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Private International Law - Contracts with Arbitration Clauses

Report By Bobby Johnson O. Sebastian

Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser...in fees, expenses and waste of time. Abraham Lincoln, 1850

DEFINITION

DEFINITION

"Alternative Dispute Resolution System" means any process or procedure used to resolve a dispute or controversy, other than by adjudication of a presiding judge of a court or an officer of a government agency, as defined in this Act, in which a neutral third party participates to assist in the resolution of issues, which includes arbitration, mediation, conciliation, early neutral evaluation, mini-trial, or any combination thereof (R.A. 9285, Sec. 3(a)).

DEFINITION

"Arbitration" means a voluntary dispute resolution process in which one or more arbitrators, appointed in accordance with the agreement of the parties, or rules promulgated pursuant to this Act, resolve a dispute by rendering an award (R.A. 9285, Sec. 3(d)).

DEFINITION
A method that allows two parties to settle a dispute without going to court. A third neutral party issues a decision that is binding for both parties.

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. [Lazatin, p. 2, citing Eastboard Navigation Ltd. vs. Juan Ysmael & Co., Inc., 102 Phil. 1 (1957)]

DEFINITION

R.A. 9285, SEC. 21. Commercial Arbitration. - An arbitration is "commercial" if it covers matters arising from all relationships of a commercial nature, whether contractual or not.

HISTORY

HISTORY

Early jurisprudence in the Philippines did not support arbitration. Despite the recognition accorded to arbitration by tradition and by provisions of the Civil Code, the use of arbitration as a mode of dispute resolution was discouraged by the tendency of some courts to nullify arbitration clauses on the ground that the clauses divested the judiciary of its jurisdiction (Lazatin, p. 2)

HISTORY

In 1921, the Supreme Court, applying common law, noted that: [t]he settlement of controversies by arbitration is an ancient practice at common law. In its broad sense, it is a substitution, by consent of the parties, of another tribunal for the tribunals provided by the ordinary processes of law. Its object is the final disposition, in a speedy and inexpensive way, of the matters involved, so that they may not become the subject of future litigation between the parties (Id., p. 1, citing Chan Linte vs. Law Union and Rock Insurance Co., et al., 42 Phil. 548).

HISTORY

In 1924, the Court observed that: In the Philippines fortunately, the attitude of the courts toward arbitration agreements is slowly crystallizing into definite and workable form. The rule now is that unless the agreement is such as to absolutely close the doors of the courts against the parties, which agreement would be void, the courts will look with favor upon such amicable agreements and will only with great reluctance interfere to anticipate or nullify the action of the arbitrator (Id., p. 2, citing Malcolm, J., dissenting, in Vega vs. San Carlos Milling Co., 51 Phil. 908).

HISTORY

In 1953, the Philippine Congress enacted Republic Act No. 876, also known as the Arbitration Law Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between them at the time of the submission and which may be the subject of an action, or the parties to any contract may in such contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract.

HISTORY
In 10 June 1958, the Philippines became a signatory to the United Nations Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958 (New York Convention). On 6 July 1967, the said Convention was ratified.

HISTORY

For years, no legislation has been passed providing a specific procedure for the enforcement of foreign arbitral awards or the conduct of international arbitration. (Lazatin, p. 3) Instead, when dealing with disputes regarding international contracts, Philippine entities, including the Government, were required to agree to dispute settlement by arbitration in the foreign country under the rules of foreign arbitral institutions (Lazatin, p. 3, citing United Nations Commission in International Trade Law (UNCITRAL) Model Law Bill, Explanatory Note.)

HISTORY
On April 20, 2004, Republic Act No. 9285, otherwise known as the Alternative Dispute Resolution Act of 2004 was enacted. On September 1, 2009, the Supreme Court issued A.M. No. 07-11-08-SC, otherwise known as the Special Rules of Court on Alternative Dispute Resolution. It took effect on October 30, 2009.

HISTORY

On December 4, 2009, the Implementing Rules and Regulations of R.A. 9285 was issued by the Department of Justice as Department Circular No. 98.

R.A. 9285 ADR Act of 2004

R.A. 9285 ADR Act of 2004

Declared Policy: to actively promote party autonomy in the resolution of disputes or the freedom of the parties to make their own arrangements to resolve their disputes and 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. (Sec. 2)

R.A. 9285 ADR Act of 2004

To harmonize with developments in international trade, Republic Act No. 9285 ensured that international commercial arbitration would be governed by the United Nations Commission in International Trade (UNCITRAL) Model Law on International Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985 (Republic Act No. 9285, Secs. 19-31).

