ADR 1st Batch of Cases

INSULAR SAVINGS BANK, G.R. No. 141818

Petitioner,
Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
FAR EAST BANK AND
TRUST COMPANY, Promulgated:
Respondent.
June 22, 2006
x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari[1] assails the November 9, 1999 Order[2] of the
Regional Trial Court of Makati City, Branch 135, in Civil Case No. 92-145 which
dismissed the petition for review for lack of jurisdiction and its February 1, 2000
Order[3] denying reconsideration thereof.
The antecedent facts are as follows:
On December 11, 1991, Far East Bank and Trust Company (Respondent) filed a
complaint against Home Bankers Trust and Company (HBTC)[4] with the
Philippine Clearing House Corporations (PCHC) Arbitration Committee docketed
as Arbicom Case No. 91-069.[5] Respondent sought to recover from the petitioner,
the sum of P25,200,000.00 representing the total amount of the three checks drawn
and debited against its clearing account. HBTC sent these checks to respondent for
clearing by operation of the PCHC clearing system. Thereafter, respondent
dishonored the checks for insufficiency of funds and returned the checks to
HBTC. However, the latter refused to accept them since the checks were returned
by respondent after the reglementary regional clearing period.[6]

Meanwhile, on January 17, 1992, before the termination of the arbitration

proceedings, respondent filed another complaint but this time with the Regional
Trial Court (RTC) in Makati City docketed as Civil Case No. 92-145 for Sum of
Money and Damages with Preliminary Attachment. The complaint was filed not
only against HBTC but also against Robert Young, Eugene Arriesgado and Victor
Tancuan (collectively known as Defendants), who were the president and
depositors of HBTC respectively.[7] Aware of the arbitration proceedings between
respondent and petitioner, the RTC, in an Omnibus Order datedApril 30, 1992,
[8]
suspended the proceedings in the case against all the defendants pending the
decision of the Arbitration Committee, to wit:
WHEREFORE, the Court hereby orders:
(a) Home Bankers & Trust Co. to produce and permit plaintiff to
inspect, copy and/or photograph the checking account deposit ledger of
Victor Tancuans Account No. 1803-00605-3;
(b) The Motions to Dismiss filed by all defendants denied, for
lack of merit; and
(c) Proceedings in this case against all defendants be
suspended pending award/decision in the arbitration proceedings
against Home Bankers and Trust Co.
SO ORDERED.[9] (Emphasis supplied)

The above Omnibus Order was amended by the trial court in its October 1,
1992 Order,[10] the dispositive portion of which reads as follows:
WHEREFORE, the Omnibus Order dated 30 April 1992 is hereby
reconsidered by deleting the phrase since the complaint also seeks
exemplary damages, attorneys fees, litigation expenses and costs of suit
against HBT, on page 4 thereof and par. C of its dispositive portion is
amended to read:
(c) Procedings against Home Bankers and Trust Co. are suspended
pending award/decision in the arbitration proceedings while those
against individual defendants be immediately reinstated and continued.
HBT and Tancuans separate Motions for Reconsiderations are
hereby denied, for lack of merit.

SO ORDERED.[11]

On February 2, 1998, the PCHC Arbitration Committee rendered its decision in

favor of respondent,[12] thus:
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in
favor of the plaintiff and against the defendant sentencing the latter to
pay the plaintiff the sum of P25.2 million as principal. In view of the
fact, however, that this amount was split between the plaintiff and the
defendant in the course of the proceedings, the amount to be paid by the
defendant to the plaintiff should only be P12,600,000.00 plus interest on
this latter amount at the rate of 12% per annum from February 11, 1992,
the date when the total amount of P25.2 Million was split between
plaintiff and defendant up to the date of payment.
In view of the facts found by the committee, no attorneys fees nor other
damages are awarded.
SO ORDERED.[13]

The motion for reconsideration filed by petitioner was denied by the Arbitration
Committee.[14] Consequently, to appeal the decision of the Arbitration Committee
in Arbicom Case No. 91-069, petitioner filed a petition for review in the earlier
case filed by respondent in Branch 135 of the RTC of Makati and docketed as
Civil Case No. 92-145.[15] In an order datedJanuary 20, 1999, the RTC directed
both petitioner and respondent to file their respective memoranda, after which, said
petition would be deemed submitted for resolution.[16]
Both parties filed several pleadings. On February 8, 1999, respondent filed a
Motion to Dismiss Petition for Review for Lack of Jurisdiction, [17] which was
opposed by the petitioner.[18] Respondent then filed its Reply to the opposition,[19] to
which petitioner filed a Rejoinder.[20] On August 16, 1999, respondent submitted its
Surrejoinder.[21]
On November 9, 1999, the RTC rendered the assailed Order which held, thus:
Acting on plaintiff Far East Bank and Trust Companys Motion To
Dismiss Petition For Review For Lack Of Jurisdiction, considering that
the petition for review is a separate and distinct case, the same must
comply with all the requirements for filing initiatory pleadings for civil
actions before this Court so that since the commencement of the subject

petition lacks the mandatory requirements provided for, except the

payment of docket fees, for lack of jurisdiction, the petition for review is
hereby dismissed.
SO ORDERED.[22]

The RTC denied petitioners motion for reconsideration, [23] hence, this petition on
the sole ground, to wit:
THE REGIONAL TRIAL COURT ERRED IN DISMISSING THE
PETITION OF PETITIONER FOR LACK OF JURISDICTION ON
THE GROUND THAT IT SHOULD HAVE BEEN DOCKETED AS A
SEPARATE CASE.[24]

Petitioner contends that Civil Case No. 92-145 was merely suspended to await the
outcome of the arbitration case pending before the PCHC. Thus, any petition
questioning the decision of the Arbitration Committee must be filed in Civil Case
No. 92-145 and should not be docketed as a separate action. Likewise, petitioner
avers that had it filed a separate action, this would have resulted in a multiplicity of
suits, which is abhorred in procedure.
Meanwhile respondent avers that the RTC correctly dismissed the appeal
from the award of private arbitrators since there is no statutory basis for such
appeal. Respondent argues that petitioners claim that the parties by agreement had
conferred on the RTC appellate jurisdiction over decisions of private arbitrators is
erroneous because they cannot confer a non-existent jurisdiction on the RTC or any
court. Furthermore, the petition for review filed by petitioner violated the rule on
commencing an original action under Section 5, Rule 1, and the raffle of cases
under Section 2, Rule 20 of the Rules of Court, when it filed the same in Branch
135 of the RTC of Makati where there was already a pending original action, i.e.,
Civil Case No. 92-145.
The petition lacks merit.
The Philippine Clearing House Corporation was created to facilitate the
clearing of checks of member banks. Among these member banks exists
a compromissoire,[25] or an arbitration agreement embedded in their contract
wherein they consent that any future dispute or controversy between its PCHC
participants involving any check would be submitted to the Arbitration Committee

for arbitration. Petitioner and respondent are members of PCHC, thus they
underwent arbitration proceedings.

The PCHC has its own Rules of Procedure for Arbitration (PCHC
Rules). However, this is governed by Republic Act No. 876, also known as The
Arbitration Law[26] and supplemented by the Rules of Court.[27] Thus, we first
thresh out the remedy of petition for review availed of by the petitioner to appeal
the order of the Arbitration Committee.
Sections 23, 24 and 29 of The Arbitration Law, and Section 13 of the PCHC
Rules, provide:
SEC. 23. Confirmation of award. At any time within one month after the
award is made, any party to the controversy which was arbitrated may
apply to the court having jurisdiction, as provided in Section 28, for
an order confirming the award; and thereupon the court must grant
such order unless the award is vacated, modified or corrected, as
prescribed herein. Notice of such motion must be served upon the
adverse party or his attorney as prescribed by law for the service of such
notice upon an attorney in action in the same court.
SEC. 24. Grounds for vacating award. In any one of the following cases,
the court must make an order vacating the award upon the petition of any
party to the controversy when such party proves affirmatively that in the
arbitration proceedings:
(a) The award was procured by corruption, fraud or other undue
means; or
(b) That there was evident partiality or corruption in the
arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in refusing to
postpone the hearing upon sufficient cause shown, or in refusing to hear
evidence pertinent and material to the controversy; that one or more of
the arbitrators was disqualified to act as such under section nine hereof,
and willfully refrained from disclosing such disqualification or of any
other misbehavior by which the rights of any party have been materially
prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly

executed them, that a mutual, final and definite award upon the subject
matter submitted to them was not made.
xxxx
SEC. 25. Grounds for modifying or correcting award. In any one of the
following cases, the court must make an order modifying or correcting
the award, upon the application of any party to the controversy which
was arbitrated:
(a) Where there was an evident miscalculation of figures, or an
evident mistake in the description of any person, thing or property
referred to in the award; or
(b) Where the arbitrators have awarded upon a matter not
submitted to them, not affecting the merits of the decision upon the
matter submitted; or
(c) Where the award is imperfect in a matter of form not affecting
the merits of the controversy, and if it had been a commissioners report,
the defect could have been amended or disregarded by the court.
The order may modify and correct the award so as to effect the
intent thereof and promote justice between the parties.
SEC. 29. Appeals. An appeal may be taken from an order made in a
proceeding under this Act, or from judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to
questions of law. The proceedings upon such an appeal, including the
judgment thereon shall be governed by the Rules of Court insofar as they
are applicable.
AMENDED ARBITRATION RULES OF PROCEDURE OF PCHC
Sec. 13. The findings of facts of the decision or award rendered by
the Arbitration Committee or by the sole Arbitrator as the case may
be shall be final and conclusive upon all the parties in said
arbitration dispute. The decision or award of the Arbitration
Committee or of the Sole Arbitrator or of the Board of Directors, as the
case may be, shall be appealable only on questions of law to any of the
Regional Trial Courts in the National Capital Region where the
Head Office of any of the parties is located. The appellant shall perfect

his appeal by filing a notice of appeal to the Arbitration Secretariat and

filing a Petition with the Regional Trial Court of the National Capital
Region for the review of the decision or award of the committee or sole
arbitrator or of the Board of Directors, as the case may be, within a nonextendible period of fifteen (15) days from and after its receipt of the
order denying or granting said motion for reconsideration or new trial
had been filed, within a non-extendible period of fifteen (15) days from
and after its receipt of the order denying or granting said motion for
reconsideration or of the decision rendered after the new trial if one had
been granted.
x x x x. (Emphasis supplied)

As provided in the PCHC Rules, the findings of facts of the decision or

award rendered by the Arbitration Committee shall be final and conclusive upon all
the parties in said arbitration dispute.[28] Under Article 2044[29] of the New Civil
Code, the validity of any stipulation on the finality of the arbitrators award or
decision is recognized. However, where the conditions described in Articles 2038,
[30]
2039[31] and 2040[32] applicable to both compromises and arbitrations are
obtaining, the arbitrators award may be annulled or rescinded. [33] Consequently, the
decision of the Arbitration Committee is subject to judicial review.
Furthermore, petitioner had several judicial remedies available at its disposal
after the Arbitration Committee denied its Motion for Reconsideration. It may
petition the proper RTC to issue an order vacating the award on the grounds
provided for under Section 24 of the Arbitration Law.[34] Petitioner likewise has the
option to file a petition for review under Rule 43 of the Rules of Court with the
Court of Appeals on questions of fact, of law, or mixed questions of fact and law.
[35]
Lastly, petitioner may file a petition for certiorari under Rule 65 of the Rules of
Court on the ground that the Arbitrator Committee acted without or in excess of its
jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction. Since this case involves acts or omissions of a quasi-judicial agency,
the petition should be filed in and cognizable only by the Court of Appeals.[36]
In this instance, petitioner did not avail of any of the abovementioned remedies
available to it. Instead it filed a petition for review with the RTC where Civil Case
No. 92-145 is pending pursuant to Section 13 of the PCHC Rules to sustain its
action.Clearly, it erred in the procedure it chose for judicial review of the arbitral
award.

Having established that petitioner failed to avail of the abovementioned

remedies, we now discuss the issue of the jurisdiction of the trial court with respect
to the petition for review filed by petitioner.
Jurisdiction is the authority to hear and determine a cause - the right to act in
a case.[37] Jurisdiction over the subject matter is the power to hear and determine
the general class to which the proceedings in question belong. Jurisdiction over the
subject matter is conferred by law and not by the consent or acquiescence of any or
all of the parties or by erroneous belief of the court that it exists.[38]
In the instant case, petitioner and respondent have agreed that the PCHC
Rules would govern in case of controversy. However, since the PCHC Rules came
about only as a result of an agreement between and among member banks of
PCHC and not by law, it cannot confer jurisdiction to the RTC. Thus, the portion of
the PCHC Rules granting jurisdiction to the RTC to review arbitral awards, only on
questions of law, cannot be given effect.
Consequently, the proper recourse of petitioner from the denial of its motion
for reconsideration by the Arbitration Committee is to file either a motion to vacate
the arbitral award with the RTC, a petition for review with the Court of Appeals
under Rule 43 of the Rules of Court, or a petition for certiorari under Rule 65 of
the Rules of Court. In the case at bar, petitioner filed a petition for review with the
RTC when the same should have been filed with the Court of Appeals under Rule
43 of the Rules of Court. Thus, the RTC of Makati did not err in dismissing the
petition for review for lack of jurisdiction but not on the ground that petitioner
should have filed a separate case from Civil Case No. 92-145 but on the necessity
of filing the correct petition in the proper court. It is immaterial whether petitioner
filed the petition for review in Civil Case No. 92-145 as an appeal of the arbitral
award or whether it filed a separate case in the RTC, considering that the RTC will
only have jurisdiction over an arbitral award in cases of motions to vacate the
same. Otherwise, as elucidated herein, the Court of Appeals retains jurisdiction in
petitions for review or in petitions for certiorari. Consequently, petitioners
arguments, with respect to the filing of separate action from Civil Case No. 92-145
resulting in a multiplicity of suits, cannot be given due course.
Alternative dispute resolution methods or ADRs like arbitration, mediation,
negotiation and conciliation are encouraged by the Supreme Court. By enabling
parties to resolve their disputes amicably, they provide solutions that are less timeconsuming, less tedious, less confrontational, and more productive of goodwill and

lasting relationships.[39] It must be borne in mind that arbitration proceedings are

mainly governed by the Arbitration Law and suppletorily by the Rules of Court.
WHEREFORE, in light of the foregoing, the petition is DENIED. The November
9, 1999 Order of the Regional Trial Court of Makati City, Branch 135, in Civil
Case No. 92-145 which dismissed the petition for review for lack of jurisdiction
and the February 1, 2000 Order denying its reconsideration, are AFFIRMED.
SO ORDERED.
G.R. No. 141833

March 26, 2003

LM POWER ENGINEERING CORPORATION, petitioner,

vs.
CAPITOL INDUSTRIAL CONSTRUCTION GROUPS, INC., respondent.
PANGANIBAN, J.:
Alternative dispute resolution methods or ADRs -- like arbitration, mediation, negotiation and conciliation -- are
encouraged by the Supreme Court. By enabling parties to resolve their disputes amicably, they provide solutions that
are less time-consuming, less tedious, less confrontational, and more productive of goodwill and lasting
relationships.1
The Case
Before us is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court, seeking to set aside the January
28, 2000 Decision of the Court of Appeals3 (CA) in CA-GR CV No. 54232. The dispositive portion of the Decision
reads as follows:
"WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE. The parties are ORDERED to
present their dispute to arbitration in accordance with their Sub-contract Agreement. The surety bond posted
by [respondent] is [d]ischarged."4
The Facts
On February 22, 1983, Petitioner LM Power Engineering Corporation and Respondent Capitol Industrial Construction
Groups Inc. entered into a "Subcontract Agreement" involving electrical work at the Third Port of Zamboanga.5
On April 25, 1985, respondent took over some of the work contracted to petitioner.6 Allegedly, the latter had failed to
finish it because of its inability to procure materials.7
Upon completing its task under the Contract, petitioner billed respondent in the amount of P6,711,813.90.8Contesting
the accuracy of the amount of advances and billable accomplishments listed by the former, the latter refused to pay.
Respondent also took refuge in the termination clause of the Agreement.9 That clause allowed it to set off the cost of
the work that petitioner had failed to undertake -- due to termination or take-over -- against the amount it owed the
latter.

