the agreement did not provide for arbitration and therefore the court could not be deprived of jurisdiction
conferred by law by the mere allegation of the existence of an arbitration clause in the agreement between the
[G.R. No. 120105. March 27, 1998] BF CORPORATION, petitioner, vs. COURT OF APPEALS, SHANGRI-LA
PROPERTIES, COLAYCO, ALFREDO C. RAMOS, INC., RUFO B. MAXIMO G.LICAUCO III and BENJAMIN C.
RAMOS, respondents.
The basic issue in this petition for review on certiorari is whether or not the contract for the construction
of the EDSA Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an
arbitration clause in case of disagreement between the parties in the implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter
engaged the former to construct the main structure of the EDSA Plaza Project, a shopping mall complex in the City
of Mandaluyong.
The construction work was in progress when SPI decided to expand the project by engaging the services of
petitioner again. Thus, the parties entered into an agreement for the main contract works after which construction
work began.
However, petitioner incurred delay in the construction work that SPI considered as serious and
substantial.[1] On the other hand, according to petitioner, the construction works progressed in faithful compliance
with the First Agreement until a fire broke out on November 30, 1990 damaging Phase I of the Project. [2] Hence,
SPI proposed the re-negotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as
Agreement for the Execution of Builders Work for the EDSA Plaza Project. Said agreement would cover the
construction work on said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner failed to complete the construction works and abandoned the project. [3] This
resulted in disagreements between the parties as regards their respective liabilities under the contract. On July
12, 1993, upon SPIs initiative, the parties respective representatives met in conference but they failed to come to
an agreement.[4]
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint
for collection of the balance due under the construction agreement. Named defendants therein were SPI and
members of its board of directors namely, Alfredo C. Ramos, Rufo B. Colayco, Antonio B. Olbes, Gerardo O. Lanuza,
Jr., Maximo G. Licauco III and Benjamin C. Ramos.
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an
answer. The motion was anchored on defendants allegation that the formal trade contract for the construction of
the project provided for a clause requiring prior resort to arbitration before judicial intervention could be invoked
in any dispute arising from the contract. The following day, SPI submitted a copy of the conditions of the contract
containing the arbitration clause that it failed to append to its motion to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although
they entered into an agreement defining their rights and obligations in undertaking the project. It emphasized that
parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract
between petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the court of
its jurisdiction over the case and that arbitration would expedite rather than delay the settlement of the parties
respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that there was no arbitration clause in the contract between
the parties. It averred that granting that such a clause indeed formed part of the contract, suspension of the
proceedings was no longer proper. It added that defendants should be declared in default for failure to file their
answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioners admission of the due execution of the
Articles of Agreement. Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani
Fernando, president of petitioner appear, while page D/7 shows that the agreement is a public document duly
notarized on November 15, 1991 by Notary Public Nilberto R. Briones as document No. 345, page 70, book No.
LXX, Series of 1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court[6] denied the motion to
suspend proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C,
Complaint), plaintiff BF and defendant Shangri-La Properties, Inc. agreed upon the terms and
conditions of the Builders Work for the EDSA Plaza Project (Phases I, II and Carpark), subject to the
execution by the parties of a formal trade contract. Defendants have submitted a copy of the alleged
trade contract, which is entitled `Contract Documents For Builders Work Trade Contractor dated 01
May 1991, page 2 of which is entitled `Contents of Contract Documents with a list of the documents
therein contained, and Section A thereof consists of the abovementioned Letter-Agreement dated
May 30, 1991. Section C of the said Contract Documents is entitled `Articles of Agreement and
Conditions of Contract which, per its Index, consists of Part A (Articles of Agreement) and B
(Conditions of Contract). The said Articles of Agreement appears to have been duly signed by
President Rufo B. Colayco of Shangri-La Properties, Inc. and President Bayani F. Fernando of BF and
their witnesses, and was thereafter acknowledged before Notary Public Nilberto R. Briones of Makati,
Metro Manila on November 15, 1991. The said Articles of Agreement also provides that the `Contract
Documents' therein listed `shall be deemed an integral part of this Agreement, and one of the said
documents is the `Conditions of Contract which contains the Arbitration Clause relied upon by the
defendants in their Motion to Suspend Proceedings.
This Court notes, however, that the `Conditions of Contract referred to, contains the following
provisions:
`3. Contract Document.
Three copies of the Contract Documents referred to in the Articles of
Agreement shall be signed by the parties to the contract and distributed to the
Owner and the Contractor for their safe keeping. (underscoring supplied)
And it is significant to note further that the said `Conditions of Contract is not duly signed by the
parties on any page thereof --- although it bears the initials of BFs representatives (Bayani F.
 Fernando and Reynaldo M. de la Cruz) without the initials thereon of any representative of Shangri-La
Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was not duly executed
or signed by the parties, and the failure of the defendants to submit any signed copy of the said
document, this Court entertains serious doubt whether or not the arbitration clause found in the said
Conditions of Contract is binding upon the parties to the Articles of Agreement. (Underscoring
supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was too
late in the day for defendants to invoke arbitration. It quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the
contract and a copy filed with the Project Manager. The demand for arbitration shall be made within
a reasonable time after the dispute has arisen and attempts to settle amicably have failed; in no case,
however, shall the demand he made be later than the time of final payment except as otherwise
expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was
to be completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay counted
from November 1, 1991 with liquified (sic) damages up to a maximum of 5% of the total contract price.
The lower court also found that after the project was completed in accordance with the agreement that
contained a provision on progress payment billing, SPI took possession and started operations thereof by opening
the same to the public in November, 1991. SPI, having failed to pay for the works, petitioner billed SPI in the total
amount of P110,883,101.52, contained in a demand letter sent by it to SPI on February 17, 1993. Instead of paying
the amount demanded, SPI set up its own claim of P220,000,000.00 and scheduled a conference on that claim for
July 12, 1993. The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required
that `Notice of the demand for arbitration of a dispute shall be filed in writing with the other party x x
x x in no case x x x x later than the time of final payment x x x x which apparently, had elapsed, not
only because defendants had taken possession of the finished works and the plaintiffs billings for the
payment thereof had remained pending since November, 1991 up to the filing of this case on July 14,
1993, but also for the reason that defendants have failed to file any written notice of any demand for
arbitration during the said long period of one year and eight months, this Court finds that it cannot
stay the proceedings in this case as required by Sec. 7 of Republic Act No. 876, because defendants
are in default in proceeding with such arbitration.
The lower court denied SPIs motion for reconsideration for lack of merit and directed it and the other
defendants to file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules of
Court before the Court of Appeals. Said appellate court granted the petition, annulled and set aside the orders and
stayed the proceedings in the lower court. In so ruling, the Court of Appeals held:
The reasons given by the respondent Court in denying petitioners motion to suspend proceedings are
untenable.
1. The notarized copy of the articles of agreement attached as Annex A to petitioners reply dated August 26,
1993, has been submitted by them to the respondent Court (Annex G, petition). It bears the signature of
petitioner Rufo B. Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani Fernando, president
of respondent Corporation (Annex G-1, petition). At page D/4 of said articles of agreement it is expressly
provided that the conditions of contract are `deemed an integral part thereof (page 188, rollo). And it is at pages
D/42 to D/44 of the conditions of contract that the provisions for arbitration are found (Annexes G-3 to G-5,
petition, pp. 227-229). Clause No. 35 on arbitration specifically provides:
Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on
his behalf and the Contractor, either during the progress or after the completion or abandonment of the Works
as to the construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in
connection therewith (including any matter or being left by this Contract to the discretion of the Project
Manager or the withholding by the Project Manager of any certificate to which the Contractor may claim to be
entitled or the measurement and valuation mentioned in clause 30 (5) (a) of these Conditions or the rights and
liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the Owner and the Contractor hereby
agree to exert all efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or
difference shall be referred to Arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent
Corporations representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of
petitioner Shangri-La Properties, Inc. does not militate against its effectivity. Said petitioner having categorically
admitted that the document, Annex A to its reply dated August 26, 1993 (Annex G, petition), is the agreement
between the parties, the initial or signature of said petitioners representative to signify conformity to arbitration
is no longer necessary. The parties, therefore, should be allowed to submit their dispute to arbitration in
accordance with their agreement.
2. The respondent Court held that petitioners `are in default in proceeding with such arbitration. It took note of
`the fact that under the supposed Arbitration Clause invoked by defendants, it is required that Notice of the
demand for arbitration of a dispute shall be filed in writing with the other party x x x in no case x x x later than
the time of final payment, which apparently, had elapsed, not only because defendants had taken possession of
the finished works and the plaintiffs billings for the payment thereof had remained pending since November,
1991 up to the filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any
written notice of any demand for arbitration during the said long period of one year and eight months, x x x.
Respondent Court has overlooked the fact that under the arbitration clause
Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and a
copy filed with the Project Manager. The demand for arbitration shall be made within a reasonable time after
the dispute has arisen and attempts to settle amicably had failed; in no case, however, shall the demand be
made later than the time of final payment except as otherwise expressly stipulated in the contract (underscoring
supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the
amount of P110,883,101.52, instead of paying, petitioners set up its own claim against respondent Corporation
in the amount of P220,000,000.00 and set a conference thereon on July 12, 1993. Said conference proved futile.
The next day, July 14, 1993, respondent Corporation filed its complaint against petitioners. On August 13, 1993,
petitioners wrote to respondent Corporation requesting arbitration. Under the circumstances, it cannot be said
that petitioners resort to arbitration was made beyond reasonable time. Neither can they be considered in
default of their obligation to respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A.
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT
OF CERTIORARI ALTHOUGH THE REMEDY OF APPEAL WAS AVAILABLE TO RESPONDENTS.
B.
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE FACTUAL
FINDINGS OF THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO
ARBITRATE, RESPONDENTS ARE ALREADY IN DEFAULT IN INVOKING THE
AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to
suspend proceedings is a resolution of an incident on the merits. As such, upon the continuation of the
proceedings, the lower court would appreciate the evidence adduced in their totality and thereafter render a
decision on the merits that may or may not sustain the existence of an arbitration clause. A decision containing a
finding that the contract has no arbitration clause can then be elevated to a higher court in an ordinary appeal
where an adequate remedy could be obtained. Hence, to petitioner, the Court of Appeals should have dismissed
the petition for certiorari because the remedy of appeal would still be available to private respondents at the
proper time.[7]
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of appeal
is succinctly reiterated in Ongsitco v. Court of Appeals[8] as follows:
x x x. Countless times in the past, this Court has held that `where appeal is the proper remedy, certiorari will not
lie. The writs of certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave abuse of
discretion equivalent to lack of jurisdiction committed by a lower court. `Where the proper remedy is appeal, the
action for certiorari will not be entertained. x x x. Certiorari is not a remedy for errors of judgment. Errors of
judgment are correctible by appeal, errors of jurisdiction are reviewable by certiorari.
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only
when `there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law x x x. That is
why they are referred to as `extraordinary. x x x.
The Court has likewise ruled that certiorari will not be issued to cure errors in proceedings or correct
erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed
in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by
timely appeal and not by a special civil action of certiorari.[9]v. Court of Appeals, 327 Phil. 1, 41-42 (1996).9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the lower
court over the controversy, the issue posed basically is whether the lower court prematurely assumed jurisdiction
over it. If the lower court indeed prematurely assumed jurisdiction over the case, then it becomes an error of
jurisdiction which is a proper subject of a petition for certiorari before the Court of Appeals. And if the lower court
does not have jurisdiction over the controversy, then any decision or order it may render may be annulled and set
aside by the appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the
existence of the arbitration clause, which is a question of fact. In the instant case, the lower court found that there
exists an arbitration clause. However, it ruled that in contemplation of law, said arbitration clause does not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the Arbitration
Clause does not in fact exist. On its face, the question is one of fact which is not proper in a petition for certiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact,
the Court of Appeals interpreted the construction of the subject contract documents containing the Arbitration
Clause in accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence which will be
extensively discussed hereunder. In effect, the issue posed before the Court of Appeals was likewise a question of
law. Being a question of law, the private respondents rightfully invoked the special civil action of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned
by the petitioners before this Court. But at the heart of said issue is the question of whether there exists an
Arbitration Clause because if an Arbitration Clause does not exist, then private respondents took the wrong mode
of appeal before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode of
appeal, which, incidentally, is a question of law, then it has to answer the core issue of whether there exists an
Arbitration Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result in
a manifest failure or miscarriage of justice, the provisions of the Rules of Court which are technical rules may be
relaxed.[10] As we shall show hereunder, had the Court of Appeals dismissed the petition for certiorari, the issue of
whether or not an arbitration clause exists in the contract would not have been resolved in accordance with
evidence extant in the record of the case. Consequently, this would have resulted in a judicial rejection of a
contractual provision agreed by the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the contract
between petitioner and private respondents is a legal issue that must be determined in this petition for review on
certiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts that in
contemplation of law there could not have been one considering the following points. First, the trial court found
that the conditions of contract embodying the arbitration clause is not duly signed by the parties. Second, private
respondents misrepresented before the Court of Appeals that they produced in the trial court a notarized duplicate
original copy of the construction agreement because what were submitted were mere photocopies thereof. The
contract(s) introduced in court by private respondents were therefore of dubious authenticity because: (a) the
Agreement for the Execution of Builders Work for the EDSA Plaza Project does not contain an arbitration clause,
(b) private respondents surreptitiously attached as Annexes `G-3 to `G-5 to their petition before the Court of
Appeals but these documents are not parts of the Agreement of the parties as there was no formal trade contract
executed, (c) if the entire compilation of documents is indeed a formal trade contract, then it should have been
duly notarized, (d) the certification from the Records Management and Archives Office dated August 26, 1993
merely states that the notarial record of Nilberto Briones x x x is available in the files of (said) office as Notarial
Registry Entry only, (e) the same certification attests that the document entered in the notarial registry pertains
to the Articles of Agreement only without any other accompanying documents, and therefore, it is not a formal
trade contract, and (f) the compilation submitted by respondents are a mere hodge-podge of documents and do
not constitute a single intelligible agreement.
