G.R. No.

103200 August 31, 1994

LA NAVAL DRUG CORPORATION, petitioner, 

vs.
THE HONORABLE COURT OF APPEALS and WILSON C. YAO, respondents.

Jerome T. Paras for petitioner.

Quasha, Asperilla, Ancheta, Peña & Nolasco for private respondent.

VITUG, J.:

In an effort to declog the courts of an increasing volume of work load and, most importantly, in order
to accord contending parties with expenditious alternatives for settling disputes, the law authorities,
indeed encourages, out of court settlements or adjudications. Compromises and arbitration are
widely known and used as such acceptable methods of resolving adversarial claims.

Arbitrations, in particular, is governed by a special law, Republic Act 876, suppletory to which are
laws and rules of general application. This case before us concerns the jurisdiction of courts, in
relation to the provisions of Section 6 of Republic Act No. 876, and, in that respect, the applicability
of the doctrine of estoppel. The law (R.A. 876), specifically Section 6 thereof, provides:

Sec. 6. Hearing by court. — A party aggrieved by the failure, neglect or refusal of

another to perform under an agreement in writing providing for arbitration may
petition the court for an order directing that such arbitration proceed in the manner
provided for in such agreement. Five days notice in writing of the hearing of such
application shall be served either personally or by registered mail upon the party in
default. The court shall hear the parties, and upon being satisfied that the making of
the agreement or such failure to comply therewith is not in issue, shall make an order
directing the parties to proceed to arbitration in accordance with the terms of the
agreement. If the making of the agreement or default be in issue the court shall
proceed to summarily hear such issue. If the finding be that no agreement in writing
providing for arbitration was made, or that there is no default in the proceeding
thereunder, the proceeding shall be dismissed. If the finding be that a written
provision for arbitration was made and there is a default in proceeding thereunder, an
order shall be made summarily directing the parties to proceed with the arbitration in
accordance with the terms thereof.

The court shall decide all motions, petitions or application filed under the provisions
of this Act, within ten days after such motions, petitions, or applications have been
heard by it.

In chronology, the events that have led to the case at bench are detailed in the appealed decision of
respondent appellate court, which we here reproduce in toto.

Original action for Certiorari and Prohibition for Annulment of the Orders, dated April
26, 1990 and June 22, 1990, respectively, of Branch LXI, Regional Trial Court,
Angeles City, in Special Case No. 6024 for Enforcement of ARBITRATION
Agreement with Damages. Petitioner assails that portion of subject Order of April 26,
1990, stating as follows:

(1) Petitioner's claim for damages predicated on alleged tortuous acts

of respondents La Naval Drug corporation such as their alleged
interference and dilatory tactics, etc. in the implementation of the
Arbitration Agreement in the Contract of Lease, thereby compelling
among others the petitioner to go to Court for redress; and
respondent La Naval Drug Corporation's counterclaim for damages
may be entertained by this Court in a hearing — not summary — for
the purpose, under the Rules of Court.

(2) A preliminary hearing of the special and affirmative defense to

show that Petitioner has not cause of action against respondent's
claim for damages is denied; a resolution on this issue is deferred
after the trial of the case on the merits.

And challenges the Order of June 22, 1990 denying its motion for reconsideration of
the said earlier Order.

From the petition below of respondent Yao, it appears that he is the present owner of
a commercial building a portion of which is leased to petitioner under a contract of
lease executed on December 23, 1993 with the former owner thereof, La
Proveedora, Inc., which contract expired on April 30, 1989. However, petitioner
exercised its option to lease the same building for another five years. But petitioner
and respondent Yao disagreed on the rental rate, and to resolve the controversy, the
latter, thru written notices to the former, expressed his intention to submit their
disagreement to arbitration, in accordance with Republic Act 876, otherwise known
as the Arbitration Law, and paragraph 7 of their lease contract, providing that:

7. . . . Should the parties fail to agree on the rate of rentals, the same
shall be submitted to a group of Arbitrators composed of three (3)
members, one to be appointed by LESSOR, another by LESSEE and
the third one to be agreed upon by the two arbitrators previously
chosen and the parties hereto shall submit to the decision of the
arbitrators.

Thus, on May 6, 1989, respondent Yao appointed Domingo Alamarez, Jr. as his
arbitrator, while on June 5, 1989, petitioner chose Atty. Casiano Sabile as its
arbitrator. The confirmation of the appointment of Aurelio Tupang, as third arbitrator,
was held in abeyance because petitioner instructed Atty. Sabile to defer the same
until its Board of Directors could convene and approve Tupang's appointment.
Respondent Yao theorizes that this was petitioner's design to delay the arbitration
proceedings, in violation of the Arbitration Law, and the governing stipulation of their
contract of lease.

On the basis of the aforesaid allegations, respondent Yao prayed that after summary
hearing pursuant to Section 6 of the Arbitration Law, Atty. Casiano Sabile and
Domingo Alamarez be directed to proceed with the arbitration in accordance with
Section 7 of subject Contract of Lease and the applicable provisions of the Arbitration
law, by appointing and confirming the appointment of the Third Arbitrator; and that
the Board of Three Arbitrators be ordered to immediately convene and resolve the
controversy before it, pursuant to Section 12 and the succeeding sections of the
Arbitration Law. (Annex "A," Petition.)

In its Answer with Counterclaim (Annex "C," Petition), petitioner here specifically
denied the averments of the petition below; theorizing that such petition is premature
since respondent Yao has not yet formally required arbitrators Alamarez and Sabile
to agree on the third arbitrator, within ten (10) days from notice, and that the delay in
the arbitration was due to respondent Yao's failure to perform what is incumbent
upon him, of notifying and thereafter, requiring both arbitrators to appoint the third
member of the Board of Arbitrators. According to petitioner, it actually gave
arbitrators Sabile and Alamarez a free hand in choosing the third arbitrator; and,
therefore, respondent Yao has no cause of action against it (petitioner). By way of
Counterclaim, petitioner alleged that it suffered actual damages of P100,000.00; and
incurred attorney's fees of P50,000.00, plus P500.00 for every court appearance of
its counsel.

On October 20, 1989, respondent Yao filed an amended petition for "Enforcement of
Arbitration Agreement with Damages;" praying that petitioner be ordered to pay
interest on the unpaid rents, at the prevailing rate of interest in commercial banks,
and exemplary damages of at least P250,000.00.

On October 24, 1989, despite petitioner's opposition to the motion to admit the
amended petition, the respondent court admitted the same.

On October 31, 1989, petitioner answered the amended petition; contending, among
others, that the amended petition should be dismissed on the ground of non-payment
of the requisite filing fees therefor; and it being in the nature of an ordinary civil
action, a full blown and regular trial, is necessary; so that respondent Yao's
proposition for a summary hearing of the arbitration issue and separate trial for his
claim for damages is procedurally untenable and implausible.

Invoking Section 5, Rule 16 of the Rules of Court, petitioner presented a "Motion to

Set Case for Preliminary Hearing" of its special and affirmative defenses, which are
grounds fro a motion to dismiss.

In its Order of November 14, 1989, the respondent court announced that the two
arbitrators chose Mrs. Eloisa R. Narciso as the third arbitrator. And on November 21,
1989, it ordered the parties to submit their position papers on the issue as to whether
or not respondent Yao's claim for damages may be litigated upon in the summary
proceeding for enforcement of arbitration agreement. It likewise informed the parties
that petitioner's Motion to Set Case for Preliminary Hearing" of Special and
Affirmative Defenses would be resolved together with the question of damages.

On April 26, 1990, the aforequoted assailed Order issued. In moving for
reconsideration of the said Order, petitioner argued that in Special Case No. 6024,
the respondent court sits as a special court exercising limited jurisdiction and is not
competent to act on respondent Yao's claim for damages, which poses an issue
litigable in an ordinary civil action. But the respondent court was not persuaded by
petitioner's submission. On June 22, 1990, it denied the motion for reconsideration.
(Rollo, pp. 89-93).
While the appellate court has agreed with petitioner that, under Section 6 of Republic Act No. 876, a
court, acting within the limits of its special jurisdiction, may in this case solely determine the issue of
whether the litigants should proceed or not to arbitration, it, however, considered petitioner in
estoppel from questioning the competence of the court to additionally hear and decide in the
summary proceedings private respondent's claim for damages, it (petitioner) having itself filed
similarly its own counterclaim with the court a quo.

It is hardly disputable that when a court is called upon to exercise limited and special jurisdiction,
that court cannot stray to matters outside the area of its declared authority or beyond what has been
expressly invested by law (Elumbaring vs. Elumbaring, 12 Phil. 384, 387), particularly, such as in
this instance, where the proceedings are summary in nature.

Prefatorily, recalling the distinctions, pertinent to the case, between the court's lack of jurisdiction
over theperson of the defendant, on the one hand, and its lack of jurisdiction over the subject
matter or the nature of the action, upon the other hand, should be useful.

