In reply to said opposition, SPI insisted that there was such an arbitration clause in the
THIRD DIVISION
[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.
DECISION
ROMERO, J.:
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 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 parties.
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.
Narvasa, C.J., (Chairman), Kapunan, and Purisima, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 107918 June 14, 1994
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, HON. MARINA L. BUZON, as Presiding Judge of RTC,
Quezon City, MM, Br. 91, VISITACION SERRA FLORES RTC, Quezon City, MM, Br. 91, MA.
ASUNCION FLORES, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO., SECURITY BANK & TRUST CO. and CITYTRUST BANKING
CORPORATION, respondents.
Soluta, Leonidas, Marifosque, Balce, Santiago & Aguila Law Office for petitioner.
Rector Law Office for respondent Flores.
Balgos and Perez Law Office for respondent PCIB.
Dumaraos, Oracion, Panganiban & Associates for respondent FEBTC.
Cauton, Banares, Carpio, Ishiwata and Associates for respondent SBTC.
Gonzaga, Soneja and Gale Law Offices for respondent Citytrust.
KAPUNAN, J.:
This is a petition for review on certiorari seeking the reversal of the decision of the Court of Appeals
on November 18, 1992 affirming in toto the Order of the Regional Trial Court of Quezon City,
Branch 91 dismissing the petitioner’s third-party complaint against private respondent banks for
lack of jurisdiction.
The facts of the case, as found by both the trial court and the Court of Appeals are undisputed:
In a complaint for Violation of the Negotiable Instrument Law and Damages,
plaintiffs 1 seek the recovery of the amount of P900,913.60 which defendant
bank 2 charged against their current account by virtue of the sixteen (16)
checks drawn by them despite the apparent alterations therein with respect
to the name of the payee, that is, the name Filipinas Shell was erased and
substituted with Ever Trading and DBL Trading by their supervisor Jeremias
Cabrera, without their knowledge and consent.
Answering the complaint, defendant bank claimed that the subject checks
appeared to have been regularly issued and free from any irregularity which
would excite or arouse any suspicion or warrant their dishonor when the same
were negotiated and honored by it; that it observed and exercised the
required diligence, care and the prescribed standard verification procedures
before finally accepting and honoring the subject checks and that the
proximate cause of plaintiffs’ loss, if any, was their own laxity, negligence and
lack of control, due care and diligence in the conduct of their business affairs.
With leave of court, defendant bank filed a Third-Party Complaint against
Philippine Commercial International Bank, Far East Bank & Trust Company,
Security Bank and Trust Company and Citytrust Banking Corporation for
reimbursement, contribution, indemnity from said third-party defendants for
being the collecting banks of the subject checks and by virtue of their bank
guarantee for all checks sent for clearing to the Philippine Clearing House
Corporation (PCHC), as provided for in Section 17, (PCHC), as provided for
in Section 17, PCHC Clearing House Rules and Regulations.
In its Answer to the Third-Party Complaint, Citytrust Banking Corporation
averred that the subject checks appeared to be complete and regular on their
face with no indication that an original payee’s name was erased and
superimposed with another; that plaintiffs’ fault and negligence in failing to
examine their monthly bank statements, together with the returned checks
and their own check stubs, put them under estoppel and cannot recover the
proceeds of the checks against it, an innocent third-party, and plaintiff must
suffer the loss as their negligence was the proximate cause thereof; and that
third party plaintiff is barred from recovering from it base on the provisions of
Sections 20 and 21 of the Philippine Clearing Rules and Regulations.
Philippine Commercial International Bank alleged that the subject check was
complete and regular on its face and was paid by it only upon presentment to
the drawee bank for clearing who, upon examination thereof, found the same
to be complete and regular on its face; that it was only after said check was
cleared by third-party plaintiff for payment that it allowed the payee to
withdraw the proceeds of the check from its account; that the cause of action
of the third-party plaintiff is barred by estoppel and/or laches for its failure to
return the check to it within the period provided for under Clearing House
Rules and Regulations; that this Court has no jurisdiction over the suit as it
and third-party plaintiff are members of the Philippine Clearing House and
bound by the Rules and Regulations thereof providing for arbitration.
A Motion To Dismiss was filed by Security Bank and Trust Company on the
grounds that third-party plaintiff failed to resort to arbitration as provided for
in Section 36 of the Clearing House Rules and Regulations of the Philippine
Clearing House Corporation, and that it was released from any liability with
the acceptance by third-party plaintiff of the subject check.
The record does not show of any Answer to the Third-Party Complaint having
been filed by Far East Bank & Trust Company, although a "Reply To FEBTC
Answer" was filed by third-party plaintiff.
On the other hand, third-party plaintiff maintains that this Court has
jurisdiction over the suit as the provisions of the Clearing House Rules and
Regulations are applicable only if the suit or action is between participating
member banks, whereas the plaintiffs are private persons and the third-party
complaint between participating member banks is only a consequence of the
original action initiated by the plaintiffs. 3
The trial court dismissed the third-party complaint for lack of jurisdiction citing Section 36 of the
Clearing House Rules and Regulations of the PCHC providing for settlement of disputes and
controversies involving any check or item cleared through the body with the PCHC. It ruled —
citing the Arbitration Rules of Procedure — that the decision or award of the PCHC through its
arbitration committee/arbitrator is appealable only on questions of law to any of the Regional Trial
Courts in the National Capital Region where the head office of any of the parties is located. 4
On the plaintiffs’ contention that jurisdiction vests with the court only if the suit or action is between
participating member banks without the involvement of private parties the trial court held:
The third-party complaint concerning a dispute or controversy among clearing
participants involving the subject checks cleared through PCHC is actually
independent of, separate and distinct from the plaintiff’s complaint. . . .
xxx xxx xxx
As the plaintiffs are not parties to the third party complaint, the provisions of
the clearing house rules and regulations on arbitration are, therefore,
 applicable to Third-Party plaintiff and third party defendant. Consequently this
court has no jurisdiction over the third party complaint. 5
After the trial court denied plaintiffs Motion for Reconsideration, 6 petitioner appealed to the Court
of Appeals which promulgated the challenged decision on November 18, 1992 dismissing the
petition for lack of merit.
Undaunted, petitioner is now before this Court seeking a review of respondent court’s decision on
a lone assignment of error:
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER DRAWEE BANK’S THIRD PARTY COMPLAINT AGAINST
PRIVATE RESPONDENT COLLECTING BANKS FALL WITHIN THE
JURISDICTION OF THE PCHC AND NOT THE REGULAR COURT.
for resolving disputes and controversies involving checks and other clearing items when it held
that "the participation of two banks. . . in the Clearing Operations of the PCHC (was) a
manifestation of its submission to its jurisdiction." 9
The applicable PCHC provisions on the question of jurisdiction provide:
Sec. 3 — AGREEMENT TO THESE RULES
It is the general agreement and understanding, that any participant in the
PCHC MICR clearing operations, by the mere act of participation, thereby
manifests its agreement to these Rules and Regulations, and its subsequent
amendments.
xxx xxx xxx

We find no merit in the petition.

Sec. 36 — ARBITRATION

The Clearing House Rules and Regulations on Arbitration of the Philippine Clearing House
36.1 Any dispute or controversy between two or more clearing participants
Corporation are clearly applicable to petitioner and private respondents, third party plaintiff and
involving any check/item cleared thru PCHC shall be submitted to the
defendants, respectively, in the court below. Petitioner Associated Bank’s third party complaint in
Arbitration Committee, upon written complaint of any involved participant by
the trial court was one for reimbursement, contribution and indemnity against the Philippine
filing the same with the PCHC serving the same upon the other party or
Commercial and Industrial Bank (PCIB), the Far East Bank and Trust, Co. (FEBTC), Security Bank
parties, who shall within fifteen (15) days after receipt thereof, file with the
and Trust Co. (SBTC), and the CityTrust Banking Corporation (CTBC), in connection with
Arbitration Committee its written answer to such written complaint and also
petitioner’s having honored sixteen checks which said respondent banks supposedly endorsed to
within the same period serve the same upon the complaining participant. This
the former for collection in 1989. Under the rules and regulations of the Philippine Clearing House
period of fifteen (15) days may be extended by the Committee not more than
Corporation (PCHC), the mere act of participation of the parties concerned in its operations in
once for another period of fifteen (15) days, but upon agreement in writing of
effect amounts to a manifestation of agreement by the parties to abide by its rules and
the complaining party, said extension may be for such period as the latter
regulations. 7 As a consequence of such participation, a party cannot invoke the jurisdiction of the
may agree to.
courts over disputes and controversies which fall under the PCHC Rules and Regulations without
first going through the arbitration processes laid out by the body. Since claims relating to the
regularity of checks cleared by banking institutions are among those claims which should first be Section 36.6 is even more emphatic:
submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated Bank, having
voluntarily bound itself to abide by such rules and regulations, is estopped from seeking relief from
the Regional Trial Court on the coattails of a private claim and in the guise of a third party complaint 36.6 The fact that a bank participates in the clearing operations of PCHC shall
without first having obtained a decision adverse to its claim from the said body. It cannot bypass be deemed its written and subscribed consent to the binding effect of this
arbitration agreement as if it had done so in accordance with Section 4 of the
the arbitration process on the basis of its averment that its third party complaint is inextricably
Republic Act No. 876 otherwise known as the Arbitration Law.
linked to the original complaint in the Regional Trial Court.