Because of the dispute, petitioner filed with the Regional Trial Court (RTC) of Makati (Branch 141) a Complaint10for
the collection of the amount representing the alleged balance due it under the Subcontract. Instead of submitting an
Answer, respondent filed a Motion to Dismiss,11 alleging that the Complaint was premature, because there was no
prior recourse to arbitration.
In its Order12 dated September 15, 1987, the RTC denied the Motion on the ground that the dispute did not involve
the interpretation or the implementation of the Agreement and was, therefore, not covered by the arbitral clause.13
After trial on the merits, the RTC14 ruled that the take-over of some work items by respondent was not equivalent to a
termination, but a mere modification, of the Subcontract. The latter was ordered to give full payment for the work
completed by petitioner.
Ruling of the Court of Appeals
On appeal, the CA reversed the RTC and ordered the referral of the case to arbitration. The appellate court held as
arbitrable the issue of whether respondents take-over of some work items had been intended to be a termination of
the original contract under Letter "K" of the Subcontract. It ruled likewise on two other issues: whether petitioner was
liable under the warranty clause of the Agreement, and whether it should reimburse respondent for the work the latter
had taken over.15
Hence, this Petition.16
The Issues
In its Memorandum, petitioner raises the following issues for the Courts consideration:
"A
Whether or not there exist[s] a controversy/dispute between petitioner and respondent regarding the interpretation
and implementation of the Sub-Contract Agreement dated February 22, 1983 that requires prior recourse to voluntary
arbitration;
"B
In the affirmative, whether or not the requirements provided in Article III 1 of CIAC Arbitration Rules regarding request
for arbitration ha[ve] been complied with[.]"17
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Whether Dispute Is Arbitrable
Petitioner claims that there is no conflict regarding the interpretation or the implementation of the Agreement. Thus,
without having to resort to prior arbitration, it is entitled to collect the value of the services it rendered through an
ordinary action for the collection of a sum of money from respondent. On the other hand, the latter contends that
there is a need for prior arbitration as provided in the Agreement. This is because there are some disparities between
the parties positions regarding the extent of the work done, the amount of advances and billable accomplishments,
and the set off of expenses incurred by respondent in its take-over of petitioners work.

We side with respondent. Essentially, the dispute arose from the parties incongruent positions on whether certain
provisions of their Agreement could be applied to the facts. The instant case involves technical discrepancies that are
better left to an arbitral body that has expertise in those areas. In any event, the inclusion of an arbitration clause in a
contract does not ipso facto divest the courts of jurisdiction to pass upon the findings of arbitral bodies, because the
awards are still judicially reviewable under certain conditions.18
In the case before us, the Subcontract has the following arbitral clause:
"6. The Parties hereto agree that any dispute or conflict as regards to interpretation and implementation of
this Agreement which cannot be settled between [respondent] and [petitioner] amicably shall be settled by
means of arbitration x x x."19
Clearly, the resolution of the dispute between the parties herein requires a referral to the provisions of their
Agreement. Within the scope of the arbitration clause are discrepancies as to the amount of advances and billable
accomplishments, the application of the provision on termination, and the consequent set-off of expenses.
A review of the factual allegations of the parties reveals that they differ on the following questions: (1) Did a takeover/termination occur? (2) May the expenses incurred by respondent in the take-over be set off against the amounts
it owed petitioner? (3) How much were the advances and billable accomplishments?
The resolution of the foregoing issues lies in the interpretation of the provisions of the Agreement. According to
respondent, the take-over was caused by petitioners delay in completing the work. Such delay was in violation of the
provision in the Agreement as to time schedule:
"G. TIME SCHEDULE
"[Petitioner] shall adhere strictly to the schedule related to the WORK and complete the WORK within the
period set forth in Annex C hereof. NO time extension shall be granted by [respondent] to [petitioner] unless
a corresponding time extension is granted by [the Ministry of Public Works and Highways] to the
CONSORTIUM."20
Because of the delay, respondent alleges that it took over some of the work contracted to petitioner, pursuant to the
following provision in the Agreement:
"K. TERMINATION OF AGREEMENT
"[Respondent] has the right to terminate and/or take over this Agreement for any of the following causes:
xxx

xxx

xxx

6. If despite previous warnings by [respondent], [petitioner] does not execute the WORK in
accordance with this Agreement, or persistently or flagrantly neglects to carry out [its] obligations
under this Agreement."21
Supposedly, as a result of the "take-over," respondent incurred expenses in excess of the contracted price. It sought
to set off those expenses against the amount claimed by petitioner for the work the latter accomplished, pursuant to
the following provision:
"If the total direct and indirect cost of completing the remaining part of the WORK exceed the sum which
would have been payable to [petitioner] had it completed the WORK, the amount of such excess [may be]
claimed by [respondent] from either of the following:

1. Any amount due [petitioner] from [respondent] at the time of the termination of this Agreement."22
The issue as to the correct amount of petitioners advances and billable accomplishments involves an evaluation of
the manner in which the parties completed the work, the extent to which they did it, and the expenses each of them
incurred in connection therewith. Arbitrators also need to look into the computation of foreign and local costs of
materials, foreign and local advances, retention fees and letters of credit, and taxes and duties as set forth in the
Agreement. These data can be gathered from a review of the Agreement, pertinent portions of which are reproduced
hereunder:
"C. CONTRACT PRICE AND TERMS OF PAYMENT
xxx

xxx

xxx

"All progress payments to be made by [respondent] to [petitioner] shall be subject to a retention sum of ten
percent (10%) of the value of the approved quantities. Any claims by [respondent] on [petitioner] may be
deducted by [respondent] from the progress payments and/or retained amount. Any excess from the
retained amount after deducting [respondents] claims shall be released by [respondent] to [petitioner] after
the issuance of [the Ministry of Public Works and Highways] of the Certificate of Completion and final
acceptance of the WORK by [the Ministry of Public Works and Highways].
xxx

xxx

xxx

"D. IMPORTED MATERIALS AND EQUIPMENT

"[Respondent shall open the letters of credit for the importation of equipment and materials listed in Annex E
hereof after the drawings, brochures, and other technical data of each items in the list have been formally
approved by [the Ministry of Public Works and Highways]. However, petitioner will still be fully responsible
for all imported materials and equipment.
"All expenses incurred by [respondent], both in foreign and local currencies in connection with the opening
of the letters of credit shall be deducted from the Contract Prices.
xxx

xxx

xxx

"N. OTHER CONDITIONS

xxx

xxx

xxx

"2. All customs duties, import duties, contractors taxes, income taxes, and other taxes that may be required
by any government agencies in connection with this Agreement shall be for the sole account of [petitioner]."23
Being an inexpensive, speedy and amicable method of settling disputes,24 arbitration -- along with mediation,
conciliation and negotiation -- is encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the commercial kind.25 It is thus regarded as the
"wave of the future" in international civil and commercial disputes.26 Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.27
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts should
liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers the asserted
dispute, an order to arbitrate should be granted.28 Any doubt should be resolved in favor of arbitration.29

Second Issue:
Prior Request for Arbitration
According to petitioner, assuming arguendo that the dispute is arbitrable, the failure to file a formal request for
arbitration with the Construction Industry Arbitration Commission (CIAC) precluded the latter from acquiring
jurisdiction over the question. To bolster its position, petitioner even cites our ruling in Tesco Services Incorporated v.
Vera.30 We are not persuaded.
Section 1 of Article II of the old Rules of Procedure Governing Construction Arbitration indeed required the
submission of a request for arbitration, as follows:
"SECTION. 1. Submission to Arbitration -- Any party to a construction contract wishing to have recourse to
arbitration by the Construction Industry Arbitration Commission (CIAC) shall submit its Request for
Arbitration in sufficient copies to the Secretariat of the CIAC; PROVIDED, that in the case of government
construction contracts, all administrative remedies available to the parties must have been exhausted within
90 days from the time the dispute arose."
Tesco was promulgated by this Court, using the foregoing provision as reference.
On the other hand, Section 1 of Article III of the new Rules of Procedure Governing Construction Arbitration has
dispensed with this requirement and recourse to the CIAC may now be availed of whenever a contract "contains a
clause for the submission of a future controversy to arbitration," in this wise:
"SECTION 1. Submission to CIAC Jurisdiction An arbitration clause in a construction contract or a
submission to arbitration of a construction dispute shall be deemed an agreement to submit an existing or
future controversy to CIAC jurisdiction, notwithstanding the reference to a different arbitration institution or
arbitral body in such contract or submission. When a contract contains a clause for the submission of a
future controversy to arbitration, it is not necessary for the parties to enter into a submission agreement
before the claimant may invoke the jurisdiction of CIAC."
The foregoing amendments in the Rules were formalized by CIAC Resolution Nos. 2-91 and 3-93.31
The difference in the two provisions was clearly explained in China Chang Jiang Energy Corporation (Philippines) v.
Rosal Infrastructure Builders et al.32 (an extended unsigned Resolution) and reiterated in National Irrigation
Administration v. Court of Appeals,33 from which we quote thus:
"Under the present Rules of Procedure, for a particular construction contract to fall within the jurisdiction of
CIAC, it is merely required that the parties agree to submit the same to voluntary arbitration Unlike in the
original version of Section 1, as applied in the Tesco case, the law as it now stands does not provide that the
parties should agree to submit disputes arising from their agreement specifically to the CIAC for the latter to
acquire jurisdiction over the same. Rather, it is plain and clear that as long as the parties agree to submit to
voluntary arbitration, regardless of what forum they may choose, their agreement will fall within the
jurisdiction of the CIAC, such that, even if they specifically choose another forum, the parties will not be
precluded from electing to submit their dispute before the CIAC because this right has been vested upon
each party by law, i.e., E.O. No. 1008."34
Clearly, there is no more need to file a request with the CIAC in order to vest it with jurisdiction to decide a
construction dispute.
The arbitral clause in the Agreement is a commitment on the part of the parties to submit to arbitration the disputes
covered therein. Because that clause is binding, they are expected to abide by it in good faith.35 And because it
covers the dispute between the parties in the present case, either of them may compel the other to arbitrate.36

