374 Phil.

157

SECOND DIVISION
[ G.R. No. 113070, September 30, 1999 ]
HON. PAMPIO A. ABARINTOS, FORMER PRESIDING JUDGE, BRANCH XLV,
REGIONAL TRIAL COURT OF NEGROS ORIENTAL, JOSE A. GARCIA, TOMAS
GARCIA, VIRGINIA A. GARCIA AND MARIA A. DIAZ, PETITIONERS, VS.
COURT OF APPEALS, FRANCISCA A. PONCE DE LEON, ANA MARIA A. DIAGO,
AGUEDA A. DIONALDO, MA. LUISA A. VALERA, MA. CRISTINA A. LACSON,
ANTONIO B. ARNAIZ, RAMON B. ARNAIZ, MA. MAGDALENA B. ARNAIZ, MA.
MANUELA A. SINCO, TERESITA A. PALANCA, JOSEFINA A. TAMBUNTING,
CONCHITA Z. ARNAIZ, VICENTE Z. ARNAIZ, LEOPOLDO Z. ARNAIZ, LIBRADA
A. LARENA, ARACELI A. PRESTON, ANTONIO E. ARNAIZ, JOSE RAMON B.
ARNAIZ AND LEONARDO E. ARNAIZ, RESPONDENTS.
DECISION
BUENA, J.:
Before us is a petition for review on certiorari which seeks to reverse the
decision[1] of public respondent Court of Appeals in C.A. G.R. No. 24139, dated 22
January 1993, and the resolution[2] of the Court of Appeals, dated 05 November
1993, denying petitioners motion for reconsideration.
The dispositive portion of the assailed decision of the appellate court reads as
follows:
WHEREFORE, in the light of the foregoing disquisitions, the petition for certiorari is
granted and the assailed orders of the Regional Trial Court of Negros Oriental in Civil
Case 139-B, are hereby nullified and set aside. The writ of prohibition is hereby
issued and respondent judge or whoever acts in his behalf in RTC to which this case
is assigned is enjoined from taking further action in Civil Case No. 139-B, except to
order its immediate dismissal with prejudice.
[3]

SO ORDERED.
As culled from the records, the antecedents of the case, are as follows:
Petitioners and private respondents are co-owners of Arnaiz Hermanos, a hacienda
consisting of several hectares of land devoted to the production and raising of sugar
cane, coconut and other crops. Portions of the hacienda also serve as fishpond, salt
bed and prawn farm.
Francisca Ponce De Leon along with the other private respondents owns around
64.485976% of the property while petitioners represent a total of 35.5140232%. [4]
By virtue of a special power of attorney , the co-owners appointed petitioner Jose
Garcia, (GARCIA for short) as administrator of the property.
[5]

Petitioner Garcia, who owns a 5.91900305% share[6] and who acted as attorney-infact of the co-owners, wielded almost absolute power over the property. Among
other acts, he decided on the crops planted; the investments made; the equipment
used; the purchases done; the produce sold and the quantity, price and time to sell
the produce. Moreover, he exercised full control over the funds of the co-ownership,
including the distribution thereof to the co-owners.
At the outset, the co-owners took Garcias words hook, line and sinker due to the
trust and confidence reposed on the latter. With the passage of time, however, the
trust and confidence waned; the respondents started to entertain doubts on the
manner Garcia administered the property. The respondents wondered why they
received only so much when, in their belief, they were entitled to receive more.
Likewise, they questioned the manner of distribution of profits prompting the
respondents to hire the services of Petronilo S. Santos & Co., a Manila based
accounting firm, to conduct an audit[7] of the books of the co-ownership.
The audit resulted to a startling discovery [8] of disbursements, expenditures,
withdrawal of funds, deposits and investments which were improperly made and
thus, prejudicial to the interest of the co-owners.
As a consequence of these findings, the co-owners, by virtue of
resolutions[9] approved by the majority, decided to manage and operate the farm
themselves, including its financial matters, and required Garcia to render a fair, true
and complete accounting of the transactions entered into by him as administrator.
Eventually, the rift borne by the discovery provoked the co-owners to terminate the
co-ownership and divide the property among themselves.
On 17 November 1990, after having agreed on the mechanics of the partition, the
petitioners and private respondents, either personally or through duly authorized
representatives, convened on November 17, 1990 and partitioned the property
owned in common[10].
In the assemblage, private respondents moved that Garcia be made to account for
the proceeds of the operation of the farm during his incumbency as administrator.
Petitioner Garcia, however, walked out of the meeting. Notwithstanding Garcias
absence, the co-owners declared the existence of a quorum and implemented the
resolution[11] which earlier revoked the special power of attorney executed in favor
of Garcia.
By a majority vote of the co-owners, an action for accounting, docketed as Civil
Case 9803[12] was filed against Garcia before the Regional Trial Court (RTC) of
Negros Oriental.
On 23 November 1990, petitioner Garcia filed a complaint for partition [13] with ex
parte appointment of receiver, docketed as Civil Case No. 139-B, before the RTC of
Bais City, Branch XLV, the lone branch in said city.
On 26 November 1990, herein petitioners filed an urgent ex parte motion for
appointment of receiver,[14] which failed to contain a notice of hearing. No copy of
the motion was sent to the private respondents.

1 | Page

A day later, the presiding judge of RTC Branch XLV issued an order [15] dated 27
November 1990,[16] appointing lawyer Enrico Garcia as receiver, without any hearing
subject however to the filing of a P30,000.00 bond as fixed by the court.
On 28 November 1990, lawyer Enrico Garcia complied with the order of the court by
filing the necessary bond[17] and on the same date took his oath of office as receiver.
[18]

Private respondents, through Ana Maria A. Diago filed with the same court a
motion[19] for inhibition and recall and/or annulment of all orders issued in
connection with Civil Case No. 139-B.
Eventually, lawyer Enrico Garcia, as receiver, filed on December 10, 1990, a
motion ex parte[20] in Civil Case 139-B, which sought to grant him authority to
withdraw funds from the bank. The motion failed to contain a notice of hearing and
private respondents were not furnished with a copy thereof.
In an order[21] dated 06 December 1990, the judge denied the motion for inhibition
filed by the respondents.
On 20 December 1990, the lower court denied private respondents motion for
annulment of the orders and granted the ex parte motion of the receiver, Enrico
Garcia, dated 03 December 1990, which authorized the latter to withdraw the
amount of P264,321.74 from the Far East Bank and Trust Company, Dumaguete City
and/or from the Bank of the Philippine Islands, Bais City, Negros Oriental.
Subsequently, in an order[22] dated 30 January 1991, the lower court granted anew
the ex parte motion of the receiver Enrico Garcia, which in effect, empowered the
latter to withdraw funds for the operation of the co-ownership property; to sell
sugar, molasses, copra, salt and fish products and to deposit the proceeds of the
sale with the bank.

are hereby authorized to open and close account on behalf of the co-ownership
funds in whatever bank they may deem appropriate;
3. That the parties hereby agree that whatever remaining balance of the funds of
the co-ownership over and above existing and recognized obligations of the coownership shall be immediately distributed among the parties in accordance with
their respective shares in the co-ownership, provided, however, in case of
dispute among the parties as to any obligations of the partnership, the
questioned amount of the disputed obligations shall remain deposited in
common funds of the co-ownership and can only be withdrawn upon final
resolution of the dispute or controversy;

4. All properties of the co-ownership whether real or personal which can be easily
divided physically in accordance with the respective shares of the parties of the
co-ownership shall be immediately distributed, as far as practicable, the
subdivision plan dated 17 November 1990 which was previously agreed upon by
the parties shall be respected;

5. Once the aforementioned properties is (sic) distributed to the respective parties

in accordance with their respective shares, each party is free to manage,
administer and enjoy his respective share;
6. The parties shall exert earnest efforts in arriving at a final settlement and
partition of all the other properties, whether real or personal owned in common
by them. In this connection, the parties hereby agree that they shall endeavour
to achieve complete settlement of the co-ownership within 30 days from the
signing of this agreement; Parties therefore set the following schedules for
conference on August 03, 10, 24 and 31, 1991 in the morning and afternoon at
the office of the SDD & Co.

On 24 July 1991, the parties entered into a compromise agreement [23] in Civil Case
No. 9979 and submitted the same to the court for approval.
The compromise agreement, reads in full thus:
COMPROMISE AGREEMENT
Comes now the parties duly assisted by their respective counsel unto this Honorable
Court hereby submit the following compromise agreement:
1. That plaintiffs and private defendants hereby agree that the funds of the coownership Arnaiz Hermanos which were deposited before the Rural Bank of Bais
City under the Savings Account No. 9728 can only be withdrawn upon the
authority and signatures of Ana Maria A. Diago and Jose A. Garcia;

7. Pending final winding up of the affairs of the co-ownership, the parties hereby
agree that whatever properties remaining of the co-ownership shall be jointly
administered by Ana Maria A. Diago and Jose A. Garcia;

8. All other claims and counterclaims of the parties in connection with the aboveentitled case are hereby waived.
WHEREFORE, it is most respectfully prayed that judgment be rendered on the basis
of this compromise agreement.
Dumaguete City, Philippines, July 24, 1991.

2. All other funds of the co-ownership wherever they may be found shall likewise
be withdrawn only upon the authority and signatures of Mr. Jose A. Garcia and
Ana Maria A. Diago; In this connection, Ana Maria A. Diago and Jose A. Garcia

Plaintiffs by:
(Sgd)
Jose A. Garcia

2 | Page

Defendants by:
(Sgd.)
Ana Maria A. Diago
Accordingly, the compromise agreement was approved by the RTC of Dumaguete
City, Branch XLII, in an order,[24] dated 25 July 1991, the dispositive portion of which
declares:
That the aforestated compromise agreement having been executed in accordance
with law and not contrary to public policy and moral, the same is hereby approved
and judgment is hereby rendered in accordance herewith without pronouncement as
to cost.
SO ORDERED.
July 25, 1991, Dumaguete City, Philippines.
(Sgd.)
Jesus L. Tabilon
Judge
Herein private respondents then brought before the Court of Appeals a petition for
certiorari and prohibition with prayer for preliminary injunction and/or temporary
restraining order, docketed as C.A. G.R. No. 24139, which sought to annul or set
aside the lower courts orders dated 27 November 1990; 06 December 1990; 20
December 1990 and 30 January 1991, in Civil Case 139-B.
In granting the petition for certiorari and prohibition filed by private respondent, the
Court of Appeals declared[25]:
After carefully reviewing the records of this case, We perceive the following
important data: (1) that ex parte motions are mere scraps of papers (Manila Surety
Co. vs. Bath Construction & Co., L-16636, June 24, 1965) and should not have been
acted upon; (2) that a motion to dismiss Civil Case No. 139-B is so important as to
be wrongfully ignored by mere ex parte motions; (3) that a question of inhibition
involves an important question of faith in the administration of justice as to be
easily ignored or cast aside; (4) that the absence of notice or opportunity to be
heard violates the fundamental principle of due process and constitutes grave abuse
of discretion by the respondent judge amounting to lack of or excess of jurisdiction;
and (5) that since partition of the property of the decedents Hacienda has already
been agreed upon by the parties, Civil Case No. 139-B is inappropriate and baseless
and should have been dismissed outright.
Aggrieved by the decision, petitioner filed a motion for reconsideration dated 19
February 1993 which the appellate court denied for lack of merit [26]
Hence, this petition, wherein the following errors [27] were ascribed to the Court of
Appeals:
ASSIGNMENT OF ERRORS
I.

The Honorable Court of Appeals erred when it granted the respondents

petition for certiorari and nullified and set aside the assailed orders of the lower
court because:
1.

There was no grave abuse of discretion when the assailed orders were
issued.

II.

2.

The respondents resort to mere procedural technicalities did not serve the
highest interest of substantial justice.

3.

The respondents were afforded due process before the assailed orders
were issued.

4.

The respondents motion to dismiss was not wrongfully ignored by mere

ex parte motions.

The Honorable Court of Appeals erred in issuing the writ of prohibition and
enjoining the presiding judge of the lower court from taking further action in
Civil Case 139-B except to order its immediate dismissal with prejudice
because:
1.

The issuance of the writ of prohibition in effect had decided Civil Case 139B on the merits thereby denying petitioners their day in court.

2.

The parties had not even started to present evidence in Civil Case No.
139-B before the lower court.
The core of the controversy centers on the effect of the compromise agreement
entered into by the parties and approved by the court, on the action for partition
with ex parte appointment of receiver, docketed as Civil Case No. 139-B filed by
herein petitioner Jose Garcia.
As to the substantive issues raised, petitioners urge that the issuance of the writ of
prohibition by the appellate court in effect resolved the merits of Civil Case No. 139B, thereby denying petitioners their day in court.
We are not impressed with petitioners contention.
Assuming that the parties in Civil Case No. 139-B had yet to adduce evidence before
the lower court, as alleged by petitioner Jose Garcia, Civil Case No. 139-B is
nonetheless rendered moot in view of the judicially sanctioned compromise
agreement.
Under Article 2028 of the Civil Code, a compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a litigation or put an end to one
already commenced. A judicial compromise has the force of law and is conclusive
between the parties.[28] Once an agreement is stamped with judicial approval, it
becomes more than a mere contract binding upon the parties, and having the
sanction of the court and entered as its determination of the controversy, it has the
force and effect of any other judgment.[29]
Applying the clear provisions of law and jurisprudence in this jurisdiction, the
compromise agreement entered into between the parties, as represented by Jose
Garcia on the part of the plaintiffs (herein petitioners) and Ana Maria Diago, on the
part of the defendants (herein private respondents), constitutes and operates as a
partition that effectively terminated the relation of co-ownership over the properties
contemplated thereunder.

3 | Page

It is settled that every act which is intended to put an end to indivision among coheirs and legatees or devisees is deemed to be a partition, although it should
purport to be a sale, an exchange, a compromise, or any other transaction. [30]
Significantly, as early as 17 November 1990, the parties already convened, agreed
on the mechanics of the partition and apportioned the property owned in common.
Notwithstanding such glaring fact, petitioner Jose Garcia decided to file a complaint
for partition with ex parte appointment of receiver docketed as Civil Case No. 139B. Eventually though, a compromise agreement was forged on 24 July 1991
between the co-owners, as duly represented by petitioner Garcia on the part of the
plaintiffs and private respondent Diago on the part of the defendants.

We therefore hold that the compromise agreement transcends its identity as a mere
contract binding only upon the parties thereto. Having been approved by a court of
law, it has become a judgment which is subject to execution in accordance with the
Rules.
WHEREFORE, in view of the foregoing, the instant petition is DENIED for lack of
merit. The assailed decision of the Court of Appeals in CA GR. SP No. 24139 is
hereby AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, and Quisumbing, JJ., concur.

A perusal of the compromise agreement in the instant case would reveal that herein
petitioner Jose Garcia was a signatory to the compromise partition dated 24 July
1991. The records would likewise indubitably show that the compromise partition
was duly approved by the Regional Trial Court, Dumaguete City, in an order dated
25 July 1991.
Be that as it may, the partition for which Civil Case No. 139-B was filed had already
been realized through the execution of the compromise agreement by the coowners and the subsequent approval thereof by the court. Stated differently,
inasmuch as the co-owners have already agreed to partition the property and in fact
appointed Ana Maria Diago and Jose Garcia, as joint administrators during the
winding-up period, and considering that the compromise agreement had been duly
stamped with judicial approval, the pending issues in Civil Case No. 139-B have
already been rendered moot and academic.
The law provides that a compromise has upon the parties the effect and authority
of res judicata.[31] It is axiomatic that a decision based on a compromise agreement
is immediately final and executory. A compromise agreement, once approved by
final orders of the court, has the force of res judicata between the parties and
should not be disturbed except for vices of consent or forgery.[32]
We see no reason to depart from the general rule in the absence of any vice of
consent or forgery clearly established in this case. Indeed, compromises are
generally to be favored and cannot be set aside if the parties acted in good faith and
made reciprocal concessions to each other in order to terminate a case. [33]
After all, reciprocal concessions are the very heart and life of every compromise
agreement.[34] To lend flesh and blood to this aphorism, the Civil Code not only
defines and authorizes compromises, it in fact encourages them in civil actions.
[35]
Thus Article 2029 of the Civil Code expressly states that the Court shall endeavor
to persuade the litigants in a civil case to agree upon some fair compromise.
Verily, the co-owners by their compromise agreement in Civil Case No. 139-B,
contracted, among others, to partition the co-ownership property and to distribute it
among themselves. Similarly, the co-owners authorized Ana Maria Diago and Jose
Garcia to act as joint administrators pending the final winding-up of the affairs of
the co-ownership. Moreover, the parties agreed to waive their respective claims and
counterclaims in connection with the case.

4 | Page

for conciliation by the Lupon and ordering the Lupon to render an Arbitration Award
thereon. According to the MCTC, based on the records of the case, an Agreement
for Arbitration was executed by the parties concerned; however, the Lupon failed to
issue an Arbitration Award as provided under the Katarungang Pambarangay Law,
so that, the case must be returned to the Lupon until an Arbitration Award is
rendered.

546 Phil. 124

THIRD DIVISION
[ G.R. NO. 167261, March 02, 2007 ]
ROSARIA LUPITAN PANG-ET, PETITIONER, VS. CATHERINE MANACNESDAO-AS, HEIR OF LEONCIO MANACNES AND FLORENTINA MANACNES,
RESPONDENT.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil
Procedure, assailing the Decision[1] of the Court of Appeals in CA-G.R. SP No. 78019,
dated 9 February 2005, which reversed and set aside the Judgment [2] of the
Regional Trial Court (RTC), Branch 36, Bontoc, Mountain Province, and reinstated
the Resolution[3] of the Municipal Circuit Trial Court (MCTC) of Besao-Sagada,
Mountain Province dismissing herein petitioner's action for Enforcement of
Arbitration Award and Damages.
The instant petition draws its origin from an Action [4] for recovery of possession of
real property situated in Sitio Abatan, Barrio Dagdag, Sagada filed by herein
petitioner before the MCTC of Besao-Sagada, Mountain Province on 9 November
1994, against the spouses Leoncio and Florentina Manacnes, the predecessors-ininterest of herein respondent.
On 23 February 1995, during the course of the pre-trial, the parties, through their
respective counsels, agreed to refer the matter to the Barangay Lupon (Lupon) of
Dagdag, Sagada for arbitration in accordance with the provisions of
the Katarungang Pambarangay Law.[5] Consequently, the proceedings before the
MCTC were suspended, and the case was remanded to the Lupon for resolution. [6]
Thereafter, the Lupon issued a Certification to File Action on 26 February 1995 due
to the refusal of the Manacnes spouses to enter into an Agreement for Arbitration
and their insistence that the case should go to court. On 8 March 1995, the
Certification, as well as the records of the case, were forwarded to the MCTC.

In compliance with the MCTC Order, the Lupon rendered an Arbitration Award on 10
May 1995 ordering herein petitioner to retrieve the land upon payment to the
spouses Manacnes of the amount of P8,000.00 for the improvements on the land.
Aggrieved, Leoncio's widow,[7] Florentina Manacnes, repudiated the Arbitration
Award but her repudiation was rejected by the Lupon. Thereafter, the MCTC was
furnished with copies of the Arbitration Award.
On 1 June 1995, herein petitioner filed with the Lupon a Motion for Execution of the
Arbitration Award. On the other hand, Florentina Manacnes filed a Motion with the
MCTC for the resumption of the proceedings in the original case for recovery of
possession and praying that the MCTC consider her repudiation of the Arbitration
Award issued by the Lupon.
Subsequently, the MCTC heard the Motion of Florentina Manacnes notwithstanding
the latter's failure to appear before the court despite notice. The MCTC denied
Florentina Manacnes' Motion to repudiate the Arbitration Award elucidating that
since the movant failed to take any action within the 10-day reglementary period
provided for under the Katarungang Pambarangay Law, the arbitration award has
become final and executory. Furthermore, upon motion of herein petitioner Pang-et,
the MCTC issued an Order remanding the records of the case to the Lupon for the
execution of the Arbitration Award. On 31 August 1995, the then incumbent Punong
Barangay of Dagdag issued a Notice of Execution of the Award.
Said Notice of Execution was never implemented. Thus, on 16 October 2001, herein
petitioner Pang-et filed with the MCTC an action for enforcement of the Arbitration
Award which was sought to be dismissed by the heir of the Manacnes spouses.
[8]
The heir of the Manacnes spouses argues that the Agreement for Arbitration and
the Arbitration Award are void, the Agreement for Arbitration not having been
personally signed by the spouses Manacnes, and the Arbitration Award having been
written in English - a language not understood by the parties.
In its Resolution dated 20 August 2002, the MCTC dismissed the Petition for
Enforcement of Arbitration Award in this wise:
x x x Are defendants estopped from questioning the proceedings before the Lupon
Tagapamayapa concerned?
The defendants having put in issue the validity of the proceedings before the lupon
concerned and the products thereof, they are not estopped. It is a hornbook rule
that a null and void act could always be questioned at any time as the action or
defense based upon it is imprescriptible.
The second issue: Is the agreement to Arbitrate null and void? Let us peruse the
pertinent law dealing on this matter which is Section 413 of the Local Government
Code of 1991 (RA 7160), to wit:

An Order was issued by the MCTC on 7 April 1995, once more remanding the matter

5 | Page

"Section 413 - (a) The parties may, at any stage of the proceedings, agree in writing
that they shall abide by the arbitration award of the lupon chairman or the pangkat.
x x x"
The foregoing should be taken together with Section 415 of the same code which
provides:
"Section 415. Appearance of parties in person. In all katarungang pambarangay
proceedings, the parties must appear in person without the assistance of counsel or
representative, except for minors and incompetents who may be assisted by their
next-of-kin who are not lawyers."
It is very clear from the foregoing that personal appearance of the parties in
conciliation proceedings before a Lupon Tagapamayapa is mandatory. Likewise, the
execution of the agreement to arbitrate must be done personally by the parties
themselves so that they themselves are mandated to sign the agreement.
Unfortunately, in this case, it was not respondents-spouses [Manacnis] who signed
the agreement to arbitrate as plaintiff herself admitted but another person. Thus, it
is very clear that the mandatory provisos of Section 413 and 415 of RA 7160 are
violated. Granting arguendo that it was Catherine who signed the agreement per
instruction of her parents, will it cure the violation? The answer must still be in the
negative. As provided for by the cited provisos of RA 7160, if ever a party is entitled
to an assistance, it shall be done only when the party concerned is a minor or
incompetent. Here, there is no showing that the spouses [Manacnis] were
incompetent. Perhaps very old but not incompetent. Likewise, what the law provides
is assistance, not signing of agreements or settlements.
Just suppose the spouses [Manacnis] executed a special power of attorney in favor
of their daughter Catherine to attend the proceedings and to sign the agreement to
arbitrate? The more that it is proscribed by the Katarungang Pambarangay Law
specifically Section 415 of RA 7160 which mandates the personal appearance of the
parties before the lupon and likewise prohibits the appearance of representatives.
In view of the foregoing, it could now be safely concluded that the questioned
agreement to arbitrate is inefficacious for being violative of the mandatory
provisions of RA 7160 particularly sections 413 and 415 thereof as it was not the
respondents-spouses [Manacnis] who signed it.
The third issue: Is the Arbitration Award now sought to be enforced effective? Much
to be desired, the natural flow of events must follow as a consequence. Considering
that the agreement to arbitrate is inefficacious as earlier declared, it follows that the
arbitration award which emanated from it is also inefficacious. Further, the
Arbitration Award by itself, granting arguendo that the agreement to arbitrate is
valid, will readily show that it does not also conform with the mandate of the
Katarungang Pambarangay Law particularly Section 411 thereto which provides:
"Sec. 411. Form of Settlement - All amicable settlements shall be in writing in a
language or dialect known to the parties x x x. When the parties to the dispute do
not use the same language or dialect, the settlement shall be written in the
language known to them."
Likewise, the implementing rules thereof, particularly Section 13 provides:
"Sec. 13 - Form of Settlement and Award. - All settlements, whether by mediation,
conciliation or arbitration, shall be in writing, in a language or dialect known to the
parties. x x x"

It is of no dispute that the parties concerned belong to and are natives of the scenic
and serene community of Sagada, Mt. Province who speak the Kankanaey language.
Thus, the Arbitration Award should have been written in the Kankanaey language.
However, as shown by the Arbitration Award, it is written in English language which
the parties do not speak and therefore a further violation of the Katarungang
Pambarangay Law.
IN THE LIGHT of all the foregoing considerations, the above-entitled case is hereby
dismissed.[9]
Petitioner Pang-et's Motion for Reconsideration having been denied, she filed an
Appeal before the RTC which reversed and set aside the Resolution of the MCTC and
remanded the case to the MCTC for further proceedings. According to the RTC:
As it appears on its face, the Agreement for Arbitration in point found on page 51 of
the expediente, dated Feb. 6, 1995, and attested by the Pangkat Chairman of the
Office of the Barangay Lupon of Dagdag, Sagada was signed by the
respondents/defendants spouses Manacnis. The representative of the Appellee in
the instant case assails such Agreement claiming that the signatures of her
aforesaid predecessors-in-interest therein were not personally affixed by the latter
or are falsified-which in effect is an attack on the validity of the document on the
ground that the consent of the defendants spouses Manacnis is vitiated by fraud.
Indulging the Appellee Heirs of Manacnis its contention that such indeed is the truth
of the matter, the fact still remains as borne out by the circumstances, that neither
did said original defendants nor did any of such heirs effectively repudiate the
Agreement in question in accordance with the procedure outlined by the law, within
five (5) days from Feb. 6, 1995, on the ground as above-stated (Secs. 413 (a), 418,
RA 7160; Secs. 7, 13, KP Law; Sec. 12, Rule IV, KP Rules). As mandated, such
failure is deemed a waiver on the part of the defendants spouses Manacnis to
challenge the Agreement for Arbitration on the ground that their consent thereto is
obtained and vitiated by fraud (Sec. 12, Par. 3, KP Rules). Corollarily, the Appellee
Heirs being privy to the now deceased original defendants should have not been
permitted by the court a quo under the equitable principle of estoppel, to raise the
matter in issue for the first time in the present case (Lopez vs. Ochoa, 103 Phil. 94).
The Arbitration Award relative to Civil Case 83 (B.C. No. 07) dated May 10, 1995,
written in English, attested by the Punong Barangay of Dagdag and found on page 4
of the record is likewise assailed by the Appellee as void on the ground that the
English language is not known by the defendants spouses Manacnis who are
Igorots. Said Appellee contends that the document should have been written in
Kankana-ey, the dialect known to the party (Sec. 413 (b), RA 7160; Sec. 7, Par. 2,
KP law, Sec. 11, KP Rules). On this score, the court a quo presumptuously
concluded on the basis of the self-serving mere say-so of the representative of the
Appellee that her predecessors did not speak or understand English. As a matter of
judicial notice, American Episcopalian Missionaries had been in Sagada, Mountain
Province as early as 1902 and continuously stayed in the place by turns, comingling with the indigenous people thereat, instructing and educating them, and
converting most to the Christian faith, among other things, until the former left
about twenty years ago. By constant association with the white folks, the natives
too old to go to school somehow learned the King's English by ear and can
effectively speak and communicate in that language. Any which way, even granting
arguendo that the defendants spouses Manacnis were the exceptions and indeed
totally ignorant of English, no petition to nullify the Arbitration award in issue on
such ground as advanced was filed by the party or any of the Appellee Heirs with

6 | Page

the MCTC of Besao-Sagada, within ten (10) days from May 10, 1995, the date of the
document. Thus, upon the expiration thereof, the Arbitration Award acquired the
force and effect of a final judgment of a court (Sec. 416, RA 7160; Sec. 11, KP Law;
Sec. 13, KP Rules); conclusive upon the original defendants in Civil Case 83 (B.C.
No. 07) and the Appellee Heirs herein privy to said defendants.
In the light thereof, the collateral attack of the Appellee on the Agreement for
Arbitration and Arbitration Award re Civil Case 83 (B.C. No. 07) should not have in
the first place been given due course by the court a quo. In which case, it would not
have in the logical flow of things declared both documents "inefficacious"; without
which pronouncements, said court would not have dismissed the case at bar.
Wherefore, Judgment is hereby rendered Reversing and Setting Aside the Resolution
appealed from, and ordering the record of the case subject thereof remanded to the
court of origin for further proceedings.[10]
Aggrieved by the reversal of the RTC, herein respondent filed a petition before the
Court of Appeals seeking to set aside the RTC Judgment. On 9 February 2005, the
appellate court rendered the herein assailed Decision, to wit:
After thoroughly reviewing through the record, We find nothing that would show
that the spouses Manacnes were ever amenable to any compromise with respondent
Pang-et. Thus, We are at a loss as to the basis of the Arbitration Award sought to be
enforced by respondent Pang-et's subsequent action before the MCTC.
There is no dispute that the proceeding in Civil Case No. 83 was suspended and the
same remanded to the Lupon on account of the Agreement to Arbitrate which was
allegedly not signed by the parties but agreed upon by their respective counsels
during the pre-trial conference. In the meeting before the Lupon, it would seem that
the agreement to arbitrate was not signed by the spouses Manacnes. More
importantly, when the pangkat chairman asked the spouses Manacnes to sign or
affix their thumbmarks in the agreement, they refused and insisted that the case
should instead go to court. Thus, the Lupon had no other recourse but to issue a
certificate to file action. Unfortunately, the case was again remanded to the Lupon
to "render an arbitration award". This time, the Lupon heard the voice tape of the
late Beket Padonay affirming respondent Pang-et's right to the disputed property.
While Pang-et offered to pay P8,000.00 for the improvements made by the spouses
Manacnes, the latter refused to accept the same and insisted on their right to the
subject property. Despite this, the Lupon on May 10, 1995 issued an Arbitration
award which favored respondent Pang-et.
From the time the case was first referred to the Lupon to the time the same was
again remanded to it, the Spouses Manacnes remained firm in not entering into any
compromise with respondent Pang-et. This was made clear in both the minutes of
the Arbitration Hearing on 26 February 1995 and on 9 April 1995. With the
foregoing, We find it evident that the spouses Manacnes never intended to submit
the case for arbitration.
Moreover, the award itself is riddled with flaws. First of all there is no showing that
the Pangkat ng Tagapagkasundo was duly constituted in accordance with Rule V of
the Katarungan Pambarangay Rules. And after constituting of the Pangkat, Rule VI,
thereof the Punong Barangay and the Pangkat must proceed to hear the case.
However, according to the minutes of the hearing before the lupon on 9 April 1995,
the pangkat Chairman and another pangkat member were absent for the hearing.