Under its Articles of Incorporation, the PCHC provides "an effective, convenient, efficient,
economical and relevant exchange and facilitate service limited to check processing and sorting
by way of assisting member banks, entities in clearing checks and other clearing items as defined
and existing in future Central Bank of the Philippines Circulars, memoranda, circular letters rules
and regulations and policies in pursuance of Section 107 of RA 265." Pursuant to its function
involving the clearing of checks and other clearing items, the PCHC has adopted rules and
regulations designed to provide member banks with a procedure whereby disputes involving the
clearance of checks and other negotiable instruments undergo a process of arbitration prior to
submission to the courts below. This procedure not only ensures a uniformity of rulings relating to
factual disputes involving checks and other negotiable instruments but also provides a mechanism
for settling minor disputes among participating and member banks which would otherwise go
directly to the trial courts. While the PCHC Rules and Regulations allow appeal to the Regional
Trial Courts only on questions of law, this does not preclude our lower courts from dealing with
questions of fact already decided by the PCHC arbitration when warranted and appropriate.
In Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation 8 this Court had
the occasion to rule on the validity of these rules as well as the jurisdiction of the PCHC as a forum
Thus, not only do the parties manifest by mere participation their consent to these rules, but such
participation is deemed (their) written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant subject to the Clearing House Rules
and Regulations of the PCHC may go on appeal to any of the Regional Trial Courts in the National
Capital Region where the head office of any of the parties is located only after a decision or award
has been rendered by the arbitration committee or arbitrator on questions of law. 10
Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to the
arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to do so.
The jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is particularly
applicable to all the parties in the third party complaint under their obligation to first seek redress
of their disputes and grievances with the PCHC before going to the trial court.
Finally, the contention that the third party complaint should not have been dismissed for being a
necessary and inseparable offshoot of the main case over which the court a quo had already
exercised jurisdiction misses the fundamental point about such pleading. A third party complaint
is a mere procedural device which under the Rules of Court is allowed only with the court’s
permission. It is an action "actually independent of, separate and distinct from the plaintiffs’ Petitioners assert that the relationship between respondents and the individual sugar
complaint" (s)uch that, were it not for the Rules of Court, it would be necessary to file the action planters is governed by milling contracts. To buttress this claim, petitioners presented
separately from the original complaint by the defendant against the third party. 11 representative samples of the milling contracts.[3]

Notably, Article VII of the milling contracts provides that 34% of the sugar and molasses
IN VIEW OF THE FOREGOING, the petition is DENIED for lack of merit. With costs against
produced from milling the Planters sugarcane shall belong to the centrals (respondents) as
petitioner.
compensation, 65% thereof shall go to the Planter and the remaining 1% shall go the association
to which the Planter concerned belongs, as aid to the said association. The 1% aid shall be used
SO ORDERED. by the association for any purpose that it may deem fit for its members, laborers and their
dependents. If the Planter was not a member of any association, then the said 1% shall revert to
the centrals. Article XIV, paragraph B[4] states that the centrals may not, during the life of the milling
FIRST DIVISION contract, sign or execute any contract or agreement that will provide better or more benefits to a
Planter, without the written consent of the existing and recognized associations except to Planters
ORMOC SUGARCANE PLANTERS G.R. No. 156660 whose plantations are situated in areas beyond thirty (30) kilometers from the mill. Article XX
ASSOCIATION, INC. (OSPA),OCCIDENTAL provides that all differences and controversies which may arise between the parties concerning
LEYTE FARMERS MULTI-PURPOSE the agreement shall be submitted for discussion to a Board of Arbitration, consisting of five (5)
COOPERATIVE, INC. (OLFAMCA), memberstwo (2) of which shall be appointed by the centrals, two (2) by the Planter and the fifth to
UNIFARM MULTI-PURPOSE be appointed by the four appointed by the parties.
COOPERATIVE, INC. (UNIFARM) and Present:
ORMOC NORTH DISTRICT IRRIGATION On June 4, 1999, petitioners, without impleading any of their individual members, filed
MULTI-PURPOSE COOPERATIVE, INC. PUNO, C.J., Chairperson, twin petitions with the RTC for Arbitration under R.A. 876, Recovery of Equal Additional Benefits,
(ONDIMCO), CARPIO, Attorneys Fees and Damages, against HIDECO and OSCO, docketed as Civil Case Nos. 3696-
Petitioners, CORONA, O and 3697-O, respectively.
LEONARDO-DE CASTRO, and
-versus- BERSAMIN, JJ. Petitioners claimed that respondents violated the Milling Contract when they gave to
independent planters who do not belong to any association the 1% share, instead of reverting said
THE COURT OF APPEALS (Special Former share to the centrals. Petitioners contended that respondents unduly accorded the independent
Sixth Division), HIDECO SUGAR MILLING Planters more benefits and thus prayed that an order be issued directing the parties to commence
CO., INC., and ORMOC SUGAR MILLING with arbitration in accordance with the terms of the milling contracts. They also demanded that
CO., INC., respondents be penalized by increasing their member Planters 65% share provided in the milling
Respondents. contract by 1%, to 66%.
Promulgated:
Respondents filed a motion to dismiss on ground of lack of cause of action because
August 24, 2009 petitioners had no milling contract with respondents. According to respondents, only some eighty
(80) Planters who were members of OSPA, one of the petitioners, executed milling contracts.
Respondents and these 80 Planters were the signatories of the milling contracts. Thus, it was the
x----------------------------------------------------------------------------------------x individual Planters, and not petitioners, who had legal standing to invoke the arbitration clause in
the milling contracts. Petitioners, not being privy to the milling contracts, had no legal standing
DECISION whatsoever to demand or sue for arbitration.
LEONARDO-DE CASTRO, J.: On August 26, 1999, the RTC issued a Joint Order[5] denying the motion to dismiss,
declaring the existence of a milling contract between the parties, and directing respondents to
Before the Court is a special civil action for certiorari assailing the Decision [1] dated nominate two arbitrators to the Board of Arbitrators, to wit:
December 7, 2001 and the Resolution dated October 30, 2002 of the Court of Appeals (CA) in
CA-G.R. SP No. 56166 which set aside the Joint Orders[2] dated August 26, 1999 and October 29, When these cases were called for hearing today, counsels for the petitioners
1999 issued by the Regional Trial Court (RTC) of Ormoc City, Branch 12 upholding petitioners and respondents argued their respective stand. The Court is convinced that
legal personality to demand arbitration from respondents and directing respondents to nominate there is an existing milling contract between the petitioners and respondents
two arbitrators to represent them in the Board of Arbitrators. and these planters are represented by the officers of the associations. The
petitioners have the right to sue in behalf of the planters.
Petitioners are associations organized by and whose members are individual sugar
planters (Planters). The membership of each association follows: 264 Planters were members of This Court, acting on the petitions, directs the respondents to nominate two
OSPA; 533 Planters belong to OLFAMCA; 617 Planters joined UNIFARM; 760 Planters enlisted arbitrators to represent HIDECO/HISUMCO and OSCO in the Board of
with ONDIMCO; and the rest belong to BAP-MPC which did not join the lawsuit. Arbitrators within fifteen (15) days from receipt of this Order. xxx
Respondents Hideco Sugar Milling Co., Inc. (Hideco) and Ormoc Sugar Milling Co, Inc. However, if the respondents fail to nominate their two arbitrators, upon proper
(OSCO) are sugar centrals engaged in grinding and milling sugarcane delivered to them by motion by the petitioners, then the Court will be compelled to use its discretion
numerous individual sugar planters, who may or may not be members of an association such as
petitioners.
 to appoint the two (2) arbitrators, as embodied in the Milling Contract and R.A.
876.
xxx
Their subsequent motion for reconsideration having been denied by the RTC in its Joint
Order[6] dated October 29, 1999, respondents elevated the case to the CA through a Petition for
Certiorari with Prayer for the Issuance of Temporary Restraining Order and/or Writ of Preliminary
Injunction.
On December 7, 2001, the CA rendered its challenged Decision, setting aside the
assailed Orders of the RTC. The CA held that petitioners neither had an existing contract with
respondents nor were they privy to the milling contracts between respondents and the individual
Planters. In the main, the CA concluded that petitioners had no legal personality to bring the action
against respondents or to demand for arbitration.
Petitioners filed a motion for reconsideration, but it too was denied by the CA in its
Resolution[7] dated October 30, 2002. Thus, the instant petition.
At the outset, it must be noted that petitioners filed the instant petition for certiorari under
Rule 65 of the Rules of Court, to challenge the judgment of the CA. Section 1 of Rule 65 states:
Section 1. Petition for Certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial functions has acted without or in excess of
its jurisdiction, or with grave abuse of discretion amounting to lack or excess
of its or his jurisdiction and there is no appeal, or any plain, speedy and
adequate remedy in the course of law, a person aggrieved thereby may file
a verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or modifying the proceedings of
such tribunal, board or officer, and granting such incidental relief as law and
justice require. xxx xxx xxx (emphasis ours)
The instant recourse is improper because the resolution of the CA was a final order from which
the remedy of appeal was available under Rule 45 in relation to Rule 56. The existence and
availability of the right of appeal proscribes resort to certiorari because one of the requirements
for availment of the latter is precisely that there should be no appeal. It is elementary that for
certiorari to prosper, it is not enough that the trial court committed grave abuse of discretion
amounting to lack or excess of jurisdiction; the requirement that there is no appeal, nor any plain,
speedy and adequate remedy in the ordinary course of law must likewise be satisfied.[8] The proper
mode of recourse for petitioners was to file a petition for review of the CAs decision under Rule
45.
Petitioners principally argue that the CA committed a grave error in setting aside the
challenged Joint Orders of the RTC which allegedly unduly curtailed the right of petitioners to
represent their planters-members and enforce the milling contracts with respondents. Petitioners
assert the said which orders were issued in accordance with Article XX of the Milling Contract and
the applicable provisions of Republic Act (R.A.) No. 876.
Where the issue or question involved affects the wisdom or legal soundness of the
decision not the jurisdiction of the court to render said decision the same is beyond the province
of a special civil action for certiorari. Erroneous findings and conclusions do not render the
appellate court vulnerable to the corrective writ of certiorari. For where the court has jurisdiction
over the case, even if its findings are not correct, they would, at most constitute errors of law and
not abuse of discretion correctable by certiorari.[9]
Moreover, even if this Court overlooks the procedural lapse committed by petitioners
and decides this matter on the merits, the present petition will still not prosper.
Stripped to the core, the pivotal issue here is whether or not petitioners ― sugar
planters associations ― are clothed with legal personality to file a suit against, or demand
arbitration from, respondents in their own name without impleading the individual Planters.
On this point, we agree with the findings of the CA.
Section 2 of R.A. No. 876 (the Arbitration Law)[10] pertinently provides:
Sec. 2. Persons and matters subject to arbitration. Two or more
persons or parties may submit to the arbitration of one or more
arbitrators any controversy existing between them at the time of the
submission and which may be the subject of an action, or the parties to
any contract may in such contract agree to settle by arbitration a
controversy thereafter arising between them. Such submission or contract
shall be valid, enforceable and irrevocable, save upon such grounds as exist
at law for the revocation of any contract. xxx (Emphasis ours)
The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit
to arbitration some future dispute, usually stipulated upon in a civil contract between the parties,
and known as an agreement to submit to arbitration, and (b) an agreement submitting an existing
matter of difference to arbitrators, termed the submission agreement. Article XX of the milling
contract is an agreement to submit to arbitration because it was made in anticipation of a dispute
that might arise between the parties after the contracts execution.
Except where a compulsory arbitration is provided by statute, the first step toward the
settlement of a difference by arbitration is the entry by the parties into a valid agreement to
arbitrate. An agreement to arbitrate is a contract, the relation of the parties is contractual, and the
rights and liabilities of the parties are controlled by the law of contracts. [11] In an agreement for
arbitration, the ordinary elements of a valid contract must appear, including an agreement to
arbitrate some specific thing, and an agreement to abide by the award, either in express language
or by implication.
The requirements that an arbitration agreement must be written and subscribed by the
parties thereto were enunciated by the Court in B.F. Corporation v. CA.[12]
During the proceedings before the CA, it was established that there were more than two
thousand (2,000) Planters in the district at the time the case was commenced at the RTC in
1999. The CA further found that of those 2,000 Planters, only about eighty (80) Planters, who were
all members of petitioner OSPA, in fact individually executed milling contracts with
respondents. No milling contracts signed by members of the other petitioners were presented
before the CA.
By their own allegation, petitioners are associations duly existing and organized under
Philippine law, i.e. they have juridical personalities separate and distinct from that of their member
Planters. It is likewise undisputed that the eighty (80) milling contracts that were presented were
signed only by the member Planter concerned and one of the Centrals as parties. In other words,
none of the petitioners were parties or signatories to the milling contracts. This circumstance is
fatal to petitioners' cause since they anchor their right to demand arbitration from the respondent
sugar centrals upon the arbitration clause found in the milling contracts. There is no legal basis
for petitioners' purported right to demand arbitration when they are not parties to the milling
contracts, especially when the language of the arbitration clause expressly grants the right to
demand arbitration only to the parties to the contract.
Simply put, petitioners do not have any agreement to arbitrate with respondents. Only
eighty (80) Planters who were all members of OSPA were shown to have such an agreement to
arbitrate, included as a stipulation in their individual milling contracts. The other petitioners failed
to prove that any of their members had milling contracts with respondents, much less, that
respondents had an agreement to arbitrate with the petitioner associations themselves.