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the
representatives of the contracting corporations did not sign the Conditions of Contract that contained the said
clause. Its other contentions, specifically that insinuating fraud as regards the alleged insertion of the arbitration
clause, are questions of fact that should have been threshed out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the parties
contract. Republic Act No. 876 provides for the formal requisites of an arbitration agreement as follows:
Section 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the
parties, as well as a submission to arbitrate an existing controversy, shall be in writing and subscribed by the
party sought to be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for arbitration
of any controversy, shall be deemed a consent of the parties of the province or city where any of the parties
resides, to enforce such contract of submission. (Underscoring supplied.)
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing
and (b) it must be subscribed by the parties or their representatives. There is no denying that the parties entered
into a written contract that was submitted in evidence before the lower court. To subscribe means to write
underneath, as ones name; to sign at the end of a document.[11] That word may sometimes be construed to mean
to give consent to or to attest.[12]
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in the
contract in question. The Articles of Agreement, which incorporates all the other contracts and agreements
between the parties, was signed by representatives of both parties and duly notarized. The failure of the private
respondents representative to initial the `Conditions of Contract would therefor not affect compliance with the
formal requirements for arbitration agreements because that particular portion of the covenants between the
parties was included by reference in the Articles of Agreement.
Petitioners contention that there was no arbitration clause because the contract incorporating said provision
is part of a hodge-podge document, is therefore untenable. A contract need not be contained in a single writing. It
may be collected from several different writings which do not conflict with each other and which, when connected,
show the parties, subject matter, terms and consideration, as in contracts entered into by correspondence. [13] A
contract may be encompassed in several instruments even though every instrument is not signed by the parties,
since it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the signed
instrument or instruments. Similarly, a written agreement of which there are two copies, one signed by each of
the parties, is binding on both to the same extent as though there had been only one copy of the agreement and
both had signed it.[14]
The flaw in petitioners contentions therefore lies in its having segmented the various components of the
whole contract between the parties into several parts. This notwithstanding, petitioner ironically admits the
execution of the Articles of Agreement. Notably, too, the lower court found that the said Articles of Agreement
also provides that the `Contract Documents therein listed `shall be deemed an integral part of this Agreement, and
one of the said documents is the `Conditions of Contract which contains the Arbitration Clause. It is this Articles of
Agreement that was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani F. Fernando,
president of petitioner corporation. The same agreement was duly subscribed before notary public Nilberto R.
Briones. In other words, the subscription of the principal agreement effectively covered the other documents
incorporated by reference therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were not
in default in invoking the provisions of the arbitration clause which states that (t)he demand for arbitration shall
be made within a reasonable time after the dispute has arisen and attempts to settle amicably had failed. Under
the factual milieu, private respondent SPI should have paid its liabilities under the contract in accordance with its
terms. However, misunderstandings appeared to have cropped up between the parties ostensibly brought about
by either delay in the completion of the construction work or by force majeure or the fire that partially gutted the
project. The almost two-year delay in paying its liabilities may not therefore be wholly ascribed to private
respondent SPI.
Besides, private respondent SPIs initiative in calling for a conference between the parties was a step towards
the agreed resort to arbitration. However, petitioner posthaste filed the complaint before the lower court. Thus,
while private respondent SPIs request for arbitration on August 13, 1993 might appear an afterthought as it was
made after it had filed the motion to suspend proceedings, it was because petitioner also appeared to act hastily
in order to resolve the controversy through the courts.
The arbitration clause provides for a reasonable time within which the parties may avail of the relief under
that clause. Reasonableness is a relative term and the question of whether the time within which an act has to be
done is reasonable depends on attendant circumstances. [15] This Court finds that under the circumstances
obtaining in this case, a one-month period from the time the parties held a conference on July 12, 1993 until
private respondent SPI notified petitioner that it was invoking the arbitration clause, is a reasonable time. Indeed,
petitioner may not be faulted for resorting to the court to claim what was due it under the contract. However, we
find its denial of the existence of the arbitration clause as an attempt to cover up its misstep in hurriedly filing the
complaint before the lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section 7
of Republic Act No. 876 provides that proceedings therein have only been stayed. After the special proceeding of
arbitration[16] has been pursued and completed, then the lower court may confirm the award[17] made by the
arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before
the approval on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes
through arbitration.[18] Republic Act No. 876 was adopted to supplement the New Civil Codes provisions on
arbitration.[19] Its potentials as one of the alternative dispute resolution methods that are now rightfully vaunted
as the wave of the future in international relations, is recognized worldwide. To brush aside a contractual
agreement calling for arbitration in case of disagreement between the parties would therefore be a step backward.
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition
for certiorari DENIED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.
G.R. No. 103200 August 31, 1994
LA NAVAL DRUG CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WILSON C. YAO, respondents.
In an effort to declog the courts of an increasing volume of work load and, most importantly, in order to accord
contending parties with expenditious alternatives for settling disputes, the law authorities, indeed encourages,
out of court settlements or adjudications. Compromises and arbitration are widely known and used as such
acceptable methods of resolving adversarial claims.
Arbitrations, in particular, is governed by a special law, Republic Act 876, suppletory to which are laws and rules
of general application. This case before us concerns the jurisdiction of courts, in relation to the provisions of
Section 6 of Republic Act No. 876, and, in that respect, the applicability of the doctrine of estoppel. The law (R.A.
876), specifically Section 6 thereof, provides:
Sec. 6. Hearing by court. — A party aggrieved by the failure, neglect or refusal of another to
perform under an agreement in writing providing for arbitration may petition the court for
an order directing that such arbitration proceed in the manner provided for in such
agreement. Five days notice in writing of the hearing of such application shall be served
either personally or by registered mail upon the party in default. The court shall hear the
parties, and upon being satisfied that the making of the agreement or such failure to comply
therewith is not in issue, shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. If the making of the agreement or default be in
issue the court shall proceed to summarily hear such issue. If the finding be that no
agreement in writing providing for arbitration was made, or that there is no default in the
proceeding thereunder, the proceeding shall be dismissed. If the finding be that a written
provision for arbitration was made and there is a default in proceeding thereunder, an order
shall be made summarily directing the parties to proceed with the arbitration in accordance
with the terms thereof.
The court shall decide all motions, petitions or application filed under the provisions of this
Act, within ten days after such motions, petitions, or applications have been heard by it.
In chronology, the events that have led to the case at bench are detailed in the appealed decision of respondent
appellate court, which we here reproduce in toto.
Original action for Certiorari and Prohibition for Annulment of the Orders, dated April 26,
1990 and June 22, 1990, respectively, of Branch LXI, Regional Trial Court, Angeles City, in
Special Case No. 6024 for Enforcement of ARBITRATION Agreement with Damages. Petitioner
assails that portion of subject Order of April 26, 1990, stating as follows:
(1) Petitioner's claim for damages predicated on alleged tortuous acts of
respondents La Naval Drug corporation such as their alleged interference
and dilatory tactics, etc. in the implementation of the Arbitration
Agreement in the Contract of Lease, thereby compelling among others
the petitioner to go to Court for redress; and respondent La Naval Drug
Corporation's counterclaim for damages may be entertained by this Court
in a hearing — not summary — for the purpose, under the Rules of Court.
(2) A preliminary hearing of the special and affirmative defense to show
that Petitioner has not cause of action against respondent's claim for
damages is denied; a resolution on this issue is deferred after the trial of
the case on the merits.
And challenges the Order of June 22, 1990 denying its motion for reconsideration of the said
earlier Order.
From the petition below of respondent Yao, it appears that he is the present owner of a
commercial building a portion of which is leased to petitioner under a contract of lease
executed on December 23, 1993 with the former owner thereof, La Proveedora, Inc., which
contract expired on April 30, 1989. However, petitioner exercised its option to lease the
same building for another five years. But petitioner and respondent Yao disagreed on the
rental rate, and to resolve the controversy, the latter, thru written notices to the former,
expressed his intention to submit their disagreement to arbitration, in accordance with
Republic Act 876, otherwise known as the Arbitration Law, and paragraph 7 of their lease
contract, providing that:
7. . . . Should the parties fail to agree on the rate of rentals, the same
shall be submitted to a group of Arbitrators composed of three (3)
members, one to be appointed by LESSOR, another by LESSEE and the
third one to be agreed upon by the two arbitrators previously chosen and
the parties hereto shall submit to the decision of the arbitrators.
Thus, on May 6, 1989, respondent Yao appointed Domingo Alamarez, Jr. as his arbitrator,
while on June 5, 1989, petitioner chose Atty. Casiano Sabile as its arbitrator. The
confirmation of the appointment of Aurelio Tupang, as third arbitrator, was held in abeyance
because petitioner instructed Atty. Sabile to defer the same until its Board of Directors could
convene and approve Tupang's appointment. Respondent Yao theorizes that this was
petitioner's design to delay the arbitration proceedings, in violation of the Arbitration Law,
and the governing stipulation of their contract of lease.
On the basis of the aforesaid allegations, respondent Yao prayed that after summary hearing
pursuant to Section 6 of the Arbitration Law, Atty. Casiano Sabile and Domingo Alamarez be
directed to proceed with the arbitration in accordance with Section 7 of subject Contract of
Lease and the applicable provisions of the Arbitration law, by appointing and confirming the
appointment of the Third Arbitrator; and that the Board of Three Arbitrators be ordered to
immediately convene and resolve the controversy before it, pursuant to Section 12 and the
succeeding sections of the Arbitration Law. (Annex "A," Petition.)
In its Answer with Counterclaim (Annex "C," Petition), petitioner here specifically denied the
averments of the petition below; theorizing that such petition is premature since respondent
Yao has not yet formally required arbitrators Alamarez and Sabile to agree on the third
arbitrator, within ten (10) days from notice, and that the delay in the arbitration was due to
respondent Yao's failure to perform what is incumbent upon him, of notifying and thereafter,
requiring both arbitrators to appoint the third member of the Board of Arbitrators. According
to petitioner, it actually gave arbitrators Sabile and Alamarez a free hand in choosing the
third arbitrator; and, therefore, respondent Yao has no cause of action against it (petitioner).
By way of Counterclaim, petitioner alleged that it suffered actual damages of P100,000.00;
 and incurred attorney's fees of P50,000.00, plus P500.00 for every court appearance of its
counsel.
On October 20, 1989, respondent Yao filed an amended petition for "Enforcement of
Arbitration Agreement with Damages;" praying that petitioner be ordered to pay interest on
the unpaid rents, at the prevailing rate of interest in commercial banks, and exemplary
damages of at least P250,000.00.
On October 24, 1989, despite petitioner's opposition to the motion to admit the amended
petition, the respondent court admitted the same.
On October 31, 1989, petitioner answered the amended petition; contending, among others,
that the amended petition should be dismissed on the ground of non-payment of the
requisite filing fees therefor; and it being in the nature of an ordinary civil action, a full blown
and regular trial, is necessary; so that respondent Yao's proposition for a summary hearing of
the arbitration issue and separate trial for his claim for damages is procedurally untenable
and implausible.
Invoking Section 5, Rule 16 of the Rules of Court, petitioner presented a "Motion to Set Case
for Preliminary Hearing" of its special and affirmative defenses, which are grounds fro a
motion to dismiss.
In its Order of November 14, 1989, the respondent court announced that the two arbitrators
chose Mrs. Eloisa R. Narciso as the third arbitrator. And on November 21, 1989, it ordered
the parties to submit their position papers on the issue as to whether or not respondent
Yao's claim for damages may be litigated upon in the summary proceeding for enforcement
of arbitration agreement. It likewise informed the parties that petitioner's Motion to Set Case
for Preliminary Hearing" of Special and Affirmative Defenses would be resolved together with
the question of damages.
