedly endorsed to the former for collection in 1989. Under the rules
and regulations of the Philippine Clearing House Corporation (PCHC), the mere act of participation of the
parties concerned in its operations in effect amounts to a manifestation of agreement by the parties to
abide by its rules and regulations. As a consequence of such participation, a party cannot invoke the
jurisdiction of the courts over disputes and controversies which fall under the PCHC Rules and
Regulations without first going through the arbitration processes laid out by the body. Since claims
relating to the regularity of checks cleared by banking institutions are among those claims which should
first be submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated Bank, having
voluntarily bound itself to abide by such rules and regulations, is estopped from seeking relief from the
Regional Trial Court on the coattails of a private claim and in the guise of a third party complaint without
first having obtained a decision adverse to its claim from the said body. It cannot bypass the arbitration
process on the basis of its averment that its third party complaint is inextricably linked to the original
complaint in the Regional Trial Court.

While the PCHC Rules and Regulations allow appeal to the Regional Trial Courts only on questions of
law, this does not preclude our lower courts from dealing with questions of fact already decided by the
PCHC arbitration when warranted and appropriate.

In Banco de Oro Savings  and Mortgage Banks vs. Equitable Banking Corporation 8 this Court had the
occasion to rule on the validity of these rules as well as the jurisdiction of the PCHC as a forum for
resolving disputes and controversies involving checks and other clearing items when it held that "the
participation of two banks. . . in the Clearing Operations of the PCHC (was) a manifestation of its
submission to its jurisdiction." 

The applicable PCHC provisions on the question of jurisdiction provide:

Sec. 3 — AGREEMENT TO THESE RULES

It is the general agreement and understanding, that any participant in the PCHC MICR
clearing operations, by the mere act of participation, thereby manifests its agreement to
these Rules and Regulations, and its subsequent amendments.

xxx xxx xxx

Sec. 36 — ARBITRATION

36.1 Any dispute or controversy between two or more clearing participants involving any
check/item cleared thru PCHC shall be submitted to the Arbitration Committee, upon
written complaint of any involved participant by filing the same with the PCHC serving the
 same upon the other party or parties, who shall within fifteen (15) days after receipt
thereof, file with the Arbitration Committee its written answer to such written complaint
and also within the same period serve the same upon the complaining participant. This
period of fifteen (15) days may be extended by the Committee not more than once for
another period of fifteen (15) days, but upon agreement in writing of the complaining
party, said extension may be for such period as the latter may agree to.

Section 36.6 is even more emphatic:

36.6 The fact that a bank participates in the clearing operations of PCHC shall be
deemed its written and subscribed consent to the binding effect of this arbitration
agreement as if it had done so in accordance with Section 4 of the Republic Act No. 876
otherwise known as the Arbitration Law.

Thus, not only do the parties manifest by mere participation their consent to these rules, but such
participation is deemed (their) written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant subject to the Clearing House Rules and
Regulations of the PCHC may go on appeal to any of the Regional Trial Courts in the National Capital
Region where the head office of any of the parties is located only after a decision or award has been
rendered by the arbitration committee or arbitrator on questions of law. 

Note:

Can a party be bound by the Arbitration Clause by statutory provision? YES

 Gonzales v. Climax Mining Ltd., G.R. No. 161957, 22 January 2007

On 23 March 2000, Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant to Clause
19.1 of the Addendum Contract and also in accordance with Sec. 5 of R.A. No. 876. On 31 March 2000,
Climax-Arimco filed a petition to compel arbitration before the RTC of Makati City while the complaint for
the nullification of the Addendum Contract was pending before the DENR Panel of Arbitrators.

Gonzales filed an Answer with Counterclaim, questioning the validity of the Addendum Contract
containing the arbitration clause. Gonzales alleged that the Addendum Contract containing the arbitration
clause is void in view of Climax-Arimco’s acts of fraud, oppression and violation of the Constitution. Thus,
the arbitration clause, Clause 19.1, contained in the Addendum Contract is also null and void ab initio and
legally inexistent. (Motion to Inhibit granted – Reraffled)1awphi1.ne

Climax-Arimco argued that R.A. No. 876 does not authorize a pre-trial or trial for a motion to compel
arbitration but directs the court to hear the motion summarily and resolve it within ten days from hearing.
Judge Pimentel granted the motion and directed the parties to arbitration. On 13 February 2001, Judge
Pimentel issued the first assailed order requiring Gonzales to proceed with arbitration proceedings and
appointing retired CA Justice Jorge Coquia as sole arbitrator. MR is denied.