Even assuming that all the petitioners were able to present milling contracts in favor of
their members, it is undeniable that under the arbitration clause in these contracts it is the parties
thereto who have the right to submit a controversy or dispute to arbitration.
Section 4 of R.A. 876 provides:
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 to the jurisdiction of the Court of First
Instance of the province or city where any of the parties resides, to enforce
such contract of submission.
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. To subscribe means to write underneath, as ones name; to sign at the end
of a document. That word may sometimes be construed to mean to give consent to or to attest.[13]
Petitioners would argue that they could sue respondents, notwithstanding the fact that
they were not signatories in the milling contracts because they are the
recognized representatives of the Planters.
This claim has no leg to stand on since petitioners did not sign the milling contracts at
all, whether as a party or as a representative of their member Planters. The individual Planter and
the appropriate central were the only signatories to the contracts and there is no provision in the
milling contracts that the individual Planter is authorizing the association to represent him/her in a
legal action in case of a dispute over the milling contracts.
Moreover, even assuming that petitioners are indeed representatives of the member
Planters who have milling contracts with the respondents and assuming further that petitioners
signed the milling contracts as representatives of their members, petitioners could not initiate
arbitration proceedings in their own name as they had done in the present case. As mere agents,
they should have brought the suit in the name of the principals that they purportedly
represent. Even if Section 4 of R.A. No. 876 allows the agreement to arbitrate to be signed by a
representative, the principal is still the one who has the right to demand arbitration.
Indeed, Rule 3, Section 2 of the Rules of Court requires suits to be brought in the name
of the real party in interest, to wit:
Sec. 2. Parties in interest. A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the party
entitled to the avails of the suit. Unless otherwise authorized by law or these
Rules, every action must be prosecuted or defended in the name of the real
party in interest.
We held in Oco v. Limbaring[14] that:
As applied to the present case, this provision has two requirements: 1) to
institute an action, the plaintiff must be the real party in interest; and 2) the
action must be prosecuted in the name of the real party in
interest. Necessarily, the purposes of this provision are 1) to prevent the
prosecution of actions by persons without any right, title or interest in the
case; 2) to require that the actual party entitled to legal relief be the one to
prosecute the action; 3) to avoid a multiplicity of suits; and 4) to discourage
litigation and keep it within certain bounds, pursuant to sound public policy.
Interest within the meaning of the Rules means material
interest or an interest in issue to be affected by the decree or judgment
of the case, as distinguished from mere curiosity about the question
involved. One having no material interest to protect cannot invoke the
jurisdiction of the court as the plaintiff in an action. When the plaintiff is not
the real party in interest, the case is dismissible on the ground of lack
of cause of action.
xxx xxx xxx
The parties to a contract are the real parties in interest in an
action upon it, as consistently held by the Court. Only the contracting
parties are bound by the stipulations in the contract; they are the ones who
would benefit from and could violate it. Thus, one who is not a party to a
contract, and for whose benefit it was not expressly made, cannot maintain
an action on it. One cannot do so, even if the contract performed by the
contracting parties would incidentally inure to ones benefit. (emphasis
ours)
In Uy v. Court of Appeals,[15] this Court held that the agents of the parties to a contract
do not have the right to bring an action even if they rendered some service on behalf of their
principals. To quote from that decision:
[Petitioners] are mere agents of the owners of the land subject of the sale. As
agents, they only render some service or do something in representation or
on behalf of their principals. The rendering of such service did not make
them parties to the contracts of sale executed in behalf of the latter. Since
a contract may be violated only by the parties thereto as against each
other, the real parties-in-interest, either as plaintiff or defendant, in an
action upon that contract must, generally, either be parties to said
contract. (emphasis and words in brackets ours)
The main cause of action of petitioners in their request for arbitration with the RTC is
the alleged violation of the clause in the milling contracts involving the proportionate sharing in the
proceeds of the harvest. Petitioners essentially demand that respondents increase the share of
the member Planters to 66% to equalize their situation with those of the non-member
Planters. Verily, from petitioners' own allegations, the party who would be injured or benefited by
a decision in the arbitration proceedings will be the member Planters involved and not
petitioners. In sum, petitioners are not the real parties in interest in the present case.
Assuming petitioners had properly brought the case in the name of their members who had
existing milling contracts with respondents, petitioners must still prove that they were indeed
authorized by the said members to institute an action for and on the members' behalf. In the same
manner that an officer of the corporation cannot bring action in behalf of a corporation unless it is
clothed with a board resolution authorizing an officer to do so, an authorization from the individual
member planter is a sine qua non for the association or any of its officers to bring an action before
the court of law. The mere fact that petitioners were organized for the purpose of advancing the
interests and welfare of their members does not necessarily mean that petitioners have the
authority to represent their members in legal proceedings, including the present arbitration
proceedings.
As we see it, petitioners had no intention to litigate the case in a representative capacity,
as they contend. All the pleadings from the RTC to this Court belie this claim.Under Section 3 of
Rule 3, where the action is allowed to be prosecuted by a representative, the beneficiary shall be
included in the title of the case and shall be deemed to be the real party in interest. As repeatedly
pointed out earlier, the individual Planters were not even impleaded as parties to this case. In
addition, petitioners need a power-of-attorney to represent the Planters whether in the lawsuit or
to demand arbitration.[16] None was ever presented here.
Lastly, petitioners theorize that they could demand and sue for arbitration independently
of the Planters because the milling contract is a contract pour autrui under Article 1311 of the Civil
Code.
ART. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of
law. The heir is not liable beyond the value of the property he received from
the decedent.
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.
To summarize, the requisites of a stipulation pour autrui or a stipulation in favor of a
third person are the following: (1) there must be a stipulation in favor of a third person, (2) the
stipulation must be a part, not the whole, of the contract, (3) the contracting parties must have
clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or
interest, (4) the third person must have communicated his acceptance to the obligor before its
revocation, and (5) neither of the contracting parties bears the legal representation or authorization
of the third party.[17] These requisites are not present in this case.
Article VI of the Milling Contract is the solitary provision that mentions some benefit in
favor of the association of which the planter is a member and we quote:
VI
SHARE IN THE SUGAR
Thirty four per centrum (34%) of the sugar ad molasses resulting
from the milling of the PLANTERs sugarcane, as computed from the weight
and analysis of the sugarcane delivered by the PLANTER, shall belong to the
CENTRAL; sixty five per centum (65%) thereof to the PLANTER, and one per
centum (1%) as aid to the association of the PLANTER; provided that, if the
PLANTER is not a member of any association recognized by the CENTRAL,
said one per centum (1%) shall revert to the CENTRAL. The 1% aid shall be
used by the association for any purpose that it may deem fit for its members,
laborers and their dependents, or for its other socio-economic projects.
The foregoing provision cannot, by any stretch of the imagination, be considered as a
stiputation pour autrui or for the benefit of the petitioners. The primary rationale for the said
stipulation is to ensure a just share in the proceeds of the harvest to the Planters. In other words,
it is a stipulation meant to benefit the Planters. Even the 1% share to be given to the association
as aid does not redound to the benefit of the association but is intended to be used for its member
Planters. Not only that, it is explicit that said share reverts back to respondent sugar centrals if the
contracting Planter is not affiliated with any recognized association.
To be considered a pour autrui provision, an incidental benefit or interest, which another
person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred
a favor upon a third person.[18] Even the clause stating that respondents must secure the consent
of the association if respondents grant better benefits to a Planter has for its rationale the
protection of the member Planter. The only interest of the association therein is that its member
Planter will not be put at a disadvantage vis a visother Planters. Thus, the associations interest in
these milling contracts is only incidental to their avowed purpose of advancing the welfare and
rights of their member Planters.
In all, the Court finds no grave abuse of discretion nor reversible error committed by the
CA in setting aside the Joint Orders issued by the RTC.
WHEREFORE, petition is hereby DISMISSED.
Costs against petitioners.
SO ORDERED.
SECOND DIVISION
[G.R. No. 161957. February 28, 2005]
JORGE GONZALES and PANEL OF ARBITRATORS, petitioners, vs. CLIMAX MINING LTD.,
CLIMAX-ARIMCO MINING CORP., and AUSTRALASIAN PHILIPPINES MINING
INC., respondents.
DECISION
TINGA, J.:
Petitioner Jorge Gonzales, as claimowner of mineral deposits located within the Addendum
Area of Influence in Didipio, in the provinces of Quirino and Nueva Vizcaya, entered into a co-
production, joint venture and/or production-sharing letter-agreement designated as the May 14,
1987 Letter of Intent with Geophilippines, Inc, and Inmex Ltd. Under the agreement, petitioner, as
claimowner, granted to Geophilippines, Inc. and Inmex Ltd. collectively, the exclusive right to
explore and survey the mining claims for a period of thirty-six (36) months within which the latter
could decide to take an operating agreement on the mining claims and/or develop, operate, mine
and otherwise exploit the mining claims and market any and all minerals that may be derived
therefrom.
On 28 February 1989, the parties to the May 14, 1987 Letter of Intent renegotiated the same
into the February 28, 1989 Agreement whereby the exploration of the mining claims was extended
for another period of three years.
On 9 March 1991, petitioner Gonzales, Arimco Mining Corporation, Geophilippines Inc.,
Inmex Ltd., and Aumex Philippines, Inc. signed a document designated as the Addendum to the
May 14, 1987 Letter of Intent and February 28, 1989 Agreement with Express Adhesion
Thereto (hereafter, the Addendum Contract).[1] Under the Addendum Contract, Arimco Mining
Corporation would apply to the Government of the Philippines for permission to mine the claims
as the Governments contractor under a Financial and Technical Assistance Agreement(FTAA).
On 20 June 1994, Arimco Mining Corporation obtained the FTAA[2] and carried out work under the
FTAA.
Respondents executed the Operating and Financial Accommodation Contract[3] (between
Climax-Arimco Mining Corporation and Climax Mining Ltd., as first parties, and Australasian
Philippines Mining Inc., as second party) dated 23 December 1996 and Assignment, Accession
Agreement[4] (between Climax-Arimco Mining Corporation and Australasian Philippines Mining
Inc.) dated 3 December 1996. Respondent Climax Mining Corporation (Climax) and respondent A.
Australasian Philippines Mining Inc. (APMI) entered into a Memorandum of Agreement[5] dated 1
June 1991 whereby the former transferred its FTAA to the latter.
PROCEDURAL GROUND
On 8 November 1999, petitioner Gonzales filed before the Panel of Arbitrators, Region II,
Mines and Geosciences Bureau of the Department of Environment and Natural Resources, THE HONORABLE COURT OF APPEALS SHOULD HAVE SUMMARILY DISMISSED
against respondents Climax-Arimco Mining Corporation (Climax-Arimco), Climax, and RESPONDENTS PETITION A QUO FOR FAILURE TO COMPLY WITH PROCEDURAL
APMI,[6] a Complaint[7] seeking the declaration of nullity or termination of the Addendum REQUIREMENTS.
Contract, the FTAA, the Operating and Financial Accommodation Contract, the Assignment,
Accession Agreement, and the Memorandum of Agreement. Petitioner Gonzales prayed for an
unspecified amount of actual and exemplary damages plus attorneys fees and for the issuance of i.
a temporary restraining order and/or writ of preliminary injunction to restrain or enjoin respondents
from further implementing the questioned agreements. He sought said releifs on the grounds of WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
FRAUD, OPPRESSION and/or VIOLATION of Section 2, Article XII of the CONSTITUTION ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A
perpetrated by these foreign RESPONDENTS, conspiring and confederating with one another and QUO DESPITE RESPONDENTS FAILURE TO COMPLY WITH THE RULES ON DISCLOSURE
with each other.[8] IN THE VERIFICATION AND CERTIFICATION PORTION OF THEIR PETITION A QUO.
On 21 February 2001, the Panel of Arbitrators dismissed the Complaint for lack of
jurisdiction. Petitioner moved for reconsideration and this was granted on 18 October 2001, the ii.
Panel believing that the case involved a dispute involving rights to mining areas and a dispute
involving surface owners, occupants and claim owners/concessionaires. According to the Panel,
although the issue raised in the Complaint appeared to be purely civil in nature and should be WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
within the jurisdiction of the regular courts, a ruling on the validity of the assailed contracts would ESTABLISHED JURISPRUDENCE WHEN IT DID NOT DISMISS THE PETITION A QUO FILED
BY RESPONDENT CLIMAX DESPITE THE LACK OF THE REQUISITE AUTHORITY TO FILE
result to the grant or denial of mining rights over the properties; therefore, the question on the
validity of the contract amounts to a mining conflict or dispute. Hence, the Panel granted THE PETITION A QUO.
the Motion for Reconsideration with regard to the issues of nullity, termination, withdrawal or
damages, but with regard to the constitutionality of the Addendum Agreement and FTAA, it held B.
that it had no jurisdiction.[9]