Finally, Section 13 of the same Rule requires that the Punong Barangay or the
Pangkat Chairman should attest that parties freely and voluntarily agreed to the
settlement arrived at. But how can this be possible when the minutes of the two
hearings show that the spouses Manacnes neither freely nor voluntarily agreed to
anything.
While RA 7160 and the Katarungan Pambarangay rules provide for a period to
repudiate the Arbitration Award, the same is neither applicable nor necessary since
the Agreement to Arbitrate or the Arbitration Award were never freely nor
voluntarily entered into by one of the parties to the dispute. In short, there is no
agreement validly concluded that needs to be repudiated.
With all the foregoing, estoppel may not be applied against petitioners for an action
or defense against a null and void act does not prescribe. With this, We cannot but
agree with the MCTC that the very agreement to arbitrate is null and void. Similarly,
the arbitration award which was but the off shoot of the agreement is also void.
WHEREFORE, the RTC judgment of 2 June 2003 is REVERSED and SET ASIDE, the
MCTC Resolution DISMISSING the Civil Case No. 118 for enforcement of Arbitration
Award is REINSTATED.[11]
Vehemently disagreeing with the Decision of the Court of Appeals, petitioner Panget filed the instant petition. Petitioner maintains that the appellate court overlooked
material facts that resulted in reversible errors in the assailed Decision. According to
petitioner, the Court of Appeals overlooked the fact that the original parties, as
represented by their respective counsels in Civil Case No. 83, mutually agreed to
submit the case for arbitration by the Lupon ng Tagapamayapa of Barangay Dagdag.
Petitioner insists that the parties must be bound by the initial agreement by their
counsels during pre-trial to an amicable settlement as any representation made by
the lawyers are deemed made with the conformity of their clients. Furthermore,
petitioner maintains that if indeed the spouses Manacnes did not want to enter into
an amicable settlement, then they should have raised their opposition at the first
instance, which was at the pre-trial on Civil Case No. 83 when the MCTC ordered
that the case be remanded to the Lupon ng Tagapamayapa for arbitration.
We do not agree with the petitioner.
First and foremost, in order to resolve the case before us, it is pivotal to stress that,
during the initial hearing before the Lupon ng Tagapamayapa, the spouses
Manacnes declined to sign the Agreement for Arbitration and were adamant that the
proceedings before the MCTC in Civil Case No. 83 must continue. As reflected in the
Minutes[12] of the Arbitration Hearing held on 26 February 1995, the legality of the
signature of Catherine Manacnes, daughter of the Manacnes spouses, who signed
the Agreement for Arbitration on behalf of her parents, was assailed on the ground
that it should be the spouses Manacnes themselves who should have signed such
agreement. To resolve the issue, the Pangkat Chairman then asked the spouses
Manacnes that if they wanted the arbitration proceedings to continue, they must
signify their intention in the Agreement for Arbitration form. However, as stated
earlier, the Manacnes spouses did not want to sign such agreement and instead
insisted that the case go to court.
Consequently, the Lupon issued a Certification to File Action on 26 February 1995

7 | Page

due to the refusal of the Manacnes spouses. Indicated in said Certification are the
following: 1) that there was personal confrontation between the parties before
the Punong Barangay but conciliation failed and 2) that the Pangkat ng
Tagapagkasundo was constituted but the personal confrontation before the Pangkat
failed likewise because respondents do not want to submit this case for arbitration
and insist that said case will go to court.[13] Nevertheless, upon receipt of said
certification and the records of the case, the MCTC ordered that the case be
remanded to the Lupon ng Tagapamayapa and for the latter to render an arbitration
award, explaining that:
Going over the documents submitted to the court by the office of the Lupon
Tagapamayapa of Dagdag, Sagada, Mountain Province, the court observed that an
"Agreement for Arbitration" was executed by the parties anent the above-entitled
case. However, said Lupon did not make any arbitration award as mandated by the
Katarungang Pambarangay Law but instead made a finding that the case may now
be brought to the court. This is violative of the KP Law, which cannot be sanctioned
by the court.[14]
At this juncture, it must be stressed that the object of the Katarungang
Pambarangay Law is the amicable settlement of disputes through conciliation
proceedings voluntarily and freely entered into by the parties. [15] Through this
mechanism, the parties are encouraged to settle their disputes without enduring the
rigors of court litigation. Nonetheless, the disputing parties are not compelled to
settle their controversy during the barangay proceedings before the Lupon or
the Pangkat, as they are free to instead find recourse in the courts [16] in the event
that no true compromise is reached.
The key in achieving the objectives of an effective amicable settlement under
the Katarungang Pambarangay Law is the free and voluntary agreement of the
parties to submit the dispute for adjudication either by the Lupon or
the Pangkat, whose award or decision shall be binding upon them with the force and
effect of a final judgment of a court.[17] Absent this voluntary submission by the
parties to submit their dispute to arbitration under the Katarungang Pambarangay
Law, there cannot be a binding settlement arrived at effectively resolving the case.
Hence, we fail to see why the MCTC further remanded the case to the Lupon ng
Tagapamayapa and insisted that the arbitration proceedings continue, despite the
clear showing that the spouses Manacnes refused to submit the controversy for
arbitration.
It would seem from the Order of the MCTC, which again remanded the case for
arbitration to the Lupon ng Tagapamayapa, that it is compulsory on the part of the
parties to submit the case for arbitration until an arbitration award is rendered by
the Lupon. This, to our minds, is contrary to the very nature of the proceedings
under the Katarungang Pambarangay Law which espouses the principle of voluntary
acquiescence of the disputing parties to amicable settlement.
What is compulsory under the Katarungang Pambarangay Law is that there be a
confrontation between the parties before the Lupon Chairman or the Pangkat and
that a certification be issued that no conciliation or settlement has been reached, as
attested to by the Lupon or Pangkat Chairman, before a case falling within the
authority of the Lupon may be instituted in court or any other government office for
adjudication. [18] In other words, the only necessary pre-condition before any case
falling within the authority of the Lupon or the Pangkat may be filed before a court
is that there has been personal confrontation between the parties but despite

earnest efforts to conciliate, there was a failure to amicably settle the dispute. It
should be emphasized that while the spouses Manacnes appeared before
the Lupon during the initial hearing for the conciliation proceedings, they refused to
sign the Agreement for Arbitration form, which would have signified their consent to
submit the case for arbitration. Therefore, upon certification by the Lupon ng
Tagapamayapa that the confrontation before the Pangkat failed because
the spouses Manacnes refused to submit the case for arbitration and
insisted that the case should go to court, the MCTC should have continued
with the proceedings in the case for recovery of possession which it
suspended in order to give way for the possible amicable resolution of the
case through arbitration before the Lupon ng Tagapamayapa.
Petitioner's assertion that the parties must be bound by their respective counsels'
agreement to submit the case for arbitration and thereafter enter into an amicable
settlement is imprecise. What was agreed to by the parties' respective counsels was
the remand of the case to the Lupon ng Tagapamayapa for conciliation proceedings
and not the actual amicable settlement of the case. As stated earlier, the parties
may only be compelled to appear before the Lupon ng Tagapamayapa for the
necessary confrontation, but not to enter into any amicable settlement, or in the
case at bar, to sign the Agreement for Arbitration. Thus, when the Manacnes
spouses personally appeared during the initial hearing before the Lupon ng
Tagapamayapa, they had already complied with the agreement during the pre-trial
to submit the case for conciliation proceedings. Their presence during said hearing
is already their acquiescence to the order of the MCTC remanding the case to
theLupon for conciliation proceedings, as there has been an actual confrontation
between the parties despite the fact that no amicable settlement was reached due
to the spouses Manacnes' refusal to sign the Agreement for Arbitration.
Furthermore, the MCTC should not have persisted in ordering the Lupon ng
Tagapamayapa to render an arbitration award upon the refusal of the spouses
Manacnes to submit the case for arbitration since such arbitration award will not
bind the spouses. As reflected in Section 413 of the Revised Katarungang
Pambarangay Law, in order that a party may be bound by an arbitration award, said
party must have agreed in writing that they shall abide by the arbitration award of
the Lupon or the Pangkat. Like in any other contract, parties who have not signed
an agreement to arbitrate will not be bound by said agreement since it is axiomatic
that a contract cannot be binding upon and cannot be enforced against one who is
not a party to it.[19] In view of the fact that upon verification by the Pangkat
Chairman, in order to settle the issue of whether or not they intend to submit the
matter for arbitration, the spouses Manacnes refused to affix their signature or
thumb mark on the Agreement for Arbitration Form, the Manacnes spouses cannot
be bound by the Agreement for Arbitration and the ensuing arbitration award since
they never became privy to any agreement submitting the case for arbitration by
the Pangkat.
WHEREFORE, premises considered, the instant petition is hereby DENIED. The
Decision of the Court of Appeals in CA-G.R. SP No. 78019 is
hereby AFFIRMED. The Municipal Circuit Trial Court of Besao-Sagada, Mountain
Province, is hereby ORDERED to proceed with the trial of Civil Case No. 83 for
Recovery of Possession of Real Property, and the immediate resolution of the same
with deliberate dispatch. No costs.

8 | Page

SO ORDERED.
Ynares-Santiago, (Chairperson), Austria-Martinez, and Nachura, JJ., concur.
Callejo, Sr., J., on leave.

467 Phil. 229

1.1
The CONTRACTOR shall furnish all materials, labor, tools, plans,
equipment and other services and [perform] all operations necessary to complete
the structural repair and waterproofing of IPT and ICT buildings, all in accordance
with the plans and specifications and subject to the terms and conditions of the Bid
Documents. The CONTRACTOR shall likewise be responsible for the removal,
hauling, disposal of materials used in the work area including cleaning thereof
during and after completion of the work.
1.2
The CONTRACTOR guarantees and warrants the availability, quality and
genuineness of all the materials it will supply, deliver and use in the construction.

FIRST DIVISION
[ G.R. No. 147349, February 13, 2004 ]
MANILA INTERNATIONAL AIRPORT AUTHORITY (MIAA), PETITIONER, VS.
ALA INDUSTRIES CORPORATION, RESPONDENT.
DECISION

1.3
The CONTRACTOR warrants further that all works stipulated in the
Contract shall be done in good and acceptable condition and to make good at the
CONTRACTORs expense any imperfections or defects which the MIAA or its
representative may discover during the progress of the work within one (1) year
from and after acceptance in writing of the said work by the MIAA, as provided in
the General Conditions and Specifications.
xxx

xxx

xxx

ARTICLE IV

PANGANIBAN, J.:
Foreseeable difficulties that occur during the Christmas season and cause a delay do
not constitute a fortuitous event. The difficulties in processing claims during that
period are not acts of God that would excuse noncompliance with judicially
approved obligations.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the
February 28, 2001 Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 59518.
The dispositive part of the Decision reads:
WHEREFORE, the appealed final order is hereby REVERSED. The Court a quo is
ordered to issue a Writ of Execution directing the branch sheriff to enforce
[Respondent] ALA Industries unpaid claim against [Petitioner] Manila International
Airport Authority (MIAA) in the total amount of P7,171,835.53.[3]
The Facts
The facts of the case are narrated by the CA as follows:
[Petitioner] MIAA conducted a public bidding for a contract involving the structural
repair and waterproofing of the International Passenger Terminal (IPT) and
International Container Terminal (ICT) buildings of the Ninoy Aquino International
Airport (NAIA). Out of eleven bidders, [Respondent] ALA submitted the second
lowest and most advantageous bid. The contract was awarded to [respondent] in
the amount of P32,000,000.00 when it agreed to reduce the price from P36,000.00.
[4]
On June 28, 1993, the contract was executed providing, inter alia, the following
terms:
ARTICLE I
SCOPE OF WORK

CONTRACT PRICE/MANNER OF PAYMENT

4.1 In consideration of the full, satisfactory and faithful performance by the
CONTRACTOR of all its undertakings and obligations defined in and provided for
under this agreement, the MIAA agrees to pay the CONTRACTOR the total amount
of PESOS: THIRTY TWO MILLION [AND] 00/100 (P32,000,000.00) Philippine
Currency, payable as follows:
4.1.1
Initial payment shall be made upon submission of work
accomplishment of not less than 15%;
4.1.2
Subsequent payments shall be for work accomplished as measured,
verified and approved by MIAA. Such progress billings shall indicate actual work
accomplishments and shall be subject to the approval of MIAA, which approval shall
not be unreasonably withheld.
4.1.3
Progress billings shall be paid by the MIAA periodically but not more
than once a month within 30 calendar days from receipt hereof.
The contract contains escalation clauses and price adjustments. [Respondent]
made the necessary repairs and waterproofing. After submission of its progress
billings to [petitioner], [respondent] received partial payments. Progress billing No.
6 remained unpaid despite repeated demands by [respondent].
On June 30, 1994, [petitioner] unilaterally rescinded the contract on the ground
that [respondent] failed to complete the project within the agreed completion date.
On September 16, 1994, [petitioner] advised [respondent] of a committee formed
to determine the extent of the work done which was given until September 30,
1994 to submit its findings. Just the same, [respondent] was not fully paid.
On October 20, 1994, [respondent] objected to the rescission made by [petitioner]

9 | Page

and reiterated its claims. As of the filing of the complaint for sum of money and
damages on July 18, 1995, [respondent] was seeking to recover from [petitioner]
P10,376,017.00 as the latters outstanding obligation and P1,642,112.84 due from
the first to [the] fifth progress billings.

thereof strictly and in good faith without pronouncement

as to costs.

With the filing of [respondents] sur-rejoinder to [petitioners] rejoinder, the trial

Court directed the parties to proceed to arbitration on July 16, 1996. The Court a
quos ruling is based on Article XXVII of the contract that provides for arbitration.

For [petitioners] failure to pay within the period above

stipulated, [respondent] filed a motion for execution to
enforce its claim in the total amount of P13,118,129.84.
[Petitioner] filed a comment and attributed the delays to
its being a government agency. In its effort to render
[respondents] motion for execution moot and academic,
[petitioner] paid [respondent] P5,946,294.31 on
February 2, 1998.

SO ORDERED.

Both parties executed a compromise agreement, assisted by their counsels, and

jointly filed in court a motion for judgment based on compromise agreement.
RTC Disposition
On November 4, 1997, the Court a quo rendered judgment approving the
compromise agreement. The pertinent portions of the compromise read as follows:
1.
As full and complete payment of its claims
against [petitioner] arising from their waterproofing
contract subject of this case, [respondent] accepts
[petitioner]s offer of payment in the amount of FIVE
MILLION NINE HUNDRED FORTY SIX THOUSAND TWO
HUNDRED NINETY FOUR AND 31/100 (P5,946,294.31).
2.
[Petitioner] shall pay [respondent] said amount
of FIVE MILLION NINE HUNDRED FORTY SIX THOUSAND
TWO HUNDRED NINETY FOUR AND 31/100
(P5,946,294.31) within a period of thirty (30) days from
receipt of a copy of the Order of the Court approving this
Compromise Agreement.
3.
Failure of the [petitioner] to pay said amount to
[respondent] within the period above stipulated shall
entitle the [respondent] to a writ of execution from this
Honorable Court to enforce all its claims[5] pleaded in the
Complaint.
4.
In consideration of the Implementation of this
Compromise Agreement, [respondent] agrees to waive all
its claims against the [petitioner] as pleaded in the
Complaint, and [petitioner] also agrees to waive all its
claims, rights and interests pleaded in the answer, and all
such other claims that it has or may have in connection
with, related to or arising from the Waterproofing
Contract subject of this case with [respondent].
Finding the aforesaid COMPROMISE AGREEMENT not to
be contrary to law, moral[s], good customs, public order,
and public policy, the Court hereby approves the same
and renders judgment in conformity with the terms and
conditions of the said COMPROMISE AGREEMENT,
enjoining the parties to comply with the provisions

On February 16, 1998, the trial court denied [respondents] motion for execution.
It also denied the motion for reconsideration, ruling as follows:
The delay in complying with the Compromise Agreement having been satisfactorily
explained by the Office of the Government Counsel, the Motion for Reconsideration
of the order denying [respondents] Motion for Execution is denied.
SO ORDERED.[6]
Ruling of the Court of Appeals
Reversing the trial court, the CA ordered it to issue a writ of execution to enforce
respondents claim to the extent of petitioners remaining balance. The appellate
court ratiocinated that a judgment rendered in accordance with a compromise
agreement was immediately executory, and that a delay of almost two months was
not substantial compliance therewith.
Hence this Petition.[7]
Issues
Petitioner raises the following issues for our consideration:
I.
Whether or not the slight delay of petitioner in complying with its obligation under
the Compromise Agreement is a valid ground for the enforcement of private
respondents claim under the Complaint.
II.
Whether or not the delay of petitioner in complying with its obligation under the
Compromise Agreement is justified under the principle that no person shall be
responsible for those events which could not be foreseen, or which though foreseen,
were inevitable.
III.
Whether or not private respondent is estopped from enforcing its claim under the

10 | P a g e

Complaint considering that it already enjoyed the benefits of the Compromise

Agreement.[8]
The foregoing may be summed up in one issue: Whether there was a fortuitous
event that excused petitioner from complying with the terms and conditions of the
judicially approved Compromise Agreement.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Delay in Payment by Reason
of a Fortuitous Event

The failure to pay on the date stipulated was clearly a violation of the Agreement.
Within thirty days from receipt of the judicial Order approving it on December 20,
1997 payment should have been made, but was not. Thus, nonfulfillment of the
terms of the compromise justified execution. [24] It is the height of absurdity for
petitioner to attribute to a fortuitous event its delayed payment. Petitioners
explanation is clearly a gratuitous assertion that borders on callousness.[25] The
Christmas season cannot be cited as an act of God that would excuse a delay in the
processing of claims by a government entity that is subject to routine accounting
and auditing rules.
A fortuitous event is one that cannot be foreseen or, though foreseen, is inevitable.
[26]
It has the following characteristics:

A compromise agreement is a contract whereby the parties make reciprocal

concessions to resolve their differences,[9] thus avoiding litigation[10] or putting an
end to one that has already commenced.[11] Generally favored in law,[12] such
agreement is a bilateral act or transaction that is binding on the contracting parties
and is expressly acknowledged by the Civil Code as a juridical agreement between
them.[13] Provided it is not contrary to law, morals, good customs, public order or
public policy,[14] it is immediately executory.[15]

x x x (a) [T]he cause of the unforeseen and unexpected occurrence, or the failure
of the debtor to comply with his obligations, must be independent of human will; (b)
it must be impossible to foresee the event which constitutes the caso fortuito, or if it
can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as
to render it impossible for the debtor to fulfill his obligation in a normal manner;
and (d) the obligor must be free from any participation in the aggravation of the
injury resulting to the creditor.[27]
None of these elements appears in this case.

Judicial Compromise
Final and Executory

First, processing claims against the government and subjecting these to the usual
accounting and auditing procedures are certainly not only foreseeable and
expectable, but also dependent upon the human will. Liquidation and payment
resulting therefrom can be deliberately delayed or speeded up.

In a long line of cases, we have consistently held that x x x a compromise once

approved by final orders of the court has the force of res judicata[16] between the
parties and should not be disturbed except for vices of consent or forgery. Hence,
a decision on a compromise agreement is final and executory x x x. [17] Such
agreement has the force of law[18] and is conclusive between the parties.[19] It
transcends its identity as a mere contract binding only upon the parties thereto, as
it becomes a judgment that is subject to execution in accordance with the Rules.
[20]
Judges therefore have the ministerial and mandatory duty to implement and
enforce it.[21]
To be valid, a compromise agreement is merely required by law, first, to be based
on real claims; second, to be actually agreed upon in good faith.[22] Both conditions
are present in this case. The claims of the parties are valid, and the agreement
done without any fraud or vice of consent.
Without a doubt, each of the parties herein entered into Compromise Agreement
freely and voluntarily. When they carefully negotiated the terms and provisions
thereof, they were adequately assisted by their respective counsels petitioner, no
less than by the Office of the Government Corporate Counsel (OGCC). [23] Each party
agreed to something that neither might have actually wanted, except for the peace
that would be brought by the avoidance of a protracted litigation. Hence, the
Agreement must govern their relations.
The Christmas Season
Not a Fortuitous Event

Second, the Christmas season is not a caso fortuito, but a regularly occurring
event. It is in fact foreseeable, and its occurrence has absolutely nothing to do with
the processing of claims.
Further, in order to claim exemption from liability by reason of a fortuitous event,
such event should be the sole and proximate cause of the injury to or the loss or
destruction of the object of the contract[28] or compromise, which was the payment
to be made by petitioner. Certainly, this payment was not lost or destroyed, but
merely delayed, thus causing injury to respondent. Grantingarguendo such loss or
destruction, the Christmas season could not have been the sole and proximate
cause thereof.
Third, the occurrence of the Christmas season did not at all render impossible the
normal fulfillment of the obligation of petitioner; otherwise, few claims would ever
be paid during this period. It ought to have taken appropriate measures to ensure
that a delay would be avoided. When it entered into the Agreement, it knew fully
well that the 30-day period for it to pay its obligation would end during the
Christmas season. Thus, it cannot now be allowed to renege on its commitment.
Fourth, petitioner cannot argue that it is free from any participation in the delay. It
should have laid out on the compromise table the problems that would be caused by
a deadline falling during the Christmas season. Furthermore, it should have
explained to respondent that government accounts would be examined carefully and
thoroughly to the last detail, in strict compliance [29] with accounting and auditing

11 | P a g e

rules issued by and pursuant to the constitutional mandate of the Commission on

Audit.[30]
Indeed, the liquidation of government obligations involves a long process beginning
with the preparation of disbursement vouchers; followed by the processing of
requests for allotment as supported by vouchers, job orders and requisitions; and
ending with the issuance of the corresponding checks.[31] Without first securing the
necessary certification as to the availability of funds and allotment against which
expenditures may be properly charged,[32] no funds shall be disbursed; and no
expenditures chargeable against any authorized allotments shall be incurred or
authorized by agency heads.
Moreover, it is important to note that under government accounting principles, no
contract involving the expenditure of public funds shall be made until there is an
appropriation therefor, the unexpended balance of which, free of other obligations,
is sufficient to cover the proposed expenditure.[33] In the present case, there was
already an antecedent appropriation for the contract when petitioner entered into
it. Obviously, prior planning had not taken into account the liquidation process in
the conduct of the compromise.
The sheer neglect shown by petitioner in failing to consider these matters
aggravated the resulting injury suffered by respondent. The former cannot be
allowed to hide now behind its government cloak.
Fortuitous Event
Negated by Negligence
The act-of-God doctrine requires all human agencies to be excluded from creating
the cause of the mischief.[34] Such doctrine cannot be invoked to protect a person
who has failed to take steps to forestall the possible adverse consequences of
loss[35] or injury. Since the delay in payment in the present case was partly a result
of human participation whether from active intervention or neglect the whole
occurrence was humanized and was therefore outside the ambit of a caso fortuito.
Furthermore, none of the requisites we have earlier mentioned are present in this
case, a fact that clearly prevents petitioner from being excused from liability.
[36]
Under the rules of evidence, the burden of proving that a loss is due to a caso
fortuito rests upon the party invoking it.[37] This responsibility, it failed to discharge.
Verily, an assiduous scrutiny of the records convinces us that it was negligent,
[38]
and that it thereby incurred a delay in the performance of its contractual
obligation under the judicial compromise. It thus created an undue risk or injury to
respondent by failing to exercise that reasonable degree of care, precaution or
vigilance that the circumstances justly demanded,[39] and that an ordinarily prudent
person would have done.[40]
Court Without Power to Alter
a Judicial Compromise
The principle of autonomy of contracts must be respected.[41] The Compromise
Agreement was a contract perfected by mere consent;[42] hence, it should have been
respected. Item 3 thereof provided that failure of petitioner to pay within the

stipulated period would entitle respondent to a writ of execution to enforce all the
claims that had been pleaded by the latter in the Complaint. This provision must be
upheld, because the Agreement supplanted the Complaint itself. Although judicial
approval was not required for the perfection of that Agreement once it was granted,
it could not and must not be disturbed except for vices of consent or forgery.[43]
No such infirmity can be found in the subject Compromise Agreement. Its terms
are clear and leave no doubt as to their intention. Thus, the literal meaning of its
stipulations must control.[44] It must be strictly interpreted and x x x understood as
including only matters specifically determined therein or which, by necessary
inference from its wording, must be deemed included.[45]
The lower court was without power to relieve petitioner from an obligation it had
voluntarily assumed, simply because the Agreement later turned out to be unwise,
disastrous or foolish.[46] It had no authority to impose upon the parties a judgment
different from or against the terms and conditions of their Compromise Agreement.
[47]
It could not alter a contract by construction or make a new one for the parties;
its duty is confined to the interpretation of the one which they have made for
themselves without regard to its wisdom or folly as the court cannot supply material
stipulations or read into the contract words which it does not contain.[48] It could
not even set aside its judgment without declaring in an incidental hearing that the
Agreement was vitiated by any of the grounds enumerated in Article 2038 of the
Civil Code.[49] Above all, neither the Agreement nor the courts approval of it was
ever questioned or assailed by the parties.
Basic is the rule that if a party fails or refuses to abide by a compromise agreement,
the other may either enforce it or regard it as rescinded and insist upon the original
demand.[50] For failure of petitioner to abide by the judicial compromise, respondent
chose to enforce it. The latters course of action was in accordance with the very
stipulations in the Agreement that the lower court could not change. [51]
Respondent is thus entitled to a writ of execution for the total amount contained in
the Compromise Agreement. The Court cannot reduce it. The partial payment
made by petitioner does not at all contravene Article 1229 of the Civil Code,
[52]
which is applicable only to contracts that are the subjects of litigation, not to
final and executory judgments.[53]
Estoppel Inapplicable
Petitioners attempt to put respondent in estoppel must be struck down. In
estoppel, a person, who by his act or conduct has induced another to act in a
particular manner, is barred from adopting an inconsistent position, attitude or
course of conduct that thereby causes loss or injury to another.[54] No such
inconsistency is present here. From the very start, respondent was already asking
the courts to enforce all its claims, pursuant to the Agreement. It has not shown
any act or conduct that would leads us to believe that by accepting petitioners
partial payment, it has dropped all claims to which it is entitled.
Certainly, an obligation may be extinguished by payment, [55] but this rule applies
when the creditor receives and acknowledges full payment [56] from the debtor.
Respondent has neither acknowledged full payment nor led petitioner to believe that
it has. Lack of reservation or protest does not ipso facto constitute a waiver of

12 | P a g e

claims. Because estoppel should be applied with caution, the action that gives rise
to it must be deliberate and unequivocal.[57]
In the present case, respondent continued to pursue the execution of its total
demand of P13,118,129.84, even after receiving P5,946,294.31 from petitioner.
This continued pursuit signified the formers intent not to waive its total claim.
Hence, it cannot be considered estopped from enforcing such claim.
The appellate court was correct in strictly following the Agreement by deducting the
amount received by respondent from the latters total claim. Besides, questions
raised on appeal must be within the issues framed by the parties and, consequently,
issues not raised in the trial court cannot be raised for the first time on
appeal.[58] Any assertion of equity must finally be struck down when dilatory
schemes exist.[59]
WHEREFORE, the Petition is hereby DENIED, and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

13 | P a g e

fishpond. Respondent did not immediately undertake the necessary repairs as the
water level was still high. Three (3) weeks later, respondent was informed by
a barangay councilor that major repairs were being undertaken in the fishpond with
the use of a crane. Respondent found out that the repairs were at the instance of
petitioner who had grown impatient with his delay in commencing the work.

493 Phil. 945

SECOND DIVISION
[ G.R. NO. 159411, March 18, 2005 ]
TEODORO I. CHAVEZ, PETITIONER, VS. HON. COURT OF APPEALS AND
JACINTO S. TRILLANA, RESPONDENTS.
DECISION
PUNO, J.:
Assailed in this petition for review is the Decision dated April 2, 2003 [1] of the Court
of Appeals in CA-G.R. CV No. 59023[2] which modified the Decision dated December
15, 1997 of the Regional Trial Court (RTC) of Valenzuela City, Branch 172, in Civil
Case No. 5139-V-97, as well as its Resolution dated August 8, 2003 [3] which denied
petitioners motion for reconsideration.
The antecedent facts are as follows:
In October 1994, petitioner Teodoro Chavez and respondent Jacinto Trillana entered
into a contract of lease[4] whereby the former leased to the latter his fishpond at
Sitio Pariahan, Taliptip, Bulacan, Bulacan, for a term of six (6) years commencing
from October 23, 1994 to October 23, 2000. The rental for the whole term was two
million two hundred forty thousand (P2,240,000.00) pesos, of which one million
(P1,000,000.00) pesos was to be paid upon signing of the contract. The balance
was payable as follows:
b. That, after six (6) months and/or, on or before one (1) year from the date of
signing this contract, the amount of THREE HUNDRED FORTY-FOUR THOUSAND
(P344,000.00) pesos shall be paid on April 23, 1995 and/or, on or before October
23, 1995 shall be paid by the LESSEE to the LESSOR.
c. That, the LESSEE, shall pay the amount of FOUR HUNDRED FORTY-EIGHT
THOUSAND (P448,000.00) pesos x x x to the LESSOR on April 23, 1997 and/or, on
or before October 23, 1997, and on April 23, 1998 and/or, on or before October 23,
1998 the amount of FOUR HUNDRED FORTY-EIGHT THOUSAND (P448,000.00)
pesos x x x.
Paragraph 5 of the contract further provided that respondent shall undertake all
construction and preservation of improvements in the fishpond that may be
destroyed during the period of the lease, at his expense, without reimbursement
from petitioner.
In August 1996, a powerful typhoon hit the country which damaged the subject

In September 1996, respondent filed a complaint before the Office of

the Barangay Captain of Taliptip, Bulacan, Bulacan. He complained about the
unauthorized repairs undertaken by petitioner, the ouster of his personnel from the
leased premises and its unlawful taking by petitioner despite their valid and
subsisting lease contract. After conciliation proceedings, an agreement was reached,
viz.:
KASUNDUAN
Napagkasunduan ngayong araw na to ika-17 ng Setyembre ng nagpabuwis
Teodoro Chavez at bumubuwis na si G. Jay Trillana na ibabalik ni G. Chavez ang
halagang P150,000.00 kay G. Trillana bilang sukli sa natitirang panahon ng
buwisan.
Ngunit kung maibibigay ni G. Chavez ang halagang P100,000.00 bago sumapit o
pagsapit ng ika-23 ng Setyembre, taong kasalukuyan, to ay nangangahulugan ng
buong kabayaran at hindi P150,000.00.
Kung sakali at hindi maibigay ang P100,000.00 ang magiging kabayaran ay
mananatiling P150,000.00 na may paraan ng pagbabayad ng sumusunod:
Ang P50,000.00 ay ibibigay bago sumapit o pagsapit ng ika-31 ng Oktubre 1996 at
ang balanseng P100,000.00 ay ibibigay sa loob ng isang taon subalit magbibigay ng
promissory note si G. Chavez at kung mabubuwisang ang kanyang palaisdaan ay
ibibigay lahat ni G. Chavez ang buong P150,000.00 sa lalong madaling panahon.
Kung magkakaroon ng sapat at total na kabayaran si G. Chavez kay G. Trillana ang
huli ay lalagda sa kasulatan bilang waiver o walang anumang paghahabol sa
nabanggit na buwisan.
Alleging non-compliance by petitioner with their lease contract and the foregoing
Kasunduan, respondent filed a complaint on February 7, 1997 against petitioner
before the RTC of Valenzuela City, docketed as Civil Case No. 5139-V-97.
Respondent prayed that the following amounts be awarded him, viz.: (a)
P300,000.00 as reimbursement for rentals of the leased premises corresponding to
the unexpired portion of the lease contract; (b) P500,000.00 as unrealized profits;
(c) P200,000.00 as moral damages; (d) P200,000.00 as exemplary damages; and,
(e) P100,000.00 as attorneys fees plus P1,000.00 for each court appearance of
respondents counsel.
Petitioner filed his answer but failed to submit the required pretrial brief and to
attend the pretrial conference. On October 21, 1997, respondent was allowed to
present his evidence ex-parte before the Acting Branch Clerk of Court.[5] On the
basis thereof, a decision was rendered on December 15, 1997 [6] in favor of
respondent, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
(1)

Ordering the defendant to reimburse to the plaintiff the sum of P300,000.00

14 | P a g e

representing rental payment of the leased premises for the unused period of lease;
(2)
Ordering the defendant to pay plaintiff the sum of P500,000.00 representing
unrealized profit as a result of the unlawful deprivation by the defendant of the
possession of the subject premises;
(3)
Ordering the defendant to pay plaintiff the sum of P200,000.00 as moral
damages;
(4)
Ordering the defendant to pay plaintiff the sum of P200,000.00 as exemplary
damages; and
(5)
Ordering the defendant to pay plaintiff the sum of P100,000.00 as and for
attorneys fees, plus costs of suit.
Petitioner appealed to the Court of Appeals which modified the decision of the trial
court by deleting the award of P500,000.00 for unrealized profits for lack of basis,
and by reducing the award for attorneys fees to P50,000.00.[7] Petitioners motion
for reconsideration was denied. Hence, this petition for review.
Petitioner contends that the Court of Appeals erred in ruling that the RTC of
Valenzuela City had jurisdiction over the action filed by respondent considering that
the subject matter thereof, his alleged violation of the lease contract with
respondent, was already amicably settled before the Office of the Barangay Captain
of Taliptip, Bulacan, Bulacan. Petitioner argued that respondent should have
followed the procedure for enforcement of the amicable settlement as provided for
in the Revised Katarungang Pambarangay Law. Assuming arguendo that the
RTC had jurisdiction, it cannot award more than the amount stipulated in the
Kasunduan which is P150,000.00. In any event, no factual or legal basis existed
for the reimbursement of alleged advance rentals for the unexpired portion of the
lease contract as well as for moral and exemplary damages, and attorneys fees.
Indeed, the Revised Katarungang Pambarangay Law[8] provides that an
amicable settlement reached after barangay conciliation proceedings has the force
and effect of a final judgment of a court if not repudiated or a petition to nullify the
same is filed before the proper city or municipal court within ten (10) days from its
date.[9] It further provides that the settlement may be enforced by execution by the
lupong tagapamayapa within six (6) months from its date, or by action in the
appropriate city or municipal court, if beyond the six-month period. [10] This special
provision follows the general precept enunciated in Article 2037 of the Civil
Code, viz.:
A compromise has upon the parties the effect and authority of res judicata; but
there shall be no execution except in compliance with a judicial compromise.
Thus, we have held that a compromise agreement which is not contrary to law,
public order, public policy, morals or good customs is a valid contract which is the
law between the parties themselves. [11] It has upon them the effect and authority
of res judicata even if not judicially approved,[12] and cannot be lightly set aside or
disturbed except for vices of consent and forgery.[13]
However, in Heirs of Zari, et al. v. Santos,[14] we clarified that the broad precept
enunciated in Art. 2037 is qualified by Art. 2041 of the same Code, which provides:

If one of the parties fails or refuses to abide by the compromise, the other party
may either enforce the compromise or regard it as rescinded and insist upon his
original demand.
We explained, viz:
[B]efore the onset of the new Civil Code, there was no right to rescind compromise
agreements. Where a party violated the terms of a compromise agreement, the only
recourse open to the other party was to enforce the terms thereof.
When the new Civil Code came into being, its Article 2041 x x x created for the first
time the right of rescission. That provision gives to the aggrieved party the right to
either enforce the compromise or regard it as rescinded and insist upon his original
demand. Article 2041 should obviously be deemed to qualify the broad precept
enunciated in Article 2037 that [a] compromise has upon the parties the effect and
authority of res judicata. (underscoring ours)
In exercising the second option under Art. 2041, the aggrieved party may, if he
chooses, bring the suit contemplated or involved in his original demand, as if there
had never been any compromise agreement, without bringing an action for
rescission.[15] This is because he may regard the compromise as already
rescinded[16] by the breach thereof of the other party.
Thus, in Morales v. National Labor Relations Commission [17] we upheld the
National Labor Relations Commission when it heeded the original demand of four (4)
workers for reinstatement upon their employers failure to comply with its obligation
to pay their monetary benefits within the period prescribed under the amicable
settlement. We reiterated the rule that the aggrieved party may either (1) enforce
the compromise by a writ of execution, or (2) regard it as rescinded and so insist
upon his original demand upon the other partys failure or refusal to abide by the
compromise. We also recognized the options in Mabale v. Apalisok,
[18]
Canonizado v. Benitez,[19] and Ramnani v. Court of Appeals,[20] to name a
few cases.
In the case at bar, the Revised Katarungang Pambarangay Law provides for a
two-tiered mode of enforcement of an amicable settlement, to wit: (a) by execution
by the Punong Barangay which is quasi-judicial and summary in nature on mere
motion of the party entitled thereto; and (b) an action in regular form, which
remedy is judicial.[21] However, the mode of enforcement does not rule out the right
of rescission under Art. 2041 of the Civil Code. The availability of the right of
rescission is apparent from the wording of Sec. 417[22] itself which provides that the
amicable settlement may be enforced by execution by the lupon within six (6)
months from its date or by action in the appropriate city or municipal court, if
beyond that period. The use of the word may clearly makes the procedure
provided in the Revised Katarungang Pambarangay Law directory[23] or merely
optional in nature.Thus, although the Kasunduan executed by petitioner and
respondent before the Office of the Barangay Captain had the force and effect of a
final judgment of a court, petitioners non-compliance paved the way for the
application of Art. 2041 under which respondent may either enforce the
compromise, following the procedure laid out in the Revised Katarungang
Pambarangay Law, or regard it as rescinded and insist upon his original demand.
Respondent chose the latter option when he instituted Civil Case No. 5139-V-97 for
recovery of unrealized profits and reimbursement of advance rentals, moral and
exemplary damages, and attorneys fees. Respondent was not limited to claiming
P150,000.00 because although he agreed to the amount in the Kasunduan, it is

15 | P a g e

axiomatic that a compromise settlement is not an admission of liability but merely a

recognition that there is a dispute and an impending litigation [24] which the parties
hope to prevent by making reciprocal concessions, adjusting their respective
positions in the hope of gaining balanced by the danger of losing. [25] Under the
Kasunduan, respondent was only required to execute a waiver of all possible
claims arising from the lease contract if petitioner fully complies with his obligations
thereunder.[26] It is undisputed that herein petitioner did not.

deleting the award of P300,000.00 as reimbursement of advance rentals. The

assailed Decision is AFFIRMED in all other respects.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Having affirmed the RTCs jurisdiction over the action filed by respondent, we now
resolve petitioners remaining contention. Petitioner contends that no factual or
legal basis exists for the reimbursement of alleged advance rentals, moral and
exemplary damages, and attorneys fees awarded by the court a quo and the Court
of Appeals.
The rule is that actual damages cannot be presumed, but must be proved with a
reasonable degree of certainty.[27] In the case at bar, we agree with petitioner that
no competent proof was presented to prove that respondent had paid P300,000.00
as advance rentals for the unexpired period of the lease contract. On the contrary,
the lease contract itself provided that the remaining rentals of P448,000.00 shall be
paid on April 23, 1997 and/or, on or before October 23, 1997, and on April 23,
1998 and/or, on or before October 23, 1998 the amount P448,000.00. Respondent
filed his complaint on February 7, 1997. No receipt or other competent proof, aside
from respondents self-serving assertion, was presented to prove that respondent
paid the rentals which were not yet due. No proof was even presented by
respondent to show that he had already paid P1,000,000.00 upon signing of the
lease contract, as stipulated therein. Petitioner, in paragraphs 2 and 7 of his
answer,[28] specifically denied that respondent did so. Courts must base actual
damages suffered upon competent proof and on the best obtainable evidence of the
actual amount thereof.[29]
As to moral damages, Art. 2220 of the Civil Code provides that same may be
awarded in breaches of contract where the defendant acted fraudulently or in bad
faith. In the case at bar, respondent alleged that petitioner made unauthorized
repairs in the leased premises and ousted his personnel therefrom despite their
valid and subsisting lease agreement. Petitioner alleged, by way of defense, that he
undertook the repairs because respondent abandoned the leased premises and left
it in a state of disrepair. However, petitioner presented no evidence to prove his
allegation, as he did not attend the pretrial conference and was consequently
declared in default. What remains undisputed therefore is that petitioner had a valid
and subsisting lease contract with respondent which he refused to honor by giving
back possession of the leased premises to respondent. We therefore sustain the
conclusion of both the trial court and the Court of Appeals that an award of moral
damages is justified under the circumstances. We likewise sustain the award for
exemplary damages considering petitioners propensity not to honor his contractual
obligations, first under the lease contract and second, under the amicable
settlement executed before the Office of the Barangay Captain. Since respondent
was compelled to litigate and incur expenses to protect his interest on account of
petitioners refusal to comply with his contractual obligations, [30] the award of
attorneys fees has to be sustained.
IN VIEW WHEREOF, the petition is PARTIALLY GRANTED. The assailed Decision
dated April 2, 2003 of the Court of Appeals in CA-G.R. CV No. 59023 is modified by

16 | P a g e

xxx
d)
468 Phil. 1000

A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, Pangasinan

assessed at P5610.00 x x x;

e)

FIRST DIVISION
[ G.R. No. 158901, March 09, 2004 ]

A parcel of Cogon land situated at Brgy. Labney, San Jacinto, Pangasinan, with
an area of 14133 sq. meters, more or less declared under Tax Declaration No.
14 of the land records of San Jacinto, Pangasinan assessed at P2830.00 x x x. [1]
On January 5, 1997, an amicable settlement was reached between the parties. By
reason thereof, respondent Arjona executed a document denominated as
PAKNAAN (Agreement, in Pangasinan dialect), which reads:
AGREEMENT

PROCESO QUIROS AND LEONARDA VILLEGAS, PETITIONERS, VS. MARCELO

ARJONA, TERESITA BALARBAR, JOSEPHINE ARJONA, AND CONCHITA
ARJONA, RESPONDENTS.
DECISION
YNARES-SATIAGO, J.:
Assailed in this petition for review is the decision of the Court of Appeals in an
action for the execution/enforcement of amicable settlement between petitioners
Proceso Quiros and Leonarda Villegas and respondent Marcelo Arjona. Appellate
court reversed the decision of the Regional Trial Court of Dagupan City-Branch 44
and reinstated the decision of the Municipal Trial Court of San Fabian-San Jacinto,
Pangasinan.
On December 19, 1996, petitioners Proceso Quiros and Leonarda Villegas filed with
the office of the barangay captain of Labney, San Jacinto, Pangasinan, a complaint
for recovery of ownership and possession of a parcel of land located at Labney, San
Jacinto, Pangasinan. Petitioners sought to recover from their uncle Marcelo Arjona,
one of the respondents herein, their lawful share of the inheritance from their late
grandmother Rosa Arjona Quiros alias Doza, the same to be segregated from the
following parcels of land:
a)

A parcel of land (Lot 1, plan Psu-189983, L.R. Case No. D-614, LRC Record No.
N- 22630), situated in the Barrio of Labney, Torud, Municipality of San Jacinto,
Province of Pangasinan x x x Containing an area of Forty Four Thousand Five
Hundred and Twenty (44,520) square meters, more or less, covered by Tax
Decl. No. 607;

b)

A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, San Jacinto,
Pangasinan with an area of 6450 sq. meters, more or less declared under Tax
Decl. No. 2066 of the land records of San Jacinto, Pangasinan assessed at
P2390.00 x x x;

c)

A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, Pangasinan

with an area of 6450 sq. meters, more or less, declared under Tax Declaration
No. 2047 of the land records of San Jacinto, Pangasinan assessed at P1700.00

I, MARCELO ARJONA, of legal age, resident of Barangay Sapang, Buho, Palayan City,
Nueva Ecija, have a land consisting of more or less one (1) hectare which I gave to
Proceso Quiros and Leonarda Villegas, this land was inherited by Doza that is why I
am giving the said land to them for it is in my name, I am affixing my signature on
this document for this is our agreement besides there are witnesses on the 5 th day
(Sunday) of January 1997.
Signed in the presence of:
(Sgd) Avelino N. De la Masa, Jr.
(Sgd) Marcelo Arjona
Witnesses:
1)
(Sgd.)
2)
(Sgd.)
3)
(Sgd.)
On the same

Teresita Balarbar
Josephine Arjona
Conchita Arjona
date, another PAKNAAN was executed by Jose Banda, as follows:
AGREEMENT

I, JOSE BANDA, married to Cecilia L. Banda, of legal age, and resident of Sitio
Torrod, Barangay Labney, San Jacinto, Pangasinan. There is a land in which they
entrusted to me and the same land is situated in Sitio Torrod, Brgy. Labney, San
Jacinto, Pangasinan, land of Arjona family.
I am cultivating/tilling this land but if ever Leonarda Villegas and Proceso Quiros
would like to get this land, I will voluntarily surrender it to them.
In order to attest to the veracity and truthfulness of this agreement, I affixed (sic)
my signature voluntarily below this document this 5th day (Sunday) of January
1997.
(Sgd.) Jose Banda
Signed in the presence of:

17 | P a g e

(Sgd) Avelino N. de la Masa, Sr.

Barangay Captain
Brgy. Labney, San Jacinto
Pangasinan
Witnesses:
1) Irene Banda
(sgd.)
2) Jose (illegible) x x x
Petitioners filed a complaint with the Municipal Circuit Trial Court with prayer for the
issuance of a writ of execution of the compromise agreement which was denied
because the subject property cannot be determined with certainty.

The Civil Code contains salutary provisions that encourage and favor compromises
and do not even require judicial approval. Thus, under Article 2029 of the Civil
Code, the courts must endeavor to persuade the litigants in a civil case to agree
upon some fair compromise. Pursuant to Article 2037 of the Civil Code, a
compromise has upon the parties the effect and authority of res judicata, and this is
true even if the compromise is not judicially approved. Articles 2039 and 2031
thereof also provide for the suspension of pending actions and mitigation of
damages to the losing party who has shown a sincere desire for a compromise, in
keeping with the Codes policy of encouraging amicable settlements. [3]

Respondents appealed to the Court of Appeals, which reversed the decision of the
Regional Trial Court and reinstated the decision of the Municipal Circuit Trial Court. [2]

Cognizant of the beneficial effects of amicable settlements, the Katarungang

Pambarangay Law (P.D. 1508) and later the Local Government Code provide for a
mechanism for conciliation where party-litigants can enter into an agreement in
the barangay level to reduce the deterioration of the quality of justice due to
indiscriminate filing of court cases. Thus, under Section 416 of the said Code, an
amicable settlement shall have the force and effect of a final judgment of the court
upon the expiration of 10 days from the date thereof, unless repudiation of the
settlement has been made or a petition to nullify the award has been filed before
the proper court

Hence, this petition on the following errors:

I
THE PAKNAAN BEING A FINAL AND EXECUTORY JUDGMENT UNDER THE LAW IS AN
IMMUTABLE JUDGMENT CAN NOT BE ALTERED, MODIFIED OR CHANGED BY THE
COURT INCLUDING THE HIGHEST COURT; and

Petitioners submit that since the amicable settlement had not been repudiated or
impugned before the court within the 10-day prescriptive period in accordance with
Section 416 of the Local Government Code, the enforcement of the same must be
done as a matter of course and a writ of execution must accordingly be issued by
the court.

II
THE SECOND PAKNAAN ALLEGEDLY EXECUTED IN CONJUNCTION WITH THE FIRST
PAKNAAN WAS NEVER ADDUCED AS EVIDENCE BY EITHER OF THE PARTIES, SO IT
IS ERROR OF JURISDICTION TO CONSIDER THE SAME IN THE DECISION MAKING.
The pivotal issue is the validity and enforceability of the amicable settlement
between the parties and corollary to this, whether a writ of execution may issue on
the basis thereof.

Generally, the rule is that where no repudiation was made during the 10-day period,
the amicable settlement attains the status of finality and it becomes the ministerial
duty of the court to implement and enforce it. However, such rule is not inflexible
for it admits of certain exceptions. In Santos v. Judge Isidro,[4] the Court observed
that special and exceptional circumstances, the imperatives of substantial justice, or
facts that may have transpired after the finality of judgment which would render its
execution unjust, may warrant the suspension of execution of a decision that has
become final and executory. In the case at bar, the ends of justice would be
frustrated if a writ of execution is issued considering the uncertainty of the object of
the agreement. To do so would open the possibility of error and future litigations.

The Regional Trial Court reversed the decision of the municipal court on appeal and
ordered the issuance of the writ of execution.

In support of their stance, petitioners rely on Section 416 of the Local Government
Code which provides that an amicable settlement shall have the force and effect of a
final judgment upon the expiration of 10 days from the date thereof, unless
repudiated or nullified by the proper court. They argue that since no such
repudiation or action to nullify has been initiated, the municipal court has no
discretion but to execute the agreement which has become final and executory.
Petitioners likewise contend that despite the failure of the Paknaan to describe with
certainty the object of the contract, the evidence will show that after the execution
of the agreement, respondent Marcelo Arjona accompanied them to the actual site
of the properties at Sitio Torod, Labney, San Jacinto, Pangasinan and pointed to
them the 1 hectare property referred to in the said agreement.

The Paknaan executed by respondent Marcelo Arjona purports to convey a parcel of

land consisting of more or less 1 hectare to petitioners Quiros and Villegas.
Another Paknaan, prepared on the same date, and executed by one Jose Banda who
signified his intention to vacate the parcel of land he was tilling located at Torrod,
Brgy. Labney, San Jacinto, Pangasinan, for and in behalf of the Arjona family. On
ocular inspection however, the municipal trial court found that the land referred to in
the second Paknaan was different from the land being occupied by petitioners.
Hence, no writ of execution could be issued for failure to determine with certainty
what parcel of land respondent intended to convey.

In their Comment, respondents insist that respondent Arjona could not have
accompanied petitioners to the subject land at Torrod, Labney because he was
physically incapacitated and there was no motorized vehicle to transport him to the
said place.

In denying the issuance of the

contract is null and void for its
While we agree that no writ of
appellate courts reason for its

writ of execution, the appellate court ruled that the

failure to describe with certainty the object thereof.
execution may issue, we take exception to the
denial.

18 | P a g e

Since an amicable settlement, which partakes of the nature of a contract, is subject

to the same legal provisions providing for the validity, enforcement, rescission or
annulment of ordinary contracts, there is a need to ascertain whether
the Paknaan in question has sufficiently complied with the requisites of validity in
accordance with Article 1318 of the Civil Code.[5]

their successors in interest, no evidence of such terms other than the contents of
the written agreement, except when it fails to express the true intent and
agreement of the parties thereto, in which case, one of the parties may bring an
action for the reformation of the instrument to the end that such true intention may
be expressed.[9]

There is no question that there was meeting of the minds between the contracting
parties. In executing the Paknaan, the respondent undertook to convey 1 hectare of
land to petitioners who accepted. It appears that while the Paknaan was prepared
and signed by respondent Arjona, petitioners acceded to the terms thereof by not
disputing its contents and are in fact now seeking its enforcement. The object is a
1-hectare parcel of land representing petitioners inheritance from their deceased
grandmother. The cause of the contract is the delivery of petitioners share in the
inheritance. The inability of the municipal court to identify the exact location of the
inherited property did not negate the principal object of the contract. This is an
error occasioned by the failure of the parties to describe the subject property, which
is correctible by reformation and does not indicate the absence of the principal
object as to render the contract void. It cannot be disputed that the object is
determinable as to its kind, i.e.1 hectare of land as inheritance, and can be
determined without need of a new contract or agreement.[6] Clearly,
the Paknaan has all the earmarks of a valid contract.

Both parties acknowledge that petitioners are entitled to their inheritance, hence,
the remedy of nullification, which invalidates the Paknaan, would prejudice
petitioners and deprive them of their just share of the inheritance. Respondent can
not, as an afterthought, be allowed to renege on his legal obligation to transfer the
property to its rightful heirs. A refusal to reform the Paknaan under such
circumstances would have the effect of penalizing one party for negligent conduct,
and at the same time permitting the other party to escape the consequences of his
negligence and profit thereby. No person shall be unjustly enriched at the expense
of another.

Although both parties agreed to transfer one-hectare real property, they failed to
include in the written document a sufficient description of the property to convey.
This error is not one for nullification of the instrument but only for reformation.

SO ORDERED.

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision

dated March 21, 2003 of the Court of Appeals, which reversed the decision of the
Regional Trial Court and reinstated the decision of the Municipal Trial Court,
is AFFIRMED. This is without prejudice to the filing by either party of an action for
reformation of the Paknaan executed on January 5, 1997.

Davide, Jr., C.J., (Chairman), Carpio, and Azcuna, JJ., concur.

Panganiban, J., on official leave.

Article 1359 of the Civil Code provides:

When, there having been a meeting of the minds of the parties to a contract, their
true intention is not expressed in the instrument purporting to embody the
agreement by reason of mistake, fraud, inequitable conduct or accident, one of the
parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the
minds of the parties, the proper remedy is not reformation of the instrument but
annulment of the contract.
Reformation is a remedy in equity whereby a written instrument is made or
construed so as to express or conform to the real intention of the parties where
some error or mistake has been committed.[7] In granting reformation, the remedy
in equity is not making a new contract for the parties, but establishing and
perpetuating the real contract between the parties which, under the technical rules
of law, could not be enforced but for such reformation.
In order that an action for reformation of instrument as provided in Article 1359 of
the Civil Code may prosper, the following requisites must concur: (1) there must
have been a meeting of the minds of the parties to the contract; (2) the instrument
does not express the true intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is due to mistake, fraud,
inequitable conduct or accident.[8]
When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and

19 | P a g e

351 Phil. 507

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.

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.

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]

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.
In reply to said opposition, SPI insisted that there was such an arbitration clause in
the existing contract between petitioner and SPI. It alleged that suspension of
proceedings would not necessarily deprive the court of its jurisdiction over the case
and that arbitration would expedite rather than delay the settlement of the parties
respective claims against each other.
In a rejoinder to SPIs reply, petitioner reiterated that there was no arbitration
clause in the contract between the parties. It averred that granting that such a
clause indeed formed part of the contract, suspension of the proceedings was no
longer proper. It added that defendants should be declared in default for failure to
file their answer within the reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioners admission of the
due execution of the Articles of Agreement. Thus, on page D/6 thereof, the
signatures of Rufo B. Colayco, SPI president, and Bayani Fernando, president of
petitioner appear, while page D/7 shows that the agreement is a public document
duly notarized on November 15, 1991 by Notary Public Nilberto R. Briones as
document No. 345, page 70, book No. LXX, Series of 1991 of his notarial register.[5]
Thereafter, upon a finding that an arbitration clause indeed exists, the lower
court[6] denied the motion to suspend proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30,
1991 (Annex C, Complaint), plaintiff BF and defendant Shangri-La Properties, Inc.
agreed upon the terms and conditions of the Builders Work for the EDSA Plaza
Project (Phases I, II and Carpark), subject to the execution by the parties of a
formal trade contract. Defendants have submitted a copy of the alleged trade
contract, which is entitled `Contract Documents For Builders Work Trade Contractor

20 | P a g e

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)

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.

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.

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.

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.)

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 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 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

21 | P a g e

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

22 | P a g e

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

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.

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.

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.

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 forcertiorari.
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 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

23 | P a g e

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.

378 Phil. 369

24 | P a g e

SECOND DIVISION
[ G.R. NO. 135362, December 13, 1999 ]
HEIRS OF AUGUSTO L. SALAS, JR., NAMELY: TERESITA D. SALAS FOR
HERSELF AND AS LEGAL GUARDIAN OF THE MINOR FABRICE CYRILL D.
SALAS, MA. CRISTINA S. LESACA, AND KARINA TERESA D. SALAS,
PETITIONERS, VS. LAPERAL REALTY CORPORATION, ROCKWAY REAL
ESTATE CORPORATION, SOUTH RIDGE VILLAGE, INC., MAHARAMI
DEVELOPMENT CORPORATION, SPOUSES THELMA D. ABRAJANO AND
GREGORIO ABRAJANO, OSCAR DACILLO, SPOUSES VIRGINIA D. LAVA AND
RODEL LAVA, EDUARDO A. VACUNA, FLORANTE DE LA CRUZ, JESUS
VICENTE B. CAPELLAN, AND THE REGISTER OF DEEDS FOR LIPA CITY,
RESPONDENTS.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Order[1] of Branch 85 of the
Regional Trial Court of Lipa City[2] dismissing petitioners' complaint[3] for rescission of
several sale transactions involving land owned by Augusto L. Salas, Jr., their
predecessor-in-interest, on the ground that they failed to first resort to arbitration.
Salas, Jr. was the registered owner of a vast tract of land in Lipa City, Batangas
spanning 1,484,354 square meters.
On May 15, 1987, he entered into an Owner-Contractor Agreement [4] (hereinafter
referred to as the Agreement) with respondent Laperal Realty Corporation
(hereinafter referred to as Laperal Realty) to render and provide complete
(horizontal) construction services on his land.
On September 23, 1988, Salas, Jr. executed a Special Power of Attorney in favor of
respondent Laperal Realty to exercise general control, supervision and management
of the sale of his land, for cash or on installment basis.
On June 10, 1989, Salas, Jr. left his home in the morning for a business trip to
Nueva Ecija. He never returned.
On August 6, 1996, Teresita Diaz Salas filed with the Regional Trial Court of Makati
City a verified petition for the declaration of presumptive death of her husband,
Salas, Jr., who had then been missing for more than seven (7) years. It was
granted on December 12, 1996.[5]
Meantime, respondent Laperal Realty subdivided the land of Salas, Jr. and sold
subdivided portions thereof to respondents Rockway Real Estate Corporation and
South Ridge Village, Inc. on February 22, 1990; to respondent spouses Abrajano
and Lava and Oscar Dacillo on June 27, 1991; and to respondents Eduardo Vacuna,
Florante de la Cruz and Jesus Vicente Capalan on June 4, 1996 (all of whom are
hereinafter referred to as respondent lot buyers).

On February 3, 1998, petitioners as heirs of Salas, Jr. filed in the Regional Trial
Court of Lipa City a Complaint[6] for declaration of nullity of sale, reconveyance,
cancellation of contract, accounting and damages against herein respondents which
was docketed as Civil Case No. 98-0047.
On April 24, 1998, respondent Laperal Realty filed a Motion to Dismiss [7]on the
ground that petitioners failed to submit their grievance to arbitration as required
under Article VI of the Agreement which provides:
"ARTICLE VI. ARBITRATION.
All cases of dispute between CONTRACTOR and OWNER'S representative shall be
referred to the committee represented by:
a. One representative of the OWNER;
b. One representative of the CONTRACTOR;
c. One representative acceptable to both OWNER and CONTRACTOR." [8]
On May 5, 1998, respondent spouses Abrajano and Lava and respondent Dacillo
filed a Joint Answer with Counterclaim and Crossclaim [9] praying for dismissal of
petitioners' Complaint for the same reason.
On August 9, 1998, the trial court issued the herein assailed Order dismissing
petitioners' Complaint for non-compliance with the foregoing arbitration clause.
Hence this petition.
Petitioners argue, thus:
"The petitioners' causes of action did not emanate from the Owner-Contractor
Agreement."
"The petitioners' causes of action for cancellation of contract and accounting are
covered by the exception under the Arbitration Law."
"Failure to arbitrate is not a ground for dismissal."[10]
In a catena of cases[11] inspired by Justice Malcolm's provocative dissent in Vega v.
San Carlos Milling Co.[12], this Court has recognized arbitration agreements as valid,
binding, enforceable and not contrary to public policy so much so that when there
obtains a written provision for arbitration which is not complied with, the trial court
should suspend the proceedings and order the parties to proceed to arbitration in
accordance with the terms of their agreement[13] Arbitration is the "wave of the
future" in dispute resolution.[14] To brush aside a contractual agreement calling for
arbitration in case of disagreement between parties would be a step backward. [15]
Nonetheless, we grant the petition.
A submission to arbitration is a contract.[16] As such, the Agreement, containing the
stipulation on arbitration, binds the parties thereto, as well as their assigns and
heirs.[17] But only they. Petitioners, as heirs of Salas, Jr., and respondent Laperal
Realty are certainly bound by the Agreement. If respondent Laperal Realty, had
assigned its rights under the Agreement to a third party, making the former, the
assignor, and the latter, the assignee, such assignee would also be bound by the
arbitration provision since assignment involves such transfer of rights as to vest in
the assignee the power to enforce them to the same extent as the assignor could

25 | P a g e

have enforced them against the debtor[18] or in this case, against the heirs of the
original party to the Agreement. However, respondents Rockway Real Estate
Corporation, South Ridge Village, Inc., Maharami Development Corporation, spouses
Abrajano, spouses Lava, Oscar Dacillo, Eduardo Vacuna, Florante de la Cruz and
Jesus Vicente Capellan are not assignees of the rights of respondent Laperal Realty
under the Agreement to develop Salas, Jr.'s land and sell the same. They are,
rather, buyers of the land that respondent Laperal Realty was given the authority to
develop and sell under the Agreement. As such, they are not "assigns"
contemplated in Art. 1311 of the New Civil Code which provides that "contracts take
effect only between the parties, their assigns and heirs".

[1]

Annex "A" of the Petition, Rollo, pp. 19-20.

[2]

Presided by Hon. Judge Avelino G. Demetria.

[3]

Rollo, p. 32.

[4]

Annex "B" of the Petition, Rollo, p. 22.

Petitioners claim that they suffered lesion of more than one-fourth (1/4) of the
value of Salas, Jr.'s land when respondent Laperal Realty subdivided it and sold
portions thereof to respondent lot buyers. Thus, they instituted action[19]against
both respondent Laperal Realty and respondent lot buyers for rescission of the sale
transactions and reconveyance to them of the subdivided lots. They argue that
rescission, being their cause of action, falls under the exception clause in Sec. 2 of
Republic Act No. 876 which provides that "such submission [to] or contract [of
arbitration] shall be valid, enforceable and irrevocable, save upon such grounds
as exist at law for the revocation of any contract".

[6]

Annex "D" of the Petition, Rollo, pp. 32-49.

[7]

Annex "E" of the Petition, Rollo, pp. 50-56.

[8]

Owner-Contractor Agreement, p. 6, Rollo, p. 27.

[9]

Annex "F" of the Petition, Rollo, pp. 58-73.

The petitioners' contention is without merit. For while rescission, as a general rule,
is an arbitrable issue,[20] they impleaded in the suit for rescission the respondent lot
buyers who are neither parties to the Agreement nor the latter's assigns or heirs.
Consequently, the right to arbitrate as provided in Article VI of the Agreement was
never vested in respondent lot buyers.

[11]

Respondent Laperal Realty, as a contracting party to the Agreement, has the right to
compel petitioners to first arbitrate before seeking judicial relief. However, to split
the proceedings into arbitration for respondent Laperal Realty and trial for the
respondent lot buyers, or to hold trial in abeyance pending arbitration between
petitioners and respondent Laperal Realty, would in effect result in multiplicity of
suits, duplicitous procedure and unnecessary delay. On the other hand, it would be
in the interest of justice if the trial court hears the complaint against all herein
respondents and adjudicates petitioners' rights as against theirs in a single and
complete proceeding.

[12]

51 Phil. 908, 916-920 (1924).

[13]

Bengson v. Chan, supra.

[14]

B.F. Corporation v. Court of Appeals, et al., 288 SCRA 267, 286 (1998).

[15]

Ibid.

[16]

Manila Electric Company v. Pasay Transportation Co., 57 Phil. 600, 603 (1932).

WHEREFORE, the instant petition is hereby GRANTED. The Order dated August 19,
1998 of Branch 85 of the Regional Trial Court of Lipa City is
hereby NULLIFIED and SET ASIDE. Said court is hereby ordered to proceed with
the hearing of Civil Case No. 98-0047.

[17]

Art. 1311, Civil Code.

Costs against private respondents.

[19]

Decision of Branch 59 of the Regional Trial Court of Makati City in SP. PROC. No.
M-4394 marked as Annex "C" of the Petition, Rollo, pp. 29-31.
[5]

[10]

Petition, pp. 7, 9-10, Rollo, pp. 9, 11-12.

Mindanao Portland Cement Corporation v. McDonough Construction Company of

Florida, 19 SCRA 808, 815 (1967); Bengson v. Chan, 78 SCRA 113, 119 (1977);
Chung Fu Industries (Phils.), Inc. v. Court of Appeals, 206 SCRA 545, 549-552
(1992); Puromines , Inc. v. Court of Appeals, 220 SCRA 281, 289-290 (1993);
National Power Corporation v. Court of Appeals, 254 SCRA 116, 125 (1996).

Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. 5 (1992), p. 188.
[18]

Complaint dated February 2, 1998 marked as Annex "D" of the Petition, Rollo,
pp. 32-48.

SO ORDERED.
[20]

Santiago v. Gonzalez, 79 SCRA 494, 500 (1977).

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

26 | P a g e

383 Phil. 887

FIRST DIVISION
[ G.R. No. 126212, March 02, 2000 ]
SEA-LAND SERVICE, INC., PETITIONER, VS. COURT OF APPEALS, A.P.
MOLLER/MAERSK LINE AND MAERSK-TABACALERA SHIPPING AGENCY
(FILIPINAS), INC., RESPONDENTS.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari seeks to annul and set aside the decision of the
Court of Appeals dated September 29, 1995 in CA-G.R. SP No. 35777, [1] dismissing
the petition for certiorari filed by petitioner to annul the two (2) orders issued by the
Regional Trial Court of Quezon City, Branch 216, in Civil Case No. Q-92-12593.
The facts are as follows:
On April 29, 1991, petitioner Sea-Land Services, Inc. and private respondent A.P.
Moller/Maersk Line (hereinafter referred to as "AMML"), both carriers of cargo in
containerships as well as common carriers, entered into a contract entitled, "Cooperation in the Pacific"[2] (hereinafter referred to as the "Agreement"), a vessel
sharing agreement whereby they mutually agreed to purchase, share and exchange
needed space for cargo in their respective containerships. Under the Agreement,
they could be, depending on the occasion, either a principal carrier (with a
negotiable bill of lading or other contract of carriage with respect to cargo) or a
containership operator (owner, operator or charterer of containership on which the
cargo is carried).
During the lifetime of the said Agreement, or on 18 May 1991, Florex International,
Inc. (hereinafter referred to as "Florex") delivered to private respondent AMML
cargo of various foodstuffs, with Oakland, California as port of discharge and San
Francisco as place of delivery. The corresponding Bill of Lading No. MAEU
MNL110263 was issued to Florex by respondent AMML. Pursuant to the Agreement,
respondent AMML loaded the subject cargo on MS Sealand Pacer, a vessel owned by
petitioner. Under this arrangement, therefore, respondent AMML was the principal
carrier while petitioner was the containership operator.
The consignee refused to pay for the cargo, alleging that delivery thereof was
delayed. Thus, on June 26, 1992, Florex filed a complaint against respondent
Maersk-Tabacalera Shipping Agency (Filipinas), Inc. for reimbursement of the value
of the cargo and other charges.[3] According to Florex, the cargo was received by the
consignee only on June 28, 1991, since it was discharged in Long Beach, California,
instead of in Oakland, California on June 5, 1991 as stipulated.