Gonzales filed Petition for Certioari under Rule 65. According to Gonzales, Sec. 6 of R.A. No. 876 and
Sec. 24 of R.A. No. 9285 or the "Alternative Dispute Resolution Act of 2004" outline the procedure to be
followed in petitions to compel arbitration, which the RTC did not follow. Thus, referral of the parties to
arbitration by Judge Pimentel despite the timely and properly raised issue of nullity of the Addendum
Contract was misplaced and without legal basis. Both R.A. No. 876 and R.A. No. 9285 mandate that any
issue as to the nullity, inoperativeness, or incapability of performance of the arbitration clause/agreement
raised by one of the parties to the alleged arbitration agreement must be determined by the court prior to
referring them to arbitration. They require that the trial court first determine or resolve the issue of nullity,
and there is no other venue for this determination other than a pre-trial and hearing on the issue by the
trial court which has jurisdiction over the case. Gonzales adds that the assailed 13 February 2001 Order
also violated his right to procedural due process when the trial court erroneously ruled on the existence of
the arbitration agreement despite the absence of a hearing for the presentation of evidence on the nullity
of the Addendum Contract.

Respondent Climax-Arimco, on the other hand, argue:

1. The special civil action for certiorari employed by Gonzales is available only where there is no
appeal or any plain, speedy, and adequate remedy in the ordinary course of law against the
challenged orders or acts. R.A. No. 876 provides for an appeal from such orders, which, under
the Rules of Court, must be filed within 15 days from notice of the final order or resolution
appealed from or of the denial of the motion for reconsideration filed in due time. Gonzales has
not denied that the relevant 15-day period for an appeal had elapsed long before he filed this
petition for certiorari. He cannot use the special civil action of certiorari as a remedy for a lost
appeal.

2. An application to compel arbitration under Sec. 6 of R.A. No. 876 confers on the trial court only a
limited and special jurisdiction, i.e., a jurisdiction solely to determine (a) whether or not the parties
have a written contract to arbitrate, and (b) if the defendant has failed to comply with that
contract.

3. Gonzales’s attack on or repudiation of the Addendum Contract also is not a ground to deny effect
to the arbitration clause in the Contract. The arbitration agreement is separate and severable
from the contract evidencing the parties’ commercial or economic transaction, it stresses. Hence,
the alleged defect or failure of the main contract is not a ground to deny enforcement of the
parties’ arbitration agreement. Even the party who has repudiated the main contract is not
prevented from enforcing its arbitration provision. R.A. No. 876 itself treats the arbitration clause
or agreement as a contract separate from the commercial, economic or other transaction to be
arbitrated.

4. The grounds Gonzales invokes for the revocation of the Addendum Contract—fraud and
oppression in the execution thereof—are also not grounds for the revocation of the arbitration
clause in the Contract. Such grounds may only be raised by way of defense in the arbitration itself
and cannot be used to frustrate or delay the conduct of arbitration proceedings. Instead, these
should be raised in a separate action for rescission.

5. The summary proceeding to compel arbitration under Sec. 6 of R.A. No. 876 should not be
confused with the procedure in Sec. 24 of R.A. No. 9285. Sec. 6 of R.A. No. 876 refers to an
application to compel arbitration where the court’s authority is limited to resolving the issue of
whether there is or there is no agreement in writing providing for arbitration, while Sec. 24 of R.A.
No. 9285 refers to an ordinary action which covers a matter that appears to be arbitrable or
subject to arbitration under the arbitration agreement.In the latter case, the statute is clear that
the court, instead of trying the case, may, on request of either or both parties, refer the parties to
arbitration, unless it finds that the arbitration agreement is null and void, inoperative or incapable
of being performed. Arbitration may even be ordered in the same suit brought upon a matter
covered by an arbitration agreement even without waiting for the outcome of the issue of the
validity of the arbitration agreement. Art. 8 of the UNCITRAL Model Law24 states that where a
court before which an action is brought in a matter which is subject of an arbitration agreement
refers the parties to arbitration, the arbitral proceedings may proceed even while the action is
pending.
ISSUE: Whether it was proper for the RTC, in the proceeding to compel arbitration under R.A. No. 876, to
order the parties to arbitrate even though the defendant therein has raised the twin issues of validity and
nullity of the Addendum Contract and, consequently, of the arbitration clause therein as well?