Respondents filed their motion for reconsideration but this was denied on 25 June 2002. SUBSTANTIVE GROUND
The Panel of Arbitrators maintained that there was a mining dispute between the parties since the
subject matter of the Complaint arose from contracts between the parties which involve the THE HONORABLE COURT OF APPEALS ERRED IN GRANTING THE PETITION A QUO FILED
exploration and exploitation of minerals over the disputed area.[10] BY RESPONDENTS AND IN DENYING MOTION FOR RECONSIDERATION FILED BY
Respondents assailed the orders of the Panel of Arbitrators via a petition for certiorari before PETITIONER FOR UTTER LACK OF BASIS IN FACT AND IN LAW.
the Court of Appeals.
i.
On 30 July 2003, the Court of Appeals granted the petition, declaring that the Panel of
Arbitrators did not have jurisdiction over the complaint filed by petitioner. [11] The jurisdiction of the
Panel of Arbitrators, said the Court of Appeals, is limited only to the resolution of mining disputes, WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
defined as those which raise a question of fact or matter requiring the technical knowledge and ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER CEDED HIS CLAIMS
experience of mining authorities. It was found that the complaint alleged fraud, oppression and OVER THE MINERAL DEPOSITS LOCATED WITHIN THE ADDENDUM AREA OF INFLUENCE.
violation of the Constitution, which called for the interpretation and application of laws, and did not
involve any mining dispute. The Court of Appeals also observed that there were no averments ii.
relating to particular acts constituting fraud and oppression. It added that since the Addendum
Contract was executed in 1991, the action to annul it should have been brought not later than
1995, as the prescriptive period for an action for annulment is four years from the time of the WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
discovery of the fraud.[12] When petitioner filed his complaint before the Panel in 1999, his action ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE PANEL OF ARBITRATORS IS
had already prescribed. Also, the Court of Appeals noted that fraud and duress only make a BEREFT OF JURISDICTION OVER THE SUBJECT MATTER OF CASE NO. 058.
contract voidable,[13] not inexistent, hence the contract remains valid until annulled. The Court of
Appeals was of the opinion that the petition should have been settled through arbitration under iii.
Republic Act No. 876 (The Arbitration Law) as stated in Clause 19.1 of the Addendum
Contract. The Court of Appeals therefore declared as invalid the orders dated 18 October 2001
and 25 June 2002 issued by the Panel of Arbitrators. On 28 January 2004, the Court of Appeals WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
denied petitioners motion for reconsideration for lack of merit.[14] ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE COMPLAINT FILED BY THE
PETITIONER FAILED TO ALLEGE ULTIMATE FACTS OR PARTICULARS OF FRAUD.
Petitioner filed on 22 March 2004 this Petition for Review on Certiorari Under Rule
45 assailing the decision and resolution of the Court of Appeals. Petitioner raises the following
issues: iv.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT PETITIONER AND RESPONDENTS
SHOULD SUBMIT TO ARBITRATION UNDER R.A. 876.
v.
WHETHER THE HONORABLE COURT OF APPEALS DEPARTED FROM THE RULES AND
ESTABLISHED JURISPRUDENCE WHEN IT HELD THAT THE ACTION TO DECLARE THE
NULLITY OF THE ADDENDUM CONTRACT, FTAA, OFAC AND AAAA ON THE GROUND OF
FRAUD HAS PRESCRIBED.
The issues for resolution in this petition for review are:
(a) Whether there was forum-shopping on the part of respondents for their failure to
disclose to this Court their filing of a Petition to Compel for Arbitration before the Regional Trial
Court of Makati City, Branch 148, which is currently pending.
(b) Whether counsel for respondent Climax had authority to file the petition for certiorari
before the Court of Appeals considering that the signor of the petition for certioraris Verification
and Certification of Non-forum Shopping was not authorized to sign the same in behalf of
respondent Climax.
(c) Whether the complaint filed by petitioner raises a mining dispute over which the Panel
of Arbitrators has jurisdiction, or a judicial question which should properly be brought before the
regular courts.
(d) Whether the dispute between the parties should be brought for arbitration under Rep.
Act No. 876.
Let us deal first with procedural matters.
Petitioner claims that respondents are guilty of forum-shopping for failing to disclose before
this Court that they had filed a Petition to Compel for Arbitration before the RTC of Makati City.
However, it cannot be determined from petitioners mere allegations in the Petition that the Petition
to Compel for Arbitration instituted by respondent Climax-Arimco, involves related causes of
action and the grant of the same or substantially the same reliefs as those involved in the instant
case. Petitioner did not attach copies of the Petition to Compel for Arbitration or any order or
resolution of the RTC of Makati City related to that case.
Furthermore, it can be gleaned from the nature of the two actions that the issues in the case
before the RTC of Makati City and in the petition for certiorari before the Court of Appeals are
different. A petition for certiorari raises the issue of whether or not there was grave abuse of
discretion, while the Petition to Compel for Arbitration seeks the implementation of the arbitration
clause in the agreement between the parties.
Petitioner next alleges that there was no authority granted by respondent Climax to the law
firm of Sycip Salazar Hernandez & Gatmaitan to file the petition before the Court of Appeals. There
is allegedly no Secretarys Certificate from respondent Climax attached to the petition. The
Verification and Certification only contains a statement made by one Marianne M. Manzanas that
she is also the authorized representative of [respondent Climax] without presenting further proof
of such authority. Hence, it is argued that as to respondent Climax, the petition filed before the
Court of Appeals is an unauthorized act and the assailed orders of the Panel of Arbitrators have
become final.
Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit, together
with the petition, a sworn certification of non-forum shopping, and failure to comply with this
requirement is sufficient ground for dismissal of the petition. The requirement that petitioner should
sign the certificate of non-forum shopping applies even to corporations, the Rules of Court making
no distinction between natural and juridical persons. The signatory in the case of the corporation
should be a duly authorized director or officer of the corporation who has knowledge of the matter
being certified.[15] If, as in this case, the petitioner is a corporation, a board resolution authorizing
a corporate officer to execute the certification against forum-shopping is necessary. A certification
not signed by a duly authorized person renders the petition subject to dismissal.[16]
On this point, we have to agree with petitioner. There appears to be no subsequent
compliance with the requirement to attach a board resolution authorizing the signor Marianne M.
Manzanas to file the petition in behalf of respondent Climax. Respondent also failed to refute this
in its Comment.[17] However, this latter issue becomes irrelevant in the light of our decision to deny
this petition for review for lack of jurisdiction by the Panel of Arbitrators over the complaint filed by
petitioner, as will be discussed below.
We now come to the meat of the case which revolves mainly around the question of
jurisdiction by the Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over the
complaint for declaration of nullity and/or termination of the subject contracts on the ground of
fraud, oppression and violation of the Constitution? This issue may be distilled into the more basic
question of whether the Complaint raises a mining dispute or a judicial question.
A judicial question is a question that is proper for determination by the courts, as opposed
to a moot question or one properly decided by the executive or legislative branch.[18] A judicial
question is raised when the determination of the question involves the exercise of a judicial
function; that is, the question involves the determination of what the law is and what the legal rights
of the parties are with respect to the matter in controversy.[19]
On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b)
mineral agreements, FTAAs, or permits, and (c) surface owners, occupants and
claimholders/concessionaires.[20] Under Republic Act No. 7942 (otherwise known as the Philippine
Mining Act of 1995), the Panel of Arbitrators has exclusive and original jurisdiction to hear and
decide these mining disputes.[21] The Court of Appeals, in its questioned decision, correctly stated
that the Panels jurisdiction is limited only to those mining disputes which raise questions of fact or
matters requiring the application of technological knowledge and experience. [22]
In Pearson v. Intermediate Appellate Court,[23] this Court observed that the trend has been
to make the adjudication of mining cases a purely administrative matter.[24] Decisions[25] of the
Supreme Court on mining disputes have recognized a distinction between (1) the primary powers
granted by pertinent provisions of law to the then Secretary of Agriculture and Natural Resources
(and the bureau directors) of an executive or administrative nature, such as granting of license,
permits, lease and contracts, or approving, rejecting, reinstating or canceling applications, or
deciding conflicting applications, and (2) controversies or disagreements of civil or contractual
nature between litigants which are questions of a judicial nature that may be adjudicated only by
the courts of justice. This distinction is carried on even in Rep. Act No. 7942.
The Complaint charged respondents with disregarding and ignoring the provisions of
the Addendum Contract, violating the purpose and spirit of the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement, and acting in a fraudulent and oppressive manner
against petitioner and practicing fraud and deception against the Government. [26] Petitioner
alleged in his Complaint that under the original agreements (the May 14, 1987 Letter of
Intent and February 28, 1989 Agreement) respondent Climax-Arimco had committed to complete
the Bankable Feasibility Study by 28 February 1992, but the same was not accomplished. Instead,
respondent Climax-Arimco, through false and insidious representations and machinations by
alleging technical and financial capacity, induced petitioner to enter into the Addendum
Contract and the FTAA in order to repeatedly extend the option period within which to conduct the
feasibility study. In essence, petitioner alleges that respondents, conspiring and confederating with
one another, misrepresented under the Addendum Contract and FTAA that respondent Climax-
Arimco possessed financial and technical capacity to put the project into commercial production,
when in truth it had no such qualification whatsoever to do so. By so doing, respondents have
allegedly caused damage not only to petitioner but also to the Republic of the Philippines.[27]
It is apparent that the Panel of Arbitrators is bereft of jurisdiction over the Complaint filed by
petitioner. The basic issue in petitioners Complaint is the presence of fraud or misrepresentation
allegedly attendant to the execution of the Addendum Contract and the other contracts emanating
from it, such that the contracts are rendered invalid and not binding upon the parties. It avers that
petitioner was misled by respondents into agreeing to the Addendum Contract. This constitutes
fraud which vitiated petitioners consent, and under Article 1390 of the Civil Code, is one of the
grounds for the annulment of a voidable contract. Voidable or annullable contracts, before they
are set aside, are existent, valid, and binding, and are effective and obligatory between the
parties.[28] They can be ratified.[29]
Petitioner insists that the Complaint is actually one for the declaration of nullity of void
contracts. He argues that respondents, by their lack of financial and technical competence to carry
out the mining project, do not qualify to enter into a co-production, joint venture or production
sharing agreement with the Government, in circumvention of and in patent violation of the spirit
and purpose of the Constitution, particularly Section 2, Article XII thereof. Petitioner relies on the
Civil Code for support:[30]
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order
or public policy;
....
(7) Those expressly prohibited or declared void by law.
....
Petitioner asserts that for circumventing and being in patent violation of the Constitution,
the Addendum Contract, the FTAA and the other contracts are void contracts. As such, they do
not produce any effect and cannot be ratified.
However, whether the case involves void or voidable contracts is still a judicial question. It
may, in some instances, involve questions of fact especially with regard to the determination of
the circumstances of the execution of the contracts. But the resolution of the validity or voidness
of the contracts remains a legal or judicial question as it requires the exercise of judicial function.
It requires the ascertainment of what laws are applicable to the dispute, the interpretation and
application of those laws, and the rendering of a judgment based thereon. Clearly, the dispute is
not a mining conflict. It is essentially judicial. The complaint was not merely for the determination
of rights under the mining contracts since the very validity of those contracts is put in issue.
The Complaint is not about a dispute involving rights to mining areas, nor is it a dispute
involving claimholders or concessionaires. The main question raised was the validity of
the Addendum Contract, the FTAA and the subsequent contracts. The question as to the rights of
petitioner or respondents to the mining area pursuant to these contracts, as well as the question
of whether or not petitioner had ceded his mining claims in favor of respondents by way of
execution of the questioned contracts, is merely corollary to the main issue, and may not be
resolved without first determining the main issue.
The Complaint is also not what is contemplated by Rep. Act No. 7942 when it says the
dispute should involve FTAAs. The Complaint is not exclusively within the jurisdiction of the Panel
of Arbitrators just because, or for as long as, the dispute involves an FTAA. The Complaint raised
the issue of the constitutionality of the FTAA, which is definitely a judicial question. The question
of constitutionality is exclusively within the jurisdiction of the courts to resolve as this would clearly
involve the exercise of judicial power. The Panel of Arbitrators does not have jurisdiction over such
an issue since it does not involve the application of technical knowledge and expertise relating to
mining. This the Panel of Arbitrators has even conceded in its Orders dated 18 October 2001 and