Respondent AMML filed its Answer[4] alleging that even on the assumption that
Florex was entitled to reimbursement, it was petitioner who should be liable.
Accordingly, respondent AMML filed a Third Party Complaint [5] against petitioner on
November 10, 1992, averring that whatever damages sustained by Florex were
caused by petitioner, which actually received and transported Florexs cargo on its
vessels and unloaded them.
On January 1, 1993, petitioner filed a Motion to Dismiss the Third Party
Complaint[6] on the ground of failure to state a cause of action and lack of
jurisdiction, the amount of damages not having been specified therein. Petitioner
also prayed either for dismissal or suspension of the Third Party Complaint on the
ground that there exists an arbitration agreement between it and respondent AMML.
On September 27, 1993, the lower court issued an Order denying petitioners
Motion to Dismiss. Petitioner's Motion for Reconsideration was likewise denied by the
lower court in its August 22, 1994 Order.
Undaunted, petitioner filed a petition for certiorari[7] with the Court of Appeals on
November 23, 1994. Meanwhile, petitioner also filed its Answer to the Third Party
Complaint in the trial court.
On September 29, 1995, respondent Court of Appeals rendered the assailed
Decision dismissing the petition for certiorari. With the denial of its Motion for
Reconsideration, petitioner filed the instant petition for review, raising the following
issues I.
THE COURT OF APPEALS DISREGARDED AN AGREEMENT TO ARBITRATE IN
VIOLATION OF STATUTE AND SUPREME COURT DECISIONS HOLDING THAT
ARBITRATION IS A CONDITION PRECEDENT TO SUIT WHERE SUCH AN AGREEMENT
TO ARBITRATE EXISTS.
II.
THE COURT OF APPEALS HAS RULED IN A MANNER NOT IN ACCORD WITH
JURISPRUDENCE WHEN IT REFUSED TO HAVE THE THIRD-PARTY COMPLAINT
DISMISSED FOR FAILURE TO STATE A CAUSE OF ACTION AND FOR RULING THAT
THE FAILURE TO STATE A CAUSE OF ACTION MAY BE REMEDIED BY REFERENCE TO
ITS ATTACHMENTS.[8]
Resolving first the issue of failure to state a cause of action, respondent Court of
Appeals did not err in reading the Complaint of Florex and respondent AMML's
Answer together with the Third Party Complaint to determine whether a cause of
action is properly alleged. In Fil-Estate Golf and Development, Inc. vs. Court of
Appeals,[9] this Court ruled that in the determination of whether or not the complaint
states a cause of action, the annexes attached to the complaint may be considered,
they being parts of the complaint.
Coming now to the main issue of arbitration, the pertinent clauses of the "Cooperation in the Pacific" contract entered into by the parties provide:
16.2

For the purposes of this agreement the Containership Operator shall be

deemed to have issued to the Principal Carrier for good consideration and
for both loaded and empty containers its non-negotiable memo bills of

27 | P a g e

16.3

32.
32.1

32.2

32.3
32.4

32.5

lading in the form attached hereto as Appendix 6, consigned only to the

Principal Carrier or its agents, provisions of which shall govern the liability
between the Principal Carrier and the Containership Operator and that for
the purpose of determining the liability in accordance with either Lines'
memo bill of lading, the number of packages or customary freight units
shown on the bill of lading issued by the Principal Carrier to its shippers
shall be controlling.
The Principal Carrier shall use all reasonable endeavours to defend all in
personam and in rem suits for loss of or damage to cargo carried pursuant
to bills of lading issued by it, or to settle such suits for as low a figure as
reasonably possible. The Principal Carrier shall have the right to seek
damages and/or an indemnity from the Containership Operator by
arbitration pursuant to Clause 32 hereof. Notwithstanding the provisions of
the Lines' memo bills of lading or any statutory rules incorporated therein
or applicable thereto, the Principal Carrier shall be entitled to commence
such arbitration at any time until one year after its liability has been finally
determined by agreement, arbitration award or judgment, such award or
judgment not being the subject of appeal, provided that the Containership
Operator has been given notice of the said claim in writing by the Principal
Carrier within three months of the Principal Carrier receiving notice in
writing of the claim. Further the Principal Carrier shall have the right to
grant extensions of time for the commencement of suit to any third party
interested in the cargo without prior reference to the Containership
Operator provided that notice of any extension so granted is given to the
Containership Operator within 30 days of any such extension being granted.
xxx xxx xxx
ARBITRATION
If at any time a dispute or claim arises out of or in connection with the
Agreement the Lines shall endeavour to settle such amicably, failing which
it shall be referred to arbitration by a single arbitrator in London, such
arbitrator to be appointed by agreement between the Lines within 14 days
after service by one Line upon the other of a notice specifying the nature of
the dispute or claim and requiring reference of such dispute or claim to
arbitration pursuant to this Article.
Failing agreement upon an arbitrator within such period of 14 days, the
dispute shall be settled by three Arbitrators, each party appointing one
Arbitrator, the third being appointed by the President of the London
Maritime Arbitrators Association.
If either of the appointed Arbitrators refuses or is incapable of acting, the
party who appointed him shall appoint a new Arbitrator in his place.
If one of the parties fails to appoint an Arbitrator - either originally or by
way of substitution for two weeks after the other party having appointed
his Arbitrator has sent the party making default notice by mail, fax or telex
to make the appointment, the party appointing the third Arbitrator shall,
after application from the party having appointed his Arbitrator, also
appoint an Arbitrator in behalf of the party making default.
Any such arbitration shall be in accordance with the Arbitration Act 1950 as
amended by the Arbitration Act 1979 or any other subsequent legislation
and the arbitrators award shall be final and binding upon Lines. To the
extent permitted by the Arbitration Act 1979 the Lines hereto exclude
pursuant to S 3(1) of that Act the jurisdiction of the English High Court of
Justice to entertain any appeal or application under Section 1 and 2 of the

Arbitration Act 1979.[10]

From the foregoing, the following matters are clear: First, disputes between the
Principal Carrier and the Containership Operator arising from contracts of carriage
shall be governed by the provisions of the bills of lading issued to the Principal
Carrier by the Containership Operator. Second, the Principal Carrier shall use its
best efforts to defend or settle all suits against it for loss of or damage to cargo
pursuant to bills of lading issued by it. Third, the Principal Carrier shall have the
right to seek damages and/or indemnity from the Containership Operator by
arbitration, pursuant to Clause 32 of the agreement. Fourth, the Principal Carrier
shall have the right to commence such arbitration any time until one year after its
liability has been finally determined by agreement, arbitration award or judgment,
provided that the Containership Operator was given notice in writing by the Principal
Carrier within three months of the Principal Carrier receiving notice in writing of said
claim.
Prescinding from the foregoing matters, we find that both the trial court and the
Court of Appeals erred in denying petitioner's prayer for arbitration.
To begin with, allowing respondent AMML's Third Party Claim against petitioner to
proceed would be in violation of Clause 16.2 of the Agreement. As summarized, the
clause provides that whatever dispute there may be between the Principal Carrier
and the Containership Operator arising from contracts of carriage shall be governed
by the provisions of the bills of lading deemed issued to the Principal Carrier by the
Containership Operator. On the other hand, to sustain the Third Party Complaint
would be to allow private respondent to hold petitioner liable under the provisions of
the bill of lading issued by the Principal Carrier to Florex, under which the latter is
suing in its Complaint, not under the bill of lading petitioner, as containership
operator, issued to respondent AMML, as Principal Carrier, contrary to what is
contemplated in Clause 16.2.
The Court of Appeals ruled that the terms of the Agreement "explicitly required that
the principal carrier's claim against the containership operator first be finally
determined by, among others, a court judgment, before the right to arbitration
accrues." However, the Court of Appeals failed to consider that, precisely, arbitration
is the mode by which the liability of the Containership Operator may be finally
determined. This is clear from the mandate of Clause 16.3 that "(T)he Principal
Carrier shall have the right to seek damages and/or an indemnity from the
Containership Operator by arbitration" and that it "shall be entitled to commence
such arbitration at any time until one year after its liability has been finally
determined by agreement, arbitration award or judgment".
For respondent Court of Appeals to say that the terms of the contract do not require
arbitration as a condition precedent to judicial action is erroneous. In the light of the
Agreement clauses aforequoted, it is clear that arbitration is the mode provided by
which respondent AMML as Principal Carrier can seek damages and/or indemnity
from petitioner, as Containership Operator. Stated differently, respondent AMML is
barred from taking judicial action against petitioner by the clear terms of their
Agreement.
As the Principal Carrier with which Florex directly dealt with, respondent AMML can
and should be held accountable by Florex in the event that it has a valid claim

28 | P a g e

against the former. Pursuant to Clause 16.3 of the Agreement, respondent AMML,
when faced with such a suit "shall use all reasonable endeavours to defend" itself or
"settle such suits for as low a figure as reasonably possible". In turn, respondent
AMML can seek damages and/or indemnity from petitioner as Containership
Operator for whatever final judgment may be adjudged against it under the
Complaint of Florex. The crucial point is that collection of said damages and/or
indemnity from petitioner should be by arbitration.
All told, when the text of a contract is explicit and leaves no doubt as to its
intention, the court may not read into it any other intention that would contradict its
plain import.[11] Arbitration being the mode of settlement between the parties
expressly provided for by their Agreement, the Third Party Complaint should have
been dismissed.
This Court has previously held that arbitration is one of the alternative methods of
dispute resolution that is now rightfully vaunted as "the wave of the future" in
international relations, and 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.[12]
WHEREFORE, premises considered, the instant Petition for Review on Certiorari
is GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 35777
is REVERSED and SET ASIDE. The Regional Trial Court of Quezon City, Branch 77,
is ordered to DISMISS Respondent AMML's Third Party Complaint in Civil Case No.
Q-92-12593. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

29 | P a g e

Valleys property along corners 11 to 15 by 322 square meters and corners 19 to 1

by 401 square meters for a total of 723 square meters. (Rollo, p. 841)
G.R. No. 102881

THIRD DIVISION
[ G.R. No. 102881, December 07, 1992 ]
TOYOTA MOTOR PHILIPPINES CORPORATION, PETITIONER, VS. THE COURT
OF APPEALS, HON. FERNANDO V. GOROSPE, JR., AND SUN VALLEY
MANUFACTURING & DEVELOPMENT CORPORATION, RESPONDENTS.

Negotiations between the two (2) corporations for a possible settlement of the
dispute bogged down. Court battles ensued, grounded on purely procedural issues.
In pursuing the resolution of the dispute, both Toyota and Sun Valley opted to file
separate actions. Much of the complications that arose and are now before us can
be traced to the two separate cases pursued by both parties. There are other cases
arising from the same dispute but which are not before us.
Culled from the records, these are the antecedents of the two cases which
transpired below.
TOYOTA CASE (Civil Case No. 91-2504)

DECISION
GUTIERREZ, JR., J.:
This case involves a boundary dispute between Toyota Motor Phil. Corporation
(Toyota) and Sun Valley Manufacturing and Development Corporation (Sun Valley).
Both Toyota and Sun Valley are the registered owners of two (2) adjoining parcels of
land situated in La Huerta, Paraaque, Metro Manila which they purchased from the
Asset Privatization Trust (APT).
The properties in question formerly belonged to Delta Motors Corporation (DMC).
They were foreclosed by the Philippine National Bank (PNB) and later transferred to
the national government through the APT for disposition.
APT then proceeded to classify the DMC properties according to the existing
improvements i.e., buildings, driveways, parking areas, perimeter fence, walls and
gates and the land on which the improvements stood. The entire DMC property is
called GC III - Delta Motors Corporation, divided into Delta I, Delta II, and Delta III.
Further subdivisions for the separate catalogues were made for each division e.g.
Delta I into Lots 1, 2 and 3. After this classification, APT parcelled out and
catalogued the properties for bidding and sale.
Part of the duly parcelled Delta I property (Lot 2) was sold to Toyota through public
bidding on May 12, 1988 for the amount of P95,385,000.00. After its purchase,
Toyota constructed a concrete hollow block (CHB) perimeter fence around its alleged
property.
On October 5, 1990, another part of the parcelled Delta I (Lot 1) covering an area
of 55,236 square meters was purchased by Sun Valley from APT for the bid price of
P124,349,767.00. Relying upon the title description of its property and the surveys
it had commissioned, Sun Valley claimed that Toyotas perimeter fence overlaps Sun

On September 11, 1991, Toyota filed a case against APT and Sun Valley docketed as
Civil Case No. 91-2504 with the Regional Trial Court of Makati, Branch 146 presided
by Judge Salvador Tensuan. The complaint was for the reformation of the Deed of
Sale executed between Toyota and APT. Toyota alleges that the instrument failed to
reflect true intention of the parties, as evidenced by the failure of the title to include
the 723 square meters strip of land.
Toyota alleges that the discrepancy came about because of the serious flaw in the
classification/cataloguing of properties bidded out for sale by APT. Toyota was made
to understand that included inits perimeter fence is the disputed strip of land. Thus,
Toyota sought the resurvey of the property to correct this error in the title. Sun
Valley was impleaded considering that it purchased the adjoining land whose title
allegedly included the 723 square meters property.
On September 11, 1991, upon Toyotas application, Judge Tensuan issued a
temporary restraining order (TRO) enjoining Sun Valley and APT from any act of
destruction and removal of Toyotas walls and structures. Sun Valley and APT were
respectively served summons on the following day.
On September 16, 1991, Sun Valley filed a motion to dismiss, on the ground that
the Toyota complaint failed to state a cause of action against it (1) since it was not a
party to the contract of the deed of sale between Toyota and APT and; (2) the
complaint was in effect a collateral attack on its title.
On September 27, 1991, Judge Tensuan initially denied Toyotas application for
preliminary injunction on the finding that there was no evidence of any threatened
destruction, removal or dispossession of Toyotas property.
On October 10, 1991, Judge Tensuan, denied Sun Valleys motion to dismiss.
Both Toyota and Sun Valley filed their respective motions for reconsideration. Toyota
moved to reconsider the denial of its injunctive application while Sun Valley moved
to reconsider the denial of its motion to dismiss.

30 | P a g e

On October 30, 1991, APT filed its answer with affirmative defenses alleging that
the complaint must be dismissed on the ground that Toyota and APT should first
have resorted to arbitration as provided in Toyotas deed of sale with APT. On
December 4, 1991, Toyota filed a motion alleging that Sun Valleys long threatened
destruction and removal of Toyotas walls and structures were actually being
implemented to which Judge Tensuan issued another TRO enjoining acts of
destruction and removal of the perimeter walls and structures on the contested
area.
Consequently, on December 17, 1991, Judge Tensuan reconsidered his earlier denial
of Toyotas application for injunction and granted a writ of preliminary injunction
enjoining Sun Valley from proceeding with its threatened destruction and removal of
Toyotas walls and directed Sun Valley to restore the premises to the status quo
ante.
On December 11, 1991, Judge Tensuan denied Sun Valleys motion for
reconsideration of its motion to dismiss. Sun Valley elevated this denial to the Court
of Appeals. The case was docketed as CA-G.R. Sp. No. 26942 and raffled to the
Eleventh (11th) Division.
Judge Tensuans jurisdiction to act considering the defense of prematurity of action
for failure to arbitrate the validity of the TRO issued on December 4, 1991 and the
order granting injunctive reliefs were challenged in a petition for certiorari filed with
the Court of Appeals and docketed as CA-G.R. No. 26813, assigned to the Second
(2nd) Division.
SUN VALLEY CASE (Civil Case No. 91-2550)
On September 16, 1991, Sun Valley, on the other hand, filed a case for recovery of
possession of the disputed 723 square meters boundary with the Regional Trial
Court (RTC) Makati, Branch 61 presided by Judge Fernando Gorospe, Jr.
On the same day, Judge Gorospe issued a TRO enjoining Toyota from committing
further acts of dispossession against Sun Valley.
On September 19, 1991, Toyota moved to lift the TRO and opposed Sun Valleys
application for injunction.

Ruling that the amendment was a matter of right, Judge Gorospe admitted the
amended complaint. Toyota adopted its motion to dismiss the original complaint as
its motion to dismiss the amended complaint. After the arguments to Toyotas
motion to dismiss, the same was submitted for resolution. Sun Valleys application
for prohibitory and mandatory injunction contained in its complaint was set for
hearing on October 1, 1991.
Protesting the admission of the amended complaint, Toyota went to the Court of
Appeals, on certiorari on October 1, 1991. This petition was docketed as CA G.R.
No. 26152 raffled to the Tenth (10th) Division.
Toyota was later prompted to file two supplemental petitions, before the Court of
Appeals as a result of Judge Gorospes alleged hasty issuance of four (4) Orders, all
dated October 1, 1992. These are:
(1) First supplemental petition dated October 4, 1991 which sought to nullify
the Order denying Toyotas motion to dismiss the amended complaint.
(2) Second supplemental petition dated October 23, 1991 which sought the
nullification of the orders granting Sun Valleys application for preliminary
prohibitory and mandatory injunction and denying Toyotas motion to
cross-examine Sun Valleys witnesses on the latters injunction
application.
On November 27, 1991, respondent Court of Appeals Tenth Division promulgated
its questioned decision which is primarily the subject matter of the present petition
before us.
The respondent court denied due course to the Toyota petition on the finding that
the amendment of Sun Valleys complaint was a valid one as Sun Valleys action was
not for unlawful detainer but an accion publiciana. Furthermore, the supplemental
petitions filed by Toyota assailing the prohibitory and mandatory injunctive writ
were not ruled upon as they were expunged from the records because of Toyotas
failure to attach a motion to admit these supplemental petitions.
Consequently, Toyota filed the present petition for certiorari on December 9, 1991.

On September 23, 1991, Toyota filed a motion to dismiss on the ground that the
RTC has no jurisdiction over the case since the complaint was a simple ejectment
case cognizable by the Metropolitan Trial Court (MTC). The motion to dismiss was
set for hearing on September 27, 1991.

Earlier, upon an ex-parte motion to clarify filed by Sun Valley on October 25, 1991,
Judge Gorospe issued another order dated December 2, 1991 which allowed Sun
Valley to break open and demolish a portion of the Toyota perimeter walls, and
eventually to secure possession of the disputed area. Toyota was constrained to
come to this Court for relief.

On September 27, 1991, Sun Valley filed an amended complaint to incorporate an

allegation that Toyotas possession of the alleged disputed area began in September,
1988 when Toyota purchased the property.

On December 11, 1991, we issued a TRO enjoining the implementation of Judge

Gorospes injunction and break-open orders dated October 1, 1991 and December
2, 1991 respectively as well as further proceedings in Civil Case No. 91-2550.

31 | P a g e

Meanwhile, the Court of Appeals Second Division issued a TRO ordering respondent
Judge Tensuan and all other persons acting in his behalf to cease and desist from
further proceeding with Civil Case No. 91-2504 and from enforcing the Order dated
December 17, 1991 and the writ of preliminary mandatory injunction dated
December 19, 1991.
This prompted Toyota to file a motion to quash the TRO and file a supplemental
petition with this Court impleading the Court of Appeals Second Division.
On January 13, 1992, we admitted the supplemental petition.
On January 10, 1992, the Court of Appeals Second Division issued its Resolution
granting Sun Valleys application for preliminary injunction which enjoined Judge
Tensuan in the Toyota case from implementing his injunction Order and from
proceeding with the case before him (Civil Case No. 91-2504).
Thus, Toyota filed its Second Supplemental Petition with this Court challenging the
validity of the injunction writ issued by the Court of Appeals Second Division.
This Second Supplemental Petition was admitted on February 10, 1992.
On February 10, 1992, we gave due course to Toyotas petition.
Subsequently, through a manifestation dated April 29, 1992, Toyota informed the
Court that on April 15, 1992, the Court of Appeals 11th Division (Sun Valley case)
rendered a decision dismissing the case before it for lack of merit. The Court
of Appeals ruled that the Toyota complaint was not a collateral attack on Sun
Valleys title and that misjoinder of parties is not a ground for dismissal.
A subsequent motion for reconsideration was denied in a resolution dated August
10, 1992.
In the instant petition Toyota raises the following issues, to wit:
1. The Court of Appeals 10th Division gravely abused its discretion when it ignored
or pretended to ignore Toyotas protests against Judge Gorospes injunction orders.
2. Sun Valley is guilty of forum-shopping and Judge Gorospe of case-grabbing.
Sun Valley, on the other hand raises the following:
1. Whether or not the petitioner availed of the proper mode of elevating the case to
this Court.
2. Whether or not the Court of Appeals committed grave abuse of discretion in
refusing to act upon petitioners supplemental petitions for certiorari.

3. Whether or not the complaint filed in the court below is an accion

publiciana which is within the jurisdiction of the RTC.
4. Whether or not Judge Salvador S. Tensuan had jurisdiction to take cognizance of
Civil Case No. 2504 for reformation of instrument.
5. Whether or not respondent Judge Gorospe, Jr. committed grave abuse of
discretion in granting private respondents application for a writ of preliminary
prohibitory/mandatory injunction.
6. Whether or not Judge Tensuan committed grave abuse of discretion in issuing
the writ of mandatory injunction dated December 19, 1991.
This case is far from settlement on the merits. Through legal maneuverings, the
parties have succeeded in muddling up the vital issues of the case and getting the
lower courts embroiled in numerous appeals over technicalities. As it is now, there
are three appellate decisions/resolutions before us for review and conflicting orders
issued by lower courts as a result of the separate cases filed by the parties. As in
the case of Consolidated Bank and Trust Corp. v. Court of Appeals 193 SCRA 158
[1991], the Court is explicit in stating that:
xxx

xxx

xxx

Where there are conflicting but inextricably interconnected issues in one and the
same complicated case, it is best that these be resolved in one integrated
proceeding where an overall picture of the entirety of the case can be presented
and examined. Piecemeal determinations by several trial courts on segments of the
basic issue and disconnected appeals to different Divisions of the Court of Appeals
resulting in separate decisions each dealing with only part of the problem are
discouraged. Needless multiplicity of suits is something which is frowned upon.
xxx

xxx

xxx

Amid the clutter of extraneous materials which have certainly bloated the records of
this case, we find only two (2) issues vital to the disposition of the petition: first, is
the matter of jurisdiction, who as between Judge Tensuan or Judge Gorospe has
jurisdiction over the dispute; and second, who as between the parties has the
rightful possession of the land.
Anent the issue on jurisdiction, we examine the two actions filed by the parties.
Toyota filed an action for reformation on September 11, 1991, before Judge Tensuan
alleging that the true intentions of the parties were not expressed in the instrument.
(Art. 1359 Civil Code) The instrument sought to be reformed is the deed of sale
executed by APT in favor of Toyota. Toyota alleges that there was a mistake in the
designation of the real properties subject matter of the contract. Sun Valley was
impleaded in order to obtain complete relief since it was the owner of the adjacent
lot.

32 | P a g e

Sun Valley, however argues that the complaint for reformation states no cause of
action against it since an action for reformation is basically one strictly between the
parties to the contract itself. Third persons who are not parties to the contract
cannot and should not be involved. Thus, Sun Valley contends that it should not
have been impleaded as a defendant.
The Court of Appeals 11th Division, in its decision promulgated on April 15, 1992
where the denial of Sun Valleys motion to dismiss was sustained, correctly ruled
that misjoinder of parties is not a ground for dismissal.
American jurisprudence from where provisions on reformation of instruments were
taken discloses that suits to reform written instruments are subject to the general
rule in equity that all persons interested in the subject matter of the litigation,
whether it is a legal or an equitable interest should be made parties, so that the
court may settle all of their rights at once and thus prevent the necessity of a
multiplicity of suits (Bevis Construction Co. v. Grace [Fla App] 115 So 2d. 84; Green
v. Stone, 54 N.J.E. 387, 34 A 1099). As a general rule, therefore, all persons to be
affected by the proposed reformation must be made parties. (American Fidelity &
Casualty Co. v. Elder, 189 Ga 229, 5 SE 2d 668; Kemp v. Funderburk, 224 NC 353,
30 SE 2d 155). In an action to reform a deed, all parties claiming an interest in the
land or any part thereof purportedly conveyed by the instrument sought to be
reformed, and whose interests will be affected by the reformation of the instrument
are necessary parties to the action. (Kemp v. Funderburk, 224 NC 353, 30 SE 2d
155)
From the foregoing jurisprudence, it would appear that Toyota was correct in
impleading Sun Valley as party defendant. However, these principles are
not applicable under the particular circumstances of this case. Under the facts of the
present case, Toyotas action for reformation is dismissible as against Sun Valley.
Attention must first be brought to the fact that the contract of sale executed
between APT and Toyota provides an arbitration clause which states that:
xxx

xxx

xxx

5. In case of disagreement or conflict arising out of this Contract, the parties

hereby undertake to submit the matter for determination by a committee of
experts, acting as arbitrators, the composition of which shall be as follows:
a) One member to be appointed by the VENDOR;
b) One member to be appointed by the VENDEE;
c) One member, who shall be a lawyer, to be appointed by both of
the aforesaid parties;

members have been appointed and proceed with the arbitration of the dispute
within three (3) calendar months counted therefrom. By written mutual agreement
by the parties hereto, such time limit for the arbitration may be extended for
another calendar month. The decision of the Arbitration Committee by majority vote
of at least two (2) members shall be final and binding upon both parties hereto. The
cost of arbitration shall be borne equally by both the VENDOR and the VENDEE;
(Rollo, pp. 816-817)
xxx

xxx

xxx

The contention that the arbitration clause has become disfunctional because of the
presence of third parties is untenable.
Contracts are respected as the law between the contracting parties (Mercantile Ins.
Co, Inc. v. Felipe Ysmael, Jr. & Co., Inc., 169 SCRA 66 [1989]). As such, the parties
are thereby expected to abide with good faith in their contractual commitments
(Quillan v. CA, 169 SCRA 279 [1989]). Toyota is therefore bound to respect the
provisions of the contract it entered into with APT.
Toyota filed an action for reformation of its contract with APT, the purpose of which
is to look into the real intentions/agreement of the parties to the contract and to
determine if there was really a mistake in the designation of the boundaries of the
property as alleged by Toyota. Such questions can only be answered by the parties
to the contract themselves. This is a controversy which clearly arose from the
contract entered into by APT and Toyota. Inasmuch as this concerns more
importantly the parties APT and Toyota themselves, the arbitration committee is
therefore the proper and convenient forum to settle the matter as clearly provided
in the deed of sale.
Having been apprised of the presence of the arbitration clause in the motion to
dismiss filed by APT, Judge Tensuan should have at least suspended the proceedings
and directed the parties to settle their dispute by arbitration (Bengson v. Chan, 78
SCRA 113 [1977], Sec. 7, RA 876). Judge Tensuan should not have taken
cognizance of the case.
But the more apparent reason which warrants the dismissal of the action as against
Sun Valley is the fact that the complaint for reformation amounts to a collateral
attack on Sun Valleys title,contrary to the finding of the Court of Appeals 11th
Division.
It is undisputed that Sun Valley has a Torrens title registered in its name by virtue
of its purchase of the land from APT.
Toyota contends that the 723 square meters strip of land which it understood to be
included in its purchase from APT was erroneously included in Sun Valleys title. This
is the reason why reformation was sought to correct the mistake.

The members of the Arbitration Committee shall be appointed not later than three
(3) working days from receipt of a written notice from either or both parties. The
Arbitration Committee shall convene not later than three (3) weeks after all its

33 | P a g e

Well-settled is the rule that a certificate of title can not be altered, modified, or
cancelled except in a direct proceeding in accordance with law. (Section 48, P.D. No.
1529)
In the case of Domingo v. Santos Ongsiako, Lim y Sia (55 Phil. 361 [1930]), the
Court held that:
x x x The fact should not be overlooked that we are here confronted with what is
really a collateral attack upon a Torrens title. The circumstance that the action was
directly brought to recover a parcel of land does not alter the truth that the
proceeding involves a collateral attack upon a Torrens title, because as we have
found, the land in controversy lies within the boundaries determined by that title.
The Land Registration Law defines the methods under which a wrongful adjudication
of title to land under the Torrens system may be corrected xxx.
While reformation may often be had to correct mistakes in defining the boundary of
lands conveyed so as to identify the lands, it may not be used to pass other lands
from those intended to be bought and sold, notwithstanding a mistake in pointing
out the lines, since reformation under these circumstances would be inequitable and
unjust. (McCay v. Jenkins, 244 Ala 650, 15 So 2d 409, 149 ALR 746)
Assuming that Toyota is afforded the relief prayed for in the Tensuan court, the
latter can not validly order the contested portion to be taken out from Sun Valleys
TCT and award it in favor of Toyota.
An action for reformation is in personam, not in rem (Cohen v. Hellman Commercial
Trust & Saving Bank, 133 Cal App 758, 24 P2d 960; Edwards v. New York Life Ins.
Co. 173 Tenn 102, 114 SW 2d 808), even when real estate is involved. (Agurs v.
Holt, 232 La 1026, 95 So 2d 644; Vallee v. Vallee (La App) 180 So 2d 570). It is
merely an equitable relief granted to the parties where through mistake or fraud,
the instrument failed to express the real agreement or intention of the parties.
While it is a recognized remedy afforded by courts of equity it may not be applied if
it is contrary to well-settled principles or rules. It is a long standing principle that
equity follows the law. It is applied in the absence of and never against statutory
law (Zabat v. Court of Appeals, 142 SCRA 587 [1986]) Courts are bound by rules of
law and have no arbitrary discretion to disregard them. (See Arsenal v.
Intermediate Appellate Court, 143 SCRA 40 [1986]) Courts of equity must proceed
with utmost caution expecially when rights of third parties may intervene. Thus in
the instant case, vis-a-vis well-settled principles or rules in land registration, the
equitable relief of reformation may not come into play in order to transfer or
appropriate a piece of land that one claims to own but which is titled in the name of
a third party.
On the other hand, Sun Valley filed an action for reconveyance against Toyota to
recover possession of the strip of land encroached upon and occupied by the latter.
What Sun Valley seeks in its complaint is the recovery of possession de jure and not
merely possession de facto. Toyota moved to dismiss on the assumption that the
complaint was one for unlawful detainer cognizable by the MTC.

We do not find any reversible error in the decision of the Court of Appeals 10th
Division where it upheld Judge Gorospes order denying Toyotas motion to dismiss.
An amendment to a complaint before a responsive pleading is filed, is a matter of
right (Rule 10, Sec. 2) Whether or not the complaint was amended, Sun Valleys
complaint was one for accion publiciana cognizable by the RTC. Its right over the
land is premised on the certificate of title registered in its name after it had
purchased said land from APT. As the registered owner it had the right of possession
of said land illegally occupied by another. (Ybaez v. IAC, 194 SCRA 743 [1991])
The case of Banayos v. Susana Realty, Inc. (71 SCRA 557 [1976]) is quite
instructive:
xxx

xxx

xxx

We deem it advisable, at this point, to reiterate the essential differences between

three kinds of actions for the recovery of possession of real property, namely: (1)
the summary action for forcible entry and unlawful detainer; (2) the accion
publiciana; and (3) the accion de reivindicacion.
The action for forcible entry may be brought where dispossession of real property
had taken place by any of the means provided for in Section 1 of Rule 70 of the
Revised Rules of Court, and in the case of unlawful detainer, where the possession
is withheld after the expiration or termination of the right to hold possession, by
virtue of any contract express or implied. These two actions must be filed within
one (1) year after such unlawful deprivation or withholding of possession with the
municipal or city court. These actions in their essence are mere quieting processes
by virtue of which a party in possession of land may not be, by force, dispossessed
of that land, the law restoring to him such possession in a summary manner, until
the right of ownership can be tried in due course of law. They are, therefore,
intended to provide an expeditious means of protecting actual possession or right to
possession of property. The aforesaid Rule 70 does not, however, cover all of the
cases of dispossession of lands. Thus, whenever the owner is dispossessed by any
other means than those mentioned he may maintain his action in the Court of First
Instance, and it is not necessary for him to wait until the expiration of twelve
months before commencing an action to be repossessed or declared to be owner of
land. (Gumiran v. Gumiran, 21 Phil. 174, 179. Cf. Medina, et al. v. Valdellon, 63
SCRA 278) Courts of First Instance have jurisdiction over actions to recover
possession of real property illegally detained, together with rents due and damages,
even though one (1) year has not expired from the beginning of such illegal
detention, provided the question of ownership of such property is also involved. In
other words, if the party illegally dispossessed desires to raise the question of illegal
dispossession as well as that of the ownership over the property, he may
commence such action in the Court of First Instance immediately or at any time
after such illegal dispossession. If he decides to raise the question of illegal
dispossession only, and the action is filed more than one (1) year after such
deprivation or withholding of possession, then the Court of First Instance will have
original jurisdiction over the case. (Bishop of Cebu v. Mangaron, 6 Phil. 286;
Catholic Church v. Tarlac and Victoria, 9 Phil. 450; Ledesma v. Marcos, 9 Phil. 618;
Medina, et al. v. Valdellon, supra) The former is an accion de reivindicacion which
seeks the recovery of ownership as well as possession, while the latter refers to an
accion publiciana, which is the recovery of the right to possess and is a plenary
action in an ordinary proceeding in the Court of First Instance. (Sec. 88, Rep. Act
No. 296; Rule 70, Rules of Court Manila Railroad Co. v. Attorney General, 20 Phil.
523; Lim Cay v. Del, 55 Phil. 692; Central Azucarera de Tarlac v. De Leon, 56 Phil.

34 | P a g e

169; Navarro v. Aguila, 66 Phil. 604; Luna v. Carandang, 26 SCRA 306; Medina, et
al. v. Valdellon, supra; Pasagui, et al. v. Villablanca, et al., supra).
With the finding that Toyotas action for reformation is dismissible as it is in effect a
collateral attack on Sun Valleys title, Sun Valleys action for recovery of possession
filed before Judge Gorospe now stands to be the proper forum where the following
dispute may be tried or heard.
We now come to the issue as to which of the parties has a legal right over the
property to warrant the issuance of the preliminary mandatory/prohibitory
injunction.

As early as September, 1988 prior to the construction of the perimeter fence, Toyota
was already aware of the discrepancies in the propertys description in the title and
the actual survey.
The letter of its surveyor company, Summa Kumagai thus reveals:
09 September, 1988
TOYOTA MOTOR PHILIPPINES CORPORATION
10th Floor, Metrobank Plaza
Sen. Gil J. Puyat Ave.,

In actions involving realty, preliminary injunction will lie only after the plaintiff has
fully established his title or right thereto by a proper action for the purpose. To
authorize a temporary injunction, the complainant must make out at least a prima
facie showing of a right to the final relief. Preliminary injunction will not issue to
protect a right not in esse (Buayan Cattle Co. Inc. v. Quintillan, 128 SCRA 286-287
[1984]; Ortigas & Company, Limited Partnership v. Ruiz, 148 SCRA 326 [1987]).