R.A. 9285 ADR Act of 2004

Republic Act No. 9285 also promoted the use and purpose of the New York Convention by specifically requiring that it shall govern the recognition and enforcement of arbitral awards covered by the said convention, while foreign arbitral awards not covered by the New York Convention shall be recognized and enforced in accordance with the procedural rules to be promulgated by the Supreme Court (Republic Act No. 9285, Secs. 4243).

KINDS OF ARBITRATION

KINDS OF ARBITRATION
Ad hoc Arbitration Institutionalized (or Institutional) Arbitration Specialized Arbitration

KINDS OF ARBITRATION

Ad hoc Arbitration the Parties select an arbitrator or arbitrators and choose procedures to govern the proceedings, including rules of arbitration institutions. So long as consent is present, the State allows the parties to conduct the arbitration in any manner they stipulate, provided that the arbitration process is not "contrary to law, morals, good customs, public order or public policy. (Lazatin p. 4)

KINDS OF ARBITRATION

Institutionalized (Institutional) - is conducted through organized bodies such as courts of arbitration, trade associations, and arbitration centers and institutes, each prescribing its own different arbitration procedure. Examples:
Philippine Dispute Resolution Center Inc. ("PDRCI").

International Chamber of Commerce ("ICC") Hongkong International Arbitration Centre ("HKIAC") Singapore International Arbitration Centre ("SIAC") (Lazatin, p. 5).

KINDS OF ARBITRATION
Specialized Arbitration - involves particular industries or kinds of disputes. Examples:

Bankers' Association of the Philippines -

disputes on check clearing Construction Industry Arbitration Commission (CIAC)

SOURCES OF LAW

SOURCES OF LAW

Republic Act No. 9285 - the primary statute used to supplement the parties agreement in governing arbitration Title XIV of the New Civil Code (Articles 2028 to 2046) UNCITRAL Model Law New York Convention Other international conventions Philippine Jurisprudence

PROCEDURE

PROCEDURE
The fundamental rule in international commercial arbitration is that the procedure will be dictated by the choice or agreement of the parties. In the absence of any agreement of the parties, the law of the forum will apply (Lazatin, p. 6).

PROCEDURE

Arbitration, being essentially consensual in nature, is dependent on the existence of an agreement that is valid as to form and substance. Without an agreement that constitutes the basis of arbitral competence, the arbitrator or the arbitral tribunal are without jurisdiction to conduct any proceedings, much less render any decision binding on the parties or on States in which enforcement may be sought.(Lazatin, p. 9)

PROCEDURE

Under the Model Law, parties are free to stipulate on their choice of law, both as to rules applicable to the substance of the dispute as well as with respect to the rules of procedure applicable to the arbitration proceedings (Lazatin, p. 15).

PROCEDURE BINDING EFFECT OF ARBITRAL AGREEMENTS

PROCEDURE BINDING EFFECT OF ARBITRAL AGREEMENTS

Parties may constitute arbitration agreements, which by definition are those agreements of parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, and may either be in the form of an arbitration clause in a contract or in a separate agreement. (Chapter II, Article 7 of the UNCITRAL Model Law)

PROCEDURE BINDING EFFECT OF ARBITRAL AGREEMENTS

The court must refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. (Chapter II, Article 8 of the UNCITRAL Model Law)

PROCEDURE SCOPE OF THE ARBITRATION CLAUSE

PROCEDURE SCOPE OF THE ARBITRATION CLAUSE


Under the UNCITRAL Model Law, the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. If arbitral tribunal rules as a preliminary question that it has jurisdiction, within thirty days after having received notice thereof, any party may request [a Philippine court] to decide the matter, which decision shall be subject to no appeal.

PROCEDURE SCOPE OF THE ARBITRATION CLAUSE

R.A. 9285, 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 pretrial 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.

PROCEDURE ESTABLISHMENT OF THE ARBITRAL TRIBUNAL

PROCEDURE ESTABLISHMENT OF THE ARBITRAL TRIBUNAL

While it is Philippine policy to actively promote party autonomy in the resolution of disputes and to give the parties freedom to make their own arrangements to resolve their disputes, Philippine law places a limit on the parties freedom to choose arbitrators (Lazatin, p. 21) Civil Code, Art. 2045. Any clause giving one of the parties power to choose more arbitrators than the other is void and of no effect.