On April 26, 1990, the aforequoted assailed Order issued. In moving for reconsideration of
the said Order, petitioner argued that in Special Case No. 6024, the respondent court sits as a
special court exercising limited jurisdiction and is not competent to act on respondent Yao's
claim for damages, which poses an issue litigable in an ordinary civil action. But the
respondent court was not persuaded by petitioner's submission. On June 22, 1990, it denied
the motion for reconsideration. (Rollo, pp. 89-93).
While the appellate court has agreed with petitioner that, under Section 6 of Republic Act No. 876, a court,
acting within the limits of its special jurisdiction, may in this case solely determine the issue of whether the
litigants should proceed or not to arbitration, it, however, considered petitioner in estoppel from questioning the
competence of the court to additionally hear and decide in the summary proceedings private respondent's claim
for damages, it (petitioner) having itself filed similarly its own counterclaim with the court a quo.
It is hardly disputable that when a court is called upon to exercise limited and special jurisdiction, that court
cannot stray to matters outside the area of its declared authority or beyond what has been expressly invested by
law (Elumbaring vs. Elumbaring, 12 Phil. 384, 387), particularly, such as in this instance, where the proceedings
are summary in nature.
Prefatorily, recalling the distinctions, pertinent to the case, between the court's lack of jurisdiction over
the personof the defendant, on the one hand, and its lack of jurisdiction over the subject matter or the nature of
the action, upon the other hand, should be useful.
The lack of jurisdiction over the person of the defendant may be waived either expressly or impliedly. When a
defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of the court. If he so
wishes not to waive this defense, he must do so seasonably by motion for the purpose of objecting to the
jurisdiction of the court; otherwise, he shall be deemed to have submitted himself to that jurisdiction. The
decisions promulgated heretofore by this Court would likewise seemingly apply estoppel to bar the defendant
from pursuing that defense by alleging in his answer any other issue for dismissing the action.
A citation of a few of our decisions might be apropos.
In Wang Laboratories, Inc., vs. Mendoza (156 SCRA 44), this Court has ruled that if the defendant, besides setting
up in a motion to dismiss his objection to the jurisdiction of the court, alleges at the same time any other ground
for dismissing the action, he is deemed to have submitted himself to the jurisdiction of the court. In the process,
it has equated the matter to a situation where, such as in Immaculata vs. Judge Navarro, et al. (146 SCRA 5), the
defendant invokes an affirmative relief against his opponent.
In De Midgely vs. Judge Ferandos (64 SCRA 23, 31), the Court elaborated thusly:
We are of the opinion that the lower court has acquired jurisdiction over the person of Mrs. Midgely by
reason of her voluntary appearance. The reservation in her motion to dismiss that she was making a
special appearance to contest the court's jurisdiction over her person may be disregarded.
It may be disregarded because it was nullified by the fact that in her motion to dismiss she relied not only
on the ground of lack of jurisdiction over her person but also on the ground that there was no showing
that earnest efforts were exerted to compromise the case and because she prayed "for such other relief
as" may be deemed "appropriate and proper."
xxx xxx xxx
When the appearance is by motion for the purpose of objecting to the jurisdiction of the court over the
person, it must be for the sole and separate purpose of objecting to the jurisdiction of the court. If his
motion is for any other purpose than to object to the jurisdiction of the court over his person, he thereby
submits himself to the jurisdiction of the court. A special appearance by motion made for the purpose of
objecting to the jurisdiction of the court over the person will be held to be a general appearance, if the
party in said motion should, for example, ask for a dismissal of the action upon the further ground that
the court had no jurisdiction over the subject matter. (Syllabus, Flores vs. Zurbito, supra, at page 751.
That rule was followed in Ocampo vs. Mina and Arejola, 41 Phil. 308).
The justification for the rule was expressed in Republic vs. Ker and Companry, Ltd. (18 SCRA 207, 213-214), in this
wise:
 We observed that the motion to dismiss filed on April 14, 1962, aside from disputing the
lower court's jurisdiction over defendant's person, prayed for dismissal of the complaint on
the ground that plaintiff's cause of action had prescribed. By interposing such second ground
in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative defense on the basis of
which it prayed the court to resolve controversy in its favor. For the court to validly decide
the said plea of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the
latter's person, who, being the proponent of the affirmative defense, should be deemed to
have abandoned its special appearance and voluntarily submitted itself to the jurisdiction of
the court.
Voluntary appearance cures defects of summons, if any, Such defect, if any, was further
cured when defendant filed its answer to the complaint. A defendant can not be permitted
to speculate upon the judgment of the court by objecting to the court's jurisdiction over its
person if the judgment is adverse to it, and acceding to jurisdiction over its person if and
when the judgment sustains its defenses.
The doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according
to natural law and right. It is a principle intended to avoid a clear case of injustice. The term is hardly
distinguishable from a waiver of right. Estoppel, like its said counterpart, must be unequivocal and intentional
for, when misapplied, it can easily become a most convenient and effective means of injustice. Estoppel is not
understood to be a principle that, as a rule, should prevalently apply but, such as it concededly is, as a mere
exception from the standard legal norms of general application that can be invoked only in highly exceptional
and justifiable cases.
Tested by the above criteria, the Court sees it propitious to re-examine specifically the question of whether or
not the submission of other issues in a motion to dismiss, or of an affirmative defense (as distinguished from an
affirmative relief) in an answer, would necessarily foreclose, and have the effect of a waiver of, the right of a
defendant to set up the court's lack of jurisdiction over the person of the defendant.
Not inevitably.
Section 1, Rule 16, of the Rules of Court, provides that a motion to dismiss may be made on the following
grounds:
(a) That the court has no jurisdiction over the person of the defendant or over the subject of the action or suit;
(b) That the court has no jurisdiction over the nature of the action or suit;
(c) The venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by statute of limitations;
(g) That the complaint states no cause of action;
(h) That the claim or demand set forth in the plaintiff's pleading has been paid, waived, abandoned, or
otherwise extinguished;
( i ) That the claim on which the action or suit is founded is unenforceable under the provisions of the statute
of frauds;
( j ) That the suit is between members of the same family and no earnest efforts towards a compromise have
been made.
Any ground for dismissal in a motion to dismiss, except improper venue, may, as further set forth in Section 5 of
the same rule, be pleaded as an affirmative defense and a preliminary hearing may be had thereon as if a motion
to dismiss had been filed. An answer itself contains the negative, as well as affirmative, defenses upon which the
defendant may rely (Section 4, Rule 6, Rules of Court). A negative defense denies the material facts averred in
the complaint essential to establish the plaintiff's cause of action, while an affirmative defense in an allegation of
a new matter which, while admitting the material allegations of the complaint, would, nevertheless, prevent or
bar recovery by the plaintiff. Inclusive of these defenses are those mentioned in Rule 16 of the Rules of Court
which would permit the filing of a motion to dismiss.
In the same manner that the plaintiff may assert two or more causes of action in a court suit, a defendant is
likewise expressly allowed, under Section 2, Rule 8, of the Rules of Court, to put up his own defenses
alternatively or even hypothetically. Indeed, under Section 2, Rule 9, of the Rules of Court, defenses and
objections not pleaded either in a motion to dismiss or in an answer, except for the failure to state a cause of
action, are deemed waived. We take this to mean that a defendant may, in fact, feel enjoined to set up, along
with his objection to the court's jurisdiction over his person, all other possible defenses. It thus appears that it is
not the invocation of any of such defenses, but the failure to so raise them, that can result in waiver or estoppel.
By defenses, of course, we refer to the grounds provided for in Rule 16 of the Rules of Court that must be
asserted in a motion to dismiss or by way of affirmative defenses in an answer.
Mindful of the foregoing, in Signetics Corporation vs. Court of Appeals and Freuhauf Electronics Phils., Inc. (225
SCRA 737, 738), we lately ruled:
This is not to say, however, that the petitioner's right to question the jurisdiction of the court
over its person is now to be deemed a foreclosed matter. If it is true, as Signetics claims, that
its only involvement in the Philippines was through a passive investment in Sigfil, which it
even later disposed of, and that TEAM Pacific is not its agent, then it cannot really be said to
be doing business in the Philippines. It is a defense, however, that requires the contravention
of the allegations of the complaint, as well as full ventilation, in effect, of the main merits of
the case, which should not thus be within the province of a mere motion to dismiss. So, also,
the issue posed by the petitioner as to whether a foreign corporation which has done
business in the country, but which has ceased to do business at the time of the filing of a
complaint, can still be made to answer for a cause of action which accrued while it was doing
business, is another matter that would yet have to await the reception and admission of
evidence. Since these points have seasonably been raised by the petitioner, there should be
no real cause for what may understandably be its apprehension, i.e., that by its participation
 during the trial on the merits, it may, absent an invocation of separate or independent reliefs
of its own, be considered to have voluntarily submitted itself to the court's jurisdiction.
Lack of jurisdiction over the subject matter of the suit is yet another matter. Whenever it appears that the court
has no jurisdiction over the subject matter, the action shall be dismissed (Section 2, Rule 9, Rules of Court). This
defense may be interposed at any time, during appeal (Roxas vs. Rafferty, 37 Phil. 957) or even after final
judgment (Cruzcosa vs. Judge Concepcion, et al., 101 Phil. 146). Such is understandable, as this kind of
jurisdiction is conferred by law and not within the courts, let alone the parties, to themselves determine or
conveniently set aside. In People vs. Casiano (111 Phil. 73 93-94), this Court, on the issue of estoppel, held:
The operation of the principle of estoppel on the question of jurisdiction seemingly depends
upon whether the lower court actually had jurisdiction or not. If it had no jurisdiction, but the
case was tried and decided upon the theory that it had jurisdiction, the parties are not
barred, on appeal, from assailing such jurisdiction, for the same "must exist as a matter of
law, and may not be conferred by consent of the parties or by estoppel" (5 C.J.S., 861-863).
However, if the lower court had jurisdiction, and the case was heard and decided upon a
given theory, such, for instance, as that the court had no jurisdiction, the party who induced
it to adopt such theory will not be permitted, on appeal, to assume an inconsistent position
— that the lower court had jurisdiction. Here, the principle of estoppel applies. The rule that
jurisdiction is conferred by law, and does not depend upon the will of the parties, has not
bearing thereon.
The rule was reiterated in Calimlim vs. Ramirez (118 SCRA 399, 406), and quite recently, in Southeast Asian
Fisheries Development Center-Aquaculture Department vs. National Labor Relations Commission (206 SCRA 283).
Jurisdiction over the nature of the action, in concept, differs from jurisdiction over the subject matter.
Illustrated, lack of jurisdiction over the nature of the action is the situation that arises when a court, which
ordinarily would have the authority and competence to take a case, is rendered without it either because a
special law has limited the exercise of its normal jurisdiction on a particular matter or because the type of action
has been reposed by law in certain other courts or quasi-judicial agencies for determination. Nevertheless, it can
hardly be questioned that the rules relating to the effects of want of jurisdiction over the subject matter should
apply with equal vigor to cases where the court is similarly bereft of jurisdiction over the nature of the action.
In summary, it is our considered view, as we now so hereby express,
that —
(1) Jurisdiction over the person must be seasonably raised, i.e., that it is pleaded in a motion to dismiss or by way
of an affirmative defense in an answer. Voluntary appearance shall be deemed a waiver of this defense. The
assertion, however, of affirmative defenses shall not be constructed as an estoppel or as a waiver of such
defense.
(2) Where the court itself clearly has no jurisdiction over the subject matter or the nature of the action, the
invocation of this defense may be done at any time. It is neither for the courts nor the parties to violate or
disregard that rule, let alone to confer that jurisdiction, this matter being legislative in character. Barring highly
meritorious and exceptional circumstances, such as hereinbefore exemplified, neither estoppel nor waiver shall
apply.
In the case at bench, the want of jurisdiction by the court is indisputable, given the nature of the controversy.
The arbitration law explicitly confines the court's authority only to pass upon the issue of whether there is or
there is no agreement in writing providing for arbitration. In the affirmative, the statute ordains that the court
shall issue an order "summarily directing the parties to proceed with the arbitration in accordance with the
terms thereof." If the court, upon the other hand, finds that no such agreement exists, "the proceeding shall be
dismissed." The proceedings are summary in nature.
All considered, the court a quo must then refrain from taking up the claims of the contending parties for
damages, which, upon the other hand, may be ventilated in separate regular proceedings at an opportune time
and venue. The circumstances obtaining in this case are far, we hold, from justifying the application of estoppel
against either party.