Since petitioner has already filed a Complaint with the RTC without prior recourse to arbitration, the proper procedure
to enable the CIAC to decide on the dispute is to request the stay or suspension of such action, as provided under
RA 876 [the Arbitration Law].37
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

JORGE GONZALES and G.R. No. 161957

PANEL OF ARBITRATORS,
Petitioners, Present:
PUNO, C. J.,
Chairperson,
- versus AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
NAZARIO, JJ.
CLIMAX MINING LTD.,
CLIMAX-ARIMCO MINING CORP.,
and AUSTRALASIAN PHILIPPINES Promulgated:
MINING INC.,
Respondents. January 22, 2007
x--------------------------------------------------------------------------------- x
JORGE GONZALES, G.R. No. 167994
Petitioner,
-

versus

HON. OSCAR B. PIMENTEL, in his

capacity as PRESIDING JUDGE of BR. 148
of the REGIONAL TRIAL COURT of
MAKATI CITY, and CLIMAX-ARIMCO
MINING CORPORATION,
Respondents.
x-------------------------- --------------------------------------------------- x

R E S O L U T I ON
TINGA, J.:
This is a consolidation of two petitions rooted in the same disputed Addendum
Contract entered into by the parties. In G.R. No. 161957, the Court in its Decision
of 28 February 2005[1] denied the Rule 45 petition of petitioner Jorge Gonzales
(Gonzales). It held that the DENR Panel of Arbitrators had no jurisdiction over the
complaint for the annulment of the Addendum Contract on grounds of fraud and
violation of the Constitution and that the action should have been brought before
the regular courts as it involved judicial issues. Both parties filed separate motions
for reconsideration. Gonzales avers in his Motion for Reconsideration [2] that the
Court erred in holding that the DENR Panel of Arbitrators was bereft of
jurisdiction, reiterating its argument that the case involves a mining dispute that
properly falls within the ambit of the Panels authority. Gonzales adds that the
Court failed to rule on other issues he raised relating to the sufficiency of his
complaint before the DENR Panel of Arbitrators and the timeliness of its filing.
Respondents Climax Mining Ltd., et al., (respondents) filed their Motion for Partial
Reconsideration and/or Clarification[3]seeking reconsideration of that part of the
Decision holding that the case should not be brought for arbitration under Republic
Act (R.A.) No. 876, also known as the Arbitration Law.[4] Respondents, citing
American jurisprudence[5] and the UNCITRAL Model Law,[6] argue that the
arbitration clause in the Addendum Contract should be treated as an agreement
independent of the other terms of the contract, and that a claimed rescission of the
main contract does not avoid the duty to arbitrate. Respondents add that Gonzaless
argument relating to the alleged invalidity of the Addendum Contract still has to be
proven and adjudicated on in a proper proceeding; that is, an action separate from
the motion to compel arbitration. Pending judgment in such separate action, the
Addendum Contract remains valid and binding and so does the arbitration clause
therein. Respondents add that the holding in the Decision that the case should not
be brought under the ambit of the Arbitration Law appears to be premised on
Gonzaless having impugn[ed] the existence or validity of the addendum
contract. If so, it supposedly conveys the idea that Gonzaless unilateral repudiation
of the contract or mere allegation of its invalidity is all it takes to avoid
arbitration. Hence, respondents submit that the courts holding that the case should

not be brought under the ambit of the Arbitration Law be understood or clarified as
operative only where the challenge to the arbitration agreement has been sustained
by final judgment.
Both parties were required to file their respective comments to the other partys
motion for reconsideration/clarification.[7]Respondents filed their Comment on 17
August 2005,[8] while Gonzales filed his only on 25 July 2006.[9]
On the other hand, G.R. No. 167994 is a Rule 65 petition filed on 6 May 2005,
or while the motions for reconsideration in G.R. No. 161957 [10] were pending,
wherein Gonzales challenged the orders of the Regional Trial Court (RTC)
requiring him to proceed with the arbitration proceedings as sought by ClimaxArimco Mining Corporation (Climax-Arimco).
On 5 June 2006, the two cases, G.R. Nos. 161957 and 167994, were consolidated
upon the recommendation of the Assistant Division Clerk of Court since the cases
are rooted in the same Addendum Contract.
We first tackle the more recent case which is G.R. No. 167994. It stemmed from
the petition to compel arbitration filed by respondent Climax-Arimco before the
RTC of Makati City on 31 March 2000 while the complaint for the nullification of
the Addendum Contract was pending before the DENR Panel of Arbitrators. On 23
March 2000, Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant
to Clause 19.1[11] of the Addendum Contract and also in accordance with Sec. 5 of
R.A. No. 876. The petition for arbitration was subsequently filed and ClimaxArimco sought an order to compel the parties to arbitrate pursuant to the said
arbitration clause. The case, docketed as Civil Case No. 00-444, was initially
raffled to Br. 132 of the RTC of Makati City, with Judge Herminio I. Benito as
Presiding Judge. Respondent Climax-Arimco filed on 5 April 2000 a motion to set
the application to compel arbitration for hearing.

On 14 April 2000, Gonzales filed a motion to dismiss which he however failed to

set for hearing. On 15 May 2000, he filed an Answer with Counterclaim,
[12]
questioning the validity of the Addendum Contract containing the arbitration
clause. Gonzales alleged that the Addendum Contract containing the arbitration
clause is void in view of Climax-Arimcos acts of fraud, oppression and violation of
the Constitution. Thus, the arbitration clause, Clause 19.1, contained in the
Addendum Contract is also null and void ab initio and legally inexistent.

On 18 May 2000, the RTC issued an order declaring Gonzaless motion to dismiss
moot and academic in view of the filing of his Answer with Counterclaim.[13]
On 31 May 2000, Gonzales asked the RTC to set the case for pre-trial. [14] This the
RTC denied on 16 June 2000, holding that the petition for arbitration is a special
proceeding that is summary in nature. [15] However, on 7 July 2000, the RTC
granted Gonzaless motion for reconsideration of the 16 June 2000 Order and set
the case for pre-trial on 10 August 2000, it being of the view that Gonzales had
raised in his answer the issue of the making of the arbitration agreement.[16]
Climax-Arimco then filed a motion to resolve its pending motion to compel
arbitration. The RTC denied the same in its 24 July 2000 order.
On 28 July 2000, Climax-Arimco filed a Motion to Inhibit Judge Herminio I.
Benito for not possessing the cold neutrality of an impartial judge. [17] On 5 August
2000, Judge Benito issued an Order granting the Motion to Inhibit and ordered the
re-raffling of the petition for arbitration. [18] The case was raffled to the sala of
public respondent Judge Oscar B. Pimentel of Branch 148.
On 23 August 2000, Climax-Arimco filed a motion for reconsideration of the 24
July 2000 Order.[19] Climax-Arimco argued that R.A. No. 876 does not authorize a
pre-trial or trial for a motion to compel arbitration but directs the court to hear the
motion summarily and resolve it within ten days from hearing. Judge Pimentel
granted the motion and directed the parties to arbitration.On 13 February 2001,
Judge Pimentel issued the first assailed order requiring Gonzales to proceed with
arbitration proceedings and appointing retired CA Justice Jorge Coquia as sole
arbitrator.[20]
Gonzales moved for reconsideration on 20 March 2001 but this was denied in the
Order dated 7 March 2005.[21]
Gonzales thus filed the Rule 65 petition assailing the Orders dated 13
February 2001 and 7 March 2005 of Judge Pimentel. Gonzales contends that public
respondent Judge Pimentel acted with grave abuse of discretion in immediately
ordering the parties to proceed with arbitration despite the proper, valid, and timely
raised argument in his Answer with Counterclaim that the Addendum Contract,
containing the arbitration clause, is null and void. Gonzales has also sought a
temporary restraining order to prevent the enforcement of the assailed orders
directing the parties to arbitrate, and to direct Judge Pimentel to hold a pre-trial

conference and the necessary hearings on the determination of the nullity of the
Addendum Contract.
In support of his argument, Gonzales invokes Sec. 6 of R.A. No. 876:
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 applications filed
under the provisions of this Act, within ten (10) days after such
motions, petitions, or applications have been heard by it.

Gonzales also cites Sec. 24 of R.A. No. 9285 or the Alternative Dispute
Resolution Act of 2004:
SEC. 24. Referral to Arbitration.A court before which an action
is brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the 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.