The lack of jurisdiction over the person of the defendant may be waived either expressly or impliedly.
When a defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of
the court. If he so wishes not to waive this defense, he must do so seasonably by motion for the
purpose of objecting to the jurisdiction of the court; otherwise, he shall be deemed to have submitted
himself to that jurisdiction. The decisions promulgated heretofore by this Court would likewise
seemingly apply estoppel to bar the defendant from pursuing that defense by alleging in his answer
any other issue for dismissing the action.

A citation of a few of our decisions might be apropos.

In Wang Laboratories, Inc., vs. Mendoza (156 SCRA 44), this Court has ruled that if the defendant,
besides setting up in a motion to dismiss his objection to the jurisdiction of the court, alleges at the
same time any other ground for dismissing the action, he is deemed to have submitted himself to the
jurisdiction of the court. In the process, it has equated the matter to a situation where, such as
in Immaculata vs. Judge Navarro, et al. (146 SCRA 5), the defendant invokes an affirmative
relief against his opponent.

In De Midgely vs. Judge Ferandos (64 SCRA 23, 31), the Court elaborated thusly:

We are of the opinion that the lower court has acquired jurisdiction over the person of
Mrs. Midgely by reason of her voluntary appearance. The reservation in her motion
to dismiss that she was making a special appearance to contest the court's
jurisdiction over her person may be disregarded.

It may be disregarded because it was nullified by the fact that in her motion to
dismiss she relied not only on the ground of lack of jurisdiction over her person but
also on the ground that there was no showing that earnest efforts were exerted to
compromise the case and because she prayed "for such other relief as" may be
deemed "appropriate and proper."

xxx xxx xxx

When the appearance is by motion for the purpose of objecting to the jurisdiction of
the court over the person, it must be for the sole and separate purpose of objecting
to the jurisdiction of the court. If his motion is for any other purpose than to object to
 the jurisdiction of the court over his person, he thereby submits himself to the
jurisdiction of the court. A special appearance by motion made for the purpose of
objecting to the jurisdiction of the court over the person will be held to be a general
appearance, if the party in said motion should, for example, ask for a dismissal of the
action upon the further ground that the court had no jurisdiction over the subject
matter. (Syllabus, Flores vs. Zurbito, supra, at page 751. That rule was followed in
Ocampo vs. Mina and Arejola, 41 Phil. 308).

The justification for the rule was expressed in Republic vs. Ker and Companry, Ltd. (18 SCRA 207,
213-214), in this wise:

We observed that the motion to dismiss filed on April 14, 1962, aside from disputing
the lower court's jurisdiction over defendant's person, prayed for dismissal of the
complaint on the ground that plaintiff's cause of action had prescribed. By interposing
such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative
defense on the basis of which it prayed the court to resolve controversy in its favor.
For the court to validly decide the said plea of defendant Ker & Co., Ltd., it
necessarily had to acquire jurisdiction upon the latter's person, who, being the
proponent of the affirmative defense, should be deemed to have abandoned its
special appearance and voluntarily submitted itself to the jurisdiction of the court.

Voluntary appearance cures defects of summons, if any, Such defect, if any, was
further cured when defendant filed its answer to the complaint. A defendant can not
be permitted to speculate upon the judgment of the court by objecting to the court's
jurisdiction over its person if the judgment is adverse to it, and acceding to
jurisdiction over its person if and when the judgment sustains its defenses.

The doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is
justice according to natural law and right. It is a principle intended to avoid a clear case of injustice.
The term is hardly distinguishable from a waiver of right. Estoppel, like its said counterpart, must be
unequivocal and intentional for, when misapplied, it can easily become a most convenient and
effective means of injustice. Estoppel is not understood to be a principle that, as a rule, should
prevalently apply but, such as it concededly is, as a mere exception from the standard legal norms of
general application that can be invoked only in highly exceptional and justifiable cases.

Tested by the above criteria, the Court sees it propitious to re-examine specifically the question of
whether or not the submission of other issues in a motion to dismiss, or of an affirmative defense (as
distinguished from an affirmative relief) in an answer, would necessarily foreclose, and have the
effect of a waiver of, the right of a defendant to set up the court's lack of jurisdiction over the person
of the defendant.

Not inevitably.

Section 1, Rule 16, of the Rules of Court, provides that a motion to dismiss may be made on the
following grounds:

(a) That the court has no jurisdiction over the person of the defendant or over the
subject of the action or suit;

(b) That the court has no jurisdiction over the nature of the action or suit;
 (c) The venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same
cause;

(f) That the cause of action is barred by a prior judgment or by statute of limitations;

(g) That the complaint states no cause of action;

(h) That the claim or demand set forth in the plaintiff's pleading has been paid,
waived, abandoned, or otherwise extinguished;

( i ) That the claim on which the action or suit is founded is unenforceable under the
provisions of the statute of frauds;

( j ) That the suit is between members of the same family and no earnest efforts
towards a compromise have been made.

Any ground for dismissal in a motion to dismiss, except improper venue, may, as further set forth in
Section 5 of the same rule, be pleaded as an affirmative defense and a preliminary hearing may be
had thereon as if a motion to dismiss had been filed. An answer itself contains the negative, as well
as affirmative, defenses upon which the defendant may rely (Section 4, Rule 6, Rules of Court). A
negative defense denies the material facts averred in the complaint essential to establish the
plaintiff's cause of action, while an affirmative defense in an allegation of a new matter which, while
admitting the material allegations of the complaint, would, nevertheless, prevent or bar recovery by
the plaintiff. Inclusive of these defenses are those mentioned in Rule 16 of the Rules of Court which
would permit the filing of a motion to dismiss.

In the same manner that the plaintiff may assert two or more causes of action in a court suit, a
defendant is likewise expressly allowed, under Section 2, Rule 8, of the Rules of Court, to put up his
own defenses alternatively or even hypothetically. Indeed, under Section 2, Rule 9, of the Rules of
Court, defenses and objections not pleaded either in a motion to dismiss or in an answer, except for
the failure to state a cause of action, are deemed waived. We take this to mean that a defendant
may, in fact, feel enjoined to set up, along with his objection to the court's jurisdiction over his
person, all other possible defenses. It thus appears that it is not the invocation of any of such
defenses, but the failure to so raise them, that can result in waiver or estoppel. By defenses, of
course, we refer to the grounds provided for in Rule 16 of the Rules of Court that must be asserted
in a motion to dismiss or by way of affirmative defenses in an answer.

Mindful of the foregoing, in Signetics Corporation vs. Court of Appeals and Freuhauf Electronics
Phils., Inc. (225 SCRA 737, 738), we lately ruled:

This is not to say, however, that the petitioner's right to question the jurisdiction of the
court over its person is now to be deemed a foreclosed matter. If it is true, as
Signetics claims, that its only involvement in the Philippines was through a passive
investment in Sigfil, which it even later disposed of, and that TEAM Pacific is not its
agent, then it cannot really be said to be doing business in the Philippines. It is a
defense, however, that requires the contravention of the allegations of the complaint,
as well as full ventilation, in effect, of the main merits of the case, which should not
 thus be within the province of a mere motion to dismiss. So, also, the issue posed by
the petitioner as to whether a foreign corporation which has done business in the
country, but which has ceased to do business at the time of the filing of a complaint,
can still be made to answer for a cause of action which accrued while it was doing
business, is another matter that would yet have to await the reception and admission
of evidence. Since these points have seasonably been raised by the petitioner, there
should be no real cause for what may understandably be its apprehension, i.e., that
by its participation during the trial on the merits, it may, absent an invocation of
separate or independent reliefs of its own, be considered to have voluntarily
submitted itself to the court's jurisdiction.

Lack of jurisdiction over the subject matter of the suit is yet another matter. Whenever it appears that
the court has no jurisdiction over the subject matter, the action shall be dismissed (Section 2, Rule 9,
Rules of Court). This defense may be interposed at any time, during appeal (Roxas vs. Rafferty, 37
Phil. 957) or even after final judgment (Cruzcosa vs. Judge Concepcion, et al., 101 Phil. 146). Such
is understandable, as this kind of jurisdiction is conferred by law and not within the courts, let alone
the parties, to themselves determine or conveniently set aside. In People vs. Casiano (111 Phil. 73
93-94), this Court, on the issue of estoppel, held:

The operation of the principle of estoppel on the question of jurisdiction seemingly

depends upon whether the lower court actually had jurisdiction or not. If it had no
jurisdiction, but the case was tried and decided upon the theory that it had
jurisdiction, the parties are not barred, on appeal, from assailing such jurisdiction, for
the same "must exist as a matter of law, and may not be conferred by consent of the
parties or by estoppel" (5 C.J.S., 861-863). However, if the lower court had
jurisdiction, and the case was heard and decided upon a given theory, such, for
instance, as that the court had no jurisdiction, the party who induced it to adopt such
theory will not be permitted, on appeal, to assume an inconsistent position — that the
lower court had jurisdiction. Here, the principle of estoppel applies. The rule that
jurisdiction is conferred by law, and does not depend upon the will of the parties, has
not bearing thereon.

The rule was reiterated in Calimlim vs. Ramirez (118 SCRA 399, 406), and quite recently,
in Southeast Asian Fisheries Development Center-Aquaculture Department vs. National Labor
Relations Commission (206 SCRA 283).