WHEREFORE, the decision of the Court of Appeals and the orders of the trial court in question are SET ASIDE. The
court a quo, in the instant proceedings, is ordered to DESIST from further hearing private respondent's claim, as
well as petitioner's counterclaim, for damages. No costs.
SO ORDERED.
[G.R. No. 136154. February 7, 2001]
DEL MONTE CORPORATION-USA, PAUL E. DERBY, JR., DANIEL COLLINS and LUIS HIDALGO, petitioners, vs. COURT
OF APPEALS, JUDGE BIENVENIDO L. REYES in his capacity as Presiding Judge, RTC-Br. 74, Malabon,
Metro Manila, MONTEBUENO MARKETING, INC., LIONG LIONG C. SY and SABROSA FOODS,
INC., respondents.
This Petition for Review on certiorari assails the 17 July 1998 Decision[1] of the Court of Appeals affirming the
11 November 1997 Order[2] of the Regional Trial Court which denied petitioners Motion to Suspend Proceedings in
Civil Case No. 2637-MN. It also questions the appellate courts Resolution[3] of 30 October 1998 which denied
petitioners Motion for Reconsideration.
On 1 July 1994, in a Distributorship Agreement, petitioner Del Monte Corporation-USA (DMC-USA)
appointed private respondent Montebueno Marketing, Inc. (MMI) as the sole and exclusive distributor of its Del
Monte products in the Philippines for a period of five (5) years, renewable for two (2) consecutive five (5) year
periods with the consent of the parties. The Agreement provided, among others, for an arbitration clause which
states -
12. GOVERNING LAW AND ARBITRATION[4]
This Agreement shall be governed by the laws of the State of California and/or, if applicable, the United States of
America. All disputes arising out of or relating to this Agreement or the parties relationship, including the
termination thereof, shall be resolved by arbitration in the City of San Francisco, State of California, under the
Rules of the American Arbitration Association. The arbitration panel shall consist of three members, one of whom
shall be selected by DMC-USA, one of whom shall be selected by MMI, and third of whom shall be selected by the
other two members and shall have relevant experience in the industry x x x x
In October 1994 the appointment of private respondent MMI as the sole and exclusive distributor of Del
Monte products in the Philippines was published in several newspapers in the country. Immediately after its
appointment, private respondent MMI appointed Sabrosa Foods, Inc. (SFI), with the approval of petitioner DMC-
USA, as MMIs marketing arm to concentrate on its marketing and selling function as well as to manage its critical
relationship with the trade.
On 3 October 1996 private respondents MMI, SFI and MMIs Managing Director Liong Liong C. Sy (LILY SY)
filed a Complaint[5] against petitioners DMC-USA, Paul E. Derby, Jr.,[6] Daniel Collins[7] and Luis Hidalgo,[8] and
Dewey Ltd.[9] before the Regional Trial Court of Malabon, Metro Manila. Private respondents predicated their
complaint on the alleged violations by petitioners of Arts. 20, [10] 21[11] and 23[12] of the Civil Code. According to
private respondents, DMC-USA products continued to be brought into the country by parallel importers despite
the appointment of private respondent MMI as the sole and exclusive distributor of Del Monte products thereby
causing them great embarrassment and substantial damage. They alleged that the products brought into the
country by these importers were aged, damaged, fake or counterfeit, so that in March 1995 they had to cause,
after prior consultation with Antonio Ongpin, Market Director for Special Markets of Del Monte Philippines, Inc.,
the publication of a "warning to the trade" paid advertisement in leading newspapers. Petitioners DMC-USA and
Paul E. Derby, Jr., apparently upset with the publication, instructed private respondent MMI to stop coordinating
with Antonio Ongpin and to communicate directly instead with petitioner DMC-USA through Paul E. Derby, Jr.
Private respondents further averred that petitioners knowingly and surreptitiously continued to deal with
the former in bad faith by involving disinterested third parties and by proposing solutions which were entirely out
of their control. Private respondents claimed that they had exhausted all possible avenues for an amicable
resolution and settlement of their grievances; that as a result of the fraud, bad faith, malice and wanton attitude
of petitioners, they should be held responsible for all the actual expenses incurred by private respondents in the
delayed shipment of orders which resulted in the extra handling thereof, the actual expenses and cost of money
for the unused Letters of Credit (LCs) and the substantial opportunity losses due to created out-of-stock situations
and unauthorized shipments of Del Monte-USA products to the Philippine Duty Free Area and Economic Zone; that
the bad faith, fraudulent acts and willful negligence of petitioners, motivated by their determination to squeeze
private respondents out of the outstanding and ongoing Distributorship Agreement in favor of another party, had
placed private respondent LILY SY on tenterhooks since then; and, that the shrewd and subtle manner with which
petitioners concocted imaginary violations by private respondent MMI of the Distributorship Agreement in order
to justify the untimely termination thereof was a subterfuge. For the foregoing, private respondents claimed,
among other reliefs, the payment of actual damages, exemplary damages, attorneys fees and litigation expenses.
On 21 October 1996 petitioners filed a Motion to Suspend Proceedings[13] invoking the arbitration clause in
their Agreement with private respondents.
In a Resolution[14] dated 23 December 1996 the trial court deferred consideration of petitioners Motion to
Suspend Proceedings as the grounds alleged therein did not constitute the suspension of the proceedings
considering that the action was for damages with prayer for the issuance of Writ of Preliminary Attachment and
not on the Distributorship Agreement.
On 15 January 1997 petitioners filed a Motion for Reconsideration to which private respondents filed
their Comment/Opposition. On 31 January 1997 petitioners filed their Reply. Subsequently, private respondents
filed an Urgent Motion for Leave to Admit Supplemental Pleading dated 2 April 1997. This Motion was admitted,
over petitioners opposition, in an Order of the trial court dated 27 June 1997.
As a result of the admission of the Supplemental Complaint, petitioners filed on 22 July 1997
a Manifestation adopting their Motion to Suspend Proceedings of 17 October 1996 and Motion for
Reconsiderationof 14 January 1997.
On 11 November 1997 the Motion to Suspend Proceedings was denied by the trial court on the ground that
it "will not serve the ends of justice and to allow said suspension will only delay the determination of the issues,
frustrate the quest of the parties for a judicious determination of their respective claims, and/or deprive and delay
their rights to seek redress."[15]
On appeal, the Court of Appeals affirmed the decision of the trial court. It held that the alleged damaging
acts recited in the Complaint, constituting petitioners causes of action, required the interpretation of Art. 21 of
the Civil Code[16] and that in determining whether petitioners had violated it "would require a full blown trial"
making arbitration "out of the question."[17] Petitioners Motion for Reconsideration of the affirmation was
denied. Hence, this Petition for Review.
The crux of the controversy boils down to whether the dispute between the parties warrants an order
compelling them to submit to arbitration.
Petitioners contend that the subject matter of private respondents causes of action arises out of or relates
to the Agreement between petitioners and private respondents. Thus, considering that the arbitration clause of
the Agreement provides that all disputes arising out of or relating to the Agreement or the parties relationship,
including the termination thereof, shall be resolved by arbitration, they insist on the suspension of the proceedings
in Civil Case No. 2637-MN as mandated by Sec. 7 of RA 876[18] -
Sec. 7. Stay of Civil Action. If any suit or proceeding be brought upon an issue arising out of an agreement
providing for arbitration thereof, the court in which such suit or proceeding is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration, shall stay the action or proceeding until an
arbitration has been had in accordance with the terms of the agreement.Provided, That the applicant for the stay
is not in default in proceeding with such arbitration.
Private respondents claim, on the other hand, that their causes of action are rooted in Arts. 20, 21 and 23 of
the Civil Code,[19] the determination of which demands a full blown trial, as correctly held by the Court of
Appeals. Moreover, they claim that the issues before the trial court were not joined so that the Honorable Judge
was not given the opportunity to satisfy himself that the issue involved in the case was referable to arbitration.They
submit that, apparently, petitioners filed a motion to suspend proceedings instead of sending a written demand
to private respondents to arbitrate because petitioners were not sure whether the case could be a subject of
arbitration. They maintain that had petitioners done so and private respondents failed to answer the demand,
petitioners could have filed with the trial court their demand for arbitration that would warrant a determination
by the judge whether to refer the case to arbitration. Accordingly, private respondents assert that arbitration is
out of the question.
Private respondents further contend that the arbitration clause centers more on venue rather than on
arbitration. They finally allege that petitioners filed their motion for extension of time to file this petition on the
same date[20] petitioner DMC-USA filed a petition to compel private respondent MMI to arbitrate before the
United States District Court in Northern California, docketed as Case No. C-98-4446. They insist that the filing of
the petition to compel arbitration in the United States made the petition filed before this Court an alternative
remedy and, in a way, an abandonment of the cause they are fighting for here in the Philippines, thus warranting
the dismissal of the present petition before this Court.
 There is no doubt that arbitration is valid and constitutional in our jurisdiction.[21] Even before the enactment
of RA 876, this Court has countenanced the settlement of disputes through arbitration. Unless the agreement is
such as absolutely to close the doors of the courts against the parties, which agreement would be void, the courts
will look with favor upon such amicable arrangement and will only interfere with great reluctance to anticipate or
nullify the action of the arbitrator.[22] Moreover, as RA 876 expressly authorizes arbitration of domestic disputes,
foreign arbitration as a system of settling commercial disputes was likewise recognized when the Philippines
adhered to the United Nations "Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of
1958" under the 10 May 1965 Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing
enforcement of international arbitration agreements between parties of different nationalities within a
contracting state.[23]
A careful examination of the instant case shows that the arbitration clause in the Distributorship Agreement
between petitioner DMC-USA and private respondent MMI is valid and the dispute between the parties is
arbitrable. However, this Court must deny the petition.
The Agreement between petitioner DMC-USA and private respondent MMI is a contract. The provision to
submit to arbitration any dispute arising therefrom and the relationship of the parties is part of that contract and
is itself a contract. As a rule, contracts are respected as the law between the contracting parties and produce effect
as between them, their assigns and heirs.[24] Clearly, only parties to the Agreement, i.e., petitioners DMC-USA and
its Managing Director for Export Sales Paul E. Derby, Jr., and private respondents MMI and its Managing Director
LILY SY are bound by the Agreement and its arbitration clause as they are the only signatories thereto. Petitioners
Daniel Collins and Luis Hidalgo, and private respondent SFI, not parties to the Agreement and cannot even be
considered assigns or heirs of the parties, are not bound by the Agreement and the arbitration clause
therein. Consequently, referral to arbitration in the State of California pursuant to the arbitration clause and the
suspension of the proceedings in Civil Case No. 2637-MN pending the return of the arbitral award could be called
for[25] but only as to petitioners DMC-USA and Paul E. Derby, Jr., and private respondents MMI and LILY SY, and
not as to the other parties in this case, in accordance with the recent case of Heirs of Augusto L. Salas, Jr. v. Laperal
Realty Corporation,[26] which superseded that of Toyota Motor Philippines Corp. v. Court of Appeals.[27]
In Toyota, the Court ruled that "[t]he contention that the arbitration clause has become dysfunctional
because of the presence of third parties is untenable ratiocinating that "[c]ontracts are respected as the law
between the contracting parties"[28] and that "[a]s such, the parties are thereby expected to abide with good faith
in their contractual commitments."[29] However, in Salas, Jr., only parties to the Agreement, their assigns or heirs
have the right to arbitrate or could be compelled to arbitrate. The Court went further by declaring that in
recognizing the right of the contracting parties to arbitrate or to compel arbitration, the splitting of the proceedings
to arbitration as to some of the parties on one hand and trial for the others on the other hand, or the suspension
of trial pending arbitration between some of the parties, should not be allowed as it would, in effect, result in
multiplicity of suits, duplicitous procedure and unnecessary delay.[30]
The object of arbitration is to allow the expeditious determination of a dispute. [31] Clearly, the issue before
us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration proceedings
and trial, or suspension of trial pending arbitration. Accordingly, the interest of justice would only be served if the
trial court hears and adjudicates the case in a single and complete proceeding.[32]
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals affirming the Order of the Regional
Trial Court of Malabon, Metro Manila, in Civil Case No. 2637-MN, which denied petitioners Motion to Suspend
Proceedings, is AFFIRMED. The Regional Trial Court concerned is directed to proceed with the hearing of Civil Case
No. 2637-MN with dispatch. No costs.
SO ORDERED.
G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.
This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the Decision2 and
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision4 of the Regional
Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum
of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications
equipment (sic), accessories, spares, services and software, at a total purchase price of Two Million One Hundred
Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods
delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the
payment schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained
defendant UCPB General Insurance Co., Inc.’s surety bond dated 3 December 1999, in favor of GILAT.