Makati, Metro Manila

Two requisites are necessary if a preliminary injunction is to issue, namely, the

existence of the right to be protected, and the facts against which the injunction is
to be directed, are violative of said right. In particular, for a writ of preliminary
injunction to issue, the existence of the right and the violation must appear in the
allegations of the complaint and an injunction is proper also when the plaintiff
appears to be entitled to the relief demanded in his complaint. Furthermore, the
complaint for injunctive relief must be construed strictly against the pleader (Ortigas
& Company, Limited Partnership v. Ruiz, supra)

GENTLEMEN:

In the instant case the existence of a clear positive right especially calling for
judicial protection has been shown by Sun Valley.
Toyotas claim over the disputed property is anchored on the fact of its purchase of
the property from APT, that from the circumstances of the purchase and the
intention of the parties, the property including the disputed area was sold to it.

ATTENTION:

MR. FLORENCIO JURADO

Finance Officer
SUBJECT :

PHASE I RENOVATION WORK

PERIMETER FENCE
This is in connection with the construction of the Perimeter Fence for the Toyota
Motor Plant Facilities which to this date we have not started yet due to the following
reasons:
1. Lack of fencing permit which can only be applied to and issued by the
Paraaque Building Official upon receipt of the transfer certificate to title and tax
declaration.
2. Although the Building Official has verbally instructed us to proceed with the
renovation work and construction of fence, we could not execute the fencing work
due to discrepancies onthe consolidation plan and the existing
property monuments. These discrepancies was (sic) confirmed with the
representatives of the Geodetic Engineer.
Kindly expedite the immediate confirmation with the Geodetic Engineer on the final
descriptions of the property lines.
We would appreciate your usual prompt attention regarding this matter.

Sun Valley, on the other hand has TCT No. 49019 of the Registry of Deeds of
Paraaque embracing the aforesaid property in its name, having been validly
acquired also from APT by virtue of a Deed of Sale executed in its favor on
December 5, 1990. (Rollo, p. 823-825; 826-827)
There are other circumstances in the case which militate against Toyotas claim for
legal possession over the disputed area.
The fact that Toyota has filed a suit for reformation seeking the inclusion of the 723
square meters strip of land is sufficient to deduce that it is not entitled to take over
the piece of property it now attempts to appropriate for itself.

Very truly yours,

CESAR D. ELE
Project Manager (Underscoring supplied, Rollo, p. 811)
Despite such notification, Toyota continued to build the perimeter fence. It is highly
doubtful whether Toyota may be considered a builder in good faith to be entitled to
protection under Article 448 of the Civil Code.
The records also reveal that Toyotas own surveyor, the Certeza Surveying &
Acrophoto Systems, Inc. confirmed in its reports dated April 1 and April 5, 1991 that
Toyotas perimeter fence overlaps the boundaries of Sun Valleys lot, (rollo, pp. 833383)

35 | P a g e

Even communication exchanges between and among APT Toyota & Sun Valley show
that the parties are certainly aware that the ownership of the disputed property
more properly pertains to Sun Valley. Among these are the following:

II. Question of ownership of certain permanent improvements (underground water

reservoir and perimeter walls/fences) located at Lot 6 which we won by bidding
from APT on October 5, 1990.

May 28, 1991

-----------------------------------------------------------------------------------------------------------------------------------

MR. JOSE CH. ALVAREZ

President
Sun Valley Manufacturing &
Development Corp. (SVMDC)
Cor. Aurora Blvd. and Andrews Ave.
Pasay City, Metro Manila

We have made our position to APT that these permanent improvements are part of
Lot 6 on an as is where is bid basis (See explanatory map - Exhibit 3). However,
since you have relayed to us that the underground water reservoir is of no use to
you, as part of the total package we are proposing to pay for the underground
water reservoir, the applicable perimeter walls/fences and the water pump/pipings
at a price mutually agreed upon.

Dear Mr. Alvarez:

We hope that through this proposal we would settle our differences and look
forward to a more cooperative relationship between good neighbors.

Thank you for honoring our invitation to a luncheon meeting held at noon time
today at Sugi Restaurant.

We will appreciate your favorable consideration and immediate attention on the

matter.

As per our understanding, we would like to propose as a package the settlement of

differences between your property and ours as follows:

Very truly yours,

I. Boundary Issue between TMP Main Office & Factory and the recently acquired
property of SVMDC
-----------------------------------------------------------------------------------------------------------------------------------

MASAO MITAKE
President
July 4, 1991
TOYOTA MOTOR PHILIPPINES CORPORATION
Rm. 15, South Superhighway

The boundary lines to our property bidded early 1988 were determined after
making full payment in August 1988 jointly by representatives of TMP/Metrobank Messrs, Mitake, Pedrosa, Alonzo and Jurado, APT - Mr. Bince together with
representatives of Geo-Resources who installed the monuments and prepared the
technical description of the property. The construction of the fence utilized existing
fence marked yellow on Exhibit 1 and made sure that the new fence to set
boundaries were on top of the monuments set by Geo-Resources. The replacement
of existing wire fence were effected by setting concrete walls on exactly the same
position.

Paraaque, Metro Manila

ATTENTION:

MR. MASAO MITAKE

President
Gentlemen:
This refers to our several meetings regarding the property problems at Lot 6 and
your encroachment of SVMD LOT I.

This is the reason why we are surprised to be informed that our fence goes beyond
the boundary lines set forth in the Technical Description on the Transfer Certificate
of Title (TCT) to our property. This occurs even on fence already existing and should
have been maintained in the TCT.

We wish to thank you for finally acknowledging the legitimacy of our demands on
both properties. In order to start a good business relationship, we propose that the
property problem at LOT 6 which consists of the perimeter fence, water reservoir,
water pump and systems be settled first, in the amount of P3,500.000.00 payable
to CMANC.

Since we have manifested our intention when we set boundaries to our property,
we propose the following in relation to the excess area occupied by TMP.

We also would like to request you to allow us to continue usage of the MERALCO
posts and lines connecting to SVMD power station which passes thru your property
and allow entry of MERALCO linemen from time to time.

1.
We offer to give way to an access road 5 m. wide more or less from point 15
to 16 of Lot 2 (14.65 m in length) at the back of our Paint Storage Building (Exhibit
2).

Upon acceptance of these requests, I will confer which our Japanese partners to
consider the selling of the 723 sq. m. of land adjacent to your Assembly Plant which
you continue to use even after said property has been legally transferred to us from
last quarter of 1990.

2.
We propose to pay for the balance of excess land inside TMP fence (contested
areas) at a price mutually agreed upon.

In view of your present good behavior, we are hoping that this first problem be
settled not later than July 15, 1991, otherwise, we will consider the whole matter as

36 | P a g e

unacceptable to you and we, therefore, proceed as earlier demanded to

immediately demolish the CHB fence that prevents us from using our property.
We hope for your immediate action to start the resolution of these unwanted
problems.
Very truly yours,
JOSE CH. ALVAREZ
President (Rollo, p. 832; Underlining ours)

lite. (See Mara, Inc. v. Estrella, 65 SCRA 471 [1975]; De Garcia v. Santos, 79 Phil.
365 [1947]; Rodulfa v. Alfonso, 76 Phil. 225 [1946] and Torre v. Querubin, 101 Phil.
53 [1957])
In view of all the foregoing, the petition is hereby DISMISSED for failure to show
reversible error, much less grave abuse of discretion, on the part of the respondent
court.
Bidin, Davide, Jr., Romero, and Melo, JJ., concur.

Moreover, Sun Valley puts forth evidence that Toyota has altered the boundaries of
its own property by moving the monuments erected thereon by APTs surveyor GeoResources and Consultancy, Inc. when Lot 2 was initially surveyed in August 1988:
The Asset Privatization Trust
10th Floor, BA-Lepanto Building
9847 Paseo de Roxas, Makati,
Metro Manila
Attention:

Mr. Felipe B. Bince, Jr.

Source: Supreme Court E-Library

This page was dynamically generated
by the E-Library Content Management System (E-LibCMS)

Associate Executive Trustee

Dear Sirs:
This has reference to our letter to your office dated April 8, 1991, a copy of which is
attached, regarding the check survey of Delta I. After asking some of the field men
who participated in the various surveys of Delta I from the consolidation to
subdivision surveys, we found out that some more of the present corner points are
not the same points shown to them during the surveys. We shall show this during a
meeting with the representatives of the owners of Lots 1 and 2.
We hope this will help clarify the discrepancies.
Very truly yours,
NORBERTO S. VILA
Exec. Vice Pres & Gen. Manager
(Underlining supplied; Rollo, p. 839)
There is therefore sufficient and convincing proof that Sun Valley has a clear legal
right to possession in its favor to warrant the issuance of a writ of
preliminary/mandatory injunction. Sun Valleys TCT gives it that right to possession.
On the other hand, Toyota has not established its right over the said property
except for the assertion that there was a mistake in an instrument which
purportedly should have included the questioned strip of land.
As between the two (2) parties, Sun Valley has a better right. Under the
circumstances, therefore, and considering that the clear legal right of Toyota to
possession of the disputed area has not been established sufficient to grant the
prayed for relief, a writ of preliminary mandatory injunction may be issued pendente

37 | P a g e

at the plant site, commanding a price of P12.1 million and requiring completion
thereof one month after civil works have been finished.[3]
However, respondent Roblecor failed to complete the work despite the extension of
time allowed it by Chung Fu. Subsequently, the latter had to take over the
construction when it had become evident that Roblecor was not in a position to fulfill
its obligation.

G.R. No. 96283

THIRD DIVISION
[ G.R. No. 96283, February 25, 1992 ]
CHUNG FU INDUSTRIES (PHILIPPINES) INC., ITS DIRECTORS AND
OFFICERS NAMELY: HUANG KUO-CHANG, HUANG AN-CHUNG, JAMES J.R.
CHEN, TRISTAN A. CATINDIG, VICENTE B. AMADOR, ROCK A.C. HUANG, JEM
S.C. HUANG, MARIA TERESA SOLIVEN AND VIRGILIO M. DEL ROSARIO,
PETITIONERS, VS. COURT OF APPEALS, HON. FRANCISCO X. VELEZ
(PRESIDING JUDGE, REGIONAL TRIAL COURT OF MAKATI
[BRANCH 57]) AND ROBLECOR PHILIPPINES, INC., RESPONDENTS.
DECISION
ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the
Court of Appeals* dated October 22, 1990 and December 3, 1990 upholding the
Orders of July 31, 1990 and August 23, 1990 of the Regional Trial Court of Makati,
Branch 57, in Civil Case No. 90-1335. Respondent Court of Appeals affirmed the
ruling of the trial court that herein petitioners, after submitting themselves for
arbitration and agreeing to the terms and conditions thereof, providing that the
arbitration award shall be final and unappealable, are precluded from seeking
judicial review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines)
(Chung Fu for brevity) and private respondent Roblecor Philippines, Inc. (Roblecor
for short) forged a construction agreement[1] whereby respondent contractor
committed to construct and finish on December 31, 1989, petitioner corporation's
industrial/factory complex in Tanawan, Tanza, Cavite for and in consideration of
P42,000,000.00. In the event of disputes arising from the performance of subject
contract, it was stipulated therein that the issue(s) shall be submitted for resolution
before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered
into two (2) other ancillary contracts, to wit: one dated June 23, 1989, for the
construction of a dormitory and support facilities with a contract price of
P3,875,285.00, to be completed on or before October 31, 1989; [2] and the other
dated August 12, 1989, for the installation of electrical, water and hydrant systems

Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of

P2,370,179.23, Roblecor on May 18, 1990, filed a petition for Compulsory
Arbitration with prayer for Temporary Restraining Order before respondent Regional
Trial Court, pursuant to the arbitration clause in the construction agreement. Chung
Fu moved to dismiss the petition and further prayed for the quashing of the
restraining order.
Subsequent negotiations between the parties eventually led to the formulation of an
arbitration agreement which, among others, provides:
"2. The parties mutually agree that the arbitration shall proceed in accordance with
the following terms and conditions: --x x x

xxx

xxx

'd. The parties mutually agree that they will abide by the decision of
the arbitrator including any amount that may be awarded to
either party as compensation, consequential damage and/or
interest thereon;
e. The parties mutually agree that the decision of the arbitrator
shall be final and unappealable. Therefore, there shall be no
further judicial recourse if either party disagrees with the
whole or any part of the arbitrator's award
f. As an exception to sub-paragraph (e), above, the parties
mutually agree that either party is entitled to seek judicial
assistance for purposes of enforcing the arbitrator's award;
xxx
(Underscoring supplied)

xxx

x x x.[4]

Respondent Regional Trial Court approved the arbitration agreement thru its Order
of May 30, 1990. Thereafter, Engr. Willardo Asuncion was appointed as the sole
arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay
respondent contractor, the sum of P16,108,801.00. He further declared the award

38 | P a g e

as final and unappealable, pursuant to the Arbitration Agreement precluding judicial

review of the award.

Allow us to take a leaf from history and briefly trace the evolution of arbitration as a
mode of dispute settlement.

Consequently, Roblecor moved for the confirmation of said award. On the other
hand, Chung Fu moved to remand the case for further hearing and asked for a
reconsideration of the judgment award claiming that Arbitrator Asuncion committed
twelve (12) instances of grave error by disregarding the provisions of the parties
contract.

Because conflict is inherent in human society, much effort has been expended by
men and institutions in devising ways of resolving the same. With the progress of
civilization, physical combat has been ruled out and instead, more pacific means
have been evolved, such as recourse to the good offices of a disinterested third
party, whether this be a court or a private individual or individuals.

Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to
seek reconsideration therefrom but to no avail. The trial court granted Roblecor's
Motion for Confirmation of Award and accordingly, entered judgment in conformity
therewith. Moreover, it granted the motion for the issuance of a writ of execution
filed by respondent.

Legal history discloses that "the early judges called upon to solve private conflicts
were primarily the arbiters, persons not specially trained but in whose morality,
probity and good sense the parties in conflict reposed full trust. Thus, in Republican
Rome, arbiter and judge (judex) were synonymous. The magistrate or praetor, after
noting down the conflicting claims of litigants, and clarifying the issues, referred
them for decision to a private person designated by the parties, by common
agreement, or selected by them from an apposite listing (the album judicium) or
else by having the arbiter chosen by lot. The judges proper, as specially trained
state officials endowed with own power and jurisdiction, and taking cognizance of
litigations from beginning to end, only appeared under the Empire, by the socalled cognitio extra ordinem."[5]

Chung Fu elevated the case via a petition for certiorari to respondent Court of
Appeals. On October 22, 1990 the assailed resolution was issued. The respondent
appellate court concurred with the findings and conclusions of respondent trial court
resolving that Chung Fu and its officers, as signatories to the Arbitration Agreement
are bound to observe the stipulations thereof providing for the finality of the award
and precluding any appeal therefrom.
A motion for reconsideration of said resolution was filed by petitioner, but it was
similarly denied by respondent Court of Appeals thru its questioned resolution of
December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
Respondents Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioners, -- (a) by refusing to exercise their judicial authority and legal duty to
review the arbitration award, and (b) by declaring that petitioners are estopped
from questioning the arbitration award allegedly in view of the stipulations in the
parties arbitration agreement that "the decision of the arbitrator shall be final and
unappealable" and that "there shall be no further judicial recourse if either party
disagrees with the whole or any part of the arbitrator's award."
Second
Respondent Court of Appeals and trial Judge gravely abused their discretion and/or
exceeded their jurisdiction, as well as denied due process and substantial justice to
petitioner, by not vacating and annulling the award dated 30 June 1990 of the
Arbitrator, on the ground that the Arbitrator grossly departed from the terms of the
parties contracts and misapplied the law, and thereby exceeded the authority and
power delegated to him. (Rollo, p. 17)

Such means of referring a dispute to a third party has also long been an accepted
alternative to litigation at common law.[6]
Sparse though the law and jurisprudence may be on the subject of arbitration in the
Philippines, it was nonetheless recognized in the Spanish Civil Code; specifically, the
provisions on compromises made applicable to arbitrations under Articles 1820 and
1821.[7] Although said provisions were repealed by implication with the repeal of the
Spanish Law of Civil Procedure,[8] these and additional ones were reinstated in the
present Civil Code.[9]
Arbitration found a fertile field in the resolution of labor-management disputes in
the Philippines. Although early on, Commonwealth Act 103 (1936) provided for
compulsory arbitration as the state policy to be administered by the Court of
Industrial Relations, in time such a modality gave way to voluntary arbitration.
While not completely supplanting compulsory arbitration which until today is
practiced by government officials, the Industrial Peace Act which was passed in
1953 as Republic Act No. 875, favored the policy of free collective bargaining, in
general, and resort to grievance procedure, in particular, as the preferred mode of
settling disputes in industry. It was accepted and enunciated more explicitly in the
Labor Code, which was passed on November 1, 1974 as Presidential Decree No.
442, with the amendments later introduced by Republic Act No. 6715 (1989).
Whether utilized in business transactions or in employer-employee relations,
arbitration was gaining wide acceptance. A consensual process, it was preferred to
orders imposed by government upon the disputants. Moreover, court litigations
tended to be time consuming, costly, and inflexible due to their scrupulous
observance of the due process of law doctrine and their strict adherence to rules of
evidence.

39 | P a g e

As early as the 1920's, this Court declared:

"In the Philippines fortunately, the attitude of the courts toward arbitration
agreements is slowly crystallizing into definite and workable form. . . The rule now
is that unless the agreement is such as absolutely to close the doors of the courts
against the parties, which agreement would be void, the courts will look with favor
upon such amicable arrangements and will only with great reluctance interfere to
anticipate or nullify the action of the arbitrator."[10]
That there was a growing need for a law regulating arbitration in general was
acknowledged when Republic Act No. 876 (1953), otherwise known as the
Arbitration Law, was passed. "Said Act was obviously adopted to supplement -- not
to supplant -- the New Civil Code on arbitration. It expressly declares that the
provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain
in force."[11]
In recognition of the pressing need for an arbitral machinery for the early and
expeditious settlement of disputes in the construction industry, a Construction
Industry Arbitration Commission (CIAC) was created by Executive Order No. 1008,
enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes
via a particular mode, it is the regular courts that remain the fora to resolve such
matters. However, the parties may opt for recourse to third parties, exercising their
basic freedom to "establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy." [12] In such a case, resort to the arbitration
process may be spelled out by them in a contract in anticipation of disputes that
may arise between them. Or this may be stipulated in a submission agreement
when they are actually confronted by a dispute. Whatever be the case, such
recourse to an extrajudicial means of settlement is not intended to completely
deprive the courts of jurisdiction. In fact, the early cases on arbitration carefully
spelled out the prevailing doctrine at the time, thus: ". . . a clause in a contract
providing that all matters in dispute between the parties shall be referred to
arbitrators and to them alone is contrary to public policy and cannot oust the courts
of jurisdiction."[13]
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit
an ongoing dispute to one is valid. Being part of a contract between the parties, it is
binding and enforceable in court in case one of them neglects, fails or refuses to
arbitrate. Going a step further, in the event that they declare their intention to refer
their differences to arbitration first before taking court action, this constitutes a
condition precedent, such that where a suit has been instituted prematurely, the
court shall suspend the same and the parties shall be directed forthwith to proceed
to arbitration.[14]
A court action may likewise be proper where the arbitrator has not been selected by
the parties.[15]

Under present law, may the parties who agree to submit their disputes to arbitration
further provide that the arbitrators award shall be final, unappealable and
executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
"Any stipulation that the arbitrators' award or decision shall be final is valid, without
prejudice to Articles 2038, 2039 and 2040."
Similarly, the Construction Industry Arbitration Law provides that the arbitral award
"shall be final and inappealable except on questions of law which shall be appealable
to the Supreme Court."[16]
Under the original Labor Code, voluntary arbitration awards or decisions were final,
unappealable and executory. "However, voluntary arbitration awards or decisions on
money claims, involving an amount exceeding One Hundred Thousand Pesos
(P100,000.00) or forty-percent (40%) of the paid-up capital of the respondent
employer, whichever is lower, may be appealed to the National Labor Relations
Commission on any of the following grounds: (a) abuse of discretion; and (b) gross
incompetence."[17] It is to be noted that the appeal in the instances cited were to be
made to the National Labor Relations Commission and not to the courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the
voluntary arbitrator is now mandated to render an award or decision within twenty
(20) calendar days from the date of submission of the dispute and such decision
shall be final and executory after ten (10) calendar days from receipt of the copy of
the award or decision by the parties.[18]
Where the parties agree that the decision of the arbitrator shall be final and
unappealable as in the instant case, the pivotal inquiry is whether subject
arbitration award is indeed beyond the ambit of the court's power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that
the finality of the arbitrators' award is not absolute and without exceptions. Where
the conditions described in Articles 2038, 2039 and 2040 applicable to both
compromises and arbitrations are obtaining, the arbitrators' award may be annulled
or rescinded.[19] Additionally, under Sections 24 and 25 of the Arbitration Law, there
are grounds for vacating, modifying or rescinding an arbitrator's award. [20] Thus, if
and when the factual circumstances referred to in the above-cited provisions are
present, judicial review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's
award to determine whether it is in accordance with law or within the scope of his
authority? How may the power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of
Court. It is to be borne in mind, however, that this action will lie only where a grave
abuse of discretion or an act without or in excess of jurisdiction on the part of the

40 | P a g e

voluntary arbitrator is clearly shown. For "the writ of certiorari is an extra-ordinary

remedy and that certiorari jurisdiction is not to be equated with appellate
jurisdiction. In a special civil action of certiorari, the Court will not engage in a
review of the facts found nor even of the law as interpreted or applied by the
arbitrator unless the supposed errors of fact or of law are so patent and gross and
prejudicial as to amount to a grave abuse of discretion or an exces de pouvoir on
the part of the arbitrator."[21]

8.
The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing expenses for change order for site development outside the
area of responsibility of Roblecor;

Even decisions of administrative agencies which are declared "final" by law are not
exempt from judicial review when so warranted. Thus, in the case of Oceanic Bic
Division (FFW) et al. v. Flerida Ruth P. Romero, et al.,[22] this Court had occasion to
rule that:

11. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct plastering; and

"x x x x Inspite of statutory provisions making 'final' the decisions of certain

administrative agencies, we have taken cognizance of petitions questioning these
decisions where want of jurisdiction, grave abuse of discretion, violation of due
process, denial of substantial justice or erroneous interpretation of the law were
brought to our attention x x x."[23] (Underscoring ours.)
It should be stressed too, that voluntary arbitrators, by the nature of their
functions, act in a quasi-judicial capacity.[24] It stands to reason, therefore, that their
decisions should not be beyond the scope of the power of judicial review of this
Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds,
most of which allege error on the part of the arbitrator in granting compensation for
various items which apparently are disputed by said petitioners:
1.
The Honorable Arbitrator committed grave error in failing to apply the terms
and conditions of the Construction Agreement, Dormitory Contract and Electrical
Contract, and in using instead the "practices" in the construction industry;
2.
The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss of productivity due to adverse weather
conditions;
3.
The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss due to delayed payment of progress billings;
4.
The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss of productivity due to the cement crisis;
5.
The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for losses allegedly sustained on account of the failed
coup d'etat;
6.
The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing the alleged unpaid billings of Chung Fu;

9.
The Honorable Arbitrator committed grave error in granting to Roblecor the
cost of warehouse No. 2;
10. The Honorable Arbitrator committed grave error in granting to Roblecor extra
compensation for airduct change in dimension;

12. The Honorable Arbitrator committed grave error in awarding to Roblecor

attorney's fees.
After closely studying the list of errors, as well as petitioners' discussion of the same
in their Motion to Remand Case For Further Hearing and Reconsideration and
Opposition to Motion for Confirmation of Award, we find that petitioners have amply
made out a case where the voluntary arbitrator failed to apply the terms and
provisions of the Construction Agreement which forms part of the law applicable as
between the parties, thus committing a grave abuse of discretion. Furthermore, in
granting unjustified extra compensation to respondent for several items, he
exceeded his powers -- all of which would have constituted ground for vacating the
award under Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case,
despite prima facie showing of the existence of grounds warranting judicial review,
effectively deprived petitioners of their opportunity to prove or substantiate their
allegations. In so doing, the trial court itself committed grave abuse of discretion.
Likewise, the appellate court, in not giving due course to the petition, committed
grave abuse of discretion. Respondent courts should not shirk from exercising their
power to review, where under the applicable laws and jurisprudence, such power
may be rightfully exercised; more so where the objections raised against an
arbitration award may properly constitute grounds for annulling, vacating or
modifying said award under the laws on arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals
dated October 22, 1990 and December 3, 1990 as well as the Orders of respondent
Regional Trial Court dated July 31, 1990 and August 23, 1990, including the writ of
execution issued pursuant thereto, are hereby SET ASIDE. Accordingly, this case is
REMANDED to the court of origin for further hearing on this matter. All incidents
arising therefrom are reverted to the status guo ante until such time as the trial
court shall have passed upon the merits of this case. No costs.
SO ORDERED.
Gutierrez, Jr., (Chairman), Feliciano, Bidin, and Davide, Jr., JJ., concur.

7.
The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing the alleged extended overhead expenses;

41 | P a g e

project owned by the former within a period of 153 days, i.e. from 8 May 1990 to 8
October 1990. The project completion date was first moved to 4 November 1990.
On that date, however, only 75.8674% of the project was actually completed.
Petitioner attributed this non-completion to Steel Builders which allegedly had
frequently incurred delays during the original contract period and the extension
period. Upon the other hand, Steel Builders insisted that the delays in the project
were either excusable or due to Hi-Precision's own fault and issuance of change
orders. The project was taken over on 7 November 1990, and eventually completed
on February 1991, by Hi-Precision.

G.R. No. 110434

THIRD DIVISION
[ G.R. No. 110434, December 13, 1993 ]
HI-PRECISION STEEL CENTER, INC., PETITIONER, VS. LIM KIM STEEL
BUILDERS, INC., AND CONSTRUCTION INDUSTRY ARBITRATION
COMMISSION, RESPONDENTS.
RESOLUTION
FELICIANO, J.:
On 18 June 1993, a "Petition for Extension to File Petition for Review" [1] was filed
before the Court, petitioner Hi-Precision Steel Center, Inc. ("Hi-Precision") stating
that it intended to file a Petition for Review on Certiorari in respect of the 13
November 1992 Award[2] and 13 May 1993 Order[3] of public respondent
Construction Industry Arbitration Commission ("CIAC") in Arbitration Case No. 13-90. The Petition (really a Motion) prayed for an extension of thirty (30) days or until
21 July 1993 within which to file a Petition for Review.
An Opposition[4] to the Motion was filed by private respondent Lim Kim Steel
Builders, Inc. ("Steel Builders") on 5 July 1993. On the same day, however, the
Court issued a Resolution[5] granting the Motion with a warning that no further
extension would be given.
The Opposition, the subsequent Reply[6] of petitioner filed on 20 July 1993 and the
Petition for Review[7] dated 21 July 1993, were noted by the Court in its
Resolution[8] of 28 July 1993. The Court also required private respondent Steel
Builders to file a Comment on the Petition for Review and Steel Builders complied.
The Petition prays for issuance of a temporary restraining order [9] to stay the
execution of the assailed Order and Award in favor of Steel Builders, which
application the Court merely noted, as it did subsequent Urgent Motions for a
temporary restraining order.[10]
Petitioner Hi-Precision entered into a contract with private respondent Steel Builders
under which the latter as Contractor was to complete a P21 Million construction

Steel Builders filed a "Request for Adjudication" with public respondent CIAC. In its
Complaint filed with the CIAC, Steel Builders sought payment of its unpaid progress
billings, alleged unearned profits and other receivables. Hi-Precision, upon the other
hand, in its Answer and Amended Answer, claimed actual and liquidated damages,
reimbursement of alleged additional costs it had incurred in order to complete the
project and attorney's fees.
The CIAC formed an Arbitral Tribunal with three (3) members, two (2) being
appointed upon nomination of Hi-Precision and Steel Builders, respectively; the third
member (the Chairman) was appointed by the CIAC as a common nominee of the
two (2) parties. Only the Chairman was a lawyer. After the arbitration proceeding,
the Arbitral Tribunal rendered a unanimous Award dated 13 November 1992, the
dispositive portion of which reads as follows:
"WHEREFORE, premises considered, the Owner [petitioner Hi-Precision] is ordered
to pay the Contractor [private respondent Steel Builders] the amount of
P6,400,717.83 and all other claims of the parties against each other are deemed
compensated and offset. No pronouncement as to costs.
The Parties are enjoined to abide by the award."[11]
Upon motions for reconsideration filed, respectively, by Hi-Precision and Steel
Builders, the Arbitral Tribunal issued an Order dated 13 May 1993 which reduced the
net amount due to contractor Steel Builders to P6,115,285.83.[12]
In its Award, the Arbitral Tribunal stated that it was guided by Articles 1169, 1192
and 2215 of the Civil Code. With such guidance, the arbitrators concluded that (a)
both parties were at fault, though the Tribunal could not point out which of the
parties was the first infractor; and (b) the breaches by one party affected the
discharge of the reciprocal obligations of the other party. With mutual fault as a
principal premise, the Arbitral Tribunal denied (a) petitioner's claims for the
additional costs allegedly incurred to complete the project; and (b) private
respondent's claim for profit it had failed to earn because of petitioner's take over of
the project.
The Tribunal then proceeded to resolve the remaining specific claims of the parties.
In disposing of these multiple, detailed claims, the Arbitral Tribunal, in respect of
one or more of the respective claims of the parties: (a) averaged out the conflicting
amounts and percentages claimed by the parties;[13] (b) found neither basis nor
justification for a particular claim;[14] (c) found the evidence submitted in support of

42 | P a g e

particular claims either weak or non-existent;[15] (d) took account of the admissions
of liability in respect of particular claims; [16] (e) relied on its own expertise in
resolving particular claims;[17] and (f) applied a "principle of equity" in requiring
each party to bear its own loss resulting or arising from mutual fault or delay
(compensatio morae).[18]
Petitioner Hi-Precision now asks this Court to set aside the Award, contending
basically that it was the contractor Steel Builders who had defaulted on
its contractual undertakings and so could not be the injured party and should not be
allowed to recover any losses it may have incurred in the project. Petitioner HiPrecision insists it is entitled to damages, and claims that the Arbitral Tribunal
committed grave abuse of discretion when it allowed certain claims by Steel Builders
and offset them against claims of Hi-Precision.
A preliminary point needs to be made. We note that the Arbitral Tribunal has not
been impleaded as a respondent in the Petition at bar. The CIAC has indeed been
impleaded; however, the Arbitral Award was not rendered by the CIAC, but rather
by the Arbitral Tribunal. Moreover, under Section 20 of Executive Order No. 1008,
dated 4 February 1985, as amended, it is the Arbitral Tribunal, or the single
Arbitrator, with the concurrence of the CIAC, which issues the writ of execution
requiring any sheriff or other proper officer to execute the award. We consider that
the Arbitral Tribunal which rendered the Award sought to be reviewed and set aside,
should be impleaded even though the defense of its Award would presumably have
to be carried by the prevailing party.
Petitioner Hi-Precision apparently seeks review both under Rule 45 and Rule 65 of
the Rules of Court.[19] We do not find it necessary to rule which of the two: a petition
for review under Rule 45 or a petition for certiorari under Rule 65 -- is necessary
under Executive Order No. 1008, as amended; this issue was, in any case, not
squarely raised by either party and has not been properly and adequately litigated.
In its Petition, Hi-Precision purports to raise "legal issues," and in presenting these
issues, prefaced each with a creative formula:
(1)
"The public respondent [should be the 'Arbitral Tribunal'] committed serious error in
law, if not grave abuse of discretion, when it failed to strictly apply Article 1191,
New Civil Code, against the contractor x x x";
(2)
"The public respondent committed serious error in law, if not grave abuse of
discretion, when it failed to rule in favor of the owner, now petitioner herein, all the
awards it claimed on arbitration, and when it nonetheless persisted in its awards of
damages in favor of the respondent. x x x;"

1990 to award termination of the contract and the owner's takeover of the project x
x x;"
(4)
"The public respondent committed serious error in law, if not grave abuse of
discretion, when it did not enforce the law between the parties, the 'technical
specification[s]' which is one of the contract documents, particularly to par. (a),
subpart 3.01, part 3, Sec. 2b, which expressly requires that major site work
activities like stripping, removal and stockpiling of top soil shall be done 'prior to the
start of regular excavation or backfilling work', the principal issue in arbitration
being noncompliance with the contract documents;"
(5)
"The public respondent committed serious error in law, if not grave
abuse of discretion, when it found, in the May 13, 1993 Order, the petitioner 'guilty
of estoppel' although it is claimed that the legal doctrine of estoppel does not apply
with respect to the required written formalities in the issuance of a change order x x
x;"
(6)
"The exceptional circumstances in Remalante vs. Tibe, 158 SCRA 138, where the
Honorable Supreme Court may review findings of facts, are present in the instant
case, namely; (a) when the inference made is manifestly absurd, mistaken or
impossible (Luna vs. Linatoc, 74 Phil. 15); (2) when there is grave abuse of
discretion in the appreciation of facts (Buyco v. People, 95 Phil. 253); (3) when the
judgment is premised on a misapprehension of facts (De la Cruz v. Sosing, 94 Phil.
26, and Castillo vs. CA, 124 SCRA 808); (4) when the findings of fact are conflicting
(Casica v. Villaseca, 101 Phil. 1205); (5) when the findings are contrary to the
admissions of the parties (Evangelista v. Alto Surety, 103 Phil. 401), and therefore,
the findings of facts of the public respondent in the instant case may be reviewed by
the Honorable Supreme Court."[20] (Underscoring partly supplied and partly in the
original)
From the foregoing, petitioner Hi-Precision may be seen to be making two (2) basic
arguments:
(a) Petitioner asks this Court to correct legal errors committed by the Arbitral
Tribunal, which at the same time constitute grave abuse of discretion amounting to
lack of jurisdiction on the part of the Arbitral Tribunal; and
(b) Should the supposed errors petitioner asks us to correct be characterized as
errors of fact, such factual errors should nonetheless be reviewed because there
was "grave abuse of discretion" in the appreciation of facts and because there was
misapprehension of facts on the part of the Arbitral Tribunal.
Executive Order No. 1008, as amended, provides, in its Section 19, as follows:

(3)
"The public respondent committed serious error in law, if not grave abuse of
discretion, for its abject failure to apply the doctrine of waiver, or estoppel against
the contractor, the private respondent herein, when it agreed on November 16,

"Sec. 19. Finality of Awards. -- The arbitral award shall be binding upon the parties.
It shall be final and inappealable except on questions of law which shall be
appealable to the Supreme Court."