Jurisdiction over the nature of the action, in concept, differs from jurisdiction over the subject matter.
Illustrated, lack of jurisdiction over the nature of the action is the situation that arises when a court,
which ordinarily would have the authority and competence to take a case, is rendered without it
either because a special law has limited the exercise of its normal jurisdiction on a particular matter
or because the type of action has been reposed by law in certain other courts or quasi-judicial
agencies for determination. Nevertheless, it can hardly be questioned that the rules relating to the
effects of want of jurisdiction over the subject matter should apply with equal vigor to cases where
the court is similarly bereft of jurisdiction over the nature of the action.

In summary, it is our considered view, as we now so hereby express,

that —

(1) Jurisdiction over the person must be seasonably raised, i.e., that it is pleaded in a motion to
dismiss or by way of an affirmative defense in an answer. Voluntary appearance shall be deemed a
waiver of this defense. The assertion, however, of affirmative defenses shall not be constructed as
an estoppel or as a waiver of such defense.
(2) Where the court itself clearly has no jurisdiction over the subject matter or the nature of the
action, the invocation of this defense may be done at any time. It is neither for the courts nor the
parties to violate or disregard that rule, let alone to confer that jurisdiction, this matter being
legislative in character. Barring highly meritorious and exceptional circumstances, such as
hereinbefore exemplified, neither estoppel nor waiver shall apply.

In the case at bench, the want of jurisdiction by the court is indisputable, given the nature of the
controversy. The arbitration law explicitly confines the court's authority only to pass upon the issue of
whether there is or there is no 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 proceedings are summary in nature.

All considered, the court a quo must then refrain from taking up the claims of the contending parties
for damages, which, upon the other hand, may be ventilated in separate regular proceedings at an
opportune time and venue. The circumstances obtaining in this case are far, we hold, from justifying
the application of estoppel against either party.

WHEREFORE, the decision of the Court of Appeals and the orders of the trial court in question are
SET ASIDE. The court a quo, in the instant proceedings, is ordered to DESIST from further hearing
private respondent's claim, as well as petitioner's counterclaim, for damages. No costs.

SO ORDERED.

DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL

COLLINS and LUIS HIDALGO, petitioners, vs. COURT OF
APPEALS, JUDGE BIENVENIDO L. REYES in his capacity as
Presiding Judge, RTC-Br. 74, Malabon, Metro Manila,
MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and
SABROSA FOODS, INC., respondents.

DECISION
BELLOSILLO, J.:

This Petition for Review on certiorari assails the 17 July 1998 Decision[1] 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 courts Resolution[3] 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 ARBITRATION[4]

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 MMIs 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, SFI and MMIs Managing Director
Liong Liong C. Sy (LILY SY) filed a Complaint[5] against petitioners DMC-USA, Paul
E. Derby, Jr.,[6] Daniel Collins[7] and Luis Hidalgo,[8] and Dewey Ltd.[9] before the
Regional Trial Court of Malabon, Metro Manila. Private respondents predicated their
complaint on the alleged violations by petitioners of Arts. 20,[10] 21[11] and 23[12] 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. 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. Petitioners 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 petitioner DMC-USA through Paul
E. Derby, Jr.
Private respondents further averred that petitioners 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. Private
respondents claimed that they had exhausted all possible avenues for an amicable
resolution and settlement of their grievances; that as a result of the fraud, bad faith,
malice and wanton attitude of petitioners, they should be held responsible for all the
actual expenses incurred by private respondents 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 unauthorized shipments of Del Monte-USA
products to the Philippine Duty Free Area and Economic Zone; that the bad faith,
fraudulent acts and willful negligence of petitioners, motivated by their determination
to squeeze private respondents out of the outstanding and ongoing Distributorship
Agreement in favor of another party, had placed private respondent LILY SY on
tenterhooks since then; and, that the shrewd and subtle manner with which petitioners
concocted imaginary violations by private respondent MMI of the Distributorship
Agreement in order to justify the untimely termination thereof was a subterfuge. For
the foregoing, private respondents claimed, among other reliefs, the payment of actual
damages, exemplary damages, attorneys fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking
the arbitration clause in their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial court 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.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which
private respondents filed their Comment/Opposition. On 31 January 1997 petitioners
filed their Reply.Subsequently, private respondents filed an Urgent Motion for Leave
to Admit Supplemental Pleading dated 2 April 1997. This Motion was admitted, over
petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners 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.
On 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."[15]
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[16] and that in
determining whether petitioners had violated it "would require a full blown trial"
making arbitration "out of the question."[17] Petitioners Motion for Reconsideration of
the affirmation was denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties
warrants an order compelling them to submit to arbitration.
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[18] -

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,[19] the determination of which demands a full
blown trial, as correctly held by the Court of Appeals. Moreover, they claim that the
issues before the trial court were not joined so that the Honorable Judge was not given
the opportunity to satisfy himself that the issue involved in the case was referable to
arbitration. They submit that, apparently, petitioners filed a motion to suspend
proceedings instead of sending a written demand to private respondents to arbitrate
because petitioners were not sure whether the case could be a subject of
arbitration. They maintain that had petitioners done so and private respondents failed
to answer the demand, petitioners could have filed with the trial court their demand
for arbitration that would warrant a determination by the judge whether to refer the
case to arbitration. Accordingly, private respondents assert that arbitration is out of the
question.
Private respondents further contend that the arbitration clause centers more on
venue rather than on arbitration. They finally allege that petitioners filed their motion
for extension of time to file this petition on the same date[20] petitioner DMC-USA filed
a petition to compel private respondent MMI to arbitrate before the United States
District Court in Northern California, docketed as Case No. C-98-4446. They insist
that the filing of the petition to compel arbitration in the United States made the
petition filed before this Court an alternative remedy and, in a way, an abandonment
of the cause they are fighting for here in the Philippines, thus warranting the dismissal
of the present petition before this Court.
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
[21]

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. [22] 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.[23]
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.[24] 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, in accordance 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"[28] and that "[a]s such, the parties are thereby expected to abide with good faith
in their contractual commitments."[29] 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.[30]
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
[31]

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.[32]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
affirming the Order of the Regional Trial Court of Malabon, Metro Manila, in Civil
Case No. 2637-MN, which denied petitioners Motion to Suspend Proceedings, is
AFFIRMED. The Regional Trial Court concerned is directed to proceed with the
hearing of Civil Case No. 2637-MN with dispatch. No costs.
SO ORDERED.
G.R. No. 189563               April 7, 2014

GILAT SATELLITE NETWORKS, LTD., Petitioner, 

vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.

DECISION

SERENO, CJ:

This is an appeal via a Petition for Review on Certiorari  filed 6 November 2009 assailing the
1

Decision  and Resolution  of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed
2 3

the Decision  of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461,
4

ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various
telecommunications equipment (sic), accessories, spares, services and software, at a total purchase
price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars
(US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay
a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22
November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB
General Insurance Co., Inc.’s surety bond dated 3 December 1999, in favor of GILAT.

During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to
One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading
(Exhibits "F", "F-1" to "F-8"). All of the equipment (including the software components for which
payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual.
Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtual’s
conformity, an amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May
30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on
the due date of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to
the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand
letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of the amount set forth
in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise
failed to pay on the succeeding payment instalment date of 30 November 2000 as set out in Annex
"A" of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001,
for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus
interests and expenses (Exhibits "H") and which letter was received by the defendant surety on
January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a
part thereof, hence, the instant complaint."  (Emphases in the original)
5

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint  against respondent
6

UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond,
plus interests and expenses. After due hearing, the RTC rendered its Decision,  the dispositive
7

portion of which is herein quoted:

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and
against the defendant, ordering, to wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred
Thousand Dollars (US$1,200,000.00) representing the principal debt under the Surety Bond,
with legal interest thereon at the rate of 12% per annum computed from the time the
judgment becomes final and executory until the obligation is fully settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars
and Four Cents (US$44,004.04) representing attorney’s fees and litigation expenses.

Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the
subject equipments [sic] and the same was installed. Even with the delivery and installation made,
One Virtual failed to pay any of the payments agreed upon. Demand notwithstanding, defendant
failed and refused and continued to fail and refused to settle the obligation." 8

Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed
by and between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond
Obligee,"  respondent agreed and bound itself to pay in accordance with the Payment Milestones.
9
This obligation was not made dependent on any condition outside the terms and conditions of the
Surety Bond and Payment Milestones. 10

Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while
a surety can be held liable for interest even if it becomes more onerous than the principal obligation,
the surety shall only accrue when the delay or refusal to pay the principal obligation is without any
justifiable cause.  Here, respondent failed to pay its surety obligation because of the advice of its
11

principal (One Virtual) not to pay.  The RTC then obligated respondent to pay petitioner the amount
12

of USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the
rate of 12% per annum computed from the time the judgment becomes final and executory, and
USD44,004.04 representing attorney’s fees and litigation expenses.