RULING: YES

We address the Rule 65 petition in G.R. No. 167994 first from the remedial law perspective. It deserves to
be dismissed on procedural grounds, as it was filed in lieu of appeal which is the prescribed remedy and
at that far beyond the reglementary period. The Arbitration Law specifically provides for an appeal by
certiorari, i.e., a petition for review under certiorari under Rule 45 of the Rules of Court that raises pure
questions of law.

In the present case, Gonzales’s petition raises a question of law, but not a question of jurisdiction. Judge
Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when he ordered Gonzales
to proceed with arbitration and appointed a sole arbitrator after making the determination that there was
indeed an arbitration agreement. It has been held that as long as a court acts within its jurisdiction and
does not gravely abuse its discretion in the exercise thereof, any supposed error committed by it will
amount to nothing more than an error of judgment reviewable by a timely appeal and not assailable by a
special civil action of certiorari. Even if we overlook the employment of the wrong remedy in the broader
interests of justice, the petition would nevertheless be dismissed for failure of Gonzalez to show grave
abuse of discretion.

Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
jurisdiction. The Civil Code is explicit on the matter. R.A. No. 876 also expressly authorizes arbitration of
domestic disputes. Foreign arbitration, as a system of settling commercial disputes of an international
character, 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.34 The enactment of R.A. No. 9285 on 2 April 2004 further institutionalized the use of alternative
dispute resolution systems, including arbitration, in the settlement of disputes.

Disputes do not go to arbitration unless and until the parties have agreed to abide by the arbitrator’s
decision. Necessarily, a contract is required for arbitration to take place and to be binding. R.A. No. 876
recognizes the contractual nature of the arbitration agreement.

In Del Monte Corporation-USA v. Court of Appeals 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 . As a
rule, contracts are respected as the law between the contracting parties and produce effect as between
them, their assigns and heirs."

The jurisdiction of the courts in relation to Sec. 6 of R.A. No. 876 as well as the nature of the proceedings
therein was expounded upon in La Naval Drug Corporation v. Court of Appeals. There it was held that
R.A. No. 876 explicitly confines the court's authority only to the determination of whether or not 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 to proceed with the arbitration in accordance with the
terms thereof." If the court, 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 nature.

Implicit in the summary nature of the judicial proceedings is the separable or independent character of the
arbitration clause or agreement.

The doctrine of separability, or severability as other writers call it, enunciates that an arbitration
agreement is independent of the main contract. The arbitration agreement is to be treated as a separate
agreement and the arbitration agreement does not automatically terminate when the contract of which it is
part comes to an end. Indeed, the doctrine denotes that the invalidity of the main contract, also referred to
as the "container" contract, does not affect the validity of the arbitration agreement. Irrespective of the
fact that the main contract is invalid, the arbitration clause/agreement still remains valid and enforceable.

The separability of the arbitration clause is confirmed in Art. 16(1) of the UNCITRAL Model Law and Art.
21(2) of the UNCITRAL Arbitration Rules.48

The separability doctrine was dwelt upon at length in the U.S. case of Prima Paint Corp. v. Flood &
Conklin Manufacturing Co.49 It was held that "arbitration clauses are ‘separable’ from the contracts in
which they are embedded, and that where no claim is made that fraud was directed to the arbitration
clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract
itself was induced by fraud."

Hence, we now hold that the validity of the contract containing the agreement to submit to arbitration does
not affect the applicability of the arbitration clause itself. A contrary ruling would suggest that a party’s
mere repudiation of the main contract is sufficient to avoid arbitration. That is exactly the situation that the
separability doctrine, as well as jurisprudence applying it, seeks to avoid.

 Korea Technologies Co. Ltd. v. Lerma, G.R. No. 143581, 7 January 2008

On March 5, 1997, Pacific General Steel Manufacturing Corp. (PGSMC)and Korea Technologies Co., Ltd.
(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.