PROCEDURE ENFORCEMENT OF ARBITRATION AGREEMENTS Philippine law treats an arbitration


agreement as contract enforceable between the parties, unless it is found to be void, inoperative or incapable of being performed. A party to an arbitration agreement may compel the other party to comply with the terms of thereof by instituting an action against him for specific performance with the courts and/or proceed ex parte with the arbitration proceedings without the defaulting party (Lazatin, p.18).

PROCEDURE ENFORCEMENT OF ARBITRATION AGREEMENTS

R.A. 9285, 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 pretrial 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.

FOREIGN ARBITRAL AWARD

R.A. 9285, SEC. 44. Foreign Arbitral Award Not Foreign Judgment. - A foreign arbitral award when confirmed by a court of a foreign country, shall be recognized and enforced as a foreign arbitral award and not a judgment of a foreign court. A foreign arbitral award, when confirmed by the regional trial court, shall be enforced as a foreign arbitral award and not as a judgment of a foreign court. A foreign arbitral award, when confirmed by the regional trial court, shall be enforced in the same manner as final and executory decisions of courts of law of the Philippines.

JURISPRUDENCE

JURISPRUDENCE
The Bremen, et al. vs. Zapata Off-Shore Company, 407 U.S. 1 (1972) Puromines, Inc. vs. Court of Appeals, 220 SCRA 281 (1993) Korea Technologies No., Ltd. vs. Lerma, G.R. No. 143581, 7 January 2008 Tuna Processing, Inc. vs. Philippine Kingford, Inc., G.R. No. 185582, 29 February 2012

JURISPRUDENCE BREMEN V. ZAPATA


Zapata, a U.S. corporation, contracted with Unterweser, a German corporation, for the towing of the formers drilling rig. The Contract contained a forum-selection clause that provides any dispute must be treated before the London Court of Justice. The rig was lost in a storm while in tow. Zapata sued Unterweser in US District Court of Tampa for damages.

JURISPRUDENCE BREMEN V. ZAPATA


Unterweser invoked the forum clause and moved to dismiss the case. It also commenced action in the London Court of Justice, pursuant to the forum clause. The District Court and the Court of Appeals held that the forum selection clause was unenforceable because it ousts the court of jurisdiction, which is contrary to public policy. It also held that Unterweser failed to prove that London would be a more convenient forum.

JURISPRUDENCE BREMEN V. ZAPATA

The U.S. Supreme Court disagreed, and concluded that the forum clause should control absent a strong showing that it should be set aside because of serious inconvenience, or contravention of public policy as declared by statute or judicial decision.

JURISPRUDENCE BREMEN V. ZAPATA


Zapara and Unterweser freely negotiated the contract, including the forum clause. It should therefore be incumbent upon the party trying to escape his contract to show that the contracted forum would be so gravely inconvenient as to deprive him of his day in court. The Supreme Court remanded the case for further proceedings.

JURISPRUDENCE PUROMINES V. CA.


Puromines and Makati Agro Trade, Inc. contracted with Philip Brothers Oceanic, Inc. for the resale of prilled Urea. The Contract had an arbitration clause requiring disputes to be settled by Arbitration in London. Much of the shipment was lost to spoilage while in transit on a ship chartered by Philip Brothers. Puromines sued in Manila. Philip Brothers moved to dismiss, invoking the arbitration clause in the contract.

JURISPRUDENCE PUROMINES V. CA.

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

JURISPRUDENCE PUROMINES V. CA.

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

JURISPRUDENCE KOREA TECH V. LERMA


In March 1997, Korea Technologies contracted with Pacific General Steel Manufacturing Corp. whereby the former was to setup an LPG cylinder manufacturing plant for the latter. Art. 15 of the Contract provided that disputes should be settled by arbitration in Seoul, Korea in accordance with Korean Commercial Arbitration Board Rules. It also provided that awards therein shall be final and binding upon the parties.

JURISPRUDENCE KOREA TECH V. LERMA


Pacific General started experiencing financial difficulties. Consequently, it was unable to supply necessary materials for the initial operation of the plant, forcing the parties to agree that Korea Tech shall be deemed to have completely complied with its obligations in the contract. The checks paid by Pacific General to Korea Tech were dishonored due to stop payment, causing the latter company to send a demand letter on May 8, 1998.