On 18 October 2007, respondent appealed to the CA.  The appellate court rendered a Decision  in
13 14

the following manner:

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision
dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One
Virtual are ordered to proceed to arbitration, the outcome of which shall necessary bind the parties,
including the surety, defendant-appellant United Coconut Planters Bank General Insurance Co., Inc.

SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’

doctrine finds application." According to this doctrine, the accessory contract must be construed with
the principal agreement.  In this case, the appellate court considered the Purchase Agreement
15

entered into between petitioner and One Virtual as the principal contract,  whose stipulations are
16

also binding on the parties to the suretyship.  Bearing in mind the arbitration clause contained in the
17

Purchase Agreement  and pursuant to the policy of the courts to encourage alternative dispute
18

resolution methods,  the trial court’s Decision was vacated; petitioner and One Virtual were ordered
19

to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument.
The motion was denied for lack of merit in a Resolution  issued by the CA on 16 September 2009.
20

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment  on the Petition for Review. On 24 November
21

2010, petitioner filed a Reply. 22

ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and One
Virtual to arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.

THE COURT’S RULING

The existence of a suretyship agreement does not give the surety the right to intervene in the
principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a
non-party such as the surety.

Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party
entitled to it applies for this relief.  This referral, however, can only be demanded by one who is a
23

party to the arbitration agreement.  Considering that neither petitioner nor One Virtual has asked for
24

a referral, there is no basis for the CA’s order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code  clearly provide that the creditor may proceed
25

against the surety without having first sued the principal debtor.  Even the Surety Agreement itself
26

states that respondent becomes liable upon "mere failure of the Principal to make such prompt
payment."  Thus, petitioner should not be ordered to make a separate claim against One Virtual (via
27

arbitration) before proceeding against respondent. 28

On the other hand, respondent maintains that a surety contract is merely an accessory contract,
which cannot exist without a valid obligation.  Thus, the surety may avail itself of all the defenses
29

available to the principal debtor and inherent in the debt  – that is, the right to invoke the arbitration
30

clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the
principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes
the existence of a principal contract.  Nevertheless, although the contract of a surety is in essence
31

secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is
said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the
principal.  He becomes liable for the debt and duty of the principal obligor, even without possessing
32

a direct or personal interest in the obligations constituted by the latter.  Thus, a surety is not entitled
33

to a separate notice of default or to the benefit of excussion.  It may in fact be sued separately or
34

together with the principal debtor. 35

After a thorough examination of the pieces of evidence presented by both parties,  the RTC found
36

that petitioner had delivered all the goods to One Virtual and installed them. Despite these
compliances, One Virtual still failed to pay its obligation,  triggering respondent’s liability to petitioner
37

as the former’s surety.  In other words, the failure of One Virtual, as the principal debtor, to fulfill its
1âwphi1

monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the
surety.

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

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,  that "[the]
38

acceptance [of a surety agreement], however, does not change in any material way the creditor’s
relationship with the principal debtor nor does it make the surety an active party to the principal
creditor-debtor relationship. In other words, the acceptance does not give the surety the right to
intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which
time, it can be directly held liable by the creditor for payment as a solidary obligor." Hence, the surety
remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot
invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that
contract.  An arbitration agreement being contractual in nature,  it is binding only on the parties
39 40

thereto, as well as their assigns and heirs. 41

Second, Section 24 of Republic Act No. 9285  is clear in stating that a referral to arbitration may only
42

take place "if at least one party so requests not later than the pre-trial conference, or upon the
request of both parties thereafter." Respondent has not presented even an iota of evidence to show
that either petitioner or One Virtual submitted its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.  They are
43

contracted precisely to mitigate risks of non-performance on the part of the obligor. This
responsibility necessarily places a surety on the same level as that of the principal debtor.  The 44

effect is that the creditor is given the right to directly proceed against either principal debtor or surety.
This is the reason why excussion cannot be invoked.  To require the creditor to proceed to
45

arbitration would render the very essence of suretyship nugatory and diminish its value in
commerce. At any rate, as we have held in Palmares v. Court of Appeals,  "if the surety is
46

dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may
pay the debt himself and become subrogated to all the rights and remedies of the creditor."

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in
the payment of the latter’s obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per
annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second
demand on 24 January 2001 because of the latter’s delay in discharging its monetary
obligation.  Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from
47

the time it demanded the fulfilment of respondent’s obligation under the suretyship contract.
Significantly, respondent does not contest this point, but instead argues that it is only liable for legal
interest of 6% per annum from the date of petitioner’s last demand on 24 January 2001.

In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the
refusal of a party to pay is without any justifiable cause.  In this case, respondent’s failure to heed
48

the demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings
as stated in the Purchase Agreement.  The CA, however, made no pronouncement on this matter.
49

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money,
and the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest."

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply.  Delay, as used in Article 1169, is
50

synonymous with default or mora, which means delay in the fulfilment of obligations.  It is the 51

nonfulfillment of an obligation with respect to time.  In order for the debtor (in this case, the surety) to
52

be in default, it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially. 53

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus
paying, its liability becomes more than the principal obligation.  The increased liability is not because
54

of the contract, but because of the default and the necessity of judicial collection. 55
However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la
Hotel, citing RCPI v. Verchez,  we held thus:
56 57

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory
force of contracts, will not permit a party to be set free from liability for any kind of misperformance of
the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract
confers upon the injured party a valid cause for recovering that which may have been lost or
suffered. The remedy serves to preserve the interests of the promissee that may include his
"expectation interest," which is his interest in having the benefit of his bargain by being put in as
good a position as he would have been in had the contract been performed, or his "reliance interest,"
which is his interest in being reimbursed for loss caused by reliance on the contract by being put in
as good a position as he would have been in had the contract not been made; or his "restitution
interest," which is his interest in having restored to him any benefit that he has conferred on the
other party. Indeed, agreements can accomplish little, either for their makers or for society, unless
they are made the basis for action. The effect of every infraction is to create a new duty, that is, to
make RECOMPENSE to the one who has been injured by the failure of another to observe his
contractual obligation unless he can show extenuating circumstances, like proof of his exercise of
due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability.
(Emphasis ours)

We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed
justified by the circumstances – that is, One Virtual’s advice regarding petitioner’s alleged breach of
obligations. The lower court’s Decision itself belied this contention when it said that "plaintiff is not
disputing that it did not complete commissioning work on one of the two systems because One
Virtual at that time is already in default and has not paid GILAT."  Assuming arguendo that the
58

commissioning work was not completed, respondent has no one to blame but its principal, One
Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop
operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated
that petitioner had delivered all equipment, including the licensed software; and that the equipment
had been installed and in fact, gone into operation.  Notwithstanding these compliances, respondent
59

still failed to pay.

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from
the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an
extra-judicial demand before an action for performance was filed, interest on the amount due begins
to run, not from the date of the filing of the complaint, but from the date of that extra-judicial
demand.  Considering that respondent failed to pay its obligation on 30 May 2000 in accordance
60

with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June
2000,  we agree with the latter that interest must start to run from the time petitioner sent its first
61

demand letter (5 June 2000), because the obligation was already due and demandable at that time.

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,  which
62

modified the guidelines established in Eastern Shipping Lines v. CA  in relation to Bangko Sentral-
63

Monetary Board Circular No. 799 (Series of 2013), to wit:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.  In
1âwphi1

the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.

xxxx

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

Applying the above-discussed concepts and in the absence of an agreement as to interests, we are
hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000,
its first date of extra judicial demand, until the satisfaction of the debt in accordance with the revised
guidelines enunciated in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision
and Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of
the Regional Trial Court, Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as
the award of legal interest is concerned. Respondent is hereby ordered to pay legal interest at the
rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship
Contract and Purchase Agreement.

SO ORDERED.

G.R. No. 174938               October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners, 

vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a

contract entered into by the corporation they represent if there are allegations of bad faith or malice
in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5,
2006 resolution. The Court of Appeals affirmed the trial court's decision holding that petitioners, as
director, should submit themselves as parties tothe arbitration proceedings between BF Corporation
and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-
Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes,
Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. 1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into
agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel
parking structure along EDSA. 2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements. However, by October 1991, Shangri-La started defaulting in payment.
3 4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of
the buildings using its own funds and credit despite Shangri-La’s default.  According to BF
5

Corporation, ShangriLa misrepresented that it had funds to pay for its obligations with BF
Corporation, and the delay in payment was simply a matter of delayed processing of BF
Corporation’s progress billing statements. 6

BF Corporation eventually completed the construction of the buildings.  Shangri-La allegedly took
7

possession of the buildings while still owing BF Corporation an outstanding balance. 8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed
to it.  It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs.
9

Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well
as for the damages that BF Corporation incurred as a result of Shangri-La’s default. 10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and
Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s failure to
submit its dispute to arbitration, in accordance with the arbitration clauseprovided in its contract,
quoted in the motion as follows: 11