25 June 2002. At this juncture, it is worthy of note that in a case,[31] which was resolved only on 1
December 2004, this Court upheld the validity of the FTAA entered into by the Republic of the
Philippines and WMC (Philippines), Inc. and constitutionality of Rep. Act No. 7942 and DENR
Administrative Order 96-40.[32] In fact, the Court took the case on an original petition, recognizing
the exceptional character of the situation and the paramount public interest involved, as well as
the necessity for a ruling to put an end to the uncertainties plaguing the mining industry and the
affected communities as a result of doubts case upon the constitutionality and validity of the Mining
Act, the subject FTAA and future FTAAs, and the need to avert a multiplicity of suits. [33]
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.
Petitioner also disagrees with the Court of Appeals ruling that the case should be brought
for arbitration under Rep. Act 876, pursuant to the arbitration clause in the Addendum
Contractwhich states that [a]ll disputes arising out of or in connection with the Contract, which
cannot be settled amicably among the Parties, shall finally be settled under R.A. 876. He points
out that respondents Climax and APMI are not parties to the Addendum Contract and are thus not
bound by the arbitration clause in said contract.
We agree that the case should not be brought under the ambit of the Arbitration Law, but
for a different reason. The question of validity of the contract containing the agreement to submit
to arbitration will affect the applicability of the arbitration clause itself. A party cannot rely on the
contract and claim rights or obligations under it and at the same time impugn its existence or
validity. Indeed, litigants are enjoined from taking inconsistent positions. As previously discussed,
the complaint should have been filed before the regular courts as it involved issues which are
judicial in nature.
WHEREFORE, in view of the foregoing, the Petition for Review on Certiorari Under Rule
45 is DENIED. The Orders dated 18 October 2001 and 25 June 2002 of the Panel of Arbitrators
are SET ASIDE. Costs against petitioner Jorge Gonzales.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
KOREA TECHNOLOGIES CO., G.R. No. 143581
LTD.,
Petitioner,
Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly in
civil and commercial disputes. Arbitration along with mediation, conciliation, and negotiation, being
inexpensive, speedy and less hostile methods have long been favored by this Court. The petition
before us puts at issue an arbitration clause in a contract mutually agreed upon by the parties
stipulating that they would submit themselves to arbitration in a foreign country. Regrettably,
instead of hastening the resolution of their dispute, the parties wittingly or unwittingly prolonged
the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is
engaged in the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing
plants, while private respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a
domestic corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract[1] whereby KOGIES
would set up an LPG Cylinder Manufacturing Plant in Carmona, Cavite. The contract was
executed in the Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment for
Contract No. KLP-970301 dated March 5, 1997[2] amending the terms of payment. The contract
and its amendment stipulated that KOGIES will ship the machinery and facilities necessary for
manufacturing LPG cylinders for which PGSMC would pay USD 1,224,000. KOGIES would install
and initiate the operation of the plant for which PGSMC bound itself to pay USD 306,000 upon the
plants production of the 11-kg. LPG cylinder samples. Thus, the total contract price amounted to
USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease[3] with Worth Properties,
Inc. (Worth) for use of Worths 5,079-square meter property with a 4,032-square meter warehouse
building to house the LPG manufacturing plant. The monthly rental was PhP 322,560 commencing
on January 1, 1998 with a 10% annual increment clause.Subsequently, the machineries,
equipment, and facilities for the manufacture of LPG cylinders were shipped, delivered, and
installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate[4] executed by the parties on January 22, 1998,
after the installation of the plant, the initial operation could not be conducted as PGSMC
encountered financial difficulties affecting the supply of materials, thus forcing the parties to agree
that KOGIES would be deemed to have completely complied with the terms and conditions of the
March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial operation of the
plant, PGSMC issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998
for PhP 4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998 for PhP 4,500,000.[5]
When KOGIES deposited the checks, these were dishonored for the reason PAYMENT
STOPPED. Thus, on May 8, 1998, KOGIES sent a demand letter[6] to PGSMC threatening
criminal action for violation of Batas Pambansa Blg. 22 in case of nonpayment. On the same date,
the wife of PGSMCs President faxed a letter dated May 7, 1998 to KOGIES President who was
then staying at a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several equipment parts
already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully
funded but the payments were stopped for reasons previously made known to KOGIES.[7]
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract
dated March 5, 1997 on the ground that KOGIES had altered the quantity and lowered the quality
of the machineries and equipment it delivered to PGSMC, and that PGSMC would dismantle and
transfer the machineries, equipment, and facilities installed in the Carmona plant. Five days later,
PGSMC filed before the Office of the Public Prosecutor an Affidavit-Complaint for Estafa docketed
as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not
unilaterally rescind their contract nor dismantle and transfer the machineries and equipment on
mere imagined violations by KOGIES. It also insisted that their disputes should be settled by
arbitration as agreed upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1,
1998 letter threatening that the machineries, equipment, and facilities installed in the plant would
be dismantled and transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an
Application for Arbitration before the Korean Commercial Arbitration Board (KCAB)
in Seoul, Korea pursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil
Case No. 98-117[8] against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The
RTC granted a temporary restraining order (TRO) on July 4, 1998, which was subsequently
extended until July 22, 1998. In its complaint, KOGIES alleged that PGSMC had initially admitted
that the checks that were stopped were not funded but later on claimed that it stopped payment
of the checks for the reason that their value was not received as the former allegedly breached
their contract by altering the quantity and lowering the quality of the machinery and equipment
installed in the plant and failed to make the plant operational although it earlier certified to the
contrary as shown in a January 22, 1998 Certificate. Likewise, KOGIES averred that PGSMC
violated Art. 15 of their Contract, as amended, by unilaterally rescinding the contract without
resorting to arbitration. KOGIES also asked that PGSMC be restrained from dismantling and
transferring the machinery and equipment installed in the plant which the latter threatened to do
on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not
entitled to the TRO since Art. 15, the arbitration clause, was null and void for being against public
policy as it ousts the local courts of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim [9] asserting
that it had the full right to dismantle and transfer the machineries and equipment because it had
paid for them in full as stipulated in the contract; that KOGIES was not entitled to the PhP
9,000,000 covered by the checks for failing to completely install and make the plant operational;
and that KOGIES was liable for damages amounting to PhP 4,500,000 for altering the quantity
and lowering the quality of the machineries and equipment. Moreover, PGSMC averred that it has
already paid PhP 2,257,920 in rent (covering January to July 1998) to Worth and it was not willing
to further shoulder the cost of renting the premises of the plant considering that the LPG cylinder
manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order
denying the application for a writ of preliminary injunction, reasoning that PGSMC had paid
KOGIES USD 1,224,000, the value of the machineries and equipment as shown in the contract
such that KOGIES no longer had proprietary rights over them.And finally, the RTC held that Art.
15 of the Contract as amended was invalid as it tended to oust the trial court or any other court
jurisdiction over any dispute that may arise between the parties. KOGIES prayer for an injunctive
writ was denied.[10] The dispositive portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court believes and
so holds that no cogent reason exists for this Court to grant the writ of
preliminary injunction to restrain and refrain defendant from dismantling the
machineries and facilities at the lot and building of Worth Properties,
Incorporated at Carmona, Cavite and transfer the same to another site: and
therefore denies plaintiffs application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and lowered the quality of the
machinery, equipment, and facilities it delivered to the plant. It claimed that it had performed all
the undertakings under the contract and had already produced certified samples of LPG
cylinders. It averred that whatever was unfinished was PGSMCs fault since it failed to procure raw
materials due to lack of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of
Appeals,[12] insisted that the arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to Dismiss [13] answering
PGSMCs memorandum of July 22, 1998 and seeking dismissal of PGSMCs counterclaims,
KOGIES, on August 4, 1998, filed its Motion for Reconsideration[14] of the July 23, 1998 Order
denying its application for an injunctive writ claiming that the contract was not merely for machinery
and facilities worth USD 1,224,000 but was for the sale of an LPG manufacturing plant consisting
of supply of all the machinery and facilities and transfer of technology for a total contract price of
USD 1,530,000 such that the dismantling and transfer of the machinery and facilities would result
in the dismantling and transfer of the very plant itself to the great prejudice of KOGIES as the still
unpaid owner/seller of the plant. Moreover, KOGIES points out that the arbitration clause under
Art. 15 of the Contract as amended was a valid arbitration stipulation under Art. 2044 of the Civil
Code and as held by this Court in Chung Fu Industries (Phils.), Inc.[15]
In the meantime, PGSMC filed a Motion for Inspection of Things[16] to determine whether
there was indeed alteration of the quantity and lowering of quality of the machineries and
equipment, and whether these were properly installed. KOGIES opposed the motion positing that
the queries and issues raised in the motion for inspection fell under the coverage of the arbitration
clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMCs motion
for inspection; (2) denying KOGIES motion for reconsideration of the July 23, 1998 RTC Order;
and (3) denying KOGIES motion to dismiss PGSMCs compulsory counterclaims as these
counterclaims fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration[17] of the
September 21, 1998 RTC Order granting inspection of the plant and denying dismissal of
PGSMCs compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its October 2,
1998 urgent motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition
for certiorari[18] docketed as CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and
September 21, 1998 RTC Orders and praying for the issuance of writs of prohibition, mandamus,
and preliminary injunction to enjoin the RTC and PGSMC from inspecting, dismantling, and
transferring the machineries and equipment in the Carmona plant, and to direct the RTC to enforce
the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES urgent motion for
reconsideration and directed the Branch Sheriff to proceed with the inspection of the machineries
and equipment in the plant on October 28, 1998.[19]
Thereafter, KOGIES filed a Supplement to the Petition[20] in CA-G.R. SP No. 49249
informing the CA about the October 19, 1998 RTC Order. It also reiterated its prayer for the
issuance of the writs of prohibition, mandamus and preliminary injunction which was not acted
upon by the CA. KOGIES asserted that the Branch Sheriff did not have the technical expertise to
ascertain whether or not the machineries and equipment conformed to the specifications in the
contract and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriffs Report [21] finding that the
enumerated machineries and equipment were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision[22] affirming the RTC Orders
and dismissing the petition for certiorari filed by KOGIES. The CA found that the RTC did not
gravely abuse its discretion in issuing the assailed July 23, 1998 and September 21,
1998 Orders. Moreover, the CA reasoned that KOGIES contention that the total contract price for
USD 1,530,000 was for the whole plant and had not been fully paid was contrary to the finding of
the RTC that PGSMC fully paid the price of USD 1,224,000, which was for all the machineries and
equipment. According to the CA, this determination by the RTC was a factual finding beyond the
ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the lower court
that an arbitration clause which provided for a final determination of the legal rights of the parties
to the contract by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of non-
forum shopping by PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones
and payment of docket fees was not required since the Answer with counterclaim was not an
initiatory pleading. For the same reason, the CA said a certificate of non-forum shopping was also
not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since
KOGIES did not wait for the resolution of its urgent motion for reconsideration of the September
21, 1998 RTC Order which was the plain, speedy, and adequate remedy available. According to
the CA, the RTC must be given the opportunity to correct any alleged error it has committed, and
that since the assailed orders were interlocutory, these cannot be the subject of a petition for
certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT BEYOND THE
AMBIT OF A PETITION FOR CERTIORARI INTENDED ONLY FOR
CORRECTION OF ERRORS OF JURISDICTION OR GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS FINDING
ON THE SAME QUESTION WAS IMPROPERLY RAISED IN THE PETITION
BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN
ARTICLE 15 OF THE CONTRACT BETWEEN THE PARTIES FOR BEING
CONTRARY TO PUBLIC POLICY AND FOR OUSTING THE COURTS OF
JURISDICTION;