43 | P a g e

Section 19 makes it crystal clear that questions of fact cannot be raised

in proceedings before the Supreme Court -- which is not a trier of facts -- in respect
of an arbitral award rendered under the aegis of the CIAC. Consideration of the
animating purpose of voluntary arbitration in general, and arbitration under the
aegis of the CIAC in particular, requires us to apply rigorously the above principle
embodied in Section 19 that the Arbitral Tribunal's findings of fact shall be final and
inappealable.
Voluntary arbitration involves the reference of a dispute to an impartial body, the
members of which are chosen by the parties themselves, which parties freely
consent in advance to abide by the arbitral award issued after proceedings where
both parties had the opportunity to be heard. The basic objective is to provide a
speedy and inexpensive method of settling disputes by allowing the parties to avoid
the formalities, delay, expense and aggravation which commonly accompany
ordinary litigation, especially litigation which goes through the entire hierarchy of
courts. Executive Order No. 1008 created an arbitration facility to which the
construction industry in the Philippines can have recourse. The Executive Order was
enacted to encourage the early and expeditious settlement of disputes in the
construction industry, a public policy the implementation of which is necessary and
important for the realization of national development goals.[21]
Aware of the objective of voluntary arbitration in the labor field, in the construction
industry, and in any other area for that matter, the Court will not assist one or the
other or even both parties in any effort to subvert or defeat that objective for their
private purposes. The Court will not review the factual findings of an arbitral tribunal
upon the artful allegation that such body had "misapprehended the facts" and will
not pass upon issues which are, at bottom, issues of fact, no matter how cleverly
disguised they might be as "legal questions." The parties here had recourse to
arbitration and chose the arbitrators themselves; they must have had confidence in
such arbitrators. The Court will not, therefore, permit the parties to relitigate before
it the issues of facts previously presented and argued before the Arbitral Tribunal,
save only where a very clear showing is made that, in reaching its factual
conclusions, the Arbitral Tribunal committed an error so egregious and hurtful to
one party as to constitute a grave abuse of discretion resulting in lack or loss of
jurisdiction.[22] Prototypical examples would be factual conclusions of the Tribunal
which resulted in deprivation of one or the other party of a fair opportunity to
present its position before the Arbitral Tribunal, and an award obtained through
fraud or the corruption of arbitrators.[23] Any other, more relaxed, rule would result
in setting at naught the basic objective of a voluntary arbitration and would reduce
arbitration to a largely inutile institution.
Examination of the Petition at bar reveals that it is essentially an attempt to reassert and re-litigate before this Court the detailed or itemized factual claims made
before the Arbitral Tribunal under a general averment that the Arbitral Tribunal had
"misapprehended the facts" submitted to it. In the present Petition, too, Hi-Precision
claims that the Arbitral Tribunal had committed grave abuse of discretion amounting
to lack of jurisdiction in reaching its factual and legal conclusions.

The first "legal issue" submitted by the Petition is the claimed misapplication by the
Arbitral Tribunal of the first and second paragraphs of Article 1191 of the Civil Code.
[24]
Article 1191 reads:
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law."
Hi-Precision contends energetically that it is the injured party and that Steel
Builders was the obligor who did not comply with what was incumbent upon it, such
that Steel Builders was the party in default and the entity guilty of negligence and
delay. As the injured party, Hi-Precision maintains that it may choose between the
fulfillment or rescission of the obligation in accordance with Article 1191, and is
entitled to damages in either case. Thus, Hi-Precision continues, when the
contractor Steel Builders defaulted on the 153rd day of the original contract period,
Hi-Precision opted for specific performance and gave Steel Builders a 30-day
extension period with which to complete the project.
What petitioner Hi-Precision, in its above argument, disregards is that the
determination of whether Hi-Precision or Steel Builders was the "injured party" is
not to be resolved by an application of Article 1191. That determination is eminently
a question of fact, for it requires ascertainment and identification of which of the
two (2) contending parties had first failed to comply with what was incumbent upon
it. In other words, the supposed misapplication of Article 1191, while ostensibly a
"legal issue," is ultimately a question of fact, i.e., the determination of the existence
or non-existence of a fact or set of facts in respect of which Article 1191 may be
properly applied. Thus, to ask this Court to correct a claimed misapplication or nonapplication of Article 1191 is to compelthis Court to determine which of the two
(2) contending parties was the "injured party" or the "first infractor." As noted
earlier, the Arbitral Tribunal after the prolonged arbitration proceeding, was unable
to make that factual determination and instead concluded that both parties had
committed breaches of their respective obligations. We will not review, and much
less reverse, that basicfactual finding of the Arbitral Tribunal.
A second "legal issue" sought to be raised by petitioner Hi-Precision relates to the
supposed failure of the Arbitral Tribunal to apply the doctrines of estoppel
and waiver as against Steel Builders.[25]The Arbitral Tribunal, after declaring that the
parties were mutually at fault, proceeded to enumerate the faults of each of the
parties. One of the faults attributed to petitioner Hi-Precision is that it had failed to
give the contractor Steel Builders the required 15-day notice for
termination of the contract.[26] This was clearly a finding of fact on the part of the

44 | P a g e

Tribunal, supported by the circumstance thatper the record, petitioner had offered
no proof that it had complied with such 15-day notice required under Article 28.01
of the General Conditions of Contract forming part of the Contract Documents.
Petitioner Hi-Precision's argument is that a written Agreement dated 16 November
1990 with Steel Builders concerning the take over of the project by HiPrecision, constituted waiver on the part of the latter of its right to a 15-day notice
of contract termination. Whether or not that Agreement dated 16 November 1990
(a document not submitted to this Court) is properly characterized as constituting
waiver on the part of Steel Builders, may be conceded to be prima facie a question
of law; but, if it is, and assuming arguendo that the Arbitral Tribunal had erred in
resolving it, that error clearly did not constitute a grave abuse of discretion resulting
in lack or loss of jurisdiction on the part of the Tribunal.

12.10.

- do -

101,621.40

12.11.

- do -

10

7,200.00

12.12.

- do -

11

0.00

12.13.

- do -

12

7,800.00

12.14.

- do -

13

49,250.00

12.15.

- do -

14

167,952.00

12.16.

- do -

15

445,600.00

12.17.

- do -

16

92,457.30

12.18.

- do -

17

1,500.00

A third "legal issue" posed by Hi-Precision relates to the supposed failure on the part
of the Arbitral Tribunal "to uphold the supremacy of 'the law between the
parties' and enforce it against private respondent [Steel Builders]."[27] The "law
between that parties" here involved is the "Technical Specifications" forming part of
the Contract Documents. Hi-Precision asserts that the Arbitral Tribunal did not
uphold the "law between the parties," but instead substituted the same with "its
[own] absurd inference and 'opinion' on mud." Here again, petitioner is merely
disguising a factual question as a "legal issue," since petitioner is in reality asking
this Court to review the physical operations relating, e.g., to site preparation carried
out by the contractor Steel Builders and to determine whether such operations were
in accordance with the Technical Specifications of the project. The Arbitral Tribunal
resolved Hi-Precision's claim by finding that Steel Builders had complied
substantially with the Technical Specifications. This Court will not pretend that it has
the technical and engineering capability to review the resolution of that factual issue
by the Arbitral Tribunal.

12.19.

20,240.00

12.20.

63,518.00

12.21.

0.00

12.22.

0.00

12.23.

0.00

12.24.

0.00

12.25.

0.00

12.26.

730,201.57

12.27.

1,130,722.70

12.28.

0.00

12.29.

273,991.00

12.30.

0.00

Finally, the Petition asks this Court to "review serious errors in the findings of fact of
the [Arbitral Tribunal]."[28] In this section of its Petition, Hi-Precision asks us to
examine each item of its own claims which the Arbitral Tribunal had rejected in its
Award, and each claim of the contractor Steel Builders which the Tribunal had
granted. In respect of each item of the owner's claims and each item of the
contractor's claims, Hi-Precision sets out its arguments, to all appearances the same
arguments it had raised before the Tribunal. As summarized in the Arbitral Award,
Contractor's Claims were as follows:

-------------------12.31.

7,318,499.28
-------------------"[29]

Upon the other hand, the petitioner's claims we are asked to review and grant are
summarized as follows:

12.1.

Unpaid Progress

Billing

1,812,706.95

12.2.

Change Order

0.00

12.3.

- do -

10,014.00

"1. Actual Damages

12.4.

- do -

320,000.00

P8,406,000.00

12.5.

- do -

112,300.70

Advance Downpayment [at] signing of Contract which

is subject to 40% deduction every progress billing
(40% of Contract Price)

12.6.

- do -

398,398.00

Progress Billings

5,582,585.55

12.7.

- do -

353,050.38

Advances made to Lim Kim

12.8.

- do -

503,836.53

12.9.

- do -

216,138.75

45 | P a g e

a) prior to
take-over

392,781.45

b) after the

a. Foreign exchange loss

11,565,048.37

b. Cost of money (a)

2,871,987.01

take-over
Civil Works
Materials

1,158,513.88

I [E]

Raw materials

4,213,318.72

Labor

a. Foreign exchange loss

4,155,982.18

b. Cost of money of (a)

821,242,72

c. Additional import levy of 5%

886,513.33

d. Cost of money (c)

170,284.44

2,155,774.79
1,448,208.90

Equipment Rental

P 8,974,816.45

Total Amount Paid for Construction

23,650,183.00
e. Cost of money on marginal deposit on Letter of Credit

Less: Contract Price

(21,000,000.00)

IA Excess of amount paid over contract price

2,650,163.29

IF Cost of money on holding to CRC INTY.

561,195.25

3,319,609.63

Total Actual Damages

35,295,927.32

2. Liquidated Damages

2,436,000.00

3. Attorney's Fees

500,000.00

IB Other items due from Lim Kim Steel Builders

a. Amount not yet deducted from Downpayment due to

non-completion of Project (P24.1326%)
2,027,138.40
b. Due to Huey Commercial used for HSCI Project

51,110.40
-----------------------------

IC Additional construction expenses

P38,231,927.32
a. Increase in prices since Oct.

5,272,096.81

b. Cost of money of (a)

873,535.49

----------------------^ ^ ^ ^ ^ ^ ^ ^ ^ "[30]

ID

Installation of machinery

46 | P a g e

We consider that in asking this Court to go over each individual claim submitted by
it and each individual countering claim submitted by Steel Builders to the Arbitral
Tribunal, petitioner Hi-Precision is asking this Court to pass upon claims which are
either clearly and directly factual in nature or require previous determination of
factual issues. This upon the one hand. Upon the other hand, the Court considers
that petitioner Hi-Precision has failed to show any serious errors of law amounting
to grave abuse of discretion resulting in lack of jurisdiction on the part of the
Arbitral Tribunal, in either the methods employed or the results reached by the
Arbitral Tribunal, in disposing of the detailed claims of the respective parties.
WHEREFORE, for all the foregoing, the Petition is hereby DISMISSED for lack of
merit. Costs against petitioner.
566 Phil. 1

SECOND DIVISION
[ G.R. No. 143581, January 07, 2008 ]
KOREA TECHNOLOGIES CO., LTD., Petitioner, vs. HON. ALBERTO A. LERMA,
in his capacity as Presiding Judge of Branch 256 of Regional Trial Court of
Muntinlupa City, and PACIFIC GENERAL STEEL MANUFACTURING
CORPORATION, Respondents.
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.

47 | P a g e

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

48 | P a g e

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.

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 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

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-claim states, A compulsory counterclaim or a cross-claim
that a defending party has at the time he files his answer shall be contained
therein.

49 | P a g e

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. InGonzales v. Climax
Mining Ltd.,[35] we held that submission to arbitration is a contract and that a clause

50 | P a g e

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]

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

Arbitration clause not contrary to public policy

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.

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 Philippines committed 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

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

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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

52 | P a g e

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.

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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]
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

54 | P a g e

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.

SO ORDERED.
Quisumbing, (Chairperson), Carpio, Carpio Morales, and Tinga, JJ., concur.

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;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98117 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.

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sight, to be opened by September 15, 1996; that sometime prior to September 15,
1996, the parties agreed that instead of January/February 1997, the delivery would
be made in April/May 1997 and that payment would be by an Irrevocable Letter of
Credit payable at sight, to be opened upon petitioner's advice. Petitioner, as seller,
failed to comply with its obligations under the contract, despite demands from
respondent, thus, the latter prayed for rescission of the contract and payment of
damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend Proceedings and To
Refer Controversy to Voluntary Arbitration,[4] wherein it argued that the alleged
contract between the parties, dated July 11, 1996, was never consummated
because respondent never returned the proposed agreement bearing its written
acceptance or conformity nor did respondent open the Irrevocable Letter of Credit
at sight. Petitioner contended that the controversy between the parties was
whether or not the alleged contract between the parties was legally in existence and
the RTC was not the proper forum to ventilate such issue. It claimed that the
contract contained an arbitration clause, to wit:
656 Phil. 29

ARBITRATION

SECOND DIVISION
[ G.R. No. 175404, January 31, 2011 ]
CARGILL PHILIPPINES, INC., PETITIONER, VS. SAN FERNANDO REGALA
TRADING, INC., RESPONDENT.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to reverse and set aside the
Decision[1] dated July 31, 2006 and the Resolution[2] dated November 13, 2006 of
the Court of Appeals (CA) in CA G.R. SP No. 50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading, Inc. filed with the
Regional Trial Court (RTC) of Makati City a Complaint for Rescission of Contract with
Damages[3] against petitioner Cargill Philippines, Inc. In its Complaint, respondent
alleged that it was engaged in buying and selling of molasses and petitioner was
one of its various sources from whom it purchased molasses. Respondent alleged
that it entered into a contract dated July 11, 1996 with petitioner, wherein it was
agreed upon that respondent would purchase from petitioner 12,000 metric tons of
Thailand origin cane blackstrap molasses at the price of US$192 per metric ton; that
the delivery of the molasses was to be made in January/February 1997 and
payment was to be made by means of an Irrevocable Letter of Credit payable at

Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the
American Arbitration Association. The Arbitration Award shall be final and binding on
both parties.[5]
that respondent must first comply with the arbitration clause before resorting to
court, thus, the RTC must either dismiss the case or suspend the proceedings and
direct the parties to proceed with arbitration, pursuant to Sections 6[6] and 7[7] of
Republic Act (R.A.) No. 876, or the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC has jurisdiction over
the action for rescission of contract and could not be changed by the subject
arbitration clause. It cited cases wherein arbitration clauses, such as the subject
clause in the contract, had been struck down as void for being contrary to public
policy since it provided that the arbitration award shall be final and binding on both
parties, thus, ousting the courts of jurisdiction.
In its Reply, petitioner maintained that the cited decisions were already inapplicable,
having been rendered prior to the effectivity of the New Civil Code in 1950 and the
Arbitration Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause relied upon by
petitioner is invalid and unenforceable, considering that the requirements imposed
by the provisions of the Arbitration Law had not been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent had even clarified
that the issue boiled down to whether the arbitration clause contained in the
contract subject of the complaint is valid and enforceable; that the arbitration clause
did not violate any of the cited provisions of the Arbitration Law.
On September 17, 1998, the RTC rendered an Order,[8] the dispositive portion of
which reads:

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Premises considered, defendant's "Motion To Dismiss/Suspend Proceedings and To

Refer Controversy To Voluntary Arbitration" is hereby DENIED. Defendant is directed
to file its answer within ten (10) days from receipt of a copy of this order.[9]
In denying the motion, the RTC found that there was no clear basis for petitioner's
plea to dismiss the case, pursuant to Section 7 of the Arbitration Law. The RTC said
that the provision directed the court concerned only to stay the action or proceeding
brought upon an issue arising out of an agreement providing for the arbitration
thereof, but did not impose the sanction of dismissal. However, the RTC did not find
the suspension of the proceedings warranted, since the Arbitration Law
contemplates an arbitration proceeding that must be conducted in the Philippines
under the jurisdiction and control of the RTC; and before an arbitrator who resides
in the country; and that the arbitral award is subject to court approval, disapproval
and modification, and that there must be an appeal from the judgment of the RTC.
The RTC found that the arbitration clause in question contravened these
procedures, i.e., the arbitration clause contemplated an arbitration proceeding in
New York before a non-resident arbitrator (American Arbitration Association); that
the arbitral award shall be final and binding on both parties. The RTC said that to
apply Section 7 of the Arbitration Law to such an agreement would result in
disregarding the other sections of the same law and rendered them useless and
mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC denied in an
Order[10] dated November 25, 1998.
Petitioner filed a petition for certiorari with the CA raising the sole issue that the RTC
acted in excess of jurisdiction or with grave abuse of discretion in refusing to
dismiss or at least suspend the proceedings a quo, despite the fact that the party's
agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then required to file their
respective Memoranda.
On July 31, 2006, the CA rendered its assailed Decision denying the petition and
affirming the RTC Orders.
In denying the petition, the CA found that stipulation providing for arbitration in
contractual obligation is both valid and constitutional; that arbitration as an
alternative mode of dispute resolution has long been accepted in our jurisdiction and
expressly provided for in the Civil Code; that R.A. No. 876 (the Arbitration Law)
also expressly authorized the arbitration of domestic disputes. The CA found error
in the RTC's holding that Section 7 of R.A. No. 876 was inapplicable to arbitration
clause simply because the clause failed to comply with the requirements prescribed
by the law. The CA found that there was nothing in the Civil Code, or R.A. No. 876,
that require that arbitration proceedings must be conducted only in the Philippines
and the arbitrators should be Philippine residents. It also found that the RTC ruling
effectively invalidated not only the disputed arbitration clause, but all other
agreements which provide for foreign arbitration. The CA did not find illegal or
against public policy the arbitration clause so as to render it null and void or
ineffectual.
Notwithstanding such findings, the CA still held that the case cannot be brought

under the Arbitration Law for the purpose of suspending the proceedings before the
RTC, since in its Motion to Dismiss/Suspend proceedings, petitioner alleged, as one
of the grounds thereof, that the subject contract between the parties did not exist
or it was invalid; that the said contract bearing the arbitration clause was never
consummated by the parties, thus, it was proper that such issue be first resolved by
the court through an appropriate trial; that the issue involved a question of fact that
the RTC should first resolve. Arbitration is not proper when one of the parties
repudiated the existence or validity of the contract.
Petitioner's motion for reconsideration was denied in a Resolution dated November
13, 2006.
Hence, this petition.
Petitioner alleges that the CA committed an error of law in ruling that arbitration
cannot proceed despite the fact that: (a) it had ruled, in its assailed decision, that
the arbitration clause is valid, enforceable and binding on the parties; (b) the case
of Gonzales v. Climax Mining Ltd.[11] is inapplicable here; (c) parties are generally
allowed, under the Rules of Court, to adopt several defenses, alternatively or
hypothetically, even if such defenses are inconsistent with each other; and (d) the
complaint filed by respondent with the trial court is premature.
Petitioner alleges that the CA adopted inconsistent positions when it found the
arbitration clause between the parties as valid and enforceable and yet in the same
breath decreed that the arbitration cannot proceed because petitioner assailed the
existence of the entire agreement containing the arbitration clause. Petitioner
claims the inapplicability of the cited Gonzales case decided in 2005, because in the
present case, it was respondent who had filed the complaint for rescission and
damages with the RTC, which based its cause of action against petitioner on the
alleged agreement dated July 11, 2006 between the parties; and that the same
agreement contained the arbitration clause sought to be enforced by petitioner in
this case. Thus, whether petitioner assails the genuineness and due execution of the
agreement, the fact remains that the agreement sued upon provides for an
arbitration clause; that respondent cannot use the provisions favorable to him and
completely disregard those that are unfavorable, such as the arbitration clause.
Petitioner contends that as the defendant in the RTC, it presented two alternative
defenses, i.e., the parties had not entered into any agreement upon which
respondent as plaintiff can sue upon; and, assuming that such agreement existed,
there was an arbitration clause that should be enforced, thus, the dispute must first
be submitted to arbitration before an action can be instituted in court. Petitioner
argues that under Section 1(j) of Rule 16 of the Rules of Court, included as a
ground to dismiss a complaint is when a condition precedent for filing the complaint
has not been complied with; and that submission to arbitration when such has been
agreed upon is one such condition precedent. Petitioner submits that the
proceedings in the RTC must be dismissed, or at least suspended, and the parties
be ordered to proceed with arbitration.
On March 12, 2007, petitioner filed a Manifestation[12] saying that the CA's rationale
in declining to order arbitration based on the 2005 Gonzales ruling had been
modified upon a motion for reconsideration decided in 2007; that the CA decision
lost its legal basis, because it had been ruled that the arbitration agreement can be

57 | P a g e

implemented notwithstanding that one of the parties thereto repudiated the contract
which contained such agreement based on the doctrine of separability.
In its Comment, respondent argues that certiorari under Rule 65 is not the remedy
against an order denying a Motion to Dismiss/Suspend Proceedings and To Refer
Controversy to Voluntary Arbitration. It claims that the Arbitration Law which
petitioner invoked as basis for its Motion prescribed, under its Section 29, a
remedy, i.e., appeal by a petition for review on certiorari under Rule 45.
Respondent contends that the Gonzales case, which was decided in 2007, is
inapplicable in this case, especially as to the doctrine of separability enunciated
therein. Respondent argues that even if the existence of the contract and the
arbitration clause is conceded, the decisions of the RTC and the CA declining referral
of the dispute between the parties to arbitration would still be correct. This is so
because respondent's complaint filed in Civil Case No. 98-1376 presents the
principal issue of whether under the facts alleged in the complaint, respondent is
entitled to rescind its contract with petitioner and for the latter to pay damages;
that such issue constitutes a judicial question or one that requires the exercise of
judicial function and cannot be the subject of arbitration.
Respondent contends that Section 8 of the Rules of Court, which allowed a
defendant to adopt in the same action several defenses, alternatively or
hypothetically, even if such defenses are inconsistent with each other refers to
allegations in the pleadings, such as complaint, counterclaim, cross-claim, thirdparty complaint, answer, but not to a motion to dismiss. Finally, respondent claims
that petitioner's argument is premised on the existence of a contract with
respondent containing a provision for arbitration. However, its reliance on the
contract, which it repudiates, is inappropriate.
In its Reply, petitioner insists that respondent filed an action for rescission and
damages on the basis of the contract, thus, respondent admitted the existence of all
the provisions contained thereunder, including the arbitration clause; that if
respondent relies on said contract for its cause of action against petitioner, it must
also consider itself bound by the rest of the terms and conditions contained
thereunder notwithstanding that respondent may find some provisions to be
adverse to its position; that respondent's citation of the Gonzales case, decided in
2005, to show that the validity of the contract cannot be the subject of the
arbitration proceeding and that it is the RTC which has the jurisdiction to resolve the
situation between the parties herein, is not correct since in the resolution of the
Gonzales' motion for reconsideration in 2007, it had been ruled that an arbitration
agreement is effective notwithstanding the fact that one of the parties thereto
repudiated the main contract which contained it.
We first address the procedural issue raised by respondent that petitioner's petition
for certiorari under Rule 65 filed in the CA against an RTC Order denying a Motion to
Dismiss/Suspend Proceedings and to Refer Controversy to Voluntary Arbitration was
a wrong remedy invoking Section 29 of R.A. No. 876, which provides:
Section 29.
x x x An appeal may be taken from an order made in a proceeding under this Act,
or from a judgment entered upon an award through certiorari proceedings, but such
appeals shall be limited to question of law. x x x.

To support its argument, respondent cites the case of Gonzales v. Climax Mining
Ltd.[13] (Gonzales case), wherein we ruled the impropriety of a petition
for certiorari under Rule 65 as a mode of appeal from an RTC Order directing the
parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of Makati a petition to
compel arbitration under R.A. No. 876, pursuant to the arbitration clause found in
the Addendum Contract it entered with Gonzales. Judge Oscar Pimentel of the RTC
of Makati then directed the parties to arbitration proceedings. Gonzales filed a
petition for certiorari with Us contending that Judge Pimentel acted with grave
abuse of discretion in immediately ordering the parties to proceed with arbitration
despite the proper, valid and timely raised argument in his Answer with
counterclaim that the Addendum Contract containing the arbitration clause was null
and void. Climax-Arimco assailed the mode of review availed of by Gonzales, citing
Section 29 of R.A. No. 876 contending that certiorari under Rule 65 can be availed
of only if there was no appeal or any adequate remedy in the ordinary course of
law; that R.A. No. 876 provides for an appeal from such order. We then ruled that
Gonzales' petition for certiorari should be dismissed as it was filed in lieu of an
appeal by certiorari which was the prescribed remedy under R.A. No. 876 and the
petition was filed far beyond the reglementary period.
We found that Gonzales' petition for certiorari raises a question of law, but not a
question of jurisdiction; that Judge Pimentel acted in accordance with the procedure
prescribed in R.A. No. 876 when he ordered Gonzales to proceed with arbitration
and appointed a sole arbitrator after making the determination that there was
indeed an arbitration agreement. It had been held that as long as a court acts
within its jurisdiction and does not gravely abuse its discretion in the exercise
thereof, any supposed error committed by it will amount to nothing more than an
error of judgment reviewable by a timely appeal and not assailable by a special civil
action of certiorari.[14]
In this case, petitioner raises before the CA the issue that the respondent Judge
acted in excess of jurisdiction or with grave abuse of discretion in refusing to
dismiss, or at least suspend, the proceedings a quo, despite the fact that the party's
agreement to arbitrate had not been complied with. Notably, the RTC found the
existence of the arbitration clause, since it said in its decision that "hardly disputed
is the fact that the arbitration clause in question contravenes several provisions of
the Arbitration Law x x x and to apply Section 7 of the Arbitration Law to such an
agreement would result in the disregard of the afore-cited sections of the Arbitration
Law and render them useless and mere surplusages." However, notwithstanding
the finding that an arbitration agreement existed, the RTC denied petitioner's
motion and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,[15] it was held that R.A. No. 876
explicitly confines the court's authority only to the determination of whether or not
there is an agreement in writing providing for arbitration. In the affirmative, the
statute ordains that the court shall issue an order summarily directing the parties to
proceed with the arbitration in accordance with the terms thereof. If the court,
upon the other hand, finds that no such agreement exists, the proceedings shall be

58 | P a g e

dismissed.
In issuing the Order which denied petitioner's Motion to Dismiss/Suspend
Proceedings and to Refer Controversy to Voluntary Arbitration, the RTC went beyond
its authority of determining only the issue of whether or not there is an agreement
in writing providing for arbitration by directing petitioner to file an answer, instead of
ordering the parties to proceed to arbitration. In so doing, it acted in excess of its
jurisdiction and since there is no plain, speedy, and adequate remedy in the
ordinary course of law, petitioner's resort to a petition for certiorari is the proper
remedy.
We now proceed to the substantive issue of whether the CA erred in finding that this
case cannot be brought under the arbitration law for the purpose of suspending the
proceedings in the RTC.
We find merit in the petition.
Arbitration, as an alternative mode of settling disputes, has long been recognized
and accepted in our jurisdiction.[16] R.A. No. 876[17] authorizes arbitration of domestic
disputes. Foreign arbitration, as a system of settling commercial disputes of an
international character, is likewise recognized.[18] The enactment of R.A. No. 9285
on April 2, 2004 further institutionalized the use of alternative dispute resolution
systems, including arbitration, in the settlement of disputes. [19]
A contract is required for arbitration to take place and to be binding. [20] Submission
to arbitration is a contract [21] and a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitration is a contract. [22] The
provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of the contract and is itself a contract. [23]
In this case, the contract sued upon by respondent provides for an arbitration
clause, to wit:
ARBITRATION
Any dispute which the Buyer and Seller may not be able to settle by mutual
agreement shall be settled by arbitration in the City of New York before the
American Arbitration Association, The Arbitration Award shall be final and binding on
both parties.
The CA ruled that arbitration cannot be ordered in this case, since petitioner alleged
that the contract between the parties did not exist or was invalid and arbitration is
not proper when one of the parties repudiates the existence or validity of the
contract. Thus, said the CA:
Notwithstanding our ruling on the validity and enforceability of the assailed
arbitration clause providing for foreign arbitration, it is our considered opinion that
the case at bench still cannot be brought under the Arbitration Law for the purpose
of suspending the proceedings before the trial court. We note that in its Motion to
Dismiss/Suspend Proceedings, etc, petitioner Cargill alleged, as one of the grounds
thereof, that the alleged contract between the parties do not legally exist or is
invalid. As posited by petitioner, it is their contention that the said contract, bearing

the arbitration clause, was never consummated by the parties. That being the case,
it is but proper that such issue be first resolved by the court through an appropriate
trial. The issue involves a question of fact that the trial court should first resolve.
Arbitration is not proper when one of the parties repudiates the existence or validity
of the contract. Apropos is Gonzales v. Climax Mining Ltd., 452 SCRA 607,
(G.R.No.161957), where the Supreme Court held that:
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....
Consequently, the petitioner herein cannot claim that the contract was never
consummated and, at the same time, invokes the arbitration clause provided for
under the contract which it alleges to be non-existent or invalid. Petitioner claims
that private respondent's complaint lacks a cause of action due to the absence of
any valid contract between the parties. Apparently, the arbitration clause is being
invoked merely as a fallback position. The petitioner must first adduce evidence in
support of its claim that there is no valid contract between them and should the
court a quo find the claim to be meritorious, the parties may then be spared the
rigors and expenses that arbitration in a foreign land would surely entail. [24]
However, the Gonzales case,[25] which the CA relied upon for not ordering
arbitration, had been modified upon a motion for reconsideration in this wise:
x x x The adjudication of the petition in G.R. No. 167994 effectively
modifies part of the Decision dated 28 February 2005 in G.R. No. 161957.
Hence, we now hold that the validity of the contract containing the
agreement to submit to arbitration does not affect the applicability of the
arbitration clause itself. A contrary ruling would suggest that a party's
mere repudiation of the main contract is sufficient to avoid arbitration.
That is exactly the situation that the separability doctrine, as well as
jurisprudence applying it, seeks to avoid. We add that when it was declared in
G.R. No. 161957 that the case should not be brought for arbitration, it should be
clarified that the case referred to is the case actually filed by Gonzales before the
DENR Panel of Arbitrators, which was for the nullification of the main contract on the
ground of fraud, as it had already been determined that the case should have been
brought before the regular courts involving as it did judicial issues. [26]
In so ruling that the validity of the contract containing the arbitration agreement
does not affect the applicability of the arbitration clause itself, we then applied the
doctrine of separability, thus:
The doctrine of separability, or severability as other writers call it, enunciates that
an arbitration agreement is independent of the main contract. The arbitration
agreement is to be treated as a separate agreement and the arbitration agreement
does not automatically terminate when the contract of which it is a part comes to an
end.

59 | P a g e

The separability of the arbitration agreement is especially significant to the

determination of whether the invalidity of the main contract also nullifies the
arbitration clause. Indeed, the doctrine denotes that the invalidity of the main
contract, also referred to as the "container" contract, does not affect the validity of
the arbitration agreement. Irrespective of the fact that the main contract is invalid,
the arbitration clause/agreement still remains valid and enforceable. [27]
Respondent argues that the separability doctrine is not applicable in petitioner's
case, since in the Gonzales case, Climax-Arimco sought to enforce the arbitration
clause of its contract with Gonzales and the former's move was premised on the
existence of a valid contract; while Gonzales, who resisted the move of ClimaxArimco for arbitration, did not deny the existence of the contract but merely
assailed the validity thereof on the ground of fraud and oppression. Respondent
claims that in the case before Us, petitioner who is the party insistent on arbitration
also claimed in their Motion to Dismiss/Suspend Proceedings that the contract
sought by respondent to be rescinded did not exist or was not consummated; thus,
there is no room for the application of the separability doctrine, since there is no
container or main contract or an arbitration clause to speak of.
We are not persuaded.
Applying the Gonzales ruling, an arbitration agreement which forms part of the main
contract shall not be regarded as invalid or non-existent just because the main
contract is invalid or did not come into existence, since the arbitration agreement
shall be treated as a separate agreement independent of the main contract. To
reiterate. a contrary ruling would suggest that a party's mere repudiation of the
main contract is sufficient to avoid arbitration and that is exactly the situation that
the separability doctrine sought to avoid. Thus, we find that even the party who has
repudiated the main contract is not prevented from enforcing its arbitration clause.
Moreover, it is worthy to note that respondent filed a complaint for rescission of
contract and damages with the RTC. In so doing, respondent alleged that a contract
exists between respondent and petitioner. It is that contract which provides for an
arbitration clause which states that "any dispute which the Buyer and Seller may not
be able to settle by mutual agreement shall be settled before the City of New York
by the American Arbitration Association. The arbitration agreement clearly
expressed the parties' intention that any dispute between them as buyer and seller
should be referred to arbitration. It is for the arbitrator and not the courts to decide
whether a contract between the parties exists or is valid.
Respondent contends that assuming that the existence of the contract and the
arbitration clause is conceded, the CA's decision declining referral of the parties'
dispute to arbitration is still correct. It claims that its complaint in the RTC presents
the issue of whether under the facts alleged, it is entitled to rescind the contract
with damages; and that issue constitutes a judicial question or one that requires the
exercise of judicial function and cannot be the subject of an arbitration proceeding.
Respondent cites our ruling in Gonzales, wherein we held that a panel of arbitrator
is bereft of jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to the
execution of the addendum contract and the other contracts emanating from it, and
that the complaint should have been filed with the regular courts as it involved
issues which are judicial in nature.