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. 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 PGSMC’s 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.

On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded but the
payments were stopped for reasons previously made known to KOGIES. On June 1, 1998, PGSMC
informed KOGIES that PGSMC was canceling their Contract dated March 5, 1997 on the ground that
KOGIES had altered the quantity and lowered the quality of the machineries and equipment it delivered to
PGSMC, and that PGSMC would dismantle and transfer the machineries, equipment, and facilities
installed in the Carmona plant. Five days later, PGSMC filed before the Office of the Public Prosecutor an
Affidavit-Complaint for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of
KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not unilaterally rescind
their contract nor dismantle and transfer the machineries and equipment on mere imagined violations by
KOGIES. It also insisted that their disputes should be settled by arbitration as agreed upon in Article 15,
the arbitration clause of their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1, 1998 letter
threatening that the machineries, equipment, and facilities installed in the plant would be dismantled and
transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an Application for Arbitration before
the Korean Commercial Arbitration Board (KCAB) in Seoul, Korea pursuant to Art. 15 of the Contract as
amended.

On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case No. 98-
1178 against PGSMC before the Muntinlupa City Regional Trial Court (RTC). KOGIES averred that
PGSMC violated Art. 15 of their Contract, as amended, by unilaterally rescinding the contract without
resorting to arbitration. On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was
not entitled to the TRO since Art. 15, the arbitration clause, was null and void for being against public
policy as it ousts the local courts of jurisdiction over the instant controversy.

RTC held that Art. 15 of the Contract as amended was invalid as it tended to oust the trial court or any
other court jurisdiction over any dispute that may arise between the parties. KOGIES’ prayer for an
injunctive writ was denied. CA The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy. Hence, this appeal.

ISSUE: Whether or not the arbitration clause is valid?

RULING: YES
The Core Issue: Article 15 of the Contract

We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It provides:
Article 15. Arbitration.—All disputes, controversies, or differences which may arise between the
parties, out of or in relation to or in connection with this Contract or for the breach thereof, shall
finally be settled by arbitration in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the Korean Commercial Arbitration Board. The award rendered by the arbitration(s)
shall be final and binding upon both parties concerned. (Emphasis supplied.)

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."

Arts. 2038, 2039, and 2040 abovecited refer to instances where a compromise or an arbitral award, as
applied to Art. 2044 pursuant to Art. 2043, may be voided, rescinded, or annulled, but these would not
denigrate the finality of the arbitral award. (about  mistake, fraud, violence, intimidation, undue influence,
or falsity of documents as ground for annulment of award)

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.

The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in accordance
with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is final and binding, is not
contrary to public policy.
What law applies? UNCITRAL Model law

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.

For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising from
contractual relations. In case a foreign arbitral body is chosen by the parties, the arbitration rules of our
domestic arbitration bodies would not be applied. As signatory to the Arbitration Rules of the UNCITRAL
Model Law on International Commercial Arbitration of the United Nations Commission on International
Trade Law (UNCITRAL) in the New York Convention on June 21, 1985, the Philippines committed itself to
be bound by the Model Law. We have even incorporated the Model Law in Republic Act No. (RA) 9285,
otherwise known as the Alternative Dispute Resolution Act of 2004. While RA 9285 was passed only in
2004, it nonetheless applies in the instant case since it is a procedural law which has a retroactive effect.

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject of
arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.––A court before which an action is brought in a matter which is
the subject matter of an arbitration agreement shall, if at least one party so requests not later than
the pre-trial conference, or upon the request of both parties thereafter, refer the parties to
arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable
of being performed.

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be final and
binding are not immediately enforceable or cannot be implemented immediately. Sec. 35 of the
UNCITRAL Model Law stipulates the requirement for the arbitral award to be recognized by a competent
court for enforcement, which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or
enforcement on the grounds provided for.

It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a judgment of a
foreign court but as a foreign arbitral award, and when confirmed, are enforced as final and executory
decisions of our courts of law. Therefore, the final foreign arbitral awards need first to be confirmed by the
RTC.

(3) The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific authority and
jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided under Art. 34(2) of
the UNCITRAL Model Law. Secs. 42 and 45.

Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually agreed
upon by the parties, still the foreign arbitral award is subject to judicial review by the RTC which can set
aside, reject, or vacate it. In this sense, what this Court held in Chung Fu Industries (Phils.), Inc. relied
upon by KOGIES is applicable insofar as the foreign arbitral awards, while final and binding, do not oust
courts of jurisdiction since these arbitral awards are not absolute and without exceptions as they are still
judicially reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether domestic or
foreign, are subject to judicial review on specific grounds provided for.

Can the RTC grant injunctive writ?

RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for PGSMC to
dismantle and transfer the equipment and machineries, we find it to be in order considering the factual
milieu of the instant case. Firstly, while the issue of the proper installation of the equipment and
machineries might well be under the primary jurisdiction of the arbitral body to decide, yet the RTC under
Sec. 28 of RA 9285 has jurisdiction to hear and grant interim measures to protect vested rights of the
parties.

 Vega v. San Carlos Milling Co. Ltd, G.R. No. L-21549, 22 October 1924

FACTS:
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 trial court ruled in favor of the plaintiff.
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
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.

ISSUE: Does the lower court erred in having held itself with jurisdiction to take cognizance of and
render judgment in the cause? Is arbitration a condition precedent before filing a case in court?

RULING: NO. Referral to arbitration is not a condition precedent

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:
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.

Dissenting of Malcolm

In the Philippines fortunately, the attitude of the courts toward arbitration agreements is slowly
crystallizing into definite and workable form. The doctrine announced in Wahl and
Wahl vs. Donaldson, Sims & Co. ([1903], 2 Phil., 301), was that a clause in a contract providing that
all matters in dispute shall be referred to arbitrators and to them alone, is contrary to public policy and
cannot oust the courts of jurisdiction. But even this conservative expression of the doctrine has
been modernized by the subsequent cases of Chang vs. Royal Exchange Assurance Corporation of
London ([1907], 8 Phil., 399); Allen vs. Province of Tayabas ([1918], 38 Phil., 356); and Chan
Linte vs. Law Union and Rock Ins. Co. ([1921], 42 Phil., 548). The rule now is that unless the
agreement is such as absolutely to close the doors of the courts against the parties, which agreement
would be void, the courts will look with favor upon such amicable arrangement and will only with great
reluctance interfere to anticipate or nullify the action of the arbitrator.

Pennsylvania- when the persons making an executory contract stipulate in it that all disputes and
differences between them, present or prospective, in reference to such contract or any sum payable
under it, shall be submitted to the arbitrament of a named individual, or specifically designated
persons, they are effectually bound irrevocaby by that stipulation, and precluded from seeking
redress elsewhere until the arbiter or arbiters agreed upon have rendered an award or
otherwise been discharged. The courts there, however, make distinction between agreements for a
general reference to arbitration and designating a particular individual or tribunal to arbitrate. The
former may be waived or revoked, and is no obstacle to a suit or action for the same matter; the latter
is irrevocable and until the designated arbiter or arbiters have decided, no right of action arises which
can be enforced in law or in equity.
England - a contractual stipulation for a general arbitration, constitutes a condition precedent to the
institution of judicial proceedings for the enforcement of the contract. (
Spanish civil law - provisions looking to the amicable adjustment of controversies out of court.
It was plainly the solemn purpose of the parties to settle their controversies amicably if
possible before resorting to the courts. They provided for themselves by mutual consent a method
which was speedier and less expensive for all concerned and less likely to breed that ill-feeling which
is often the consequence of hotly contested litigation. All this was done by the Planters on the one
hand and by the Milling Company on the other, to the end that justice might guide them and possible
differences by quickly adjusted.
 It is clear, by paragraph 7 of the Mutual Covenants, that these parties did not intend that the decision
of the arbitrators should prevent resort to the courts, for they expressly agreed to carry litigation
between them to the courts of Iloilo. Acting under legal rules, even in their most restrictive form,
disputes arising out of the contract, were to be referred to arbitration so that the damages sustained
by a breach of the contract, could be ascertained by specified arbitrators before any right of action
arose; but the matters in dispute were not to be referred to arbitrators and to them alone, to the utter
exclusion of the courts. It is exactly correct to state that the clauses of the Covenants hereinbefore
quoted, were meant as a condition precedent to litigation, which accordingly should be given effect.