c. DECREEING PRIVATE RESPONDENTS COUNTERCLAIMS
TO BE ALL COMPULSORY NOT NECESSITATING PAYMENT OF
DOCKET FEES AND CERTIFICATION OF NON-FORUM SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY
WITHOUT WAITING FOR THE RESOLUTION OF THE MOTION FOR
RECONSIDERATION OF THE ORDER DATED SEPTEMBER 21, 1998 OR
WITHOUT GIVING THE TRIAL COURT AN OPPORTUNITY TO CORRECT
ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23
AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF
CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY IN
NATURE;
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED
FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE SAME FOR
ALLEGEDLY WITHOUT MERIT.[23]
The Courts Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid
docket fees and filed a certificate of non-forum shopping, and that its failure to do so was a fatal
defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer
with Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997
Revised Rules of Civil Procedure, the rule that was effective at the time the Answer with
Counterclaim was filed. Sec. 8 on existing counterclaim or cross-claimstates, A compulsory
counterclaim or a cross-claim that a defending party has at the time he files his answer shall be
contained therein.
On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims
against KOGIES, it was not liable to pay filing fees for said counterclaims being compulsory in
nature. We stress, however, that effective August 16, 2004 under Sec. 7, Rule 141, as amended
by A.M. No. 04-2-04-SC, docket fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMCs Answer is not an
initiatory pleading which requires a certification against forum shopping under Sec. 5[24] of Rule 7,
1997 Revised Rules of Civil Procedure. It is a responsive pleading, hence, the courts a quo did
not commit reversible error in denying KOGIES motion to dismiss PGSMCs compulsory
counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari and Prohibition are
neither the remedies to question the propriety of an interlocutory order of the trial court. [26] The CA
erred on its reliance on Gamboa. Gamboa involved the denial of a motion to acquit in a criminal
case which was not assailable in an action for certiorari since the denial of a motion to quash
required the accused to plead and to continue with the trial, and whatever objections the accused
had in his motion to quash can then be used as part of his defense and subsequently can be
raised as errors on his appeal if the judgment of the trial court is adverse to him. The general rule
is that interlocutory orders cannot be challenged by an appeal. [27] Thus, in Yamaoka v. Pescarich
Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an
adverse judgment on the merits, incorporating in said appeal the grounds for
assailing the interlocutory orders. Allowing appeals from interlocutory orders
would result in the sorry spectacle of a case being subject of a
counterproductive ping-pong to and from the appellate court as often as a trial
court is perceived to have made an error in any of its interlocutory
rulings. However, where the assailed interlocutory order was issued with
grave abuse of discretion or patently erroneous and the remedy of appeal
would not afford adequate and expeditious relief, the Court allows certiorari
as a mode of redress.[28]
Also, appeals from interlocutory orders would open the floodgates to endless occasions
for dilatory motions. Thus, where the interlocutory order was issued without or in excess of
jurisdiction or with grave abuse of discretion, the remedy is certiorari.[29]
The alleged grave abuse of discretion of the respondent court equivalent to lack of
jurisdiction in the issuance of the two assailed orders coupled with the fact that there is no plain,
speedy, and adequate remedy in the ordinary course of law amply provides the basis for allowing
the resort to a petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition for
certiorari. Note that KOGIES motion for reconsideration of the July 23, 1998 RTC Order which
denied the issuance of the injunctive writ had already been denied. Thus, KOGIES only remedy
was to assail the RTCs interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the September 21,
1998 RTC Order relating to the inspection of things, and the allowance of the compulsory
counterclaims has not yet been resolved, the circumstances in this case would allow an exception
to the rule that before certiorari may be availed of, the petitioner must have filed a motion for
reconsideration and said motion should have been first resolved by the court a quo. The reason
behind the rule is to enable the lower court, in the first instance, to pass upon and correct its
mistakes without the intervention of the higher court.[30]
The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant,
equipment, and facilities when he is not competent and knowledgeable on said matters is evidently
flawed and devoid of any legal support. Moreover, there is an urgent necessity to resolve the issue
on the dismantling of the facilities and any further delay would prejudice the interests of
KOGIES. Indeed, there is real and imminent threat of irreparable destruction or substantial
damage to KOGIES equipment and machineries. We find the resort to certiorari based on the
gravely abusive orders of the trial court sans the ruling on the October 2, 1998 motion for
reconsideration to be proper.
The Core Issue: Article 15 of the Contract
 We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration
clause. It provides:
Article 15. Arbitration.All disputes, controversies, or differences
which may arise between the parties, out of or in relation to or in connection
with this Contract or for the breach thereof, shall finally be settled by
arbitration in Seoul, Korea in accordance with the Commercial Arbitration
Rules of the Korean Commercial Arbitration Board. The award rendered by
the arbitration(s) shall be final and binding upon both parties
concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null
and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the contract is
made governs. Lex loci contractus. The contract in this case was perfected here in
the Philippines. Therefore, our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code
sanctions the validity of mutually agreed arbitral clause or the finality and binding effect of an
arbitral award. Art. 2044 provides, Any stipulation that the arbitrators award or decision shall
be final, is valid, without prejudice to Articles 2038, 2039 and 2040. (Emphasis supplied.)
Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to instances where a compromise
or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043, [34] may be voided, rescinded,
or annulled, but these would not denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It has
not been shown to be contrary to any law, or against morals, good customs, public order, or public
policy. There has been no showing that the parties have not dealt with each other on equal
footing. We find no reason why the arbitration clause should not be respected and complied with
by both parties. In Gonzales v. Climax Mining Ltd.,[35] we held that submission to arbitration is a
contract and that a clause in a contract providing that all matters in dispute between the parties
shall be referred to arbitration is a contract. [36] Again in Del Monte Corporation-USA v. Court of
Appeals, we likewise ruled that [t]he provision to submit to arbitration any dispute arising therefrom
and the relationship of the parties is part of that contract and is itself a contract. [37]
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done
in Seoul, Korea in accordance with the Commercial Arbitration Rules of the KCAB, and that the
arbitral award is final and binding, is not contrary to public policy. This Court has sanctioned the
validity of arbitration clauses in a catena of cases. In the 1957 case of Eastboard Navigation Ltd.
v. Juan Ysmael and Co., Inc.,[38] this Court had occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms is valid. In BF Corporation v. Court
of Appeals, we held that [i]n 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. Republic Act No. 876 was adopted
to supplement the New Civil Codes provisions on arbitration. [39] And in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitrationalong with mediation, conciliation and negotiationis
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.[40]
Having said that the instant arbitration clause is not against public policy, we come to
the question on what governs an arbitration clause specifying that in case of any dispute arising
from the contract, an arbitral panel will be constituted in a foreign country and the arbitration rules
of the foreign country would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to arbitrate disputes
arising from contractual relations. In case a foreign arbitral body is chosen by the parties, the
arbitration rules of our domestic arbitration bodies would not be applied. As signatory to the
Arbitration Rules of the UNCITRAL Model Law on International Commercial Arbitration [41] of
the United Nations Commission on International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippinescommitted itself to be bound by the Model Law. We
have even incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as
the Alternative Dispute Resolution Act of 2004 entitled An Act to Institutionalize the Use of an
Alternative Dispute Resolution System in the Philippines and to Establish the Office for Alternative
Dispute Resolution, and for Other Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of
Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial
Arbitration.International commercial arbitration shall be governed by the
Model Law on International Commercial Arbitration (the Model Law) adopted
by the United Nations Commission on International Trade Law on June 21,
1985 (United Nations Document A/40/17) and recommended for enactment
by the General Assembly in Resolution No. 40/72 approved on December 11,
1985, copy of which is hereto attached as Appendix A.
SEC. 20. Interpretation of Model Law.In interpreting the Model
Law, regard shall be had to its international origin and to the need for
uniformity in its interpretation and resort may be made to the travaux
preparatories and the report of the Secretary General of the United Nations
Commission on International Trade Law dated March 25, 1985 entitled,
International Commercial Arbitration: Analytical Commentary on Draft Trade
identified by reference number A/CN. 9/264.
While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since
it is a procedural law which has a retroactive effect. Likewise, KOGIES filed its application for
arbitration before the KCAB on July 1, 1998 and it is still pending because no arbitral award has
yet been rendered. Thus, RA 9285 is applicable to the instant case. Well-settled is the rule that
procedural laws are construed to be applicable to actions pending and undetermined at the time
of their passage, and are deemed retroactive in that sense and to that extent. As a general rule,
the retroactive application of procedural laws does not violate any personal rights because no
vested right has yet attached nor arisen from them.[42]
Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL
Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the
subject of arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in
such cases, thus:
SEC. 24. Referral to Arbitration.A court before which an action is
brought in a matter which is the subject matter of an arbitration agreement
shall, if at least one party so requests not later than the pre-trial conference,
or upon the request of both parties thereafter, refer the parties to arbitration
unless it finds that the arbitration agreement is null and void, inoperative or
incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause
to be final and binding are not immediately enforceable or cannot be implemented
immediately. Sec. 35[43] of the UNCITRAL Model Law stipulates the requirement for the arbitral
award to be recognized by a competent court for enforcement, which court under Sec. 36 of the
UNCITRAL Model Law may refuse recognition or enforcement on the grounds provided for. RA
9285 incorporated these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of procedure
to be promulgated by the Supreme Court. Said procedural rules shall provide
that the party relying on the award or applying for its enforcement shall file
with the court the original or authenticated copy of the award and the
arbitration agreement. If the award or agreement is not made in any of the
official languages, the party shall supply a duly certified translation thereof
into any of such languages.
The applicant shall establish that the country in which foreign