According to Gonzales, the above-quoted provisions of law outline the procedure

to be followed in petitions to compel arbitration, which the RTC did not
follow. Thus, referral of the parties to arbitration by Judge Pimentel despite the
timely and properly raised issue of nullity of the Addendum Contract was
misplaced and without legal basis. Both R.A. No. 876 and R.A. No. 9285 mandate
that any issue as to the nullity, inoperativeness, or incapability of performance of
the arbitration clause/agreement raised by one of the parties to the alleged
arbitration agreement must be determined by the court prior to referring them to
arbitration. They require that the trial court first determine or resolve the issue of
nullity, and there is no other venue for this determination other than a pre-trial and
hearing on the issue by the trial court which has jurisdiction over the case.Gonzales
adds that the assailed 13 February 2001 Order also violated his right to procedural
due process when the trial court erroneously ruled on the existence of the
arbitration agreement despite the absence of a hearing for the presentation of
evidence on the nullity of the Addendum Contract.
Respondent Climax-Arimco, on the other hand, assails the mode of review availed
of by Gonzales. Climax-Arimco cites Sec. 29 of R.A. No. 876:
SEC. 29. Appeals.An appeal may be taken from an order made in a
proceeding under this Act, or from a judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to
questions of law. The proceedings upon such an appeal, including the
judgment thereon shall be governed by the Rules of Court in so far as
they are applicable.

Climax-Arimco mentions that the special civil action for certiorari employed by
Gonzales is available only where there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law against the challenged orders or
acts. Climax-Arimco then points out that R.A. No. 876 provides for an appeal from
such orders, which, under the Rules of Court, must be filed within 15 days from
notice of the final order or resolution appealed from or of the denial of the motion
for reconsideration filed in due time. Gonzales has not denied that the relevant 15day period for an appeal had elapsed long before he filed this petition for
certiorari. He cannot use the special civil action of certiorari as a remedy for a lost
appeal.
Climax-Arimco adds that an application to compel arbitration under Sec. 6 of R.A.
No. 876 confers on the trial court only a limited and special jurisdiction, i.e., a

jurisdiction solely to determine (a) whether or not the parties have a written
contract to arbitrate, and (b) if the defendant has failed to comply with that
contract. Respondent cites La Naval Drug Corporation v. Court of Appeals,
[22]
which holds that in a proceeding to compel arbitration, [t]he arbitration law
explicitly confines the courts authority only to pass upon the issue of whether there
is or there is no agreement in writing providing for arbitration, and [i]n 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.[23] Climax-Arimco argues that R.A. No. 876 gives no room for any other
issue to be dealt with in such a proceeding, and that the court presented with an
application to compel arbitration may order arbitration or dismiss the same,
depending solely on its finding as to those two limited issues. If either of these
matters is disputed, the court is required to conduct a summary hearing on
it. Gonzaless proposition contradicts both the trial courts limited jurisdiction and
the summary nature of the proceeding itself.
Climax-Arimco further notes that Gonzaless attack on or repudiation of the
Addendum Contract also is not a ground to deny effect to the arbitration clause in
the Contract. The arbitration agreement is separate and severable from the contract
evidencing the parties commercial or economic transaction, it stresses. Hence, the
alleged defect or failure of the main contract is not a ground to deny enforcement
of the parties arbitration agreement. Even the party who has repudiated the main
contract is not prevented from enforcing its arbitration provision. R.A. No. 876
itself treats the arbitration clause or agreement as a contract separate from the
commercial, economic or other transaction to be arbitrated. The statute, in
particular paragraph 1 of Sec. 2 thereof, considers the arbitration stipulation an
independent contract in its own right whose enforcement may be prevented only on
grounds which legally make the arbitration agreement itself revocable, thus:
SEC. 2. Persons and matters subject to arbitration.Two or more
persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing, between them at the time of the
submission and which may be the subject of an action, or the parties to
any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or
contract shall be valid, enforceable and irrevocable, save upon such
grounds as exist at law for the revocation of any contract.
xxxx

The grounds Gonzales invokes for the revocation of the Addendum Contractfraud
and oppression in the execution thereofare also not grounds for the revocation of
the arbitration clause in the Contract, Climax-Arimco notes. Such grounds may
only be raised by way of defense in the arbitration itself and cannot be used to
frustrate or delay the conduct of arbitration proceedings.Instead, these should be
raised in a separate action for rescission, it continues.
Climax-Arimco emphasizes that the summary proceeding to compel arbitration
under Sec. 6 of R.A. No. 876 should not be confused with the procedure in Sec. 24
of R.A. No. 9285. Sec. 6 of R.A. No. 876 refers to an application to compel
arbitration where the courts authority is limited to resolving the issue of whether
there is or there is no agreement in writing providing for arbitration, while Sec. 24
of R.A. No. 9285 refers to an ordinary action which covers a matter that appears to
be arbitrable or subject to arbitration under the arbitration agreement. In the latter
case, the statute is clear that the court, instead of trying the case, may, on request of
either or both parties, refer the parties to arbitration, unless it finds that the
arbitration agreement is null and void, inoperative or incapable of being
performed. Arbitration may even be ordered in the same suit brought upon a matter
covered by an arbitration agreement even without waiting for the outcome of the
issue of the validity of the arbitration agreement. Art. 8 of the UNCITRAL Model
Law[24] states that where a court before which an action is brought in a matter
which is subject of an arbitration agreement refers the parties to arbitration, the
arbitral proceedings may proceed even while the action is pending.
Thus, the main issue raised in the Petition for Certiorari is whether it was proper
for the RTC, in the proceeding to compel arbitration under R.A. No. 876, to order
the parties to arbitrate even though the defendant therein has raised the twin issues
of validity and nullity of the Addendum Contract and, consequently, of the
arbitration clause therein as well. The resolution of both Climax-Arimcos Motion
for Partial Reconsideration and/or Clarification in G.R. No. 161957 and Gonzaless
Petition for Certiorari in G.R. No. 167994 essentially turns on whether the question
of validity of the Addendum Contract bears upon the applicability or enforceability
of the arbitration clause contained therein. The two pending matters shall thus be
jointly resolved.
We address the Rule 65 petition in G.R. No. 167994 first from the remedial
law perspective. It deserves to be dismissed on procedural grounds, as it was filed
in lieu of appeal which is the prescribed remedy and at that far beyond the
reglementary period. It is elementary in remedial law that the use of an erroneous

mode of appeal is cause for dismissal of the petition for certiorari and it has been
repeatedly stressed that a petition for certiorari is not a substitute for a lost appeal.
As its nature, a petition for certiorari lies only where there is no appeal, and no
plain, speedy and adequate remedy in the ordinary course of law.[25] The Arbitration
Law specifically provides for an appeal by certiorari, i.e., a petition for review
under certiorari under Rule 45 of the Rules of Court that raises pure questions of
law.[26] There is no merit to Gonzaless argument that the use of the permissive term
may in Sec. 29, R.A. No. 876 in the filing of appeals does not prohibit nor discount
the filing of a petition for certiorari under Rule 65. [27] Proper interpretation of the
aforesaid provision of law shows that the term may refers only to the filing of an
appeal, not to the mode of review to be employed. Indeed, the use of may merely
reiterates the principle that the right to appeal is not part of due process of law but
is a mere statutory privilege to be exercised only in the manner and in accordance
with law.
Neither can BF Corporation v. Court of Appeals[28] cited by Gonzales
support his theory. Gonzales argues that said case recognized and allowed a
petition for certiorari under Rule 65 appealing the order of the Regional Trial Court
disregarding the arbitration agreement as an acceptable remedy.[29] The BF
Corporation case had its origins in a complaint for collection of sum of money
filed by therein petitioner BF Corporation against Shangri-la Properties, Inc.
(SPI). SPI moved to suspend the proceedings alleging that the construction
agreement or the Articles of Agreement between the parties contained a clause
requiring prior resort to arbitration before judicial intervention. The trial court
found that an arbitration clause was incorporated in the Conditions of Contract
appended to and deemed an integral part of the Articles of Agreement. Still, the
trial court denied the motion to suspend proceedings upon a finding that the
Conditions of Contract were not duly executed and signed by the parties. The trial
court also found that SPI had failed to file any written notice of demand for
arbitration within the period specified in the arbitration clause. The trial court
denied SPI's motion for reconsideration and ordered it to file its responsive
pleading. Instead of filing an answer, SPI filed a petition for certiorari under Rule
65, which the Court of Appeals, favorably acted upon. In a petition for review
before this Court, BF Corporation alleged, among others, that the Court of Appeals
should have dismissed the petition for certiorari since the order of the trial court
denying the motion to suspend proceedings is a resolution of an incident on the
merits and upon the continuation of the proceedings, the trial court would
eventually render a decision on the merits, which decision could then be elevated
to a higher court in an ordinary appeal.[30]