Note:
 As early as 1924, arbitration is already utilized as seen in stipulations pertaining to it
 Is this good law?
 Is an arbitration agreement a condition precedent to the filing of an action in court?
Rule 16.1 (j) of the Rules of Court – MTD on the ground of failure to comply with a condition
precedent
 Is this an absolute rule? No. It can be waived

 Del Monte Corp. USA v. Court of Appeals, G.R. No. 136154, 7 February 2001

This Petition for Review  on certiorari assails the 17 July 1998 Decision1 of the Court of Appeals affirming
the 11 November 1997 Order 2 of the Regional Trial Court which denied petitioners' Motion to Suspend
Proceedings in Civil Case No. 2637-MN. It also questions the appellate court's Resolution3 of 30 October
1998 which denied petitioners' Motion for Reconsideration.

On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)

appointed private respondent 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. The agreement provided, among others, for an
arbitration clause which states –

12. GOVERNING LAW AND ARBITRATION4

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 x x x x

In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country. Immediately after
its appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of
petitioner 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.

On 3 October 1996 private respondents MMI and SFI filed a Complaint against petitioners DMC-
USA, before RTC Malabon. Private respondents predicated their complaint on the alleged violations by
petitioners of Arts. 20,10 2111 and 2312 of the Civil Code. According to private respondents, DMC-USA
products continued to be brought into the country by parallel importers despite the appointment of private
respondent MMI as the sole and exclusive distributor of Del Monte products thereby causing them great
embarrassment and substantial damage. On 21 October 1996 petitioners DMC-USA, et al filed a Motion
to Suspend Proceedings invoking the arbitration clause in their Agreement with private
respondents.1âwphi1.nêt

RTC deferred consideration of petitioners' 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.
Thereafter, 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 Court of appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners' causes of action, required the interpretation of Art.
21 of the Civil Code and that in determining whether petitioners had violated it "would require a full blown
trial" making arbitration "out of the question." Petitioners' Motion for Reconsideration of the affirmation
was denied. Hence, this Petition for Review.

ISSUE: Whether the dispute between the parties warrants an order compelling them to submit to
arbitration?

RULING: Only as to the parties to the contract.

Petitioners contend that the subject matter of private respondents' causes of action arises out of or relates
to the Agreement between petitioners and private respondents. Thus, considering that the arbitration
clause of the Agreement provides that all disputes arising out of or relating to the Agreement or the
parties' relationship, including the termination thereof, shall be resolved by arbitration, they insist on the
suspension of the proceedings in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876–

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

Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and 23
of the Civil Code, the determination of which demands a full blown trial, as correctly held by the Court of
Appeals.

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 petitioner DMC-USA and private respondent MMI is valid and the dispute between
the parties is arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private respondent 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., petitioners DMC-USA and its Managing Director for Export Sales Paul E. Derby, Jr., and
private respondents MMI and its Managing Director LILY SY are bound by the Agreement and its
arbitration clause as they are the only signatories thereto. Petitioners Daniel Collins and Luis Hidalgo, and
private respondent 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 25 but
only as to petitioners DMC-USA and Paul E. Derby, Jr., and private respondents MMI and LILY SY, and
not as to the other parties in this case. This is consistent with the recent case of Heirs of Augusto L.
Salas, Jr. v. Laperal Realty Corporation,26 which superseded that of Toyota Motor Philippines Corp. v.
Court of Appeals.27

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." 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.

Do you agree with the Decision of the court?

SEE: Rule 4.7. Multiple actions and parties. - The court shall not decline to refer some or all of the
parties to arbitration for any of the following reasons:

a. Not all of the disputes subject of the civil action may be referred to arbitration;

b. Not all of the parties to the civil action are bound by the arbitration agreement and referral
to arbitration would result in multiplicity of suits;

c. The issues raised in the civil action could be speedily and efficiently resolved in its entirety
by the court rather than in arbitration;

d. Referral to arbitration does not appear to be the most prudent action; or

e. The stay of the action would prejudice the rights of the parties to the civil action who are
not bound by the arbitration agreement.

The court may, however, issue an order directing the inclusion in arbitration of those parties who are
not bound by the arbitration agreement but who agree to such inclusion provided those originally
bound by it do not object to their inclusion.