Such argument is misplaced and respondent cannot rely on the Gonzales case to
support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the Panel of Arbitrators,
Region II, Mines and Geosciences Bureau, of the Department of Environment and
Natural Resources (DENR) against respondents Climax- Mining Ltd, Climax-Arimco
and Australasian Philippines Mining Inc, seeking the declaration of nullity or
termination of the addendum contract and the other contracts emanating from it on
the grounds of fraud and oppression. The Panel dismissed the complaint for lack of
jurisdiction. However, the Panel, upon petitioner's motion for reconsideration, ruled
that it had jurisdiction over the dispute maintaining that it was a mining dispute,
since the subject complaint arose from a contract between the parties which
involved the exploration and exploitation of minerals over the disputed area.
Respondents assailed the order of the Panel of Arbitrators via a petition
for certiorari before the CA. The CA granted the petition and declared that the Panel
of Arbitrators did not have jurisdiction over the complaint, since its jurisdiction was
limited to the resolution of mining disputes, such as those which raised a question
of fact or matter requiring the technical knowledge and experience of mining
authorities and not when the complaint alleged fraud and oppression which called
for the interpretation and application of laws. The CA further ruled that the petition
should have been settled through arbitration under R.A. No. 876 the Arbitration
Law as provided under the addendum contract.
On a review on certiorari, we affirmed the CA's finding that the Panel of Arbitrators
who, under R.A. No. 7942 of the Philippine Mining Act of 1995, has exclusive and
original jurisdiction to hear and decide mining disputes, such as mining areas,
mineral agreements, FTAAs or permits and surface owners, occupants and
claimholders/concessionaires, is bereft of jurisdiction over the complaint for
declaration of nullity of the addendum contract; thus, the Panels' jurisdiction is
limited only to those mining disputes which raised question of facts or matters
requiring the technical knowledge and experience of mining authorities. We then
said:
In Pearson v. Intermediate Appellate Court, this Court observed that the trend has
been to make the adjudication of mining cases a purely administrative matter.
Decisions 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.[28]
We found that since the complaint filed before the DENR Panel of Arbitrators
charged respondents with disregarding and ignoring the addendum contract, and
acting in a fraudulent and oppressive manner against petitioner, the complaint filed
before the Panel was not a dispute involving rights to mining areas, or was it a
dispute involving claimholders or concessionaires, but essentially judicial issues. We
then said that the Panel of Arbitrators did not have jurisdiction over such issue,

60 | P a g e

since it does not involve the application of technical knowledge and expertise
relating to mining. It is in this context that we said that:
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. [29]
In fact, We even clarified in our resolution on Gonzales' motion for reconsideration
that "when we declared that the case should not be brought for arbitration, it should
be clarified that the case referred to is the case actually filed by Gonzales before the
DENR Panel of Arbitrators, which was for the nullification of the main contract on the
ground of fraud, as it had already been determined that the case should have been
brought before the regular courts involving as it did judicial issues." We made such
clarification in our resolution of the motion for reconsideration after ruling that the
parties in that case can proceed to arbitration under the Arbitration Law, as
provided under the Arbitration Clause in their Addendum Contract.

application shall be served either personally or by registered mail upon the party in
default. The court shall hear the parties, and upon being satisfied that the making of
the agreement or such failure to comply therewith is not in issue, shall make an
order directing the parties to proceed to arbitration in accordance with the terms of
the agreement. If the making of the agreement or default be in issue the court shall
proceed to summarily hear such issue. If the finding be that no agreement in writing
providing for arbitration was made, or that there is no default in the proceeding
thereunder, the proceeding shall be dismissed. If the finding be that a written
provision for arbitration was made and there is a default in proceeding thereunder,
an order shall be made summarily directing the parties to proceed with the
arbitration in accordance with the terms thereof.
The court shall decide all motions, petitions or applications filed under the provisions
of this Act, within ten days after such motions, petitions, or applications have been
heard by it.
Sec. 7. Stay of civil action. - If any suit or proceeding be brought upon an issue
arising out of an agreement providing for the arbitration thereof, the court in which
such suit or proceeding is pending, upon being satisfied that the issue involved in
such suit or proceeding is referable to arbitration, shall say the action or proceeding
until an arbitration has been had in accordance with the terms of the agreement;
Provided that the applicant for the stay is not in default in proceeding with such
arbitration.
[7]

Penned by Judge Lucia Violago Isnani; rollo, pp. 71-75.

WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2006 and the
Resolution dated November 13, 2006 of the Court of Appeals in CA-G.R. SP No.
50304 are REVERSED and SET ASIDE. The parties are
hereby ORDERED to SUBMIT themselves to the arbitration of their dispute,
pursuant to their July 11, 1996 agreement.

[8]

[10]

Records, pp. 113-115.

SO ORDERED.

[11]

G.R. No. 161957, February 28, 2005, 452 SCRA 607.

Carpio, (Chairperson), Nachura, Abad, and Mendoza, JJ., concur.

[12]

Rollo, pp. 311-314.

[13]

G.R. Nos. 161957 & 167994, January 22, 1997, 512 SCRA 148, 163.

[14]

Id. at 165.

[15]

G.R. No. 103200, August 31, 1994, 236 SCRA 78, 91.
Gonzales v. Climax Mining Ltd., supra note 13, at 166.

Penned by Associate Justice Edgardo F. Sundiam, with Associate Justices Rodrigo

V. Cosico and Japar B. Dimaampao, concurring; rollo, pp. 32-45.

[9]

Id. at 75.

[1]

[2]

Id. at 47-48.

[16]

[3]

Docketed as Civil Case No. 98-1376; raffled off to Branch 59.

[17]

[4]

Rollo, pp. 61-70.

[5]

Id. at 60.

Section 6. Hearing by court. - A party aggrieved by the failure, neglect or refusal

of another to perform under an agreement in writing providing for arbitration may
petition the court for an order directing that such arbitration proceed in the manner
provided for in such agreement. Five days notice in writing of the hearing of such
[6]

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.
[18]

Gonzeles v. Climax Mining Ltd., supra note 13.

[19]

Id. at 167.

[20]

Id.

61 | P a g e

[21]

Id., citing Manila Electric Co. v. Pasay Transportation Co., 57 Phil 600 (1932).

[22]

Id. at 167-168.

[23]

Id., citing Del Monte Corporation -USA v. Court of Appeals, 404 Phil. 192 (2001).

[24]

Rollo, pp. 44-45. (Emphasis supplied.)

[25]

Gonzales v. Climax Mining Ltd., supra note 11.

Gonzales v. Climax Mining Ltd., supra note 13, at 172-173. (Emphasis

supplied.)
[26]

[27]

Id. at 170.

[28]

Gonzales v. Climax Mining Ltd., supra note 11, at 620.

Id. at 624.
621 Phil. 22
[29]

SECOND DIVISION
[ G.R. No. 154048, November 27, 2009 ]
STANFILCO EMPLOYEES AGRARIAN REFORM BENEFICIARIES MULTIPURPOSE COOPERATIVE, PETITIONER, VS. DOLE PHILIPPINES, INC.
(STANFILCO DIVISION), ORIBANEX SERVICES, INC. AND SPOUSES ELLY
AND MYRNA ABUJOS, RESPONDENTS.
DECISION
BRION, J.:
Before this Court is the petition for review on certiorari[1] filed by petitioner Stanfilco
Employees Agrarian Reform Beneficiaries Multi-Purpose Cooperative (SEARBEMCO).
It assails:
(a) the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 66148 dated
November 27, 2001; and
(b) the CA's resolution[3] of June 13, 2002 in the same case, denying SEARBEMCO's
motion for reconsideration.
THE FACTUAL ANTECEDENTS
On January 29, 1998, SEARBEMCO, as seller, and respondent DOLE Philippines, Inc.
(Stanfilco Division) (DOLE), as buyer, entered into a Banana Production and
Purchase Agreement[4] (BPPA). The BPPA provided that SEARBEMCO shall sell

exclusively to DOLE, and the latter shall buy from the former, all Cavendish bananas
of required specifications to be planted on the land owned by SEARBEMCO. The
BPPA states:
The SELLER agrees to sell exclusively to the BUYER, and the BUYER agrees to buy
all Cavendish Banana of the Specifications and Quality described in EXHIBIT "A"
hereof produced on the SELLER'S plantation covering an area of 351.6367 hectares,
more or less, and which is planted and authorized under letter of instruction no. 790
as amended on November 6, 1999 under the terms and conditions herein
stipulated. The SELLER shall not increase or decrease the area(s) stated above
without the prior written approval of the BUYER. However, the SELLER may reduce
said area(s) provided that if the SELLER replaces the reduction by planting bananas
on an equivalent area(s) elsewhere, it is agreed that such replacement area(s) shall
be deemed covered by the Agreement. If the SELLER plants an area(s) in excess of
said 351.6367 hectares, the parties may enter into a separate agreement regarding
the production of said additional acreage. SELLER will produce banana to the
maximum capacity of the plantation, as much as practicable, consistent with good
agricultural practices designed to produce banana of quality having the standards
hereinafter set forth for the duration of this Banana Production and Purchase
Agreement.
SEARBEMCO bound and obliged itself, inter alia, to do the following:
V. SPECIFIC OBLIGATIONS OF THE SELLER
xxx
p.) Sell exclusively to the BUYER all bananas produced from the subject plantation,
except those rejected by the BUYER for failure to meet the specifications and
conditions contained in Exhibit "A" hereof. In the case of any such rejected
bananas, the SELLER shall have the right to sell such rejected bananas to
third parties, for domestic non-export consumption. The SELLER shall only sell
bananas produced from the plantation and not from any other source. [Emphasis
supplied.]
Any dispute arising from or in connection with the BPPA between the parties shall be
finally settled through arbitration. To quote the BPPA:
IX. ARBITRATION OF DISPUTE
All disputes arising in connection with this Agreement shall be finally settled under
the Rules of Conciliation and Arbitration of the International Chamber of Commerce
by three (3) Arbitrators appointed in accordance with said Rules. The Arbitration
shall be held in a venue to be agreed by the parties. Judgment upon the award
rendered may be entered in any Philippine Court having jurisdiction or application
may be made to such court for judicial acceptance of the award and as order of
enforcement, as the case may be.
On December 11, 2000, DOLE filed a complaint with the Regional Trial Court [5] (RTC)
against SEARBEMCO, the spouses Elly and Myrna Abujos (spouses Abujos), and
Oribanex Services, Inc. (Oribanex) for specific performance and damages, with a
prayer for the issuance of a writ of preliminary injunction and of a temporary
restraining order. DOLE alleged that SEARBEMCO sold and delivered to Oribanex,
through the spouses Abujos, the bananas rejected by DOLE, in violation of
paragraph 5(p), Article V of the BPPA which limited the sale of rejected bananas for
"domestic non-export consumption." DOLE further alleged that Oribanex is likewise
an exporter of bananas and is its direct competitor.

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DOLE narrated in its complaint how SEARBEMCO sold and delivered the rejected
bananas to Oribanex through the spouses Abujos:
9.) That, however, on April 12, 2000 at about 5:00 o'clock in the afternoon, [DOLE]
through its authorized security personnel discovered that defendant SEARBEMCO, in
violation of Section 5(p) Article V of the Banana Production and Purchase
Agreement, packed the bananas rejected by [DOLE] in boxes marked "CONSUL" in
Packing Plant 32 in DAPCO Panabo and sold and delivered them to defendant
Abujos;
10.) That about 373 "CONSUL" marked boxes were packed and knowingly sold by
defendant SEARBEMCO to ORIBANEX SERVICES, INC. through defendants Abujos
who carried and loaded the same on board a blue Isuzu Canter bearing plate no.
LDM 976 and delivered to defendant ORIBANEX for export at the TEFASCO Wharf
covered by Abujos Delivery Receipt, a copy of which is hereto attached as Annex
"B";
11.) That the following day, April 13, 2000, again the same security found that
defendant SEARBEMCO continued to pack the bananas rejected by plaintiff in boxes
marked as "CONSUL" and, in violation of paragraph 5(p) Article V of the Banana
Production and Purchase Agreement, sold and delivered them to defendant
ORIBANEX SERVICES, INC., for export, through defendants Abujos;
12.) That about 648 "CONSUL" marked boxes were packed and knowingly sold by
defendant SEARBEMCO to ORIBANEX SERVICES, INC., through defendants Abujos
who carried and loaded the same on board a red Isuzu Forwarder, bearing plate no.
LCV 918, and delivered to defendant ORIBANEX for export at the TEFASCO Wharf
covered by Abujos Delivery Receipt, a copy of which is hereto attached and marked
as Annex "C";
13.) That the sale of a total of 712 boxes of rejected bananas covering April 12 and
13, 2000, or any other dates prior thereto or made thereafter by defendant
SEARBEMCO to defendant ORIBANEX SERVICES, INC. through defendant Abujos is
in utter violation of the Agreement between plaintiff [DOLE] and defendant
SEARBEMCO that SEARBEMCO may sell bananas rejected by plaintiff to parties for
domestic non-export consumption only.
SEARBEMCO responded with a motion to dismiss on the grounds of lack of
jurisdiction over the subject matter of the claim, lack of cause of action, failure to
submit to arbitration which is a condition precedent to the filing of a complaint, and
the complaint's defective verification and certification of non-forum shopping.
[6]
SEARBEMCO argued that:
1) the Department of Agrarian Reform Adjudication Board (DARAB) has exclusive
jurisdiction over the action filed by DOLE, pursuant to Sections 1 and 3(e) of
Administrative Order
No. 09, Series of 1998[7] (AO No. 9-98) and Section 5(a) and (c) of Administrative
Order No. 02, Series of 1999[8] (AO No. 2-99) of the Department of Agrarian Reform
(DAR), since the dispute between the parties is an agrarian dispute within the
exclusive competence of the DARAB to resolve;
2) the filing of the complaint is premature, as the dispute between DOLE and
SEARBEMCO has not been referred to and resolved by arbitration, contrary to Article
IX of the BPPA and Article V, Sec. 30(g)[9] of AO No. 9-98 of the DAR;

3) it did not violate Section 5(p), Article V of the BPPA, since the rejected bananas
were sold to the spouses Abujos who were third-party buyers and not exporters of
bananas; and
4) the complaint is fatally defective as the Board of Directors of DOLE did not
approve any resolution authorizing Atty. Reynaldo Echavez to execute the requisite
Verification and Certification Against Forum Shopping and, therefore, the same is
fatally defective.
DOLE opposed SEARBEMCO's motion to dismiss alleging, among others, that:
1) the dispute between the parties is not an agrarian dispute within the exclusive
jurisdiction of the DARAB under Republic Act No. 6657[10] (RA No. 6657); and
2) the Arbitration Clause of the BPPA is not applicable as, aside from SEARBEMCO,
DOLE impleaded other parties (i.e., the spouses Abujos and Oribanex who are not
parties to the BPPA) as defendants.[11]
Subsequently, DOLE filed on February 2, 2001 an amended complaint, [12] the
amendment consisting of the Verification and Certification against forum shopping
for DOLE executed by Danilo C. Quinto, DOLE's Zone Manager.
THE RTC RULING
The RTC denied SEARBEMCO's motion to dismiss in an Order dated May 16, 2001.
[13]
The trial court stated that the case does not involve an agrarian conflict and is a
judicial matter that it can resolve.
SEARBEMCO moved for the reconsideration of the RTC Order.[14] The RTC denied the
motion for lack of merit in its Order of July 12, 2001.[15]
THE CA RULING
On July 26, 2001, SEARBEMCO filed a special civil action for certiorari[16] with
the CA alleging grave abuse of discretion on the part of the RTC for denying its
motion to dismiss and the subsequent motion for reconsideration.
SEARBEMCO argued that the BPPA the parties executed is an agri-business venture
agreement contemplated by DAR's AO No. 9-98. Thus, any dispute arising from the
interpretation and implementation of the BPPA is an agrarian dispute within the
exclusive jurisdiction of the DARAB.
In a decision dated November 27, 2001,[17] the CA found that the RTC did not
gravely abuse its discretion in denying SEARBEMCO's motion to dismiss and motion
for reconsideration.
The CA ruled that "the [DAR] has no jurisdiction, under said [AO No. 9-98], over
actions between [SEARBEMCO] and [DOLE] for enforcement of the said Agreement
when one commits a breach thereof and for redress by way of specific performance
and damages inclusive of injunctive relief."[18] It held that the case is not an agrarian
dispute within the purview of Section 3(d) of RA No. 6657,[19] but is an action to
compel SEARBEMCO to comply with its obligations under the BPPA; it called for the
application of the provisions of the Civil Code, not RA No. 6657.
The CA likewise disregarded SEARBEMCO's emphatic argument that DOLE's

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complaint was prematurely filed because of its failure to first resort to arbitration.
The arbitration clause under the BPPA, said the CA, applies only when the parties
involved are parties to the agreement; in its complaint, DOLE included the spouses
Abujos and Oribanex as defendants. According to the CA, "if [DOLE] referred its
dispute with [SEARBEMCO] to a Panel of Arbitrators, any judgment rendered by the
latter, whether for or against [DOLE] will not be binding on the [spouses Abujos]
and [Oribanex], as case law has it that only the parties to a suit, as well as their
successors-in-interest, are bound by the judgment of the Court or quasi-judicial
bodies."[20]
On SEARBEMCO's argument that the Verification and Certification Against Forum
Shopping under DOLE's amended complaint is defective for failure to state that this
was based on "personal knowledge," the CA ruled that the omission of the word
"personal" did not render the Verification and Certification defective.
SEARBEMCO moved for reconsideration of the decision, but the CA denied the
motion for lack of merit in its resolution of June 13, 2002.[21]
ASSIGNMENT OF ERRORS
In the present petition, SEARBEMCO submits that the CA erred in ruling that:
1.) the RTC has jurisdiction over the subject matter of the complaint of DOLE,
considering that the case involves an agrarian dispute within the exclusive
jurisdiction of the DARAB;
2.) the complaint of DOLE states a cause of action, despite the fact that
SEARBEMCO has not violated any provision of the BPPA; and
3.) the filing of the complaint is not premature, despite DOLE's failure to submit its
claim to arbitration - a condition precedent to any juridical recourse.
THE COURT'S RULING
We do not find the petition meritorious.
DOLE's complaint falls within
the jurisdiction of the regular courts, not the
DARAB.
SEARBEMCO mainly relies on Section 50[22] of RA No. 6657 and the characterization
of the controversy as an agrarian dispute or as an agrarian reform matter in
contending that the present controversy falls within the competence of the DARAB
and not of the regular courts. The BPPA, SEARBEMCO claims, is a joint venture and
a production, processing and marketing agreement, as defined under Section 5 (c)
(i) and (ii) of DAR AO No. 2-99;[23] hence, any dispute arising from the BPPA is
within the exclusive jurisdiction of the DARAB. SEARBEMCO also asserts that the
parties' relationship in the present case is not only that of buyer and seller, but also
that of supplier of land covered by the CARP and of manpower on the part of
SEARBEMCO, and supplier of agricultural inputs, financing and technological
expertise on the part of DOLE. Therefore, SEARBEMCO concludes that the BPPA is
not an ordinary contract, but one that involves an agrarian element and, as such, is

imbued with public interest.

We clarify at the outset that what we are reviewing in this petition is
the legal question of whether the CA correctly ruled that the RTC committed no
grave abuse discretion in denying SEARBEMCO's motion to dismiss. In ruling for
legal correctness, we have to view the CA decision in the same context that the
petition for certiorari it ruled upon was presented to the appellate court; we have to
examine the CA decision from the prism of whether it correctly determined the
presence or absence of grave abuse of discretion in the RTC ruling before it, not on
the basis of whether the RTC ruling on the merits of the case was correct. In other
words, we have to be keenly aware that the CA undertook a Rule 65 review, not a
review on appeal, of the challenged RTC ruling. A court acts with grave abuse of
discretion amounting to lack or excess of jurisdiction when its action was performed
in a capricious and whimsical exercise of judgment equivalent to lack of discretion.
The abuse of discretion must be so patent and gross as to amount to an evasion of
a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at
all in contemplation of the law, as where the power is exercised in an arbitrary and
despotic manner by reason or passion or personal hostility.[24]
As the CA found, the RTC's action was not attended by any grave abuse of
discretion and the RTC correctly ruled in denying SEARBEMCO's motion to
dismiss. We fully agree with the CA.
Section 3(d) of RA No. 6657 is clear in defining an agrarian dispute: "any
controversy relating to tenurial arrangements, whether leasehold, tenancy,
stewardship or otherwise, over lands devoted to agriculture, including dispute
concerning farm-workers' associations or representations of persons in negotiating,
fixing, maintaining, changing or seeking to arrange terms or conditions of such
tenurial arrangements. It includes any controversy relating to compensation of lands
acquired under this Act and other terms and conditions of transfer of ownership
from landowners to farmworkers, tenants and other agrarian reform beneficiaries,
whether the disputants stand in the proximate relation of farm operator and
beneficiary, landowner and tenant, or lessor and lessee." [25]
RA No. 6657 is procedurally implemented through the 2003 DARAB Rules of
Procedure where Section 1, Rule II[26] enumerates the instances where the DARAB
shall have primary and exclusive jurisdiction. A notable feature of RA No. 6657 and
its implementing rules is the focus on agricultural lands and the relationship over
this land that serves as the basis in the determination of whether a matter falls
under DARAB jurisdiction.
In Heirs of the Late Hernan Rey Santos v. Court of Appeals,[27] we held that:
For DARAB to have jurisdiction over a case, there must exist a tenancy
relationship between the parties. x x x. In Vda. De Tangub v. Court of
Appeals (191 SCRA 885), we held that the jurisdiction of the Department of
Agrarian Reform is limited to the following: a.) adjudication of all matters involving
implementation of agrarian reform; b.) resolution of agrarian conflicts and land
tenure related problems; and c.) approval and disapproval of the conversion,
restructuring or readjustment of agricultural lands into residential, commercial,
industrial, and other non-agricultural uses. [Emphasis supplied].
The case of Pasong Bayabas Farmers Association, Inc. v. Court of Appeals [28] lists
down the indispensable elements for a tenancy relationship to exist: "(1) the parties

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are the landowner and the tenant or agricultural lessee; (2) the subject matter of
the relationship is an agricultural land; (3) there is consent between the parties
to the relationship; (4) the purpose of the relationship is to bring about agricultural
production; (5) there is personal cultivation on the part of the tenant or agricultural
lessee; and (6) the harvest is shared between the landowner and the tenant or the
agricultural lessee."
The parties in the present case have no tenurial, leasehold, or any other agrarian
relationship that could bring their controversy within the ambit of agrarian reform
laws and within the jurisdiction of the DARAB. In fact, SEARBEMCO has no
allegation whatsoever in its motion to dismiss regarding any tenancy relationship
between it and DOLE that gave the present dispute the character of an agrarian
dispute.
We have always held that tenancy relations cannot be presumed. The elements of
tenancy must first be proved by substantial evidence which can be shown through
records, documents, and written agreements between the parties. A principal factor,
too, to consider in determining whether a tenancy relationship exists is the intent of
the parties.[29]
SEARBEMCO has not shown that the above-mentioned indispensable elements of
tenancy relations are present between it and DOLE. It also cannot be gleaned from
the intention of the parties that they intended to form a tenancy relationship
between them. In the absence of any such intent and resulting relationship, the
DARAB cannot have jurisdiction. Instead, the present petition is properly cognizable
by the regular courts, as the CA and the RTC correctly ruled.
Notably, the requirement of the existence of tenurial relationship has been relaxed
in the cases of Islanders CARP-Farmers Beneficiaries Muti-Purpose Cooperative, Inc.
v. Lapanday Agricultural and Dev't. Corporation[30] and Cubero v. Laguna West
Multi-Purpose Cooperative, Inc.[31] The Court, speaking through former Chief Justice
Panganiban, declared in Islanders that:
[The definition of `agrarian dispute' in RA No. 6657 is] broad enough to include
disputes arising from any tenurial arrangement beyond the traditional landownertenant or lessor-lessee relationship. xxx [A]grarian reform extends beyond the mere
acquisition and redistribution of land, the law acknowledges other modes of tenurial
arrangements to effect the implementation of CARP.[32]
While Islanders and Cubero may seem to serve as precedents to the present case, a
close analysis of these cases, however, leads us to conclude that significant
differences exist in the factual circumstances between those cases and the present
case, thus rendering the rulings in these cited cases inapplicable.
Islanders questioned (through a petition for declaration of nullity filed before the
RTC of Tagum City) the lack of authority of the farmer-beneficiaries' alleged
representative to enter into a Joint Production Agreement with Lapanday. The
farmers-beneficiaries assailed the validity of the agreement by additionally claiming
that its terms contravened RA No. 6657.
Cubero likewise involved a petition to declare the nullity of a Joint Venture
Agreement between the farmer-beneficiaries and Laguna West Multi-Purpose
Cooporative, Inc. The successors of the farmer-beneficiaries assailed the agreement
before the RTC of Tanauan, Batangas for having been executed within the 10-year

prohibitory period under Section 27 of RA No. 6657.

In both cases, the Court ruled that the RTC lacked jurisdiction to hear the complaint
and declared the DARAB as the competent body to resolve the dispute. The Court
declared that when the question involves the rights and obligations of persons
engaged in the management, cultivation, and use of an agricultural land covered by
CARP, the case falls squarely within the jurisdictional ambit of the DAR.
Carefully analyzed, the principal issue raised in Islanders and Cubero referred to
the management, cultivation, and use of the CARP-covered
agricultural land; the issue of the nullity of the joint economic enterprise
agreements in Islanders and Cubero would directly affect the agricultural land
covered by CARP. Those cases significantly did not pertain to postharvest transactions involving the produce from CARP-covered agricultural lands, as
the case before us does now.
Moreover, the resolution of the issue raised in Islanders and Cubero required the
interpretation and application of the provisions of RA No. 6657, considering that the
farmer-beneficiaries claimed that the agreements contravened specific provisions of
that law. In the present case, DOLE's complaint for specific performance and
damages before the RTC did not question the validity of the BPPA that would require
the application of the provisions of RA No. 6657; neither did SEARBEMCO's motion
to dismiss nor its other pleadings assail the validity of the BPPA on the ground that
its provisions violate RA No. 6657. The resolution of the present case would
therefore involve, more than anything else, the application of civil law provisions on
breaches of contract, rather than agrarian reform principles. Indeed, in support of
their arguments, the parties have capitalized and focused on their relationship as
buyer and seller. DOLE, the buyer, filed a complaint against SEARBEMCO, the seller,
to enforce the BPPA between them and to compel the latter to comply with its
obligations. The CA is thus legally correct in its declaration that "the action before
the RTC does not involve an agrarian dispute, nor does it call for the application of
Agrarian Reform laws. x x x. The action of [DOLE] involves and calls for the
application of the New Civil Code, in tandem with the terms and conditions
of the [BPPA] of [SEARBEMCO] and [DOLE]."[33]
We find SEARBEMCO's reliance on DAR AO No. 9-98 and AO No. 2-99 as bases for
DARAB's alleged expanded jurisdiction over all disputes arising from the
interpretation of agribusiness ventures to be misplaced. DARAB's jurisdiction under
Section 50 of RA No. 6657 should be read in conjunction with the coverage of
agrarian reform laws; administrative issuances like DAR AO Nos. 9-98 and 2-99
cannot validly extend the scope of the jurisdiction set by law. In so ruling, however,
we do not pass upon the validity of these administrative issuances. We do recognize
the possibility that disputes may exist between parties to joint economic enterprises
that directly pertain to the management, cultivation, and use of CARP-covered
agricultural land. Based on our above discussion, these disputes will fall within
DARAB's jurisdiction.
Even assuming that the present case can be classified as an agrarian dispute
involving the interpretation or implementation of agribusiness venture agreements,
DARAB still cannot validly acquire jurisdiction, at least insofar as DOLE's cause of
action against the third parties - the spouses Abujos and Oribanex - is concerned.
To prevent multiple actions, we hold that the present case is best resolved by the

65 | P a g e

trial court.

are not necessary in the present case

DOLE's complaint validly states a cause of action

SEARBEMCO argues that DOLE failed to comply with a condition precedent before
the filing of its complaint with the RTC, i.e., DOLE did not attempt to settle their
controversy through arbitration proceedings. SEARBEMCO relies on Article V, Section
30(g) of DAR AO No. 9-98[36]
and Section 10 of DAR AO No. 2-99[37] which provide that "as a rule, voluntary
methods such as mediation or conciliation, shall be preferred in resolving disputes
involving joint economic enterprises." SEARBEMCO also cites Section IX of the BPPA
which provides that all disputes arising out of or in connection with their agreement
shall be finally settled through arbitration.

SEARBEMCO asserts that the pleading containing DOLE's claim against it states no
cause of action. It contends that it did not violate any of the provisions of the BPPA,
since the bananas rejected by DOLE were sold to the spouses Abujos who are thirdparty buyers and are not exporters of bananas - transactions that the BPPA allows.
Since the sole basis of DOLE's complaint was SEARBEMCO's alleged violation of the
BPPA, which SEARBEMCO insists did not take place, the complaint therefore did not
state a cause of action.
Due consideration of the basic rules on "lack of cause of action" as a ground for a
motion to dismiss weighs against SEARBEMCO's argument.
In the case of Jimenez, Jr. v. Jordana,[34] this Court had the opportunity to discuss
the sufficiency of the allegations of the complaint to uphold a valid cause of action,
as follows:
In a motion to dismiss, a defendant hypothetically admits the truth of the material
allegations of the plaintiff's complaint. This hypothetical admission extends to the
relevant and material facts pleaded in, and the inferences fairly deductible from, the
complaint. Hence, to determine whether the sufficiency of the facts alleged in the
complaint constitutes a cause of action, the test is as follows: admitting the truth of
the facts alleged, can the court render a valid judgment in accordance with the
prayer?
To sustain a motion to dismiss, the movant needs to show that the plaintiff's claim
for relief does not exist at all. On the contrary, the complaint is sufficient "if it
contains sufficient notice of the cause of action even though the allegations may be
vague or indefinite, in which event, the proper recourse would be, not a motion to
dismiss, but a motion for a bill of particulars.[35]
In applying this authoritative test, we must hypothetically assume the
truth of DOLE's allegations, and determine whether the RTC can render a valid
judgment in accordance with its prayer.
We find the allegations in DOLE's complaint to be sufficient basis for the judgment
prayed for. Hypothetically admitting the allegations in DOLE's complaint
that SEARBEMCO sold the rejected bananas to Oribanex, a competitor of DOLE and
also an exporter of bananas, through the spouses Abujos, a valid judgment may be
rendered by the RTC holding SEARBEMCO liable for breach of contract. That the sale
had been to the spouses Abujos who are not exporters is essentially a denial of
DOLE's allegations and is not therefore a material consideration in weighing the
merits of the alleged "lack of cause of action." What SEARBEMCO stated is a
counter-statement of fact and conclusion, and is a defense that it will have to prove
at the trial. At this point, the material consideration is merely what the complaint
expressly alleged. Hypothetically assuming DOLE's allegations of ultimate sale to
Oribanex, through the spouses Abujos, to be true, we hold - following the test of
sufficiency in Jordana- that DOLE's prayer for specific performance and damages
may be validly granted; hence, a cause of action exists.
The filing of the complaint is not
premature since arbitration proceedings

Following our conclusion that agrarian laws find no application in the present case,
we find - as the CA did - that SEARBEMCO's arguments anchored on these laws are
completely baseless. Furthermore, the cited DAR AO No. 2-99, on its face, only
mentions a "preference," not a strict requirement of referral to arbitration. The
BPPA-based argument deserves more and closer consideration.
We agree with the CA ruling that the BPPA arbitration clause does not apply to the
present case since third parties are involved. Any judgment or ruling to be rendered
by the panel of arbitrators will be useless if third parties are included in the case,
since the arbitral ruling will not bind them; they are not parties to the arbitration
agreement. In the present case, DOLE included as parties the spouses Abujos and
Oribanex since they are necessary parties, i.e., they were directly involved in the
BPPA violation DOLE alleged, and their participation are indispensable for a
complete resolution of the dispute. To require the spouses Abujos and Oribanex to
submit themselves to arbitration and to abide by whatever judgment or ruling the
panel of arbitrators shall make is legally untenable; no law and no agreement made
with their participation can compel them to submit to arbitration.
In support of its position, SEARBEMCO cites the case of Toyota Motor Philippines
Corp. v. Court of Appeals[38] which holds that, "the contention that the arbitration
clause has become dysfunctional because of the presence of third parties is
untenable. Contracts are respected as the law between the contracting parties. As
such, the parties are thereby expected to abide with good faith in their contractual
commitments." SEARBEMCO argues that the presence of third parties in the
complaint does not affect the validity of the provisions on arbitration.
Unfortunately, the ruling in the Toyota case has been superseded by the more
recent cases of Heirs of Augusto L. Salas, Jr. v. Laperal Realty
Corporation[39] and Del Monte Corporation-USA v. Court of Appeals. [40]
Heirs of Salas involved the same issue now before us: whether or not the complaint
of petitioners-heirs in that case should be dismissed for their failure to submit the
matter to arbitration before filing their complaint. The petitioners-heirs included as
respondents third persons who were not parties to the original agreement between
the petitioners-heirs and respondent Laperal Realty. In ruling that prior resort to
arbitration is not necessary, this Court held:
Respondent Laperal Realty, as a contracting party to the Agreement, has the right to
compel petitioners to first arbitrate before seeking judicial relief. However, to split
the proceedings into arbitration for respondent Laperal Realty and trial for the
respondent lot buyers, or to hold trial in abeyance pending arbitration between

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petitioners and respondent Laperal Realty, would in effect result in multiplicity of

suits, duplicitous procedure and unnecessary delay. On the other hand, it would be
in the interest of justice if the trial court hears the complaint against all herein
respondents and adjudicates petitioner's rights as against theirs in a single and
complete proceeding.[41]
The case of Del Monte is more direct in stating that the doctrine held in
the Toyota case has already been abandoned:
The Agreement between petitioner DMC-USA and private respondent MMI is a
contract. The provision to submit to arbitration any dispute arising therefrom and
the relationship of the parties is part of that contract and is itself a contract. As a
rule, contracts are respected as the law between the contracting parties and
produce effect as between them, their assigns and heirs. Clearly, only parties to
the Agreement, i.e., petitioners DMC-USA and its Managing Director for
Export Sales Paul E. Derby, and private respondents MMI and its Managing
Director Lily Sy are bound by the Agreement and its arbitration clause as
they are the only signatories thereto. Petitioners Daniel Collins and Luis
Hidalgo, and private respondent SFI, not parties to the Agreement and cannot even
be considered assigns or heirs of the parties, are not bound by the Agreement and
the arbitration clause therein. Consequently, referral to arbitration in the State of
California pursuant to the arbitration clause and the suspension of the proceedings
in Civil Case No. 2637-MN pending the return of the arbitral award could be called
for but only as to petitioners DMC-USA and Paul E. Derby, Jr., and private
respondents MMI and Lily Sy, and not as to other parties in this case, in accordance
with the recent case of Heirs of Augusto L. Salas, Jr. v. Laperal Realty Corporation,
which superseded that of [sic] Toyota Motor Philippines Corp. v. Court of Appeals.