The Court did not uphold BF Corporations argument. The issue raised
before the Court was whether SPI had taken the proper mode of appeal before the
Court of Appeals. The question before the Court of Appeals was whether the trial
court had prematurely assumed jurisdiction over the controversy. The question of
jurisdiction in turn depended on the question of existence of the arbitration clause
which is one of fact. While on its face the question of existence of the arbitration
clause is a question of fact that is not proper in a petition for certiorari, yet since
the determination of the question obliged the Court of Appeals as it did to interpret
the contract documents in accordance with R.A. No. 876 and existing
jurisprudence, the question is likewise a question of law which may be properly
taken cognizance of in a petition for certiorari under Rule 65, so the Court held.[31]
The situation in B.F. Corporation is not availing in the present petition. The
disquisition in B.F. Corporation led to the conclusion that in order that the question
of jurisdiction may be resolved, the appellate court had to deal first with a question
of law which could be addressed in a certiorari proceeding. In the present case,
Gonzaless petition raises a question of law, but not a question of jurisdiction. Judge
Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when
he ordered Gonzales to proceed with arbitration and appointed a sole arbitrator
after making the determination that there was indeed an arbitration agreement. It
has been held that as long as a court acts within its jurisdiction and does not
gravely abuse its discretion in the exercise thereof, any supposed error committed
by it will amount to nothing more than an error of judgment reviewable by a timely
appeal and not assailable by a special civil action of certiorari. [32] Even if we
overlook the employment of the wrong remedy in the broader interests of justice,
the petition would nevertheless be dismissed for failure of Gonzalez to show grave
abuse of discretion.
Arbitration, as an alternative mode of settling disputes, has long been recognized
and accepted in our jurisdiction. The Civil Code is explicit on the matter.[33] R.A.
No. 876 also expressly authorizes arbitration of domestic disputes. Foreign
arbitration, as a system of settling commercial disputes of an international
character, was likewise recognized when the Philippines adhered to the United
Nations "Convention on the Recognition and the Enforcement of Foreign Arbitral
Awards of 1958," under the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing enforcement of international
arbitration agreements between parties of different nationalities within a
contracting state.[34] The enactment of R.A. No. 9285 on 2 April 2004 further
institutionalized the use of alternative dispute resolution systems, including
arbitration, in the settlement of disputes.

Disputes do not go to arbitration unless and until the parties have agreed to abide
by the arbitrators decision. Necessarily, a contract is required for arbitration to take
place and to be binding. R.A. No. 876 recognizes the contractual nature of the
arbitration agreement, thus:
SEC. 2. Persons and matters subject to arbitration.Two or more
persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing, between them at the time of the
submission and which may be the subject of an action, or the parties to
any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or
contract shall be valid, enforceable and irrevocable, save upon such
grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of
valuations, appraisals or other controversies which may be collateral,
incidental, precedent or subsequent to any issue between the parties.
A controversy cannot be arbitrated where one of the parties to the
controversy is an infant, or a person judicially declared to be
incompetent, unless the appropriate court having jurisdiction approve a
petition for permission to submit such controversy to arbitration made
by the general guardian or guardian ad litem of the infant or of the
incompetent. [Emphasis added.]

Thus, we held in Manila Electric Co. v. Pasay Transportation Co.[35] that a

submission to arbitration is a contract. A clause in a contract providing that all
matters in dispute between the parties shall be referred to arbitration is a contract,
[36]
and in Del Monte Corporation-USA v. Court of Appeals[37] that [t]he provision
to submit to arbitration any dispute arising therefrom and the relationship of the
parties is part of that contract and is itself a contract. As a rule, contracts are
respected as the law between the contracting parties and produce effect as between
them, their assigns and heirs.[38]
The special proceeding under Sec. 6 of R.A. No. 876 recognizes the
contractual nature of arbitration clauses or agreements. It 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 applications filed
under the provisions of this Act, within ten days after such motions,
petitions, or applications have been heard by it. [Emphasis added.]

This special proceeding is the procedural mechanism for the enforcement of the
contract to arbitrate. The jurisdiction of the courts in relation to Sec. 6 of R.A. No.
876 as well as the nature of the proceedings therein was expounded upon in La
Naval Drug Corporation v. Court of Appeals.[39] There it was held that R.A. No.
876 explicitly confines the court's authority only to the determination of whether or
not there is an agreement in writing providing for arbitration. In the affirmative, the
statute ordains that the court shall issue an order "summarily directing the parties
to proceed with the arbitration in accordance with the terms thereof." If the court,
upon the other hand, finds that no such agreement exists, "the proceeding shall be
dismissed."[40]The cited case also stressed that the proceedings are summary in
nature.[41] The same thrust was made in the earlier case ofMindanao Portland
Cement Corp. v. McDonough Construction Co. of Florida[42] which held, thus:
Since there obtains herein a written provision for arbitration as
well as failure on respondent's part to comply therewith, the court a
quo rightly ordered the parties to proceed to arbitration in accordance

with the terms of their agreement (Sec. 6, Republic Act 876).

Respondent's arguments touching upon the merits of the dispute are
improperly raised herein. They should be addressed to the arbitrators.
This proceeding is merely a summary remedy to enforce the agreement
to arbitrate. The duty of the court in this case is not to resolve the
merits of the parties' claims but only to determine if they should
proceed to arbitration or not. x x x x[43]

Implicit in the summary nature of the judicial proceedings is the separable or

independent character of the arbitration clause or agreement. This was highlighted
in the cases of Manila Electric Co. v. Pasay Trans. Co.[44] and Del Monte
Corporation-USA v. Court of Appeals.[45]
The doctrine of separability, or severability as other writers call
it, enunciates that an arbitration agreement is independent of the main
contract. The arbitration agreement is to be treated as a separate agreement and the
arbitration agreement does not automatically terminate when the contract of which
it is part comes to an end.[46]
The separability of the arbitration agreement is especially significant to the
determination of whether the invalidity of the main contract also nullifies the
arbitration clause. Indeed, the doctrine denotes that the invalidity of the main
contract, also referred to as the container contract, does not affect the validity of
the arbitration agreement. Irrespective of the fact that the main contract is invalid,
the arbitration clause/agreement still remains valid and enforceable.[47]
The separability of the arbitration clause is confirmed in Art. 16(1) of the
UNCITRAL Model Law and Art. 21(2) of the UNCITRAL Arbitration Rules.[48]
The separability doctrine was dwelt upon at length in the U.S. case of Prima
Paint Corp. v. Flood & Conklin Manufacturing Co.[49] In that case, Prima Paint and
Flood and Conklin (F & C) entered into a consulting agreement whereby F & C
undertook to act as consultant to Prima Paint for six years, sold to Prima Paint a list
of its customers and promised not to sell paint to these customers during the same
period. The consulting agreement contained an arbitration clause. Prima Paint did
not make payments as provided in the consulting agreement, contending that F &
C had fraudulently misrepresented that it was solvent and able for perform its
contract when in fact it was not and had even intended to file for bankruptcy after

executing the consultancy agreement. Thus, F & C served Prima Paint with a
notice of intention to arbitrate. Prima Paint sued in court for rescission of the
consulting agreement on the ground of fraudulent misrepresentation and asked for
the issuance of an order enjoining F & C from proceeding with arbitration. F & C
moved to stay the suit pending arbitration. The trial court granted F & Cs motion,
and the U.S. Supreme Court affirmed.
The U.S. Supreme Court did not address Prima Paints argument that it had
been fraudulently induced by F & C to sign the consulting agreement and held that
no court should address this argument. Relying on Sec. 4 of the Federal Arbitration
Actwhich provides that if a party [claims to be] aggrieved by the alleged failure x x
x of another to arbitrate x x x, [t]he court shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the failure to comply
therewith is not in issue, the court shall make an order directing the parties
to proceed to arbitration x x x. If the making of the arbitration agreement or the
failure, neglect, or refusal to perform the same be in issue, the court shall proceed
summarily to the trial thereofthe U.S. High Court held that the court should not
order the parties to arbitrate if the making of the arbitration agreement is in
issue. The parties should be ordered to arbitration if, and only if, they have
contracted to submit to arbitration. Prima Paint was not entitled to trial on the
question of whether an arbitration agreement was made because its allegations of
fraudulent inducement were not directed to the arbitration clause itself, but only to
the consulting agreement which contained the arbitration agreement. [50]Prima
Paint held that arbitration clauses are separable from the contracts in which they
are embedded, and that where no claim is made that fraud was directed to the
arbitration clause itself, a broad arbitration clause will be held to encompass
arbitration of the claim that the contract itself was induced by fraud.[51]
There is reason, therefore, to rule against Gonzales when he alleges that
Judge Pimentel acted with grave abuse of discretion in ordering the parties to
proceed with arbitration. Gonzaless argument that the Addendum Contract is null
and void and, therefore the arbitration clause therein is void as well, is not
tenable. First, the proceeding in a petition for arbitration under R.A. No. 876 is
limited only to the resolution of the question of whether the arbitration agreement
exists. Second, the separability of the arbitration clause from the Addendum
Contract means that validity or invalidity of the Addendum Contract will not affect
the enforceability of the agreement to arbitrate. Thus, Gonzaless petition for
certiorari should be dismissed.