During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of
the equipment (including the software components for which payment was secured by the surety bond, was
shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999 (Exhibit
"E"), the surety issued, with One Virtual’s conformity, an amendment to the surety bond, Annex "A" thereof,
correcting its expiry date from May 30, 2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date
of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting
GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said
amount of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One
Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment instalment date of 30
November 2000 as set out in Annex "A" of the surety bond, prompting GILAT to send a second demand letter
dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety
bond, plus interests and expenses (Exhibits "H") and which letter was received by the defendant surety on
January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof,
hence, the instant complaint."5 (Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6 against respondent UCPB General
Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses.
After due hearing, the RTC rendered its Decision,7 the dispositive portion of which is herein quoted:
WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the
defendant, ordering, to wit:
 1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt under the Surety Bond, with legal interest thereon
at the rate of 12% per annum computed from the time the judgment becomes final and executory until
the obligation is fully settled; and
2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four
Cents (US$44,004.04) representing attorney’s fees and litigation expenses.
Accordingly, defendant’s counterclaim is hereby dismissed for want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject
equipments [sic] and the same was installed. Even with the delivery and installation made, One Virtual failed to
pay any of the payments agreed upon. Demand notwithstanding, defendant failed and refused and continued to
fail and refused to settle the obligation."8
Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and
between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee,"9 respondent agreed and
bound itself to pay in accordance with the Payment Milestones. This obligation was not made dependent on any
condition outside the terms and conditions of the Surety Bond and Payment Milestones.10
Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while a surety can
be held liable for interest even if it becomes more onerous than the principal obligation, the surety shall only
accrue when the delay or refusal to pay the principal obligation is without any justifiable cause. 11 Here,
respondent failed to pay its surety obligation because of the advice of its principal (One Virtual) not to pay.12 The
RTC then obligated respondent to pay petitioner the amount of USD1,200,000.00 representing the principal debt
under the Surety Bond, with legal interest at the rate of 12% per annum computed from the time the judgment
becomes final and executory, and USD44,004.04 representing attorney’s fees and litigation expenses.
On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a Decision14 in the
following manner:
WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision dated December
28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to
arbitration, the outcome of which shall necessary bind the parties, including the surety, defendant-appellant
United Coconut Planters Bank General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine
finds application." According to this doctrine, the accessory contract must be construed with the principal
agreement.15In this case, the appellate court considered the Purchase Agreement entered into between
petitioner and One Virtual as the principal contract,16 whose stipulations are also binding on the parties to the
suretyship.17 Bearing in mind the arbitration clause contained in the Purchase Agreement18 and pursuant to the
policy of the courts to encourage alternative dispute resolution methods,19 the trial court’s Decision was
vacated; petitioner and One Virtual were ordered to proceed to arbitration.
On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion
was denied for lack of merit in a Resolution20 issued by the CA on 16 September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November 2010, petitioner
filed a Reply.22
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to
arbitrate; and
2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by
respondent of its obligation under the Suretyship Agreement.
THE COURT’S RULING
The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract,
nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it
applies for this relief.23 This referral, however, can only be demanded by one who is a party to the arbitration
agreement.24 Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the
CA’s order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may proceed against the
surety without having first sued the principal debtor.26 Even the Surety Agreement itself states that respondent
becomes liable upon "mere failure of the Principal to make such prompt payment."27 Thus, petitioner should not
be ordered to make a separate claim against One Virtual (via arbitration) before proceeding against
respondent.28
On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot
exist without a valid obligation.29 Thus, the surety may avail itself of all the defenses available to the principal
debtor and inherent in the debt30 – that is, the right to invoke the arbitration clause in the Purchase Agreement.
We agree with petitioner.
In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal debtor.
This undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal
contract.31 Nevertheless, although the contract of a surety is in essence secondary only to a valid principal
obligation, its liability to the creditor or "promise" of the principal is said to be direct, primary and absolute; in
other words, a surety is directly and equally bound with the principal.32 He becomes liable for the debt and duty
of the principal obligor, even without possessing a direct or personal interest in the obligations constituted by
the latter.33Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion.34 It may in
fact be sued separately or together with the principal debtor.35
After a thorough examination of the pieces of evidence presented by both parties,36 the RTC found that
petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual
still failed to pay its obligation,37 triggering respondent’s liability to petitioner as the former’s surety.1âwphi1 In
other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave
the latter an immediate right to pursue respondent as the surety.
Consequently, we cannot sustain respondent’s claim that the Purchase Agreement, being the principal contract
to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of
settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., 38 that "[the] acceptance [of a
surety agreement], however, does not change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words,
the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises
only upon the debtor’s default, at which time, it can be directly held liable by the creditor for payment as a
solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner
that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a
party to that contract.39 An arbitration agreement being contractual in nature,40 it is binding only on the parties
thereto, as well as their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place
"if at least one party so requests not later than the pre-trial conference, or upon the request of both parties
thereafter." Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual
submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are contracted
precisely to mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a
surety on the same level as that of the principal debtor.44 The effect is that the creditor is given the right to
directly proceed against either principal debtor or surety. This is the reason why excussion cannot be
invoked.45 To require the creditor to proceed to arbitration would render the very essence of suretyship
nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals,46 "if
the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of the creditor."
Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment
of the latter’s obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from
the time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January
2001 because of the latter’s delay in discharging its monetary obligation.47 Citing Article 1169 of the Civil Code,
petitioner insists that the delay started to run from the time it demanded the fulfilment of respondent’s
obligation under the suretyship contract. Significantly, respondent does not contest this point, but instead
argues that it is only liable for legal interest of 6% per annum from the date of petitioner’s last demand on 24
January 2001.
In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the refusal of a
party to pay is without any justifiable cause.48 In this case, respondent’s failure to heed the demand was due to
the advice of One Virtual that petitioner allegedly breached its undertakings as stated in the Purchase
Agreement.49The CA, however, made no pronouncement on this matter.
We sustain petitioner.
Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the
debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest."
Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of
the obligation, and the latter fails to comply.50 Delay, as used in Article 1169, is synonymous with default or
mora, which means delay in the fulfilment of obligations.51 It is the nonfulfillment of an obligation with respect
to time.52 In order for the debtor (in this case, the surety) to be in default, it is necessary that the following
requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or extrajudicially.53
Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its
liability becomes more than the principal obligation.54 The increased liability is not because of the contract, but
because of the default and the necessity of judicial collection.55
However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la
Hotel,56 citing RCPI v. Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify,
prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit
a party to be set free from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the
promissee that may include his "expectation interest," which is his interest in having the benefit of his bargain by
being put in as good a position as he would have been in had the contract been performed, or his "reliance
interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as
good a position as he would have been in had the contract not been made; or his "restitution interest," which is
his interest in having restored to him any benefit that he has conferred on the other party. Indeed, agreements
can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect
of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who has been injured by the
failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof
of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing
liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed justified
by the circumstances – that is, One Virtual’s advice regarding petitioner’s alleged breach of obligations. The
lower court’s Decision itself belied this contention when it said that "plaintiff is not disputing that it did not
complete commissioning work on one of the two systems because One Virtual at that time is already in default
and has not paid GILAT."58 Assuming arguendo that the commissioning work was not completed, respondent has
no one to blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner would not have
been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly
stated that petitioner had delivered all equipment, including the licensed software; and that the equipment had
been installed and in fact, gone into operation.59 Notwithstanding these compliances, respondent still failed to
pay.
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time
judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article
1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an
action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the
complaint, but from the date of that extra-judicial demand.60 Considering that respondent failed to pay its
obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of
petitioner was sent on 5 June 2000,61 we agree with the latter that interest must start to run from the time
petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at
that time.
With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,62 which modified the
guidelines established in Eastern Shipping Lines v. CA63 in relation to Bangko Sentral-Monetary Board Circular No.
799 (Series of 2013), to wit:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.1âwphi1 In the absence of stipulation,
the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby
compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra
judicial demand, until the satisfaction of the debt in accordance with the revised guidelines enunciated in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch
141, Makati City is REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned.
Respondent is hereby ordered to pay legal interest at the rate of 6% per annum from 5 June 2000 until the
satisfaction of its obligation under the Suretyship Contract and Purchase Agreement.
SO ORDERED.
G.R. No. 174938 October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G.
LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings pursuant to a contract
entered into by the corporation they represent if there are allegations of bad faith or malice in their acts
representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October 5, 2006 resolution.
The Court of Appeals affirmed the trial court's decision holding that petitioners, as director, should submit
themselves as parties tothe arbitration proceedings between BF Corporation and Shangri-La Properties, Inc.
(Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-Laand the
members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr.,
Maximo G. Licauco III, and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into
agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking
structure along EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing
statements.3However, by October 1991, Shangri-La started defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings
using its own funds and credit despite Shangri-La’s default.5 According to BF Corporation, ShangriLa
misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay in payment was
simply a matter of delayed processing of BF Corporation’s progress billing statements.6
BF Corporation eventually completed the construction of the buildings.7 Shangri-La allegedly took possession of
the buildings while still owing BF Corporation an outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it.9 It also
alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs. Therefore, they should
be held jointly and severally liable with Shangri-La for its obligations as well as for the damages that BF
Corporation incurred as a result of Shangri-La’s default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos
filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration,
in accordance with the arbitration clauseprovided in its contract, quoted in the motion as follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager
on his behalf and the Contractor, either during the progress or after the completion or abandonment of the
Works as to the construction of this Contract or as to any matter or thing of whatsoever nature arising there
under or inconnection therewith (including any matter or thing left by this Contract to the discretion of the
Project Manager or the withholding by the Project Manager of any certificate to which the Contractor may claim
to be entitled or the measurement and valuation mentioned in clause 30(5)(a) of these Conditions or the rights
and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the owner and the Contractor
hereby agree to exert all efforts to settle their differences or dispute amicably. Failing these efforts then such
dispute or difference shall be referred to arbitration in accordance with the rules and procedures of the
Philippine Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the Arbitrators shall be
a condition precedent to any right of legal action that either party may have against the other. . .
.12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13
In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend proceedings.14
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with compulsory counter claim
against BF Corporation and crossclaim against Shangri-La.15 They alleged that they had resigned as members of
Shangri-La’s board of directors as of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of its November 18,
1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a
petition for certiorari with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the submission of the
dispute to arbitration.18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on certiorari with this
court.19 On March 27, 1998, this court affirmed the Court of Appeals’ decision, directing that the dispute be
submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF Corporation and Shangri-La
failed to agree as to the law that should govern the arbitration proceedings.21 On October 27, 1998, the trial
court issued the order directing the parties to conduct the proceedings in accordance with Republic Act No.
876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification, both seeking to clarify
the term, "parties," and whether Shangri-La’s directors should be included in the arbitration proceedings and
served with separate demands for arbitration.23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded
from the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for arbitration upon all defendants
in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s directors were interested parties who
"must also be served with a demand for arbitration to give them the opportunity to ventilate their side of the
controversy, safeguard their interest and fend off their respective positions."26 Petitioners’ motion for
reconsideration ofthis order was denied by the trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of discretion in the
issuance of orders compelling them to submit to arbitration proceedings despite being third parties to the
contract between Shangri-La and BF Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for certiorari. The Court of
Appeals ruled that ShangriLa’s directors were necessary parties in the arbitration proceedings.30 According to the
Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts in representation of the
party to the contract pursuant to Art. 31 of the Corporation Code, and that as directors of the defendant
corporation, [they], in accordance with Art. 1217 of the Civil Code, stand to be benefited or injured by the result
of the arbitration proceedings, hence, being necessary parties, they must be joined in order to have complete
adjudication of the controversy. Consequently, if [they were] excluded as parties in the arbitration proceedings
and an arbitral award is rendered, holding [Shangri-La] and its board of directors jointly and solidarily liable to
private respondent BF Corporation, a problem will arise, i.e., whether petitioners will be bound bysuch arbitral
award, and this will prevent complete determination of the issues and resolution of the controversy.31
The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . . . would be
contrary to the policy against multiplicity of suits."32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and January 19, 2005 of public
respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006 resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of Appeals decision and
the October 5, 2006 Court of Appeals resolution.35
The issue in this case is whether petitioners should be made parties to the arbitration proceedings, pursuant to
the arbitration clause provided in the contract between BF Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or obligations.36 The corporation is
a separate being, and nothing justifies BF Corporation’s allegation that they are solidarily liable with Shangri-
La.37Neither did they bind themselves personally nor did they undertake to shoulder Shangri-La’s obligations
should it fail in its obligations.38 BF Corporation also failed to establish fraud or bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF Corporation and Shangri-
La.40Provisions including arbitration stipulations should bind only the parties.41 Based on our arbitration laws,
parties who are strangers to an agreement cannot be compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties in resolving
their disputes.43 Compelling them to submit to arbitration is against this purpose and may be tantamount to
stipulating for the parties.44
Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III, Alfredo C.Ramos and
Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that Shangri-
La’sdirectors, being non-parties to the contract, should not be made personally liable for Shangri-La’s acts.46Since
the contract was executed only by BF Corporation and Shangri-La, only they should be affected by the contract’s
stipulation.47 BF Corporation also failed to specifically allege the unlawful acts of the directors that should make
them solidarily liable with Shangri-La for its obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties should undergo
arbitration "clearly contemplated the inclusion of the directors of the corporation[.]"49 BF Corporation also
argued that while petitioners were not parties to the agreement, they were still impleaded under Section 31 of
the Corporation Code.50 Section 31 makes directors solidarily liable for fraud, gross negligence, and bad
faith.51Petitioners are not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their solidary liability, they are
necessary parties to the arbitration proceedings.53 The full resolution of all disputes in the arbitration
proceedings should also be done in the interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral Tribunal had
already promulgated its decision on July 31, 2007.55 The Arbitral Tribunal denied BF Corporation’s claims against
them.56Petitioners stated that "[they] were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ."57 They also stated that "[their] unwilling participation
in the arbitration case was done ex abundante ad cautela, as manifested therein on several
occasions."58 Petitioners informed the court that they already manifested with the trial court that "any action
taken on [the Arbitral Tribunal’s decision] should be without prejudice to the resolution of [this] case." 59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda. Petitioners and Maximo G.
Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated their arguments that they should not be held
liable for Shangri-La’s default and made parties to the arbitration proceedings because only BF Corporation and
Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary liability under Section
31 of the Corporation Code. Shangri-La added that their exclusion from the arbitration proceedings will result in
multiplicity of suits, which "is not favored in this jurisdiction."60 It pointed out that the case had already been
mooted by the termination of the arbitration proceedings, which petitioners actively participated in. 61 Moreover,
BF Corporation assailed only the correctness of the Arbitral Tribunal’s award and not the part absolving Shangri-
La’s directors from liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims were already
dismissed with finality, and the claims against them were likewise dismissed with finality, they no longer have
any interest orpersonality in the arbitration case. Thus, there is no longer any need to resolve the present
Petition, which mainly questions the inclusion of petitioners in the arbitration proceedings." 64 The court’s
decision in this case will no longer have any effect on the issue of petitioners’ inclusion in the arbitration
proceedings.65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on BF Corporation,
have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that principles may be
established for the guidance of the bench, bar, and the public. In De la Camara v. Hon. Enage, 66 this court
disregarded the fact that petitioner in that case already escaped from prison and ruled on the issue of excessive
bails:
While under the circumstances a ruling on the merits of the petition for certiorari is notwarranted, still, as set
forth at the opening of this opinion, the fact that this case is moot and academic should not preclude this
Tribunal from setting forth in language clear and unmistakable, the obligation of fidelity on the part of lower
court judges to the unequivocal command of the Constitution that excessive bail shall not be required.67
This principle was repeated in subsequent cases when this court deemed it proper to clarify important matters
for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in accordance with
Shangri-Laand BF Corporation’s agreement, in order to determine if the distinction between Shangri-La’s
personality and their personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid litigation and settle
disputes amicably and more expeditiously by themselves and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as early as 1949. It
was later institutionalized by the approval of Republic Act No. 876,70 which expressly authorized, made valid,
enforceable, and irrevocable parties’ decision to submit their controversies, including incidental issues, to
arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement, defendant raises the issue
that, even if it be granted that it agreed to submit its dispute with plaintiff to arbitration, said agreement is void
and without effect for it amounts to removing said dispute from the jurisdiction of the courts in which the
parties are domiciled or where the dispute occurred. It is true that there are authorities which hold that "a clause
in a contract providing that all matters in dispute between the parties shall be referred to arbitrators and to
them alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric Co. vs. Pasay
Transportation Co., 57 Phil., 600, 603), however, there are authorities which favor "the more intelligent view that
arbitration, as an inexpensive, speedy and amicable method of settling disputes, and as a means of avoiding
litigation, should receive every encouragement from the courts which may be extended without contravening
sound public policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view when it
reproduced in the new Civil Code the provisions of the old Code on Arbitration. And only recently it approved
Republic Act No. 876 expressly authorizing arbitration of future disputes.72 (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses are liberally
construed to favor arbitration. Thus, in LM Power Engineering Corporation v. Capitol Industrial Construction
Groups, Inc.,73this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with mediation,
conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging judicial dockets,
arbitration also hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as the
"wave of the future" in international civil and commercial disputes. Brushing aside a contractual agreement
calling for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution methods, courts
should liberally construe arbitration clauses. Provided such clause is susceptible of an interpretation that covers
the asserted dispute, an order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor interpretations that would
render effective an arbitration clause was later expressed in Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote party autonomy in
the resolution of disputes or the freedom of the party to make their own arrangements to resolve their disputes.
Towards this end, the State shall encourage and actively promote the use of Alternative Dispute Resolution
(ADR) as an important means to achieve speedy and impartial justice and declog court dockets. As such, the
State shall provide means for the use of ADR as an efficient tool and an alternative procedure for the resolution
of appropriate cases. Likewise, the State shall enlist active private sector participation in the settlement of
disputes through ADR. This Act shall be without prejudice to the adoption by the Supreme Court of any ADR
system, such as mediation, conciliation, arbitration, or any combination thereof as a means of achieving speedy
and efficient means of resolving cases pending before all courts in the Philippines which shall be governed by
such rules as the Supreme Court may approve from time to time.
....
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to the policy of the law
in favor of arbitration.Where action is commenced by or against multiple parties, one or more of whomare
parties who are bound by the arbitration agreement although the civil action may continue as to those who are
not bound by such arbitration agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for purposes ofavoiding
litigation and expediting resolution of the dispute, that interpretation shall be adopted. Petitioners’ main
argument arises from the separate personality given to juridical persons vis-à-vis their directors, officers,
stockholders, and agents. Since they did not sign the arbitration agreement in any capacity, they cannot be
forced to submit to the jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement.
Moreover, they had already resigned as directors of Shangri-Laat the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct from
Shangri-La.
A corporation is an artificial entity created by fiction of law.76 This means that while it is not a person, naturally,
the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its stockholders, officers, directors,
representatives,77 and other juridical entities. The law vests in corporations rights,powers, and attributes as if
they were natural persons with physical existence and capabilities to act on their own.78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some
of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
 8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
11. To exercise such other powers asmay be essential or necessary to carry out its purpose or purposes
as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through
itsdirectors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts
without them.
A consequence of a corporation’s separate personality is that consent by a corporation through its
representatives is not consent of the representative, personally. Its obligations, incurred through official acts of
its representatives, are its own. A stockholder, director, or representative does not become a party to a contract
just because a corporation executed a contract through that stockholder, director or representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the
corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the
corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their disputes. This
court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation79 that an arbitration clause shall not
apply to persons who were neither parties to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds
the parties thereto, as well as their assigns and heirs. But only they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
The provision to submit to arbitration any dispute arising therefrom and the relationship of the parties is part of
that contract and is itself a contract. As a rule, contracts are respected as the law between the contracting
parties and produce effect as between them, their assigns and heirs. Clearly, only parties to the Agreement . . .
are bound by the Agreement and its arbitration clause as they are the only signatories thereto.82 (Citation
omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co., Inc.83 and Stanfilco
Employees v. DOLE Philippines, Inc., et al.84
As a general rule, therefore, a corporation’s representative who did not personally bind himself or herself to an
arbitration agreement cannot be forced to participate in arbitration proceedings made pursuant to an
agreement entered into by the corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues."85 It is also warranted in alter ego cases "where a corporation is merely
a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation."86
When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the
corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too,
become liable as if they were the corporation.
Among the persons who may be treatedas the corporation itself under certain circumstances are its directors
and officers. Section 31 of the Corporation Code provides the instances when directors, trustees, or officers may
become liable for corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse
to the corporation in respect of any matter which has been reposed inhim in confidence, as to which equity
imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and
must account for the profits which otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily liable with it
for all damages suffered by the corporation, its stockholders or members, and other persons in any of the
following cases:
a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as
director or trustee.
Solidary liability with the corporation will also attach in the following instances:
 a) "When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action."89
When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the
duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without
a trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced.
Courts or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the corporation and
the persons representing it. The determination of these circumstances must be made by one tribunal or court in
a proceeding participated in by all parties involved, including current representatives of the corporation, and
those persons whose personalities are impliedly the sameas the corporation. This is because when the court or
tribunal finds that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for corporate acts. The
corporation’s distinct personality is disregarded, and the corporation is seen as a mere aggregation of persons
undertaking a business under the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice orbad
faith on their part in directing the affairs of the corporation, complainants are effectively alleging that the
directors and the corporation are not acting as separate entities. They are alleging that the acts or omissions by
the corporation that violated their rights are also the directors’ acts or omissions.90 They are alleging that
contracts executed by the corporation are contracts executed by the directors. Complainants effectively pray
that the corporate veilbe pierced because the cause of action between the corporation and the directors is the
same.
In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited.
Institution of more than one suit for the same cause of action constitutes splitting the cause of action, which is a
ground for the dismissal ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a single cause
of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on the basis of the
same cause of action, the filing of one or a judgment upon the merits in any one is available as a ground for the
dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be indistinct that we rule
that petitioners may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the arbitration proceedings, we are not
overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration principle that only parties to
an arbitration agreement may be compelled to submit to arbitration. In that case, this court recognizedthat
persons other than the main party may be compelled to submit to arbitration, e.g., assignees and heirs.
Assignees and heirs may be considered parties to an arbitration agreement entered into by their assignor
because the assignor’s rights and obligations are transferred to them upon assignment. In other words, the
assignor’s rights and obligations become their own rights and obligations. In the same way, the corporation’s
obligations are treated as the representative’s obligations when the corporate veil is pierced. Moreover, in Heirs
of Augusto Salas, this court affirmed its policy against multiplicity of suits and unnecessary delay. This court said
that "to split the proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay."91 This court also intimated that the interest
of justice would be best observed if it adjudicated rights in a single proceeding.92 While the facts of that case
prompted this court to direct the trial court to proceed to determine the issues of thatcase, it did not prohibit
courts from allowing the case to proceed to arbitration, when circumstances warrant.
Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the incidental issue of
whether piercing of the corporate veil is warranted, should be determined in a single proceeding. Such finding
would determine if the corporation is merely an aggregation of persons whose liabilities must be treated as one
with the corporation.
However, when the courts disregard the corporation’s distinct and separate personality from its directors or
officers, the courts do not say that the corporation, in all instances and for all purposes, is the same as its
directors, stockholders, officers, and agents. It does not result in an absolute confusion of personalities of the
corporation and the persons composing or representing it. Courts merely discount the distinction and treat them
as one, in relation to a specific act, in order to extend the terms of the contract and the liabilities for all damages
to erring corporate officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate veil,
parties who are normally treated as distinct individuals should be made to participate in the arbitration
proceedings in order to determine ifsuch distinction should indeed be disregarded and, if so, to determine the
extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the existence of
circumstances that render petitioners and the other directors solidarily liable. It ruled that petitioners and
Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. The
Arbitral Tribunal’s decision was made with the participation of petitioners, albeit with their continuing objection.
In view of our discussion above, we rule that petitioners are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and resolution of October 5,
2006 are AFFIRMED.
SO ORDERED.
G.R. No. 198075 September 4, 2013
KOPPEL, INC. (formerly known as KPL AIRCON, INC.), Petitioner,
vs.
MAKATI ROTARY CLUB FOUNDATION, INC., Respondent.
DECISION
PEREZ, J.:
This case is an appeal1 from the Decision2 dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No.
116865.
The facts:
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products, was the registered owner of a
parcel of land located at Km. 16, South Superhighway, Parañaque City (subject land).3 Within the subject land are
buildings and other improvements dedicated to the business of FKI.4
In 1975,FKI5bequeathed the subject land (exclusive of the improvements thereon) in favor of herein respondent
Makati Rotary Club Foundation, Incorporated by way of a conditional donation.6 The respondent accepted the
donation with all of its conditions.7 On 26 May1975, FKI and the respondent executed a Deed of
Donation8evidencing their consensus.