35. Arbitration

(1) Provided always that in case any dispute or difference shall arise between the Owner or the
Project Manager on his behalf and the Contractor, either during the progress or after the completion
or abandonment of the Works as to the construction of this Contract or as to any matter or thing of
whatsoever nature arising there under or inconnection therewith (including any matter or thing left by
this Contract to the discretion of the Project Manager or the withholding by the Project Manager of
any certificate to which the Contractor may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights and liabilities of the parties under
clauses 25, 26, 32 or 33 of these Conditions), the owner and the Contractor hereby agree to exert all
efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or
difference shall be referred to arbitration in accordance with the rules and procedures of the
Philippine Arbitration Law.

x x x           x x x          x x x

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may have
against the other. . . . (Underscoring in the original)
12

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings. 14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory

counter claim against BF Corporation and crossclaim against Shangri-La.  They alleged that they
15

had resigned as members of Shangri-La’s board of directors as of July 15, 1991. 16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its
November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III,
and Benjamin Ramos filed a petition for certiorari with the Court of Appeals. 17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission
of the dispute to arbitration. 18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari
with this court.  On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that
19

the dispute be submitted for arbitration. 20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and
Shangri-La failed to agree as to the law that should govern the arbitration proceedings.  On October
21

27, 1998, the trial court issued the order directing the parties to conduct the proceedings in
accordance with Republic Act No. 876. 22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both
seeking to clarify the term, "parties," and whether Shangri-La’s directors should be included in the
arbitration proceedings and served with separate demands for arbitration. 23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be
excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF
Corporation’s agreement. 24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all
defendants in BF Corporation’s complaint.  According to the trial court, Shangri-La’s directors were
25

interested parties who "must also be served with a demand for arbitration to give them the
opportunity to ventilate their side of the controversy, safeguard their interest and fend off their
respective positions."  Petitioners’ motion for reconsideration ofthis order was denied by the trial
26

court on January 19, 2005. 27

Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion
in the issuance of orders compelling them to submit to arbitration proceedings despite being third
parties to the contract between Shangri-La and BF Corporation. 28

In its May 11, 2006 decision,  the Court of Appeals dismissed petitioners’ petition for certiorari. The
29

Court of Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration
proceedings.  According to the Court of Appeals:
30

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and that as
directors of the defendant corporation, [they], in accordance with Art. 1217 of the Civil Code, stand to
be benefited or injured by the result of the arbitration proceedings, hence, being necessary parties,
they must be joined in order to have complete adjudication of the controversy. Consequently, if [they
were] excluded as parties in the arbitration proceedings and an arbitral award is rendered, holding
[Shangri-La] and its board of directors jointly and solidarily liable to private respondent BF
Corporation, a problem will arise, i.e., whether petitioners will be bound bysuch arbitral award, and
this will prevent complete determination of the issues and resolution of the controversy. 31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would
be contrary to the policy against multiplicity of suits."
32
The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19,
2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED. 33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals
decision and the October 5, 2006 Court of Appeals resolution. 35

The issue in this case is whether petitioners should be made parties to the arbitration proceedings,
pursuant to the arbitration clause provided in the contract between BF Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or obligations.  The
36

corporation is a separate being, and nothing justifies BF Corporation’s allegation that they are
solidarily liable with Shangri-La.  Neither did they bind themselves personally nor did they undertake
37

to shoulder Shangri-La’s obligations should it fail in its obligations.  BF Corporation also failed to
38

establish fraud or bad faith on their part.39

Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La. Provisions including arbitration stipulations should bind only the parties.  Based on our
40 41

arbitration laws, parties who are strangers to an agreement cannot be compelled to arbitrate. 42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in
resolving their disputes.  Compelling them to submit to arbitration is against this purpose and may
43

be tantamount to stipulating for the parties. 44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo
C.Ramos and Benjamin C. Ramos. 45

Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable for
Shangri-La’s acts. Since the contract was executed only by BF Corporation and Shangri-La, only
46

they should be affected by the contract’s stipulation.  BF Corporation also failed to specifically allege
47

the unlawful acts of the directors that should make them solidarily liable with Shangri-La for its
obligations. 48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should
undergo arbitration "clearly contemplated the inclusion of the directors of the corporation[.]"  BF
49

Corporation also argued that while petitioners were not parties to the agreement, they were still
impleaded under Section 31 of the Corporation Code.  Section 31 makes directors solidarily liable
50

for fraud, gross negligence, and bad faith. Petitioners are not really third parties to the agreement
51

because they are being sued as Shangri-La’s representatives, under Section 31 of the Corporation
Code. 52

BF Corporation further argued that because petitioners were impleaded for their solidary liability,
they are necessary parties to the arbitration proceedings.  The full resolution of all disputes in the
53

arbitration proceedings should also be done in the interest of justice. 54

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on July 31, 2007.  The Arbitral Tribunal denied BF
55

Corporation’s claims against them.  Petitioners stated that "[they] were included by the Arbitral
56

Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection

thereto. . . ."  They also stated that "[their] unwilling participation in the arbitration case was done ex
57

abundante ad cautela, as manifested therein on several occasions." Petitioners informed the court
58

that they already manifested with the trial court that "any action taken on [the Arbitral Tribunal’s
decision] should be without prejudice to the resolution of [this] case." 59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and
Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that
they should not be held liable for Shangri-La’s default and made parties to the arbitration
proceedings because only BF Corporation and Shangri-La were parties to the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability
under Section 31 of the Corporation Code. Shangri-La added that their exclusion from the arbitration
proceedings will result in multiplicity of suits, which "is not favored in this jurisdiction."  It pointed out
60

that the case had already been mooted by the termination of the arbitration proceedings, which
petitioners actively participated in.  Moreover, BF Corporation assailed only the correctness of the
61

Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from liability. 62

BF Corporation filed a counter-manifestation with motion to dismiss  in lieu of the required
63

memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were
already dismissed with finality, and the claims against them were likewise dismissed with finality,
they no longer have any interest orpersonality in the arbitration case. Thus, there is no longer any
need to resolve the present Petition, which mainly questions the inclusion of petitioners in the
arbitration proceedings."  The court’s decision in this case will no longer have any effect on the issue
64

of petitioners’ inclusion in the arbitration proceedings. 65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF
Corporation, have rendered this case moot and academic.

The mootness of the case, however, had not precluded us from resolving issues so that principles
may be established for the guidance of the bench, bar, and the public. In De la Camara v. Hon.
Enage,  this court disregarded the fact that petitioner in that case already escaped from prison and
66

ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted,
still, as set forth at the opening of this opinion, the fact that this case is moot and academic should
not preclude this Tribunal from setting forth in language clear and unmistakable, the obligation of
fidelity on the part of lower court judges to the unequivocal command of the Constitution that
excessive bail shall not be required. 67

This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance. 68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the distinction
between Shangri-La’s personality and their personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation
and settle disputes amicably and more expeditiously by themselves and through their choice of
arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,  which was approved as early
69

as 1949. It was later institutionalized by the approval of Republic Act No. 876,  which expressly
70

authorized, made valid, enforceable, and irrevocable parties’ decision to submit their controversies,
including incidental issues, to arbitration. This court recognized this policy in Eastboard Navigation,
Ltd. v. Ysmael and Company, Inc.: 71

As a corollary to the question regarding the existence of an arbitration agreement, defendant raises
the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said
agreement is void and without effect for it amounts to removing said dispute from the jurisdiction of
the courts in which the parties are domiciled or where the dispute occurred. It is true that there are
authorities which hold that "a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitrators and to them alone, is contrary to public policy and cannot oust
the courts of jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Phil., 600, 603),
however, there are authorities which favor "the more intelligent view that arbitration, as an
inexpensive, speedy and amicable method of settling disputes, and as a means of avoiding litigation,
should receive every encouragement from the courts which may be extended without contravening
sound public policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern
view when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And
only recently it approved Republic Act No. 876 expressly authorizing arbitration of future
disputes.  (Emphasis supplied)
72

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are
liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol
Industrial Construction Groups, Inc.,  this court said:
73

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with
mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of the future" in international civil and commercial
disputes. Brushing aside a contractual agreement calling for arbitration between the parties would be
a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods,
courts should liberally construe arbitration clauses. Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration. (Emphasis supplied)
74

A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations
that would render effective an arbitration clause was later expressed in Republic Act No. 9285: 75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party
autonomy in the resolution of disputes or the freedom of the party to make their own arrangements
to resolve their disputes. Towards this end, the State shall encourage and actively promote the use
of Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial
justice and declog court dockets. As such, the State shall provide means for the use of ADR as an
efficient tool and an alternative procedure for the resolution of appropriate cases. Likewise, the State
shall enlist active private sector participation in the settlement of disputes through ADR. This Act
shall be without prejudice to the adoption by the Supreme Court of any ADR system, such as
mediation, conciliation, arbitration, or any combination thereof as a means of achieving speedy and
efficient means of resolving cases pending before all courts in the Philippines which shall be
governed by such rules as the Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the
policy of the law in favor of arbitration.Where action is commenced by or against multiple parties,
one or more of whomare parties who are bound by the arbitration agreement although the civil action
may continue as to those who are not bound by such arbitration agreement. (Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes
ofavoiding litigation and expediting resolution of the dispute, that interpretation shall be adopted.
Petitioners’ main argument arises from the separate personality given to juridical persons vis-à-vis
their directors, officers, stockholders, and agents. Since they did not sign the arbitration agreement
in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in
accordance with the arbitration agreement. Moreover, they had already resigned as directors of
Shangri-Laat the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and
distinct from Shangri-La.