This brings us back to G.R. No. 161957. The adjudication of the petition in
G.R. No. 167994 effectively modifies part of the Decision dated 28 February
2005 in G.R. No. 161957. Hence, we now hold that the validity of the contract
containing the agreement to submit to arbitration does not affect the applicability
of the arbitration clause itself. A contrary ruling would suggest that a partys mere
repudiation of the main contract is sufficient to avoid arbitration. That is exactly
the situation that the separability doctrine, as well as jurisprudence applying it,
seeks to avoid. We add that when it was declared in G.R. No. 161957 that the case
should not be brought for arbitration, it should be clarified that the case referred to
is the case actually filed by Gonzales before the DENR Panel of Arbitrators, which
was for the nullification of the main contract on the ground of fraud, as it had
already been determined that the case should have been brought before the regular
courts involving as it did judicial issues.
The Motion for Reconsideration of Gonzales in G.R. No. 161957 should
also be denied. In the motion, Gonzales raises the same question of jurisdiction,
more particularly that the complaint for nullification of the Addendum Contract
pertained to theDENR Panel of Arbitrators, not the regular courts. He insists that
the subject of his complaint is a mining dispute since it involves a dispute
concerning rights to mining areas, the Financial and Technical Assistance
Agreement (FTAA) between the parties, and it also involves claimowners. He adds
that the Court failed to rule on other issues he raised, such as whether he had ceded
his claims over the mineral deposits located within the Addendum Area of
Influence; whether the complaint filed before the DENR Panel of Arbitrators
alleged ultimate facts of fraud; and whether the action to declare the nullity of the
Addendum Contract on the ground of fraud has prescribed.

These are the same issues that Gonzales raised in his Rule 45 petition in
G.R. No. 161957 which were resolved against him in the Decision of 28 February
2005. Gonzales does not raise any new argument that would sway the Court even a
bit to alter its holding that the complaint filed before the DENR Panel of
Arbitrators involves judicial issues which should properly be resolved by the
regular courts. He alleged fraud or misrepresentation in the execution of the
Addendum Contract which is a ground for the annulment of a voidable contract.
Clearly, such allegations entail legal questions which are within the jurisdiction of
the courts.

The question of whether Gonzales had ceded his claims over the mineral
deposits in the Addendum Area of Influence is a factual question which is not
proper for determination before this Court. At all events, moreover, the question is
irrelevant to the issue of jurisdiction of the DENR Panel of Arbitrators. It should be
pointed out that the DENR Panel of Arbitrators made a factual finding in its Order
dated 18 October 2001, which it reiterated in its Order dated 25 June 2002, that
Gonzales had, through the various agreements, assigned his interest over the
mineral claims all in favor of [Climax-Arimco] as well as that without the
complainant [Gonzales] assigning his interest over the mineral claims in favor of
[Climax-Arimco], there would be no FTAA to speak of. [52] This finding was
affirmed by the Court of Appeals in its Decision dated 30 July 2003 resolving the
petition for certiorari filed by Climax-Arimco in regard to the 18 October
2001 Order of the DENR Panel.[53]
The Court of Appeals likewise found that Gonzaless complaint alleged fraud
but did not provide any particulars to substantiate it. The complaint repeatedly
mentioned fraud, oppression, violation of the Constitution and similar conclusions
but nowhere did it give any ultimate facts or particulars relative to the allegations.
[54]

Sec. 5, Rule 8 of the Rules of Court specifically provides that in all

averments of fraud, the circumstances constituting fraud must be stated with
particularity. This is to enable the opposing party to controvert the particular facts
allegedly constituting the same. Perusal of the complaint indeed shows that it failed
to state with particularity the ultimate facts and circumstances constituting the
alleged fraud. It does not state what particulars about Climax-Arimcos financial or
technical capability were misrepresented, or how the misrepresentation was
done. Incorporated in the body of the complaint are verbatim reproductions of the
contracts, correspondence and government issuances that reportedly explain the
allegations of fraud and misrepresentation, but these are, at best, evidentiary
matters that should not be included in the pleading.
As to the issue of prescription, Gonzaless claims of fraud and
misrepresentation attending the execution of the Addendum Contract are grounds
for the annulment of a voidable contract under the Civil Code.[55] Under Art. 1391
of the Code, an action for annulment shall be brought within four years, in the case
of fraud, beginning from the time of the discovery of the same.However, the time
of the discovery of the alleged fraud is not clear from the allegations of Gonzaless
complaint. That being the situation coupled with the fact that this Court is not a

trier of facts, any ruling on the issue of prescription would be uncalled for or even
unnecessary.
WHEREFORE, the Petition for Certiorari in G.R. No. 167994 is
DISMISSED. Such dismissal effectively renders superfluous formal action on the
Motion for Partial Reconsideration and/or Clarification filed by Climax Mining
Ltd., et al. in G.R. No. 161957.
The Motion for Reconsideration filed by Jorge Gonzales in G.R. No. 161957
is DENIED WITH FINALITY.
SO ORDERED.
G.R. No. 146717

November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED
and SECURITY BANK CORPORATION, respondents.

DECISION

TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important
device in international trade. A creation of commerce and businessmen, the letter of credit is also
unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled
"Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered
into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a
turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole
responsibility for the design, construction, commissioning, testing and completion of the Project. 4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June
2000, or such later date as may be agreed upon between petitioner and respondent LHC or
otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim
extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are

variations, force majeure, and delays caused by LHC itself.5 Further, in case of dispute, the parties
are bound to settle their differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion date, or such time
for completion as may be determined by the parties' agreement, petitioner opened in favor of LHC
two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent
Australia and New Zealand Banking Group Limited (ANZ Bank)7and Standby Letter of Credit No.
IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)8 each in the amount of
US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of
legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999. 10 This was followed by another Request for
Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC) 11 on 3
November 2000. In both arbitration proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force majeure to justify the extension of
time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of
the Turnkey Contract,12 petitionerin two separate letters13 both dated 10 August 2000advised
respondent banks of the arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations. Asserting that LHC had no
right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner
warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC
or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated
damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite
the letters of petitioner, however, both banks informed petitioner that they would pay on the
Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted; accordingly it declared
petitioner in default/delay in the performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June
2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the
same time, LHC served notice that it would call on the securities for the payment of liquidated
damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before
the Regional Trial Court (RTC) of Makati.17 Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring, paying on, or in any manner disposing of
the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour

temporary restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and
raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000. 18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to
justify the issuance of the writ. Employing the principle of "independent contract" in letters of credit,
the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It
debunked petitioner's contention that the principle of "independent contract" could be invoked only
by respondent banks since according to it respondent LHC is the ultimate beneficiary of the
Securities. The trial court further ruled that the banks were mere custodians of the funds and as such
they were obligated to transfer the same to the beneficiary for as long as the latter could submit the
required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for
the issuance of a temporary restraining order and writ of preliminary injunction. 20 Petitioner submitted
to the appellate court that LHC's call on the Securities was premature considering that the issue of
its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until
the fact of delay could be established, LHC had no right to draw on the Securities for liquidated
damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and
use of the Securities as payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the face of the two Standby Letters of
Credit which both provide that the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarant's capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining
order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and
ordering respondent banks to cease and desist from transferring, paying or in any manner disposing
of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of
LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the
balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial court's decision that LHC could call on the Securities pursuant to
the first principle in credit law that the credit itself is independent of the underlying transaction and
that as long as the beneficiary complied with the credit, it was of no moment that he had not
complied with the underlying contract. Further, the appellate court held that even assuming that the
trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it
constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE

INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON
IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE
THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE
TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S
CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE
IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY
BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN
PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN
FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the "independence principle" on letters
of credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still
pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to
the principle against unjust enrichment and that, under the premises, injunction was the appropriate
remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through the use of different modes of discovery
available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions
were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred
delays notwithstanding its knowledge and admission that delays were excused under the Turnkey
Contractto be able to draw against the Securities. Reiterating that fraud constitutes an exception
to the independence principle, petitioner urges that this warrants a ruling from this Court that the call
on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that
it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the
Securities and not ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed
by petitioner present erroneous and misleading information which would change petitioner's theory
on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the
ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities

and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated
damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated
12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the
Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of
whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from
drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No.
11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties
made claims and counterclaims arising from petitioner's performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc.
v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to enforce
and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April
2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be
returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the
ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC
asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same time
seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it
was under no obligation to look into the validity or accuracy of the certification submitted by
respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to
be enjoined by petitioner was already fait accompli and the present petition would no longer serve
any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under
which it had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its
obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had
been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the applicability of the "independence principle" and "fraud
exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also
referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is
to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of
a letter of credit is not strictly contractual, because both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary
contract, because the issuer must honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter,
it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it
is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally
conditional, yet the draft presented under it is often negotiable.29

In commercial transactions, a letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying. 30 The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the
sale of goods. However, credits are also used in non-sale settings where they serve to reduce the
risk of nonperformance. Generally, credits in the non-sale settings have come to be known as
standby credits.31
There are three significant differences between commercial and standby credits. First, commercial
credits involve the payment of money under a contract of sale. Such credits become payable upon
the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is payable upon certification of a
party's nonperformance of the agreement. The documents that accompany the beneficiary's draft
tend to show that the applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The beneficiary of the standby credit
must certify that his obligor has not performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment
of debt therefor to the addressee.33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation to the underlying contract or disputes
between the parties thereto.34
Since letters of credit have gained general acceptability in international trade transactions, the ICC
has published from time to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters
of credit incorporate the UCP.35 First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the
absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v.
Court of Appeals,38 this Court ruled that there being no specific provisions which govern the legal
complexities arising from transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case may be, the applicability
of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with or bound by
such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any
other obligation under the credit is not subject to claims or defenses by the applicant resulting from
his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or between the applicant and the issuing
bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the
draft and the required documents are presented to it. The so-called "independence principle"
assures the seller or the beneficiary of prompt payment independent of any breach of the main

contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general
and/or particular conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of
the goods, or any other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement
like for instance a typical standby; or (b) independence may be only as to the justification aspect like
in a commercial letter of credit or repayment standby, which is identical with the same obligations
under the underlying agreement. In both cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. 40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it
is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it
would be contrary to common sense to deny the benefit of an independent contract to the very party
for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to
invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the credit are complied
with.41 Precisely, the independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the
obligation under the letter of credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that may
invoke the independence principle on letters of creditdoes not impress this Court. To say that the
independence principle may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for
the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions.
With the letter of credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand, the other party to the business transaction,
i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial transaction does not push through, or the
applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled
to the proceeds of the letter of credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement of a dispute between the

parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the
argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable
only after settlement of the dispute on the contract entered into by the applicant and the beneficiary,
there would be no practical and beneficial use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that
commercial credits are attractive. Essentially, these credits are inexpensive and efficient.
Often they replace surety contracts, which tend to generate higher costs than credits do and
are usually triggered by a factual determination rather than by the examination of
documents.
Because parties and courts should not confuse the different functions of the surety contract
on the one hand and the standby credit on the other, the distinction between surety contracts
and credits merits some reflection. The two commercial devices share a common purpose.
Both ensure against the obligor's nonperformance. They function, however, in distinctly
different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's
performance, usually by hiring someone to complete that performance. Surety contracts,
then, often involve costs of determining whether the obligor defaulted (a matter over which
the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the
surety contract to the beneficiary is obvious. He knows that the surety, often an insurance
company, is a strong financial institution that will perform if the obligor does not. The
beneficiary also should understand that such performance must await the sometimes lengthy
and costly determination that the obligor has defaulted. In addition, the surety's performance
takes time.
The standby credit has different expectations. He reasonably expects that he will receive
cash in the event of nonperformance, that he will receive it promptly, and that he will receive
it before any litigation with the obligor (the applicant) over the nature of the applicant's
performance takes place. The standby credit has this opposite effect of the surety contract: it
reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's performance. The beneficiary may have to
establish that fact in litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be that
the applicant has, in fact, performed and that the beneficiary's presentation of those
documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in
contract, or in breach of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the beneficiary, not the applicant,
holds the money. Parties that use a standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in some quarters to overlook this
distinction between surety contracts and standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate the performance question before payment to the
beneficiary.42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask
the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates
petitioner's posture that LHC cannot invoke the independence principle and highlights its puerility,
more so in this case where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit,
this Court rules that the respondent banks were left with little or no alternative but to honor the credit
and both of them in fact submitted that it was "ministerial" for them to honor the call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions
of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the Employer in
the form of two irrevocable and confirmed standby letters of credit (the "Securities"), each in
the amount of US$8,988,907, issued and confirmed by banks or financial institutions
acceptable to the Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of
US$75,000 for each and every day or part of a day that shall elapse between the Target
Completion Date and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The
Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following
day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the
amount of such damages from any monies due, or to become due to the Contractor and/or
by drawing on the Security."45
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with
good faith, usage, and law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages occasioned by any delay on
the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC,
is certainly an alternative recourse available to it upon the happening of the contingency for which
the Securities have been proffered. Thus, even without the use of the "independence principle," the
Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is
wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a
breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral
tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing
on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge are untrue. In such a situation,
petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not
without limits and it is important to fashion those limits in light of the principle's purpose, which is to

serve the commercial function of the credit. If it does not serve those functions, application of the
principle is not warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact
of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to
declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for
petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in
their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines
that the untruthfulness of a certificate accompanying a demand for payment under a standby credit
may qualify as fraud sufficient to support an injunction against payment. 48 The remedy for fraudulent
abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of
fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit
and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is
not granted or the recovery of damages would be seriously damaged. 49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be
entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive right or interest;
it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The
issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking cognizance of the
case, the only limitation being that this discretion should be exercised based upon the grounds and
in the manner provided by law.51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to be
directed are violative of the said right.52It must be shown that the invasion of the right sought to be
protected is material and substantial, that the right of complainant is clear and unmistakable and that
there is an urgent and paramount necessity for the writ to prevent serious damage. 53 Moreover, an
injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. 54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain
LHC's call on the Securities which would justify the issuance of preliminary injunction. By petitioner's
own admission, the right of LHC to call on the Securities was contractually rooted and subject to the
express stipulations in the Turnkey Contract.55Indeed, the Turnkey Contract is plain and unequivocal
in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in
Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the
Securities, stating the nature of the default for which the claim on any of the Securities is to
be made, provided that no notice will be required if the Employer calls upon any of the

Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor
to renew or extend the Securities within 14 days of their expiration in accordance with Clause
4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the
amount of such damages from any monies due, or to become due, to the Contractor and/or
by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties
intended that all disputes regarding delay should first be settled through arbitration before LHC
would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that
the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not
ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. 58 What
petitioner did assert before the courts below was the fact that LHC's draws on the Securities would
be premature and without basis in view of the pending disputes between them. Petitioner should not
be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the
issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings
below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time
on appeal.59 The lower courts could thus not be faulted for not applying the fraud exception rule not
only because the existence of fraud was fundamentally interwoven with the issue of default still
pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey
Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance
with the tenor thereof. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. 60 More importantly, pursuant to the
principle of autonomy of contracts embodied in Article 1306 of the Civil Code, 61petitioner could have
incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral
tribunals that default had occurred would justify the enforcement of the Securities. However, the fact
is petitioner did not do so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts
due under the Securities, this Court reiterates that pursuant to the independence principle the banks
were under no obligation to determine the veracity of LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat,
respondent banks' undertaking was simply to pay once the required documents are presented by the
beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws
upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be foreclosed pursuant to general
principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters
of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the
instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post Manila,
Inc.64 this Court ruled that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former employerthe very purpose
of the preliminary injunction has expired, any declaration upholding the propriety of the writ would
be entirely useless as there would be no actual case or controversy between the parties insofar as
the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant
petition mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of
injunctive relief could have no practical effect on the existing controversy.65 The other issues raised
by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the
Securities, according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner
presented before this Court the same claim for money which it has filed in two other proceedings, to
wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues
that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the
claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to
Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal
and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed for judgment on
the issue of whether the funds LHC drew on the Securities should be returnedpetitioner resorted
to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the
charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely, by some other court. 67 It may also consist in
the act of a party against whom an adverse judgment has been rendered in one forum, of seeking
another and possibly favorable opinion in another forum other than by appeal or special civil action
of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on
the supposition that one or the other court might look with favor upon the other party.68 To determine
whether a party violated the rule against forum-shopping, the test applied is whether the elements of
litis pendentia are present or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished with summary
dismissal of the multiple petitions and direct contempt of court. 70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has
been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from
notice.

SO ORDERED.