The Lease and the Amended Deed of Donation
One of the conditions of the donation required the respondent to lease the subject land back to FKI under terms
specified in their Deed of Donation.9 With the respondent’s acceptance of the donation, a lease agreement
between FKI and the respondent was, therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation , were as follows:
1. The period of the lease is for twenty-five (25) years,10 or until the 25th of May 2000;
2. The amount of rent to be paid by FKI for the first twenty-five (25) years is ₱40,126.00 per annum .11
The Deed of Donation also stipulated that the lease over the subject property is renewable for another period of
twenty-five (25) years " upon mutual agreement" of FKI and the respondent.12 In which case, the amount of rent
shall be determined in accordance with item 2(g) of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual agreement and in case of disagreement the
matter shall be referred to a Board of three Arbitrators appointed and with powers in accordance with the
Arbitration Law of the Philippines, Republic Act 878, whose function shall be to decide the current fair market
value of the land excluding the improvements, provided, that, any increase in the fair market value of the land
shall not exceed twenty five percent (25%) of the original value of the land donated as stated in paragraph 2(c) of
this Deed. The rental for the second 25 years shall not exceed three percent (3%) of the fair market value of the
land excluding the improvements as determined by the Board of Arbitrators.13
In October 1976, FKI and the respondent executed an Amended Deed of Donation14 that reiterated the
provisions of the Deed of Donation , including those relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of Donation and Amended Deed of Donation , FKI
was able to continue in its possession and use of the subject land.
2000 Lease Contract
Two (2) days before the lease incorporated in the Deed of Donation and Amended Deed of Donation was set to
expire, or on 23 May 2000, FKI and respondent executed another contract of lease ( 2000 Lease Contract
)15covering the subject land. In this 2000 Lease Contract, FKI and respondent agreed on a new five-year lease to
take effect on the 26th of May 2000, with annual rents ranging from ₱4,000,000 for the first year up to
₱4,900,000 for the fifth year.16 The 2000 Lease Contract also contained an arbitration clause enforceable in the
event the parties come to disagreement about the" interpretation, application and execution" of the lease, viz :
19. Governing Law – The provisions of this 2000 Lease Contract shall be governed, interpreted and construed in
all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2000 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and respondent.17 (Emphasis
supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to renew their lease for another five (5) years.
This new lease (2005 Lease Contract )18 required FKI to pay a fixed annual rent of ₱4,200,000.19 In addition to
paying the fixed rent, however, the 2005 Lease Contract also obligated FKI to make a yearly " donation " of
money to the respondent.20 Such donations ranged from ₱3,000,000 for the first year up to ₱3,900,000for the
fifth year.21 Notably, the 2005 Lease Contract contained an arbitration clause similar to that in the 2000 Lease
Contract, to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and construed in
all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and respondent.22 (Emphasis
supplied)
The Assignment and Petitioner’s Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and " donations "due it per the 2005 Lease Contract.23 But in
June of 2008, FKI sold all its rights and properties relative to its business in favor of herein petitioner Koppel,
Incorporated.24 On 29 August 2008, FKI and petitioner executed an Assignment and Assumption of Lease and
Donation25 —wherein FKI, with the conformity of the respondent, formally assigned all of its interests and
obligations under the Amended Deed of Donation and the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and " donation " under the 2005 Lease
Contract.
Petitioner’s refusal to pay such rent and "donation " emanated from its belief that the rental stipulations of the
2005 Lease Contract, and even of the 2000 Lease Contract, cannot be given effect because they violated one of
the" material conditions " of the donation of the subject land, as stated in the Deed of Donation and Amended
Deed of Donation.26
According to petitioner, the Deed of Donation and Amended Deed of Donation actually established not only one
but two (2) lease agreements between FKI and respondent, i.e. , one lease for the first twenty-five (25)years or
from 1975 to 2000, and another lease for the next twenty-five (25)years thereafter or from 2000 to 2025. 27
Both leases are material conditions of the donation of the subject land.
Petitioner points out that while a definite amount of rent for the second twenty-five (25) year lease was not
fixed in the Deed of Donation and Amended Deed of Donation , both deeds nevertheless prescribed rules and
limitations by which the same may be determined. Such rules and limitations ought to be observed in any
succeeding lease agreements between petitioner and respondent for they are, in themselves, material
conditions of the donation of the subject land.28
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended Deed of Donation that
supposedly limits the amount of rent for the lease over the second twenty-five (25) years to only " three percent
(3%) of the fair market value of the subject land excluding the improvements.29
For petitioner then, the rental stipulations of both the 2000 Lease Contract and 2005 Lease Contract cannot be
enforced as they are clearly, in view of their exorbitant exactions, in violation of the aforementioned threshold in
item 2(g) of the Deed of Donation and Amended Deed of Donation . Consequently, petitioner insists that the
amount of rent it has to pay thereon is and must still be governed by the limitations prescribed in the Deed of
Donation and Amended Deed of Donation.30
The Demand Letters
On 1 June 2009, respondent sent a letter (First Demand Letter)31 to petitioner notifying the latter of its default "
per Section 12 of the 2005 Lease Contract " and demanding for the settlement of the rent and " donation " due
for the year 2009. Respondent, in the same letter, further intimated of canceling the 2005 Lease Contract should
petitioner fail to settle the said obligations.32 Petitioner received the First Demand Letter on2 June 2009.33
On 22 September 2009, petitioner sent a reply34 to respondent expressing its disagreement over the rental
stipulations of the 2005 Lease Contract — calling them " severely disproportionate," "unconscionable" and "in
clear violation to the nominal rentals mandated by the Amended Deed of Donation." In lieu of the amount
demanded by the respondent, which purportedly totaled to ₱8,394,000.00, exclusive of interests, petitioner
offered to pay only ₱80,502.79,35 in accordance with the rental provisions of the Deed of Donation and Amended
Deed of Donation.36 Respondent refused this offer.37
On 25 September 2009, respondent sent another letter (Second Demand Letter)38 to petitioner, reiterating its
demand for the payment of the obligations already due under the 2005 Lease Contract. The Second Demand
Letter also contained a demand for petitioner to " immediately vacate the leased premises " should it fail to pay
such obligations within seven (7) days from its receipt of the letter.39 The respondent warned of taking " legal
steps " in the event that petitioner failed to comply with any of the said demands.40 Petitioner received the
Second Demand Letter on 26September 2009.41
Petitioner refused to comply with the demands of the respondent. Instead, on 30 September 2009, petitioner
filed with the Regional Trial Court (RTC) of Parañaque City a complaint42 for the rescission or cancellation of the
Deed of Donation and Amended Deed of Donation against the respondent. This case is currently pending before
Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case43 against the petitioner before the Metropolitan
Trial Court (MeTC) of Parañaque City. The ejectment case was raffled to Branch 77 and was docketed as Civil
Case No. 2009-307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.44 In it, petitioner reiterated its
objection over the rental stipulations of the 2005 Lease Contract for being violative of the material conditions of
the Deed of Donation and Amended Deed of Donation.45 In addition to the foregoing, however, petitioner also
interposed the following defenses:
1. The MeTC was not able to validly acquire jurisdiction over the instant unlawful detainer case in view
of the insufficiency of respondent’s demand.46 The First Demand Letter did not contain an actual
demand to vacate the premises and, therefore, the refusal to comply there with does not give rise to
an action for unlawful detainer.47
2. Assuming that the MeTC was able to acquire jurisdiction, it may not exercise the same until the
disagreement between the parties is first referred to arbitration pursuant to the arbitration clause of
the 2005 Lease Contract.48
3. Assuming further that the MeTC has jurisdiction that it can exercise, ejectment still would not lie as
the 2005 Lease Contract is void abinitio.49 The stipulation in the 2005 Lease Contract requiring
petitioner to give yearly " donations " to respondent is a simulation, for they are, in fact, parts of the
rent. 50 Such grants were only denominated as " donations " in the contract so that the respondent—
anon-stock and non-profit corporation—could evade payment of the taxes otherwise due thereon.51
In due course, petitioner and respondent both submitted their position papers, together with their other
documentary evidence.52 Remarkably, however, respondent failed to submit the Second Demand Letter as part
of its documentary evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment53 in favor of the petitioner. While the MeTC refused to dismiss
the action on the ground that the dispute is subject to arbitration, it nonetheless sided with the petitioner with
respect to the issues regarding the insufficiency of the respondent’s demand and the nullity of the 2005 Lease
Contract.54The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without pronouncement as to costs.
SO ORDERED.55
The respondent appealed to the Regional Trial Court (RTC). This appeal was assigned to Branch 274 of the RTC of
Parañaque City and was docketed as Civil Case No. 10-0255.
On 29 October 2010, the RTC reversed56 the MeTC and ordered the eviction of the petitioner from the subject
land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the Metropolitan Trial Court, Branch
77, Parañaque City, is hereby reversed, judgment is thus rendered in favor of the plaintiff-appellant and against
the defendant-appellee, and ordering the latter –
(1) to vacate the lease[d] premises made subject of the case and to restore the possession thereof to
the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty Two Thousand
Four Hundred Thirty Six Pesos (₱9,362,436.00), penalties and net of 5% withholding tax, for the lease
period from May 25, 2009 to May 25, 2010 and such monthly rental as will accrue during the pendency
of this case;
(3) to pay attorney’s fees in the sum of ₱100,000.00 plus appearance fee of ₱3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-appellee, as these were built in good faith, the
provisions of Art. 1678of the Civil Code shall apply.
SO ORDERED.57
The ruling of the RTC is premised on the following ratiocinations:
1. The respondent had adequately complied with the requirement of demand as a jurisdictional
precursor to an unlawful detainer action.58 The First Demand Letter, in substance, contains a demand
for petitioner to vacate when it mentioned that it was a notice " per Section12 of the 2005 Lease
Contract."59 Moreover, the issue of sufficiency of the respondent’s demand ought to have been laid to
rest by the Second Demand Letter which, though not submitted in evidence, was nonetheless admitted
by petitioner as containing a" demand to eject " in its Answer with Compulsory Counterclaim.60
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the
same time, impugn such contract’s validity.61 Even assuming that it can, petitioner still did not file a
formal application before the MeTC so as to render such arbitration clause operational.62 At any rate,
the MeTC would not be precluded from exercising its jurisdiction over an action for unlawful detainer,
over which, it has exclusive original jurisdiction.63
3. The 2005 Lease Contract must be sustained as a valid contract since petitioner was not able to
adduce any evidence to support its allegation that the same is void.64 There was, in this case, no
evidence that respondent is guilty of any tax evasion.65
Aggrieved, the petitioner appealed to the Court of Appeals.
On 19 August 2011, the Court of Appeals affirmed66 the decision of the RTC:
WHEREFORE , the petition is DENIED . The assailed Decision of the Regional Trial Court of Parañaque City, Branch
274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx
SO ORDERED.67
Hence, this appeal.
On 5 September 2011, this Court granted petitioner’s prayer for the issuance of a Temporary Restraining
Order68staying the immediate implementation of the decisions adverse to it.
OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all erred in overlooking the
significance of the arbitration clause incorporated in the 2005 Lease Contract . As the Court sees it, that is a fatal
mistake.
For this reason, We grant the petition.
Present Dispute is Arbitrable Under the
Arbitration Clause of the 2005 Lease
Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the petitioner and respondent
emanates from the rental stipulations of the 2005 Lease Contract. The respondent insists upon the enforce
ability and validity of such stipulations, whereas, petitioner, in substance, repudiates them. It is from petitioner’s
apparent breach of the 2005 Lease Contract that respondent filed the instant unlawful detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute between the petitioner and
respondent arose from the application or execution of the 2005 Lease Contract . Undoubtedly, such kinds of
dispute are covered by the arbitration clause of the 2005 Lease Contract to wit:
19. Governing Law – The provisions of this 2005 Lease Contract shall be governed, interpreted and construed in
all aspects in accordance with the laws of the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this 2005 Lease Contract shall be
submitted to a board of three (3) arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding upon FKI and respondent.69 (Emphasis
supplied)
The arbitration clause of the 2005 Lease Contract stipulates that "any disagreement" as to the " interpretation,
application or execution " of the 2005 Lease Contract ought to be submitted to arbitration.70 To the mind of this
Court, such stipulation is clear and is comprehensive enough so as to include virtually any kind of conflict or
dispute that may arise from the 2005 Lease Contract including the one that presently besets petitioner and
respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case carries with it certain legal
effects. However, before discussing what these legal effects are, We shall first deal with the challenges posed
against the application of such arbitration clause.