A corporation is an artificial entity created by fiction of law.  This means that while it is not a person,
76

naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal
sense, is an individual with a personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives,  and other juridical entities. The law vests in
77

corporations rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own.  For instance, they have the power to sue and enter into
78

transactions or contracts. Section 36 of the Corporation Code enumerates some of a corporation’s

powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its purpose
or purposes as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers
through itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or
enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation through its

representatives is not consent of the representative, personally. Its obligations, incurred through
official acts of its representatives, are its own. A stockholder, director, or representative does not
become a party to a contract just because a corporation executed a contract through that
stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities incurred on
or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation  that an
79

arbitration clause shall not apply to persons who were neither parties to the contract nor assignees
of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on

arbitration, binds the parties thereto, as well as their assigns and heirs. But only they.  (Citations
80

omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,  this court ruled:

81

The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties
is part of that contract and is itself a contract. As a rule, contracts are respected as the law between
the contracting parties and produce effect as between them, their assigns and heirs. Clearly, only
parties to the Agreement . . . are bound by the Agreement and its arbitration clause as they are the
only signatories thereto.  (Citation omitted)
82

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.  and Stanfilco Employees v. DOLE Philippines, Inc., et al.
83 84

As a general rule, therefore, a corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she is generally not considered a
party to that agreement.

However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate
fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as
a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues."  It is also warranted in alter ego
85

cases "where a corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another corporation." 86

When corporate veil is pierced, the corporation and persons who are normally treated as distinct
from the corporation are treated as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.

Among the persons who may be treatedas the corporation itself under certain circumstances are its
directors and officers. Section 31 of the Corporation Code provides the instances when directors,
trustees, or officers may become liable for corporate acts:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and other
persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed inhim in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily
liable with it for all damages suffered by the corporation, its stockholders or members, and other
persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
 b) The director or trustee was guilty of gross negligence or bad faith in directing corporate
affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or her
duties as director or trustee.

Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto";87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation";  and
88

c) "When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action."
89

When there are allegations of bad faith or malice against corporate directors or representatives, it
becomes the duty of courts or tribunals to determine if these persons and the corporation should be
treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the
courts or tribunals must first determine whether circumstances exist towarrant the courts or tribunals
to disregard the distinction between the corporation and the persons representing it. The
determination of these circumstances must be made by one tribunal or court in a proceeding
participated in by all parties involved, including current representatives of the corporation, and those
persons whose personalities are impliedly the sameas the corporation. This is because when the
court or tribunal finds that circumstances exist warranting the piercing of the corporate veil, the
corporate representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a mere
aggregation of persons undertaking a business under the collective name of the corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging
malice orbad faith on their part in directing the affairs of the corporation, complainants are effectively
alleging that the directors and the corporation are not acting as separate entities. They are alleging
that the acts or omissions by the corporation that violated their rights are also the directors’ acts or
omissions.  They are alleging that contracts executed by the corporation are contracts executed by
90

the directors. Complainants effectively pray that the corporate veilbe pierced because the cause of
action between the corporation and the directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the
parties.  Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.
1âwphi1

Institution of more than one suit for the same cause of action constitutes splitting the cause of action,
which is a ground for the dismissal ofthe others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a
single cause of action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the
basis of the same cause of action, the filing of one or a judgment upon the merits in any one is
available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be indistinct
that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are
not overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that
only parties to an arbitration agreement may be compelled to submit to arbitration. In that case, this
court recognizedthat persons other than the main party may be compelled to submit to arbitration,
e.g., assignees and heirs. Assignees and heirs may be considered parties to an arbitration
agreement entered into by their assignor because the assignor’s rights and obligations are
transferred to them upon assignment. In other words, the assignor’s rights and obligations become
their own rights and obligations. In the same way, the corporation’s obligations are treated as the
representative’s obligations when the corporate veil is pierced. Moreover, in Heirs of Augusto Salas,
this court affirmed its policy against multiplicity of suits and unnecessary delay. This court said that
"to split the proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay."  This court also intimated that the
91

interest of justice would be best observed if it adjudicated rights in a single proceeding.  While the
92

facts of that case prompted this court to direct the trial court to proceed to determine the issues of
thatcase, it did not prohibit courts from allowing the case to proceed to arbitration, when
circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the
incidental issue of whether piercing of the corporate veil is warranted, should be determined in a
single proceeding. Such finding would determine if the corporation is merely an aggregation of
persons whose liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from its
directors or officers, the courts do not say that the corporation, in all instances and for all purposes,
is the same as its directors, stockholders, officers, and agents. It does not result in an absolute
confusion of personalities of the corporation and the persons composing or representing it. Courts
merely discount the distinction and treat them as one, in relation to a specific act, in order to extend
the terms of the contract and the liabilities for all damages to erring corporate officials who
participated in the corporation’s illegal acts. This is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.

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

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the
existence of circumstances that render petitioners and the other directors solidarily liable. It ruled
that petitioners and Shangri-La’s other directors were not liable for the contractual obligations of
Shangri-La to BF Corporation. The Arbitral Tribunal’s decision was made with the participation of
petitioners, albeit with their continuing objection. In view of our discussion above, we rule that
petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.

G.R. No. 198075               September 4, 2013

KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner, 
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.

DECISION

PEREZ, J.:

This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-
G.R. SP No. 116865.

The facts:

The Donation

Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered
owner of a parcel of land located at Km. 16, South Superhighway, Parañaque City (subject
land).3 Within the subject land are buildings and other improvements dedicated to the business of
FKI.4

In 1975, FKI5 bequeathed the subject land (exclusive of the improvements thereon) in favor of herein
respondent Makati Rotary Club Foundation, Incorporated by way of a conditional donation.6 The
respondent accepted the donation with all of its conditions.7 On 26 May1975, FKI and the
respondent executed a Deed of Donation8evidencing their consensus.

The Lease and the Amended Deed of Donation

One of the conditions of the donation required the respondent to lease the subject land back to FKI
under terms specified in their Deed of Donation.9 With the respondent’s acceptance of the donation,
a lease agreement between FKI and the respondent was, therefore, effectively incorporated in the
Deed of Donation.

Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:

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

2. The amount of rent to be paid by FKI for the first twenty-five (25) years is ₱40,126.00 per
annum .11

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

g. The rental for the second 25 years shall be the subject of mutual agreement and in case of
disagreement the matter shall be referred to a Board of three Arbitrators appointed and with powers
in accordance with the Arbitration Law of the Philippines, Republic Act 878, whose function shall be
to decide the current fair market value of the land excluding the improvements, provided, that, any
increase in the fair market value of the land shall not exceed twenty five percent (25%) of the original
value of the land donated as stated in paragraph 2(c) of this Deed. The rental for the second 25
years shall not exceed three percent (3%) of the fair market value of the land excluding the
improvements as determined by the Board of Arbitrators.13

In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that reiterated
the provisions of the Deed of Donation , including those relating to the lease of the subject land.

Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of
Donation , FKI was able to continue in its possession and use of the subject land.

2000 Lease Contract

Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation
was set to expire, or on 23 May 2000, FKI and respondent executed another contract of lease ( 2000
Lease Contract )15covering the subject land. In this 2000 Lease Contract, FKI and respondent agreed
on a new five-year lease to take effect on the 26th of May 2000, with annual rents ranging from
₱4,000,000 for the first year up to ₱4,900,000 for the fifth year.16 The 2000 Lease Contract also
contained an arbitration clause enforceable in the event the parties come to disagreement about the"
interpretation, application and execution" of the lease, viz :

19. Governing Law – The provisions of this 2000 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and
respondent.17 (Emphasis supplied)

2005 Lease Contract

After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another
five (5) years. This new lease (2005 Lease Contract )18 required FKI to pay a fixed annual rent of
₱4,200,000.19 In addition to paying the fixed rent, however, the 2005 Lease Contract also obligated
FKI to make a yearly " donation " of money to the respondent.20 Such donations ranged from
₱3,000,000 for the first year up to ₱3,900,000for the fifth year.21 Notably, the 2005 Lease Contract
contained an arbitration clause similar to that in the 2000 Lease Contract, to wit:

19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and
respondent.22 (Emphasis supplied)

The Assignment and Petitioner’s Refusal to Pay

From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease
Contract.23 But in June of 2008, FKI sold all its rights and properties relative to its business in favor of
herein petitioner Koppel, Incorporated.24 On 29 August 2008, FKI and petitioner executed an
Assignment and Assumption of Lease and Donation25 —wherein FKI, with the conformity of the
respondent, formally assigned all of its interests and obligations under the Amended Deed of
Donation and the 2005 Lease Contract in favor of petitioner.