JURISPRUDENCE KOREA TECH V. LERMA


On the same day, the wife of Pacific Generals president complained in a faxed letter to the president of Korea Tech that the latter delivered substandard hydraulic press and failed to deliver other parts fully paid for. Thereafter, Pacific General informed Korea Tech that it was cancelling their contract and dismantle the plant. It also filed an estafa case the president of Korea Tech.

JURISPRUDENCE KOREA TECH V. LERMA


Korea Tech, on the other hand filed a complaint for specific performance against Pacific General, claiming full compliance with its obligations under the contract. It also prayed for a TRO against Pacific General, invoking the Arbitration clause. Trial Court held that Article 15 of the Contract as amended was invalid as it tended to oust the trial court or any other court jurisdiction over any dispute that may arise between the parties. The CA affirmed.

JURISPRUDENCE KOREA TECH V. LERMA

The Supreme Court disagreed: Established in this jurisdiction is the rule that the law of the place where the contract is made governs. Lex loci contractus. The contract in this case was perfected here in the Philippines. Therefore, our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the validity of mutually agreed arbitral clause or the finality and binding effect of an arbitral award. Art. 2044 provides, Any stipulation that the arbitrators award or decision shall be final, is valid, without prejudice to Articles 2038, 2039 and 2040.

JURISPRUDENCE KOREA TECH V. LERMA

The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been shown to be contrary to any law, or against morals, good customs, public order, or public policy. There has been no showing that the parties have not dealt with each other on equal footing. We find no reason why the arbitration clause should not be respected and complied with by both parties. In Gonzales v. Climax Mining Ltd. (512 SCRA 148), we held that submission to arbitration is a contract and that a clause in a contract providing that all matters in dispute between the parties shall be referred to arbitration is a contract.

JURISPRUDENCE KOREA TECH V. LERMA


The RTC must refer to arbitration in proper cases. Foreign Arbitral Awards must be confirmed by the RTC. The RTC has jurisdiction to review foreign arbitral awards Grounds for Judicial Review different in domestic (R.A. 876) and foreign arbitral awards (R.A. 9258). RTC Decision of assailed foreign arbitral award appealable.

JURISPRUDENCE KOREA TECH V. LERMA


The RTC must refer to arbitration in proper cases. Foreign Arbitral Awards must be confirmed by the RTC. The RTC has jurisdiction to review foreign arbitral awards Grounds for Judicial Review different in domestic (R.A. 876) and foreign arbitral awards (R.A. 9258). RTC Decision of assailed foreign arbitral award appealable.

JURISPRUDENCE TPI V. KINGFORD

Philippine Kingford, along with 4 other tuna processors, entered into a Memorandum of Agreement with Kanemitsu Yamaoka, whereby the latter as licensor will grant the use of his processes to the former as licensees in exchange for royalties. The parties also agreed to establish Tuna Processing, Inc. (TPI) under California laws for the purpose of enforcing the MOA. For reasons not stated in the pleadings, licensees, including Kingford, withdrew from petitioner TPI and correspondingly reneged on their obligations.

JURISPRUDENCE TPI V. KINGFORD


TPI then submitted the matter to International Centre for Dispute Resolution in the State of California, United States and won the case against Kingford. To enforce the award, petitioner TPI filed a Petition for Confirmation, Recognition, and Enforcement of Foreign Arbitral Award before the RTC of Makati. Kingford moved to dismiss on the ground that TPI, being a foreign corporation without license to do business in the Philippines, lacks legal capacity to sue.

JURISPRUDENCE TPI V. KINGFORD


The RTC agreed with Kingford and dismissed the case. Supreme Court reversed and ruled that the Corporation Code, as general law, should yield to R.A. 9258, known as the ADR Act of 2004, which is a special law. Sec. 45 of the ADR Act of 2004 provides that the opposing party in an application for recognition and enforcement of the arbitral award may raise only those grounds that were enumerated under Article V of the New York Convention. Capacity to sue is not one.

THE END
Works cited:

Lazatin, Victor P. and Progalidad, Patricia Ann T., Arbitration in the Philippines. <http://www.aseanlawassociation.org/9GAdocs/w4_Philipines.pdf> Date Retrieved: 3 February 2014 United Nations Commission in International Trade (UNCITRAL) Model Law on International Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985 United Nations Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958 Republic Act No. 9285 A.M. No. 07-11-08-SC, Special Rules of Court on Alternative Dispute Resolution. DOJ Department Circular No. 98, Implementing Rules and Regulations of R.A. 9285