Challenges Against the Application of the
Arbitration Clause of the 2005 Lease
Contract
Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract, the petitioner, as well as the
MeTC, RTC and the Court of Appeals, vouched for the non-application of the same in the instant case. A plethora
of arguments was hurled in favor of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were offered against the application
of the arbitration clause of the 2005 Lease Contract:
1. The disagreement between the petitioner and respondent is non-arbitrable as it will inevitably touch
upon the issue of the validity of the 2005 Lease Contract.71 It was submitted that one of the reasons
offered by the petitioner in justifying its failure to pay under the 2005 Lease Contract was the nullity of
such contract for being contrary to law and public policy.72 The Supreme Court, in Gonzales v. Climax
Mining, Ltd.,73 held that " the validity of contract cannot be subject of arbitration proceedings " as such
questions are " legal in nature and require the application and interpretation of laws and jurisprudence
which is necessarily a judicial function ." 74
2. The petitioner cannot validly invoke the arbitration clause of the 2005 Lease Contract while, at the
same time, impugn such contract’s validity.75
3. Even assuming that it can invoke the arbitration clause whilst denying the validity of the 2005 Lease
Contract , petitioner still did not file a formal application before the MeTC so as to render such
arbitration clause operational.76 Section 24 of Republic Act No. 9285 requires the party seeking
arbitration to first file a " request " or an application therefor with the court not later than the
preliminary conference.77
4. Petitioner and respondent already underwent Judicial Dispute Resolution (JDR) proceedings before
the RTC.78 Hence, a further referral of the dispute to arbitration would only be circuitous.79 Moreover,
an ejectment case, in view of its summary nature, already fulfills the prime purpose of arbitration, i.e. ,
to provide parties in conflict with an expedient method for the resolution of their dispute.80 Arbitration
then would no longer be necessary in this case.81
None of the arguments have any merit.
First. As highlighted in the previous discussion, the disagreement between the petitioner and respondent falls
within the all-encompassing terms of the arbitration clause of the 2005 Lease Contract. While it may be
conceded that in the arbitration of such disagreement, the validity of the 2005 Lease Contract, or at least, of
such contract’s rental stipulations would have to be determined, the same would not render such disagreement
non-arbitrable. The quotation from Gonzales that was used to justify the contrary position was taken out of
context. A rereading of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of the Mines and Geosciences
Bureau (PA-MGB) seeking the nullification of a Financial Technical Assistance Agreement and other mining
related agreements entered into by private parties.82
Grounds invoked for the nullification of such agreements include fraud and unconstitutionality.83 The pivotal
issue that confronted the Court then was whether the PA-MGB has jurisdiction over that particular arbitration
complaint. Stated otherwise, the question was whether the complaint for arbitration raises arbitrable issues that
the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid of any jurisdiction to take
cognizance of the complaint for arbitration, this Court pointed out to the provisions of R.A. No. 7942, or the
Mining Act of 1995, which granted the PA-MGB with exclusive original jurisdiction only over mining disputes, i.e.,
disputes involving " rights to mining areas," "mineral agreements or permits," and " surface owners, occupants,
claim holders or concessionaires" requiring the technical knowledge and experience of mining authorities in
order to be resolved.84 Accordingly, since the complaint for arbitration in Gonzales did not raise mining disputes
as contemplated under R.A. No. 7942 but only issues relating to the validity of certain mining related
agreements, this Court held that such complaint could not be arbitrated before the PA-MGB.85 It is in this context
that we made the pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a disagreement between the parties as to
some provisions of the contract between them, which needs the interpretation and the application of that
particular knowledge and expertise possessed by members of that Panel. It is not proper when one of the parties
repudiates the existence or validity of such contract or agreement on the ground of fraud or oppression as in this
case. The validity of the contract cannot be subject of arbitration proceedings. Allegations of fraud and duress in
the execution of a contract are matters within the jurisdiction of the ordinary courts of law. These questions are
legal in nature and require the application and interpretation of laws and jurisprudence which is necessarily a
judicial function.86 (Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for arbitration on the ground that the
issue raised therein, i.e. , the validity of contracts, is per se non-arbitrable. The real consideration behind the
ruling was the limitation that was placed by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an arbitral
body . Gonzales rejected the complaint for arbitration because the issue raised therein is not a mining dispute
per R.A. No. 7942 and it is for this reason, and only for this reason, that such issue is rendered non-arbitrable
before the PA-MGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PA-MGB only to
mining disputes.87
Much more instructive for our purposes, on the other hand, is the recent case of Cargill Philippines, Inc. v. San
Fernando Regal Trading, Inc.88 In Cargill , this Court answered the question of whether issues involving the
rescission of a contract are arbitrable. The respondent in Cargill argued against arbitrability, also citing therein
Gonzales . After dissecting Gonzales , this Court ruled in favor of arbitrability.89 Thus, We held:
Respondent contends that assuming that the existence of the contract and the arbitration clause is conceded,
the CA's decision declining referral of the parties' dispute to arbitration is still correct. It claims that its complaint
in the RTC presents the issue of whether under the facts alleged, it is entitled to rescind the contract with
damages; and that issue constitutes a judicial question or one that requires the exercise of judicial function and
cannot be the subject of an arbitration proceeding. Respondent cites our ruling in Gonzales, wherein we held
that a panel of arbitrator is bereft of jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to the execution of the addendum
contract and the other contracts emanating from it, and that the complaint should have been filed with the
regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on the Gonzales case to support its
argument.90(Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract notwithstanding the fact
that it assails the validity of such contract. This is due to the doctrine of separability. 91
Under the doctrine of separability, an arbitration agreement is considered as independent of the main
contract.92Being a separate contract in itself, the arbitration agreement may thus be invoked regardless of the
possible nullity or invalidity of the main contract.93
Once again instructive is Cargill, wherein this Court held that, as a further consequence of the doctrine of
separability, even the very party who repudiates the main contract may invoke its arbitration clause.94
Third . The operation of the arbitration clause in this case is not at all defeated by the failure of the petitioner to
file a formal "request" or application therefor with the MeTC. We find that the filing of a "request" pursuant to
Section 24 of R.A. No. 9285 is not the sole means by which an arbitration clause may be validly invoked in a
pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration . - A court before which an action is brought in a matter which is the subject
matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial conference,
or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration
agreement is null and void, inoperative or incapable of being performed. [Emphasis ours; italics original]
The " request " referred to in the above provision is, in turn, implemented by Rules 4.1 to 4.3 of A.M. No. 07-11-
08-SC or the Special Rules of Court on Alternative Dispute Resolution (Special ADR Rules):
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending action filed in violation of the arbitration agreement,
whether contained in an arbitration clause or in a submission agreement, may request the court to refer the
parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists before the action is filed . - The
request for referral shall be made not later than the pre-trial conference. After the pre-trial conference, the
court will only act upon the request for referral if it is made with the agreement of all parties to the case.
(B) Submission agreement . - If there is no existing arbitration agreement at the time the case is filed but the
parties subsequently enter into an arbitration agreement, they may request the court to refer their dispute to
arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a motion, which shall state that
the dispute is covered by an arbitration agreement.
A part from other submissions, the movant shall attach to his motion an authentic copy of the arbitration
agreement.
The request shall contain a notice of hearing addressed to all parties specifying the date and time when it would
be heard. The party making the request shall serve it upon the respondent to give him the opportunity to file a
comment or opposition as provided in the immediately succeeding Rule before the hearing. [Emphasis ours;
italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1.It reads: "a party to a pending action filed in
violation of the arbitration agreement x x x may request the court to refer the parties to arbitration in
accordance with such agreement."
In using the word " may " to qualify the act of filing a " request " under Section 24 of R.A. No. 9285, the Special
ADR Rules clearly did not intend to limit the invocation of an arbitration agreement in a pending suit solely via
such "request." After all, non-compliance with an arbitration agreement is a valid defense to any offending suit
and, as such, may even be raised in an answer as provided in our ordinary rules of procedure.95
In this case, it is conceded that petitioner was not able to file a separate " request " of arbitration before the
MeTC. However, it is equally conceded that the petitioner, as early as in its Answer with Counterclaim ,had
already apprised the MeTC of the existence of the arbitration clause in the 2005 Lease Contract96 and, more
significantly, of its desire to have the same enforced in this case.97 This act of petitioner is enough valid
invocation of his right to arbitrate. Fourth . The fact that the petitioner and respondent already under went
through JDR proceedings before the RTC, will not make the subsequent conduct of arbitration between the
parties unnecessary or circuitous. The JDR system is substantially different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early neutral evaluation which entails
the submission of a dispute before a " JDR judge " who shall merely " facilitate settlement " between the parties
in conflict or make a " non-binding evaluation or assessment of the chances of each party’s case." 98 Thus in JDR,
the JDR judge lacks the authority to render a resolution of the dispute that is binding upon the parties in conflict.
In arbitration, on the other hand, the dispute is submitted to an arbitrator/s —a neutral third person or a group
of thereof— who shall have the authority to render a resolution binding upon the parties.99
Clearly, the mere submission of a dispute to JDR proceedings would not necessarily render the subsequent
conduct of arbitration a mere surplusage. The failure of the parties in conflict to reach an amicable settlement
before the JDR may, in fact, be supplemented by their resort to arbitration where a binding resolution to the
dispute could finally be achieved. This situation precisely finds application to the case at bench.
Neither would the summary nature of ejectment cases be a valid reason to disregard the enforcement of the
arbitration clause of the 2005 Lease Contract . Notwithstanding the summary nature of ejectment cases,
arbitration still remains relevant as it aims not only to afford the parties an expeditious method of resolving their
dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost, a
product of party autonomy or the freedom of the parties to " make their own arrangements to resolve their own
disputes."100 Arbitration agreements manifest not only the desire of the parties in conflict for an expeditious
resolution of their dispute. They also represent, if not more so, the parties’ mutual aspiration to achieve such
resolution outside of judicial auspices, in a more informal and less antagonistic environment under the terms of
their choosing. Needless to state, this critical feature can never be satisfied in an ejectment case no matter how
summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of the 2005 Lease Agreement
in this case, We shall now proceed with the discussion of its legal effects.
Legal Effect of the Application of the
Arbitration Clause
Since there really are no legal impediments to the application of the arbitration clause of the 2005 Contract of
Lease in this case, We find that the instant unlawful detainer action was instituted in violation of such clause. The
Law, therefore, should have governed the fate of the parties and this suit:
R.A. No. 876 Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue arising out of an
agreement providing for the arbitration thereof, the court in which such suit or proceeding is pending, upon
being satisfied that the issue involved in such suit or proceeding is referable to arbitration, shall stay the action
or proceeding until an arbitration has been had in accordance with the terms of the agreement: Provided, That
the applicant for the stay is not in default in proceeding with such arbitration.[Emphasis supplied]
R.A. No. 9285
Section 24. Referral to Arbitration. - A court before which an action is brought in a matter which is the subject
matter of an arbitration agreement shall, if at least one party so requests not later that the pre-trial conference,
or upon the request of both parties thereafter, refer the parties to arbitration unless it finds that the arbitration
agreement is null and void, in operative or incapable of being performed. [Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been stayed;101 the petitioner and
the respondent should have been referred to arbitration pursuant to the arbitration clause of the 2005 Lease
Contract . The MeTC, however, did not do so in violation of the law—which violation was, in turn, affirmed by
the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos.876 and 9285 renders invalid all proceedings it
undertook in the ejectment case after the filing by petitioner of its Answer with Counterclaim —the point when
the petitioner and the respondent should have been referred to arbitration. This case must, therefore, be
remanded to the MeTC and be suspended at said point. Inevitably, the decisions of the MeTC, RTC and the Court
of Appeals must all be vacated and set aside.
The petitioner and the respondent must then be referred to arbitration pursuant to the arbitration clause of the
2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about to make. Nonetheless, this
Court must make the same if only to stress the point that, in our jurisdiction, bona fide arbitration agreements
are recognized as valid;102 and that laws,103 rules and regulations104 do exist protecting and ensuring their
enforcement as a matter of state policy. Gone should be the days when courts treat otherwise valid arbitration
agreements with disdain and hostility, if not outright " jealousy,"105 and then get away with it. Courts should
instead learn to treat alternative means of dispute resolution as effective partners in the administration of
justice and, in the case of arbitration agreements, to afford them judicial restraint.106 Today, this Court only
performs its part in upholding a once disregarded state policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of Parañaque City, a complaint 107 for
the rescission or cancellation of the Deed of Donation and Amended Deed of Donation against the respondent.
The case is currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 09-0346.
This Court recognizes the great possibility that issues raised in Civil Case No. CV 09-0346 may involve matters
that are rightfully arbitrable per the arbitration clause of the 2005 Lease Contract. However, since the records of
Civil Case No. CV 09-0346 are not before this Court, We can never know with true certainty and only speculate.
In this light, let a copy of this Decision be also served to Branch 257of the RTC of Parañaque for its consideration
and, possible, application to Civil Case No. CV 09-0346.
WHEREFORE, premises considered, the petition is hereby GRANTED . Accordingly, We hereby render a Decision:
1. SETTING ASIDE all the proceedings undertaken by the Metropolitan Trial Court, Branch 77, of
Parañaque City in relation to Civil Case No. 2009-307 after the filing by petitioner of its Answer with
Counterclaim ;
 2. REMANDING the instant case to the MeTC, SUSPENDED at the point after the filing by petitioner of
its Answer with Counterclaim;

3. SETTING ASIDE the following:

a. Decision dated 19 August 2011 of the Court of Appeals in C.A.-G.R. SP No. 116865,

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

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

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

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

No costs.

SO ORDERED.