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

Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental
stipulations of the 2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given
effect because they violated one of the" material conditions " of the donation of the subject land, as
stated in the Deed of Donation and Amended Deed of Donation.26

According to petitioner, the Deed of Donation and Amended Deed of Donation actually established
not only one but two (2) lease agreements between FKI and respondent, i.e. , one lease for the first
twenty-five (25)years or from 1975 to 2000, and another lease for the next twenty-five (25)years
thereafter or from 2000 to 2025. 27 Both leases are material conditions of the donation of the subject
land.

Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease
was not fixed in the Deed of Donation and Amended Deed of Donation , both deeds nevertheless
prescribed rules and limitations by which the same may be determined. Such rules and limitations
ought to be observed in any succeeding lease agreements between petitioner and respondent for
they are, in themselves, material conditions of the donation of the subject land.28

In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation
that supposedly limits the amount of rent for the lease over the second twenty-five (25) years to only
" three percent (3%) of the fair market value of the subject land excluding the improvements.29

For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract
cannot be enforced as they are clearly, in view of their exorbitant exactions, in violation of the
aforementioned threshold in item 2(g) of the Deed of Donation and Amended Deed of Donation .
Consequently, petitioner insists that the amount of rent it has to pay thereon is and must still be
governed by the limitations prescribed in the Deed of Donation and Amended Deed of Donation.30

The Demand Letters

On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter of
its default " per Section 12 of the 2005 Lease Contract " and demanding for the settlement of the
rent and " donation " due for the year 2009. Respondent, in the same letter, further intimated of
canceling the 2005 Lease Contract should petitioner fail to settle the said obligations.32 Petitioner
received the First Demand Letter on2 June 2009.33

On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the
rental stipulations of the 2005 Lease Contract — calling them " severely disproportionate,"
"unconscionable" and "in clear violation to the nominal rentals mandated by the Amended Deed of
Donation." In lieu of the amount demanded by the respondent, which purportedly totaled to
₱8,394,000.00, exclusive of interests, petitioner offered to pay only ₱80,502.79,35 in accordance with
the rental provisions of the Deed of Donation and Amended Deed of Donation.36 Respondent refused
this offer.37

On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner,
reiterating its demand for the payment of the obligations already due under the 2005 Lease Contract.
The Second Demand Letter also contained a demand for petitioner to " immediately vacate the
leased premises " should it fail to pay such obligations within seven (7) days from its receipt of the
letter.39 The respondent warned of taking " legal steps " in the event that petitioner failed to comply
with any of the said demands.40 Petitioner received the Second Demand Letter on 26September
2009.41

Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009,
petitioner filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission
or cancellation of the Deed of Donation and Amended Deed of Donation against the respondent.
This case is currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-
0346.

The Ejectment Suit

On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the
Metropolitan Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77
and was docketed as Civil Case No. 2009-307.

On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it, petitioner
reiterated its objection over the rental stipulations of the 2005 Lease Contract for being violative of
the material conditions of the Deed of Donation and Amended Deed of Donation.45 In addition to the
foregoing, however, petitioner also interposed the following defenses:

1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer
case in view of the insufficiency of respondent’s demand.46 The First Demand Letter did not
contain an actual demand to vacate the premises and, therefore, the refusal to comply there
with does not give rise to an action for unlawful detainer.47

2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same
until the disagreement between the parties is first referred to arbitration pursuant to the
arbitration clause of the 2005 Lease Contract.48

3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would
not lie as the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005 Lease
Contract requiring petitioner to give yearly " donations " to respondent is a simulation, for
they are, in fact, parts of the rent. 50 Such grants were only denominated as " donations " in
the contract so that the respondent—anon-stock and non-profit corporation—could evade
payment of the taxes otherwise due thereon.51

In due course, petitioner and respondent both submitted their position papers, together with their
other documentary evidence.52 Remarkably, however, respondent failed to submit the Second
Demand Letter as part of its documentary evidence.

Rulings of the MeTC, RTC and Court of Appeals

On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused
to dismiss the action on the ground that the dispute is subject to arbitration, it nonetheless sided with
the petitioner with respect to the issues regarding the insufficiency of the respondent’s demand and
the nullity of the 2005 Lease Contract.54 The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to
costs.

SO ORDERED.55

The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch
274 of the RTC of Parañaque City and was docketed as Civil Case No. 10-0255.

On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from
the subject land:

WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial
Court, Branch 77, Parañaque City, is hereby reversed, judgment is thus rendered in favor of the
plaintiff-appellant and against the defendant-appellee, and ordering the latter –

(1) to vacate the lease[d] premises made subject of the case and to restore the possession
thereof to the plaintiff-appellant;

(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two
Thousand Four Hundred Thirty Six Pesos (₱9,362,436.00), penalties and net of 5%
withholding tax, for the lease period from May 25, 2009 to May 25, 2010 and such monthly
rental as will accrue during the pendency of this case;

(3) to pay attorney’s fees in the sum of ₱100,000.00 plus appearance fee of ₱3,000.00;

(4) and costs of suit.

As to the existing improvements belonging to the defendant-appellee, as these were built in good
faith, the provisions of Art. 1678of the Civil Code shall apply.

SO ORDERED.57

The ruling of the RTC is premised on the following ratiocinations:

1. The respondent had adequately complied with the requirement of demand as a

jurisdictional precursor to an unlawful detainer action.58 The First Demand Letter, in
substance, contains a demand for petitioner to vacate when it mentioned that it was a notice
" per Section12 of the 2005 Lease Contract."59 Moreover, the issue of sufficiency of the
respondent’s demand ought to have been laid to rest by the Second Demand Letter which,
though not submitted in evidence, was nonetheless admitted by petitioner as containing a"
demand to eject " in its Answer with Compulsory Counterclaim.60

2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract
while, at the same time, impugn such contract’s validity.61 Even assuming that it can,
petitioner still did not file a formal application before the MeTC so as to render such
arbitration clause operational.62 At any rate, the MeTC would not be precluded from
exercising its jurisdiction over an action for unlawful detainer, over which, it has exclusive
original jurisdiction.63
 3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was not
able to adduce any evidence to support its allegation that the same is void.64 There was, in
this case, no evidence that respondent is guilty of any tax evasion.65

Aggrieved, the petitioner appealed to the Court of Appeals.

On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:

WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of
Parañaque City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.

xxxx

SO ORDERED.67

Hence, this appeal.

On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary
Restraining Order68staying the immediate implementation of the decisions adverse to it.

OUR RULING

Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in
overlooking the significance of the arbitration clause incorporated in the 2005 Lease Contract . As
the Court sees it, that is a fatal mistake.

For this reason, We grant the petition.

Present Dispute is Arbitrable Under the

Arbitration Clause of the 2005 Lease
Agreement Contract

Going back to the records of this case, it is discernable that the dispute between the petitioner and
respondent emanates from the rental stipulations of the 2005 Lease Contract. The respondent
insists upon the enforce ability and validity of such stipulations, whereas, petitioner, in substance,
repudiates them. It is from petitioner’s apparent breach of the 2005 Lease Contract that respondent
filed the instant unlawful detainer action.

One cannot escape the conclusion that, under the foregoing premises, the dispute between the
petitioner and respondent arose from the application or execution of the 2005 Lease Contract .
Undoubtedly, such kinds of dispute are covered by the arbitration clause of the 2005 Lease Contract
to wit:

19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and
construed in all aspects in accordance with the laws of the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall
be submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of
the Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and
respondent.69 (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the "
interpretation, application or execution " of the 2005 Lease Contract ought to be submitted to
arbitration.70 To the mind of this Court, such stipulation is clear and is comprehensive enough so as
to include virtually any kind of conflict or dispute that may arise from the 2005 Lease Contract
including the one that presently besets petitioner and respondent.

The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain
legal effects. However, before discussing what these legal effects are, We shall first deal with the
challenges posed against the application of such arbitration clause.

Challenges Against the Application of the

Arbitration Clause of the 2005 Lease
Contract

Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as
well as the MeTC, RTC and the Court of Appeals, vouched for the non-application of the same in the
instant case. A plethora of arguments was hurled in favor of bypassing arbitration. We now address
them.

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

1. The disagreement between the petitioner and respondent is non-arbitrable as it will

inevitably touch upon the issue of the validity of the 2005 Lease Contract.71 It was submitted
that one of the reasons offered by the petitioner in justifying its failure to pay under the 2005
Lease Contract was the nullity of such contract for being contrary to law and public
policy.72 The Supreme Court, in Gonzales v. Climax Mining, Ltd.,73 held that " the validity of
contract cannot be subject of arbitration proceedings " as such questions are " legal in nature
and require the application and interpretation of laws and jurisprudence which is necessarily
a judicial function ." 74

2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract
while, at the same time, impugn such contract’s validity.75

3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the
2005 Lease Contract , petitioner still did not file a formal application before the MeTC so as
to render such arbitration clause operational.76 Section 24 of Republic Act No. 9285 requires
the party seeking arbitration to first file a " request " or an application therefor with the court
not later than the preliminary conference.77

4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR)

proceedings before the RTC.78 Hence, a further referral of the dispute to arbitration would
only be circuitous.79 Moreover, an ejectment case, in view of its summary nature, already
fulfills the prime purpose of arbitration, i.e. , to provide parties in conflict with an expedient
method for the resolution of their dispute.80 Arbitration then would no longer be necessary in
this case.81

None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the petitioner and
respondent falls within the all-encompassing terms of the arbitration clause of the 2005 Lease
Contract. While it may be conceded that in the arbitration of such disagreement, the validity of the
2005 Lease Contract, or at least, of such contract’s rental stipulations would have to be determined,
the same would not render such disagreement non-arbitrable. The quotation from Gonzales that was
used to justify the contrary position was taken out of context. A rereading of Gonzales would fix its
relevance to this case.