arbitration award was made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards
Not Covered by the New York Convention.The recognition and enforcement
of foreign arbitral awards not covered by the New York Convention shall be
done in accordance with procedural rules to be promulgated by the Supreme
Court. The Court may, on grounds of comity and reciprocity, recognize and
enforce a non-convention award as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign arbitral
award when confirmed by a court of a foreign country, shall be recognized
and enforced as a foreign arbitral award and not as a judgment of a foreign
court.
A foreign arbitral award, when confirmed by the Regional Trial
Court, shall be enforced in the same manner as final and executory decisions
of courts of law of the Philippines
xxxx
SEC. 47. Venue and Jurisdiction.Proceedings for recognition and
enforcement of an arbitration agreement or for vacations, setting aside,
correction or modification of an arbitral award, and any application with a court
for arbitration assistance and supervision shall be deemed as special
proceedings and shall be filed with the Regional Trial Court (i) where
arbitration proceedings are conducted; (ii) where the asset to be attached or
levied upon, or the act to be enjoined is located; (iii) where any of the parties
to the dispute resides or has his place of business; or (iv) in the National
Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.In a special proceeding
for recognition and enforcement of an arbitral award, the Court shall send
notice to the parties at their address of record in the arbitration, or if any part
cannot be served notice at such address, at such partys last known
address. The notice shall be sent al least fifteen (15) days before the date set
for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not
as a judgment of a foreign court but as a foreign arbitral award, and when confirmed, are enforced
as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is similar
to judgments or awards given by some of our quasi-judicial bodies, like the National Labor
Relations Commission and Mines Adjudication Board, whose final judgments are stipulated to be
final and binding, but not immediately executory in the sense that they may still be judicially
reviewed, upon the instance of any party. Therefore, the final foreign arbitral awards are similarly
situated in that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific
authority and jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided
under Art. 34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.The New York
Convention shall govern the recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral awards shall be
filed with the Regional Trial Court in accordance with the rules of procedure
to be promulgated by the Supreme Court. Said procedural rules shall provide
that the party relying on the award or applying for its enforcement shall file
with the court the original or authenticated copy of the award and the
arbitration agreement. If the award or agreement is not made in any of the
official languages, the party shall supply a duly certified translation thereof
into any of such languages.
 The applicant shall establish that the country in which foreign
arbitration award was made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an
award has been made, the Regional Trial Court may, if it considers it proper,
vacate its decision and may also, on the application of the party claiming
recognition or enforcement of the award, order the party to provide
appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign
arbitration proceeding may oppose an application for recognition and
enforcement of the arbitral award in accordance with the procedures and
rules to be promulgated by the Supreme Court only on those grounds
enumerated under Article V of the New York Convention. Any other ground
raised shall be disregarded by the Regional Trial Court.
Thus, while the RTC does not have jurisdiction over disputes governed by arbitration
mutually agreed upon by the parties, still the foreign arbitral award is subject to judicial review by
the RTC which can set aside, reject, or vacate it. In this sense, what this Court held in Chung Fu
Industries (Phils.), Inc. relied upon by KOGIES is applicable insofar as the foreign arbitral awards,
while final and binding, do not oust courts of jurisdiction since these arbitral awards are not
absolute and without exceptions as they are still judicially reviewable. Chapter 7 of RA 9285 has
made it clear that all arbitral awards, whether domestic or foreign, are subject to judicial review on
specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards
The differences between a final arbitral award from an international or foreign arbitral
tribunal and an award given by a local arbitral tribunal are the specific grounds or conditions that
vest jurisdiction over our courts to review the awards.
For foreign or international arbitral awards which must first be confirmed by the RTC,
the grounds for setting aside, rejecting or vacating the award by the RTC are provided under Art.
34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC pursuant
to Sec. 23 of RA 876[44] and shall be recognized as final and executory decisions of the
RTC,[45] they may only be assailed before the RTC and vacated on the grounds provided under
Sec. 25 of RA 876.[46]
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved
party in cases where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award,
thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision
of the Regional Trial Court confirming, vacating, setting aside, modifying or
correcting an arbitral award may be appealed to the Court of Appeals in
accordance with the rules and procedure to be promulgated by the Supreme
Court.
The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate court to post a
counterbond executed in favor of the prevailing party equal to the amount of
the award in accordance with the rules to be promulgated by the Supreme
Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court
through a petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign
arbitration as it bound itself through the subject contract. While it may have misgivings on the
foreign arbitration done in Korea by the KCAB, it has available remedies under RA 9285. Its
interests are duly protected by the law which requires that the arbitral award that may be rendered
by KCAB must be confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an arbitration
clause, stipulating that the arbitral award is final and binding, does not oust our courts of jurisdiction
as the international arbitral award, the award of which is not absolute and without exceptions, is
still judicially reviewable under certain conditions provided for by the UNCITRAL Model Law on
ICA as applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which provides that
the parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and binding on
the parties, and not contrary to public policy; consequently, being bound to the contract of
arbitration, a party may not unilaterally rescind or terminate the contract for whatever cause
without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles[47] and reiterated
in succeeding cases,[48] that the act of treating a contract as rescinded on account of infractions
by the other contracting party is valid albeit provisional as it can be judicially assailed, is not
applicable to the instant case on account of a valid stipulation on arbitration. Where an arbitration
clause in a contract is availing, neither of the parties can unilaterally treat the contract as rescinded
since whatever infractions or breaches by a party or differences arising from the contract must be
brought first and resolved by arbitration, and not through an extrajudicial rescission or judicial
action.
The issues arising from the contract between PGSMC and KOGIES on whether the
equipment and machineries delivered and installed were properly installed and operational in the
plant in Carmona, Cavite; the ownership of equipment and payment of the contract price; and
whether there was substantial compliance by KOGIES in the production of the samples, given the
alleged fact that PGSMC could not supply the raw materials required to produce the sample LPG
cylinders, are matters proper for arbitration.Indeed, we note that on July 1, 1998, KOGIES
instituted an Application for Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of the
Contract as amended. Thus, it is incumbent upon PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMCs Motion for
Inspection of Things on September 21, 1998, as the subject matter of the motion is under the
primary jurisdiction of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from
the inspection made on October 28, 1998, as ordered by the trial court on October 19, 1998, is of
no worth as said Sheriff is not technically competent to ascertain the actual status of the equipment
and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders
pertaining to the grant of the inspection of the equipment and machineries have to be recalled and
nullified.
 Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract price
of USD 1,530,000 was for the whole plant and its installation is beyond the ambit of a Petition for
Certiorari.
Petitioners position is untenable.
It is settled that questions of fact cannot be raised in an original action for certiorari.[49] Whether or
not there was full payment for the machineries and equipment and installation is indeed a factual
issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the RTC in
resolving the issue on the ownership of the plant when it is the arbitral body (KCAB) and not the
RTC which has jurisdiction and authority over the said issue. The RTCs determination of such
factual issue constitutes grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the
way for PGSMC to dismantle and transfer the equipment and machineries, we find it to be in order
considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries might
well be under the primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of
RA 9285 has jurisdiction to hear and grant interim measures to protect vested rights of the
parties. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.(a) It is not
incompatible with an arbitration agreement for a party to request, before
constitution of the tribunal, from a Court to grant such measure. After
constitution of the arbitral tribunal and during arbitral proceedings, a request
for an interim measure of protection, or modification thereof, may be made
with the arbitral or to the extent that the arbitral tribunal has no power to
act or is unable to act effectivity, the request may be made with the
Court. The arbitral tribunal is deemed constituted when the sole arbitrator or
the third arbitrator, who has been nominated, has accepted the nomination
and written communication of said nomination and acceptance has been
received by the party making the request.
(b) The following rules on interim or provisional relief shall be
observed:
Any party may request that provisional relief be granted against the
adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon
the provision of security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application
transmitted by reasonable means to the Court or arbitral tribunal as the case
may be and the party against whom the relief is sought, describing in
appropriate detail the precise relief, the party against whom the relief is
requested, the grounds for the relief, and the evidence supporting the
request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the orders judicial
enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim measure of protection
as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of an
award or in another form, by which, at any time prior to the issuance of the
award by which the dispute is finally decided, the arbitral tribunal orders a
party to:
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely
to cause, current or imminent harm or prejudice to the arbitral process itself;
(c) Provide a means of preserving assets out of which a subsequent award
may be satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution of
the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to
issue interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure
in relation to arbitration proceedings, irrespective of whether their place is in
the territory of this State, as it has in relation to proceedings in courts. The
court shall exercise such power in accordance with its own procedures in
consideration of the specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we
were explicit that even the pendency of an arbitral proceeding does not foreclose resort to the
courts for provisional reliefs. We explicated this way:

As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the ICC,
which governs the parties arbitral dispute, allows the application of a party to
a judicial authority for interim or conservatory measures. Likewise, Section 14
of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the rights of
any party to petition the court to take measures to safeguard and/or conserve
any matter which is the subject of the dispute in arbitration. In addition, R.A.
9285, otherwise known as the Alternative Dispute Resolution Act of 2004,
allows the filing of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act effectively. [50]
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-
117 are REVERSED and SET ASIDE;
(3) The parties are hereby ORDERED to submit themselves to the arbitration of their
dispute and differences arising from the subject Contract before the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and
machineries, if it had not done so, and ORDERED to preserve and maintain them until the finality
of whatever arbitral award is given in the arbitration proceedings.
No pronouncement as to costs.

SO ORDERED.
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim
measures of protection.

Secondly, considering that the equipment and machineries are in the possession of
PGSMC, it has the right to protect and preserve the equipment and machineries in the best way
it can. Considering that the LPG plant was non-operational, PGSMC has the right to dismantle
and transfer the equipment and machineries either for their protection and preservation or for the
better way to make good use of them which is ineluctably within the management discretion of
PGSMC.

Thirdly, and of greater import is the reason that maintaining the equipment and
machineries in Worths property is not to the best interest of PGSMC due to the prohibitive rent
while the LPG plant as set-up is not operational. PGSMC was losing PhP322,560 as monthly
rentals or PhP3.87M for 1998 alone without considering the 10% annual rent increment in
maintaining the plant.

Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the
preservation or transfer of the equipment and machineries as an interim measure, yet on hindsight,
the July 23, 1998 Order of the RTC allowing the transfer of the equipment and machineries given
the non-recognition by the lower courts of the arbitral clause, has accorded an interim measure of
protection to PGSMC which would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial
amount based on the contract. Moreover, KOGIES is amply protected by the arbitral action it has
instituted before the KCAB, the award of which can be enforced in our jurisdiction through the
RTC. Besides, by our decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.

PGSMC to preserve the subject equipment and machineries

Finally, while PGSMC may have been granted the right to dismantle and transfer the
subject equipment and machineries, it does not have the right to convey or dispose of the same
considering the pending arbitral proceedings to settle the differences of the parties. PGSMC
therefore must preserve and maintain the subject equipment and machineries with the diligence
of a good father of a family[51] until final resolution of the arbitral proceedings and enforcement of
the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET
ASIDE;