In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and
Geosciences Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance
Agreement and other mining related agreements entered into by private parties.82

Grounds invoked for the nullification of such agreements include fraud and unconstitutionality.83 The
pivotal issue that confronted the Court then was whether the PA-MGB has jurisdiction over that
particular arbitration complaint. Stated otherwise, the question was whether the complaint for
arbitration raises arbitrable issues that the PA-MGB can take cognizance of.

Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any
jurisdiction to take cognizance of the complaint for arbitration, this Court pointed out to the provisions
of R.A. No. 7942, or the Mining Act of 1995, which granted the PA-MGB with exclusive original
jurisdiction only over mining disputes, i.e., disputes involving " rights to mining areas," "mineral
agreements or permits," and " surface owners, occupants, claim holders or concessionaires"
requiring the technical knowledge and experience of mining authorities in order to be
resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise mining disputes
as contemplated under R.A. No. 7942 but only issues relating to the validity of certain mining related
agreements, this Court held that such complaint could not be arbitrated before the PA-MGB.85 It is in
this context that we made the pronouncement now in discussion:

Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the
parties as to some provisions of the contract between them, which needs the interpretation and the
application of that particular knowledge and expertise possessed by members of that Panel. It is not
proper when one of the parties repudiates the existence or validity of such contract or agreement on
the ground of fraud or oppression as in this case. The validity of the contract cannot be subject of
arbitration proceedings. Allegations of fraud and duress in the execution of a contract are matters
within the jurisdiction of the ordinary courts of law. These questions are legal in nature and require
the application and interpretation of laws and jurisprudence which is necessarily a judicial
function.86 (Emphasis supplied)

The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground
that the issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The real
consideration behind the ruling was the limitation that was placed by R.A. No. 7942 upon the
jurisdiction of the PA-MGB as an arbitral body . Gonzales rejected the complaint for arbitration
because the issue raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason,
and only for this reason, that such issue is rendered non-arbitrable before the PA-MGB. As stated
beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB only to mining disputes.87

Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines,
Inc. v. San Fernando Regal Trading, Inc.88 In Cargill , this Court answered the question of whether
issues involving the rescission of a contract are arbitrable. The respondent in Cargill argued against
arbitrability, also citing therein Gonzales . After dissecting Gonzales , this Court ruled in favor of
arbitrability.89 Thus, We held:

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

Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)

Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding
the fact that it assails the validity of such contract. This is due to the doctrine of separability.91

Under the doctrine of separability, an arbitration agreement is considered as independent of the

main contract.92Being a separate contract in itself, the arbitration agreement may thus be invoked
regardless of the possible nullity or invalidity of the main contract.93

Once again instructive is Cargill, wherein this Court held that, as a further consequence of the
doctrine of separability, even the very party who repudiates the main contract may invoke its
arbitration clause.94

Third . The operation of the arbitration clause in this case is not at all defeated by the failure of the
petitioner to file a formal "request" or application therefor with the MeTC. We find that the filing of a
"request" pursuant to Section 24 of R.A. No. 9285 is not the sole means by which an arbitration
clause may be validly invoked in a pending suit.

Section 24 of R.A. No. 9285 reads:

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

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

RULE 4: REFERRAL TO ADR

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

Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action is
filed . - The request for referral shall be made not later than the pre-trial conference. After the pre-
trial conference, the court will only act upon the request for referral if it is made with the agreement
of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is filed
but the parties subsequently enter into an arbitration agreement, they may request the court to refer
their dispute to arbitration at any time during the proceedings.

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

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

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

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

In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No. 9285,
the Special ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a
pending suit solely via such "request." After all, non-compliance with an arbitration agreement is a
valid defense to any offending suit and, as such, may even be raised in an answer as provided in our
ordinary rules of procedure.95

In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration
before the MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with
Counterclaim ,had already apprised the MeTC of the existence of the arbitration clause in the 2005
Lease Contract96 and, more significantly, of its desire to have the same enforced in this case.97 This
act of petitioner is enough valid invocation of his right to arbitrate. Fourth . The fact that the petitioner
and respondent already under went through JDR proceedings before the RTC, will not make the
subsequent conduct of arbitration between the parties unnecessary or circuitous. The JDR system is
substantially different from arbitration proceedings.

The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation
which entails the submission of a dispute before a " JDR judge " who shall merely " facilitate
settlement " between the parties in conflict or make a " non-binding evaluation or assessment of the
chances of each party’s case."98 Thus in JDR, the JDR judge lacks the authority to render a
resolution of the dispute that is binding upon the parties in conflict. In arbitration, on the other hand,
the dispute is submitted to an arbitrator/s —a neutral third person or a group of thereof— who shall
have the authority to render a resolution binding upon the parties.99

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

Neither would the summary nature of ejectment cases be a valid reason to disregard the
enforcement of the arbitration clause of the 2005 Lease Contract . Notwithstanding the summary
nature of ejectment cases, arbitration still remains relevant as it aims not only to afford the parties an
expeditious method of resolving their dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and
foremost, a product of party autonomy or the freedom of the parties to " make their own
arrangements to resolve their own disputes."100 Arbitration agreements manifest not only the desire
of the parties in conflict for an expeditious resolution of their dispute. They also represent, if not more
so, the parties’ mutual aspiration to achieve such resolution outside of judicial auspices, in a more
informal and less antagonistic environment under the terms of their choosing. Needless to state, this
critical feature can never be satisfied in an ejectment case no matter how summary it may be.

Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease
Agreement in this case, We shall now proceed with the discussion of its legal effects.

Legal Effect of the Application of the

Arbitration Clause

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

R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue
arising out of an agreement providing for the arbitration thereof, the court in which such suit or
proceeding is pending, upon being satisfied that the issue involved in such suit or proceeding is
referable to arbitration, shall stay the action or proceeding until an arbitration has been had in
accordance with the terms of the agreement: Provided, That the applicant for the stay is not in
default in proceeding with such arbitration.[Emphasis supplied]

R.A. No. 9285

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

It is clear that under the law, the instant unlawful detainer action should have been stayed;101 the
petitioner and the respondent should have been referred to arbitration pursuant to the arbitration
clause of the 2005 Lease Contract . The MeTC, however, did not do so in violation of the law—which
violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.

The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid all
proceedings it undertook in the ejectment case after the filing by petitioner of its Answer with
Counterclaim —the point when the petitioner and the respondent should have been referred to
arbitration. This case must, therefore, be remanded to the MeTC and be suspended at said point.
Inevitably, the decisions of the MeTC, RTC and the Court of Appeals must all be vacated and set
aside.

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

This Court is not unaware of the apparent harshness of the Decision that it is about to make.
Nonetheless, this Court must make the same if only to stress the point that, in our jurisdiction, bona
fide arbitration agreements are recognized as valid;102 and that laws,103 rules and regulations104 do
exist protecting and ensuring their enforcement as a matter of state policy. Gone should be the days
when courts treat otherwise valid arbitration agreements with disdain and hostility, if not outright "
jealousy,"105 and then get away with it. Courts should instead learn to treat alternative means of
dispute resolution as effective partners in the administration of justice and, in the case of arbitration
agreements, to afford them judicial restraint.106 Today, this Court only performs its part in upholding a
once disregarded state policy.

Civil Case No. CV 09-0346

This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a
complaint107 for the rescission or cancellation of the Deed of Donation and Amended Deed of
Donation against the respondent. The case is currently pending before Branch 257 of the RTC,
docketed as Civil Case No. CV 09-0346.

This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may
involve matters that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract.
However, since the records of Civil Case No. CV 09-0346 are not before this Court, We can never
know with true certainty and only speculate. In this light, let a copy of this Decision be also served to
Branch 257of the RTC of Parañaque for its consideration and, possible, application to Civil Case No.
CV 09-0346.

WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby

render a Decision:

1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch
77, of Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of its
Answer with Counterclaim ;

2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by
petitioner of its Answer with Counterclaim;

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.

116865,

b. Decision dated 29 October 2010 of the Regional Trial Court, Branch 274, of
Parañaque City in Civil Case No. 10-0255,

c. Decision dated 27 April 2010 of the Metropolitan Trial Court, Branch 77, of
Parañaque City in Civil Case No. 2009-307; and

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

Let a copy of this Decision be served to Branch 257 of the RTC of Parañaque for its consideration
and, possible, application to Civil Case No. CV 09-0346.

No costs.
SO ORDERED.