SEARBEMCO.
SO ORDERED.
Carpio, (Chairperson), Leonardo-De Castro, Del Castillo, and Abad, JJ., concur.

xxxx
The object of arbitration is to allow the expeditious determination of a dispute.
Clearly, the issue before us could not be speedily and efficiently resolved in its
entirety if we allow simultaneous arbitration proceedings and trial, or suspension of
trial pending arbitration. Accordingly, the interest of justice would only be served if
the trial court hears and adjudicates the case in a single and complete proceeding.
[42]

Following these precedents, the CA was therefore correct in its conclusion that the
parties' agreement to refer their dispute to arbitration applies only where
the parties to the BPPA are solely the disputing parties.
Additionally, the inclusion of third parties in the complaint supports our declaration
that the present case does not fall under DARAB's jurisdiction. DARAB's quasijudicial powers under Section 50 of RA No. 6657 may be invoked only when there is
prior certification from the Barangay Agrarian Reform Committee (or BARC) that the
dispute has been submitted to it for mediation and conciliation, without any success
of settlement.[43] Since the present dispute need not be referred to arbitration
(including mediation or conciliation) because of the inclusion of third parties, neither
SEARBEMCO nor DOLE will be able to present the requisite BARC certification that is
necessary to invoke DARAB's jurisdiction; hence, there will be no compliance with
Section 53 of RA No. 6657.
WHEREFORE, premises considered, we hereby DENY the petition for certiorari for
lack of merit. The Regional Trial Court, Branch 34, Panabo City, is hereby directed to
proceed with the case in accordance with this Decision. Costs against petitioner

67 | P a g e

The Lease and the Amended Deed of Donation

One of the conditions of the donation required the respondent to lease the subject
land back to FKI under terms specified in their Deed of Donation.[9] With the
respondents acceptance of the donation, a lease agreement between FKI and the
respondent was, therefore, effectively incorporated in the Deed of Donation.
Pertinent terms of such lease agreement, as provided in the Deed of Donation, were
as follows:

G.R. No. 198075

SECOND DIVISION
[ G.R. No. 198075, September 04, 2013 ]
KOPPEL, INC. (FORMERLY KNOWN AS KPL AIRCON, INC.), PETITIONER, VS.
MAKATI ROTARY CLUB FOUNDATION, INC., RESPONDENT.
DECISION
PEREZ, J.:
This case is an appeal[1] from the Decision[2] dated 19 August 2011 of the Court of
Appeals in C.A.-G.R. SP No. 116865.

1.

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

2.

The amount of rent to be paid by FKI for the first twenty-five (25) years is
P40,126.00 per annum.[11]

The Deed of Donation also stipulated that the lease over the subject property is
renewable for another period of twenty-five (25) years upon mutual agreement of
FKI and the respondent.[12] In which case, the amount of rent shall be determined in
accordance with item 2(g) of the Deed of Donation, viz:
g. The rental for the second 25 years shall be the subject of mutual agreement and
in case of disagreement the matter shall be referred to a Board of three Arbitrators
appointed and with powers in accordance with the Arbitration Law of the Philippines,
Republic Act 878, whose function shall be to decide the current fair market value of
the land excluding the improvements, provided, that, any increase in the fair
market value of the land shall not exceed twenty five percent (25%) of the original
value of the land donated as stated in paragraph 2(c) of this Deed. The rental for
the second 25 years shall not exceed three percent (3%) of the fair market value of
the land excluding the improvements as determined by the Board of Arbitrators. [13]
In October 1976, FKI and the respondent executed an Amended Deed of
Donation[14] that reiterated the provisions of the Deed of Donation, including those
relating to the lease of the subject land.
Verily, by virtue of the lease agreement contained in the Deed of
Donation and Amended Deed of Donation, FKI was able to continue in its possession
and use of the subject land.

The facts:
2000 Lease Contract
The Donation
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning products,
was the registered owner of a parcel of land located at Km. 16, South
Superhighway, Paraaque City (subject land).[3]Within the subject land are buildings
and other improvements dedicated to the business of FKI. [4]
In 1975, FKI[5] bequeathed the subject land (exclusive of the improvements
thereon) in favor of herein respondent Makati Rotary Club Foundation, Incorporated
by way of a conditional donation.[6]The respondent accepted the donation with all of
its conditions.[7] On 26 May 1975, FKI and the respondent executed a Deed of
Donation[8] evidencing their consensus.

Two (2) days before the lease incorporated in the Deed of Donation and Amended
Deed of Donation was set to expire, or on 23 May 2000, FKI and respondent
executed another contract of lease (2000 Lease Contract)[15] covering the subject
land. In this 2000 Lease Contract, FKI and respondent agreed on a new five-year
lease to take effect on the 26th of May 2000, with annual rents ranging from
P4,000,000 for the first year up to P4,900,000 for the fifth year.[16]
The 2000 Lease Contract also contained an arbitration clause enforceable in the
event the parties come to disagreement about the interpretation, application and
execution of the lease, viz:
19. Governing Law The provisions of this [2000 Lease Contract] shall be
governed, interpreted and construed in all aspects in accordance with the laws of

68 | P a g e

the Republic of the Philippines.

Any disagreement as to the interpretation, application or execution of this
[2000 Lease Contract] shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding
upon [FKI and respondent].[17] (Emphasis supplied)
2005 Lease Contract
After the 2000 Lease Contract expired, FKI and respondent agreed to renew their
lease for another five (5) years. This new lease (2005 Lease Contract)[18] required
FKI to pay a fixed annual rent of P4,200,000.[19] In addition to paying the fixed rent,
however, the 2005 Lease Contract also obligated FKI to make a yearly donation of
money to the respondent.[20] Such donations ranged from P3,000,000 for the first
year up to P3,900,000 for the fifth year.[21]
Notably, the 2005 Lease Contract contained an arbitration clause similar to that in
the 2000 Lease Contract, to wit:
19. Governing Law The provisions of this [2005 Lease Contract] shall be
governed, interpreted and construed in all aspects in accordance with the laws of
the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this
[2005 Lease Contract] shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding
upon [FKI and respondent].[22] (Emphasis supplied)
The Assignment and Petitioners Refusal to Pay
From 2005 to 2008, FKI faithfully paid the rentals and donations due it per
the 2005 Lease Contract.[23] But in June of 2008, FKI sold all its rights and
properties relative to its business in favor of herein petitioner Koppel, Incorporated.
[24]
On 29 August 2008, FKI and petitioner executed an Assignment and Assumption
of Lease and Donation[25]wherein FKI, with the conformity of the respondent,
formally assigned all of its interests and obligations under the Amended Deed of
Donation and the 2005 Lease Contract in favor of petitioner.
The following year, petitioner discontinued the payment of the rent and donation
under the 2005 Lease Contract.
Petitioners refusal to pay such rent and donation emanated from its belief that
the rental stipulations of the 2005 Lease Contract, and even of the 2000 Lease
Contract, cannot be given effect because they violated one of the material
conditions of the donation of the subject land, as stated in the Deed of
Donation and Amended Deed of Donation.[26]
According to petitioner, the Deed of Donation and Amended Deed of
Donation actually established not only one but two (2) lease agreements between
FKI and respondent, i.e., one lease for the first twenty-five (25) years or from 1975
to 2000, and another lease for the next twenty-five (25) years thereafter or from
2000 to 2025.[27] Both leases are material conditions of the donation of the subject
land.

Petitioner points out that while a definite amount of rent for the second twenty-five
(25) year lease was not fixed in the Deed of Donation and Amended Deed of
Donation, both deeds nevertheless prescribed rules and limitations by which the
same may be determined. Such rules and limitations ought to be observed in any
succeeding lease agreements between petitioner and respondent for they are, in
themselves, material conditions of the donation of the subject land. [28]
In this connection, petitioner cites item 2(g) of the Deed of Donation and Amended
Deed of Donation that supposedly limits the amount of rent for the lease over the
second twenty-five (25) years to only three percent (3%) of the fair market value
of the [subject] land excluding the improvements.[29]
For petitioner then, the rental stipulations of both the 2000 Lease
Contract and 2005 Lease Contract cannot be enforced as they are clearly, in view of
their exorbitant exactions, in violation of the aforementioned threshold in item 2(g)
of the Deed of Donation and Amended Deed of Donation. Consequently, petitioner
insists that the amount of rent it has to pay thereon is and must still be governed by
the limitations prescribed in the Deed of Donation and Amended Deed of Donation.
[30]

The Demand Letters

On 1 June 2009, respondent sent a letter (First Demand Letter)[31] to petitioner
notifying the latter of its default per Section 12 of the [2005 Lease Contract] and
demanding for the settlement of the rent and donation due for the year 2009.
Respondent, in the same letter, further intimated of cancelling the 2005 Lease
Contract should petitioner fail to settle the said obligations.[32] Petitioner received
the First Demand Letter on 2 June 2009.[33]
On 22 September 2009, petitioner sent a reply [34] to respondent expressing its
disagreement over the rental stipulations of the 2005 Lease Contractcalling them
severely disproportionate, unconscionable and in clear violation to the nominal
rentals mandated by the Amended Deed of Donation. In lieu of the amount
demanded by the respondent, which purportedly totaled to P8,394,000.00,
exclusive of interests, petitioner offered to pay only P80,502.79, [35] in accordance
with the rental provisions of the Deed of Donation and Amended Deed of Donation.
[36]
Respondent refused this offer.[37]
On 25 September 2009, respondent sent another letter (Second Demand Letter)
[38]
to petitioner, reiterating its demand for the payment of the obligations already
due under the 2005 Lease Contract. The Second Demand Letter also contained a
demand for petitioner to immediately vacate the leased premises should it fail to
pay such obligations within seven (7) days from its receipt of the letter.[39] The
respondent warned of taking legal steps in the event that petitioner failed to
comply with any of the said demands.[40] Petitioner received the Second Demand
Letter on 26 September 2009.[41]
Petitioner refused to comply with the demands of the respondent. Instead, on 30
September 2009, petitioner filed with the Regional Trial Court (RTC) of Paraaque
City a complaint[42] for the rescission or cancellation of the Deed of
Donation and Amended Deed of Donation against the respondent. This case is

69 | P a g e

currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 090346.
The Ejectment Suit
On 5 October 2009, respondent filed an unlawful detainer case [43] against the
petitioner before the Metropolitan Trial Court (MeTC) of Paraaque City. The
ejectment case was raffled to Branch 77 and was docketed as Civil Case No. 2009307.
On 4 November 2009, petitioner filed an Answer with Compulsory Counterclaim.
[44]
In it, petitioner reiterated its objection over the rental stipulations of the 2005
Lease Contract for being violative of the material conditions of the Deed of
Donation and Amended Deed of Donation.[45] In addition to the foregoing, however,
petitioner also interposed the following defenses:
1.

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

2.

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

3.

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

SO ORDERED.[55]
The respondent appealed to the Regional Trial Court (RTC). This appeal was
assigned to Branch 274 of the RTC of Paraaque City and was docketed as Civil
Case No. 10-0255.
On 29 October 2010, the RTC reversed[56] the MeTC and ordered the eviction of the
petitioner from the subject land:
WHEREFORE, all the foregoing duly considered, the appealed Decision of the
Metropolitan Trial Court, Branch 77, Paraaque City, is hereby reversed, judgment is
thus rendered in favor of the plaintiff-appellant and against the defendant-appellee,
and ordering the latter
(1) to vacate the lease[d] premises made subject of the case and to restore the
possession thereof to the plaintiff-appellant;
(2) to pay to the plaintiff-appellant the amount of Nine Million Three Hundred Sixty
Two Thousand Four Hundred Thirty Six Pesos (P9,362,436.00), penalties and
net of 5% withholding tax, for the lease period from May 25, 2009 to May 25,
2010 and such monthly rental as will accrue during the pendency of this case;
(3) to pay attorneys fees in the sum of P100,000.00 plus appearance fee of
P3,000.00;
(4) and costs of suit.
As to the existing improvements belonging to the defendant-appellee, as
these were built in good faith, the provisions of Art. 1678 of the Civil Code
shall apply.
SO ORDERED.[57]
The ruling of the RTC is premised on the following ratiocinations:
1.

The respondent had adequately complied with the requirement of demand

as a jurisdictional precursor to an unlawful detainer action.[58] The First
Demand Letter, in substance, contains a demand for petitioner to vacate
when it mentioned that it was a notice per Section 12 of the [2005 Lease
Contract].[59] Moreover, the issue of sufficiency of the respondents demand
ought to have been laid to rest by the Second Demand Letter which,
though not submitted in evidence, was nonetheless admitted by petitioner
as containing a demand to eject in its Answer with Compulsory
Counterclaim.[60]

2.

The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contracts validity.
[61]
Even assuming that it can, petitioner still did not file a formal
application before the MeTC so as to render such arbitration clause
operational.[62] At any rate, the MeTC would not be precluded from
exercising its jurisdiction over an action for unlawful detainer, over which, it
has exclusive original jurisdiction.[63]

3.

The 2005 Lease Contract must be sustained as a valid contract since

petitioner was not able to adduce any evidence to support its allegation

In due course, petitioner and respondent both submitted their position papers,
together with their other documentary evidence.[52] Remarkably, however,
respondent failed to submit the Second Demand Letter as part of its documentary
evidence.
Rulings of the MeTC, RTC and Court of Appeals
On 27 April 2010, the MeTC rendered judgment[53] in favor of the petitioner. While
the MeTC refused to dismiss the action on the ground that the dispute is subject to
arbitration, it nonetheless sided with the petitioner with respect to the issues
regarding the insufficiency of the respondents demand and the nullity of the 2005
Lease Contract.[54] The MeTC thus disposed:
WHEREFORE, judgment is hereby rendered dismissing the case x x x, without
pronouncement as to costs.

70 | P a g e

that the same is void.[64] There was, in this case, no evidence that
respondent is guilty of any tax evasion.[65]
Aggrieved, the petitioner appealed to the Court of Appeals.
On 19 August 2011, the Court of Appeals affirmed[66] the decision of the RTC:
WHEREFORE, the petition is DENIED. The assailed Decision of the Regional Trial
Court of Paraaque City, Branch 274, in Civil Case No. 10-0255 is AFFIRMED.
xxxx

Contract ought to be submitted to arbitration.[70] To the mind of this Court, such

stipulation is clear and is comprehensive enough so as to include virtually any kind
of conflict or dispute that may arise from the 2005 Lease Contractincluding the one
that presently besets petitioner and respondent.
The application of the arbitration clause of the 2005 Lease Contract in this case
carries with it certain legal effects. However, before discussing what these legal
effects are, We shall first deal with the challenges posed against the application of
such arbitration clause.
Challenges Against the Application of the Arbitration Clause of the 2005
Lease Contract

SO ORDERED. [67]
Hence, this appeal.
On 5 September 2011, this Court granted petitioners prayer for the issuance of a
Temporary Restraining Order[68] staying the immediate implementation of the
decisions adverse to it.
OUR RULING
Independently of the merits of the case, the MeTC, RTC and Court of Appeals all
erred in overlooking the significance of the arbitration clause incorporated in
the 2005 Lease Contract. As the Court sees it, that is a fatal mistake.

Curiously, despite the lucidity of the arbitration clause of the 2005 Lease Contract,
the petitioner, as well as the MeTC, RTC and the Court of Appeals, vouched for the
non-application of the same in the instant case. A plethora of arguments was hurled
in favor of bypassing arbitration. We now address them.
At different points in the proceedings of this case, the following arguments were
offered against the application of the arbitration clause of the 2005 Lease Contract:
1.

The disagreement between the petitioner and respondent is non-arbitrable

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

2.

The petitioner cannot validly invoke the arbitration clause of the 2005
Lease Contract while, at the same time, impugn such contracts validity.[75]

3.

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

4.

Petitioner and respondent already underwent Judicial Dispute Resolution

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

For this reason, We grant the petition.

Present Dispute is Arbitrable Under the Arbitration Clause of the 2005
Lease Agreement Contract
Going back to the records of this case, it is discernable that the dispute between the
petitioner and respondent emanates from the rental stipulations of the 2005 Lease
Contract. The respondent insists upon the enforceability and validity of such
stipulations, whereas, petitioner, in substance, repudiates them. It is from
petitioners apparent breach of the 2005 Lease Contract that respondent filed the
instant unlawful detainer action.
One cannot escape the conclusion that, under the foregoing premises, the dispute
between the petitioner and respondent arose from the application or execution of
the 2005 Lease Contract. Undoubtedly, such kinds of dispute are covered by the
arbitration clause of the 2005 Lease Contract to wit:
19. Governing Law The provisions of this [2005 Lease Contract] shall be
governed, interpreted and construed in all aspects in accordance with the laws of
the Republic of the Philippines.
Any disagreement as to the interpretation, application or execution of this
[2005 Lease Contract] shall be submitted to a board of three (3)
arbitrators constituted in accordance with the arbitration law of the
Philippines. The decision of the majority of the arbitrators shall be binding
upon [FKI and respondent].[69] (Emphasis supplied)
The arbitration clause of the 2005 Lease Contract stipulates that any
disagreement as to the interpretation, application or execution of the 2005 Lease

71 | P a g e

None of the arguments have any merit.

First. As highlighted in the previous discussion, the disagreement between the
petitioner and respondent falls within the all-encompassing terms of the arbitration
clause of the 2005 Lease Contract. While it may be conceded that in the arbitration
of such disagreement, the validity of the 2005 Lease Contract, or at least, of such
contracts rental stipulations would have to be determined, the same would not
render such disagreement non-arbitrable. The quotation from Gonzales that was
used to justify the contrary position was taken out of context. A rereading
of Gonzales would fix its relevance to this case.
In Gonzales, a complaint for arbitration was filed before the Panel of Arbitrators of
the Mines and Geosciences Bureau (PA-MGB) seeking the nullification of a Financial
Technical Assistance Agreement and other mining related agreements entered into
by private parties.[82] Grounds invoked for the nullification of such agreements
include fraud and unconstitutionality.[83] The pivotal issue that confronted the Court
then was whether the PA-MGB has jurisdiction over that particular arbitration
complaint. Stated otherwise, the question was whether the complaint for arbitration
raises arbitrable issues that the PA-MGB can take cognizance of.
Gonzales decided the issue in the negative. In holding that the PA-MGB was devoid
of any jurisdiction to take cognizance of the complaint for arbitration, this Court
pointed out to the provisions of R.A. No. 7942, or the Mining Act of 1995, which
granted the PA-MGB with exclusive original jurisdiction only over mining disputes,
i.e., disputes involving rights to mining areas, mineral agreements or permits,
and surface owners, occupants, claimholders or concessionaires requiring the
technical knowledge and experience of mining authorities in order to be resolved.
[84]
Accordingly, since the complaint for arbitration in Gonzales did not raise mining
disputes as contemplated under R.A. No. 7942 but only issues relating to the
validity of certain mining related agreements, this Court held that such complaint
could not be arbitrated before the PA-MGB.[85] It is in this context that we made the
pronouncement now in discussion:
Arbitration before the Panel of Arbitrators is proper only when there is a
disagreement between the parties as to some provisions of the contract between
them, which needs the interpretation and the application of that particular
knowledge and expertise possessed by members of that Panel. It is not proper when
one of the parties repudiates the existence or validity of such contract or agreement
on the ground of fraud or oppression as in this case. The validity of the contract
cannot be subject of arbitration proceedings. Allegations of fraud and duress in
the execution of a contract are matters within the jurisdiction of the ordinary courts
of law. These questions are legal in nature and require the application and
interpretation of laws and jurisprudence which is necessarily a judicial
function.[86] (Emphasis supplied)
The Court in Gonzales did not simply base its rejection of the complaint for
arbitration on the ground that the issue raised therein, i.e., the validity of contracts,
is per se non-arbitrable. The real consideration behind the ruling was the limitation
that was placed by R.A. No. 7942 upon the jurisdiction of the PA-MGB as an
arbitral body. Gonzales rejected the complaint for arbitration because the issue
raised therein is not a mining dispute per R.A. No. 7942 and it is for this reason,
and only for this reason, that such issue is rendered non-arbitrable before the PAMGB. As stated beforehand, R.A. No. 7942 clearly limited the jurisdiction of the PAMGB only to mining disputes.[87]

Much more instructive for our purposes, on the other hand, is the recent case
of Cargill Philippines, Inc. v. San Fernando Regal Trading, Inc.[88] In Cargill,
this Court answered the question of whether issues involving the rescission of a
contract are arbitrable. The respondent in Cargill argued against arbitrability, also
citing therein Gonzales. After dissecting Gonzales, this Court ruled in favor of
arbitrability.[89] Thus, We held:
Respondent contends that assuming that the existence of the contract and the
arbitration clause is conceded, the CA's decision declining referral of the parties'
dispute to arbitration is still correct. It claims that its complaint in the RTC presents
the issue of whether under the facts alleged, it is entitled to rescind the contract
with damages; and that issue constitutes a judicial question or one that requires the
exercise of judicial function and cannot be the subject of an arbitration proceeding.
Respondent cites our ruling in Gonzales, wherein we held that a panel of arbitrator
is bereft of jurisdiction over the complaint for declaration of nullity/or termination of
the subject contracts on the grounds of fraud and oppression attendant to the
execution of the addendum contract and the other contracts emanating from it, and
that the complaint should have been filed with the regular courts as it involved
issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on
the Gonzales case to support its argument. [90] (Emphasis ours)
Second. Petitioner may still invoke the arbitration clause of the 2005 Lease
Contract notwithstanding the fact that it assails the validity of such contract. This is
due to the doctrine of separability.[91]
Under the doctrine of separability, an arbitration agreement is considered as
independent of the main contract.[92] Being a separate contract in itself, the
arbitration agreement may thus be invoked regardless of the possible nullity or
invalidity of the main contract.[93]
Once again instructive is Cargill, wherein this Court held that, as a further
consequence of the doctrine of separability, even the very party who repudiates the
main contract may invoke its arbitration clause.[94]
Third. The operation of the arbitration clause in this case is not at all defeated by
the failure of the petitioner to file a formal request or application therefor with the
MeTC. We find that the filing of a request pursuant to Section 24 of R.A. No. 9285
is not the sole means by which an arbitration clause may be validly invoked in a
pending suit.
Section 24 of R.A. No. 9285 reads:
SEC. 24. Referral to Arbitration. - A court before which an action is brought in a
matter which is the subject matter of an arbitration agreement shall, if at least one
party so requestsnot later that the pre-trial conference, or upon the request of
both parties thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, inoperative or incapable of being performed.
[Emphasis ours; italics original]
The request referred to in the above provision is, in turn, implemented by Rules
4.1 to 4.3 of A.M. No. 07-11-08-SC or the Special Rules of Court on Alternative
Dispute Resolution (Special ADR Rules):

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RULE 4: REFERRAL TO ADR

Rule 4.1. Who makes the request. - A party to a pending action filed in violation of
the arbitration agreement, whether contained in an arbitration clause or in a
submission agreement, mayrequest the court to refer the parties to arbitration in
accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the arbitration agreement exists
before the action is filed. - The request for referral shall be made not later than the
pre-trial conference. After the pre-trial conference, the court will only act upon the
request for referral if it is made with the agreement of all parties to the case.
(B) Submission agreement. - If there is no existing arbitration agreement at the
time the case is filed but the parties subsequently enter into an arbitration
agreement, they may request the court to refer their dispute to arbitration at any
time during the proceedings.
Rule 4.3. Contents of request. - The request for referral shall be in the form of a
motion, which shall state that the dispute is covered by an arbitration agreement.
Apart from other submissions, the movant shall attach to his motion an authentic
copy of the arbitration agreement.
The request shall contain a notice of hearing addressed to all parties specifying the
date and time when it would be heard. The party making the request shall serve it
upon the respondent to give him the opportunity to file a comment or opposition as
provided in the immediately succeeding Rule before the hearing. [Emphasis ours;
italics original]
Attention must be paid, however, to the salient wordings of Rule 4.1. It reads: [a]
party to a pending action filed in violation of the arbitration agreement x x
x may request the court to refer the parties to arbitration in accordance with such
agreement.
In using the word may to qualify the act of filing a request under Section 24 of
R.A. No. 9285, the Special ADR Rules clearly did not intend to limit the invocation of
an arbitration agreement in a pending suit solely via such request. After all, noncompliance with an arbitration agreement is a valid defense to any offending suit
and, as such, may even be raised in an answer as provided in our ordinary rules of
procedure.[95]
In this case, it is conceded that petitioner was not able to file a separate request
of arbitration before the MeTC. However, it is equally conceded that the petitioner,
as early as in its Answer with Counterclaim, had already apprised the MeTC of the
existence of the arbitration clause in the 2005 Lease Contract[96] and, more
significantly, of its desire to have the same enforced in this case. [97]This act of
petitioner is enough valid invocation of his right to arbitrate.
Fourth. The fact that the petitioner and respondent already underwent through JDR
proceedings before the RTC, will not make the subsequent conduct of arbitration
between the parties unnecessary or circuitous. The JDR system is substantially
different from arbitration proceedings.
The JDR framework is based on the processes of mediation, conciliation or early

neutral evaluation which entails the submission of a dispute before a JDR judge
who shall merely facilitate settlement between the parties in conflict or make a
non-binding evaluation or assessment of the chances of each partys case.[98] Thus
in JDR, the JDR judge lacks the authority to render a resolution of the dispute that
is binding upon the parties in conflict. In arbitration, on the other hand, the dispute
is submitted to an arbitrator/sa neutral third person or a group of thereofwho
shall have the authority to render a resolution binding upon the parties. [99]
Clearly, the mere submission of a dispute to JDR proceedings would not necessarily
render the subsequent conduct of arbitration a mere surplusage. The failure of the
parties in conflict to reach an amicable settlement before the JDR may, in fact, be
supplemented by their resort to arbitration where a binding resolution to the dispute
could finally be achieved. This situation precisely finds application to the case at
bench.
Neither would the summary nature of ejectment cases be a valid reason to
disregard the enforcement of the arbitration clause of the 2005 Lease Contract.
Notwithstanding the summary nature of ejectment cases, arbitration still remains
relevant as it aims not only to afford the parties an expeditious method of resolving
their dispute.
A pivotal feature of arbitration as an alternative mode of dispute resolution is that it
is, first and foremost, a product of party autonomy or the freedom of the parties to
make their own arrangements to resolve their own disputes.[100] Arbitration
agreements manifest not only the desire of the parties in conflict for an expeditious
resolution of their dispute. They also represent, if not more so, the parties mutual
aspiration to achieve such resolution outside of judicial auspices, in a more informal
and less antagonistic environment under the terms of their choosing. Needless to
state, this critical feature can never be satisfied in an ejectment case no matter how
summary it may be.
Having hurdled all the challenges against the application of the arbitration clause of
the 2005 Lease Agreement in this case, We shall now proceed with the discussion of
its legal effects.
Legal Effect of the Application of the Arbitration Clause
Since there really are no legal impediments to the application of the arbitration
clause of the 2005 Contract of Lease in this case, We find that the instant unlawful
detainer action was instituted in violation of such clause. The Law, therefore, should
have governed the fate of the parties and this suit:
R.A. No. 876
Section 7. Stay of civil action. - If any suit or proceeding be brought upon an issue
arising out of an agreement providing for the arbitration thereof, the court in which
such suit or proceeding is pending, upon being satisfied that the issue involved in
such suit or proceeding is referable to arbitration, shall stay the action or
proceeding until an arbitration has been had in accordance with the terms
of the agreement: Provided, That the applicant for the stay is not in default in
proceeding with such arbitration. [Emphasis supplied]
R.A. No. 9285

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Section 24. Referral to Arbitration. - A court before which an action is brought in a

matter which is the subject matter of an arbitration agreement shall, if at least one
party so requests not later that the pre-trial conference, or upon the request of both
parties thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, inoperative or incapable of being performed.
[Emphasis supplied]
It is clear that under the law, the instant unlawful detainer action should have been
stayed;[101] the petitioner and the respondent should have been referred to
arbitration pursuant to the arbitration clause of the 2005 Lease Contract. The MeTC,
however, did not do so in violation of the lawwhich violation was, in turn, affirmed
by the RTC and Court of Appeals on appeal.
The violation by the MeTC of the clear directives under R.A. Nos. 876 and 9285
renders invalid all proceedings it undertook in the ejectment case after the filing by
petitioner of its Answer with Counterclaimthe point when the petitioner and the
respondent should have been referred to arbitration. This case must, therefore, be
remanded to the MeTC and be suspended at said point. Inevitably, the decisions of
the MeTC, RTC and the Court of Appeals must all be vacated and set aside.

speculate.
In this light, let a copy of this Decision be also served to Branch 257 of the RTC of
Paraaque for its consideration and, possible, application to Civil Case No. CV 090346.
WHEREFORE, premises considered, the petition is hereby GRANTED. Accordingly,
We hereby render a Decision:
1.

SETTING ASIDE all the proceedings undertaken by the Metropolitan

Trial Court, Branch 77, of Paraaque City in relation to Civil Case No. 2009307 after the filing by petitioner of its Answer with Counterclaim;

2.

REMANDING the instant case to the MeTC, SUSPENDED at the

point after the filing by petitioner of its Answer with Counterclaim;

3.

SETTING ASIDE the following:

The petitioner and the respondent must then be referred to arbitration pursuant to
the arbitration clause of the 2005 Lease Contract.
This Court is not unaware of the apparent harshness of the Decision that it is about
to make. Nonetheless, this Court must make the same if only to stress the point
that, in our jurisdiction, bona fidearbitration agreements are recognized as valid;
[102]
and that laws,[103] rules and regulations[104] do exist protecting and ensuring their
enforcement as a matter of state policy. Gone should be the days when courts treat
otherwise valid arbitration agreements with disdain and hostility, if not outright
jealousy,[105] and then get away with it. Courts should instead learn to treat
alternative means of dispute resolution as effective partners in the administration of
justice and, in the case of arbitration agreements, to afford them judicial restraint.
[106]
Today, this Court only performs its part in upholding a once disregarded state
policy.
Civil Case No. CV 09-0346
This Court notes that, on 30 September 2009, petitioner filed with the RTC of
Paraaque City, a complaint[107] for the rescission or cancellation of the Deed of
Donation and Amended Deed of Donationagainst the respondent. The case is
currently pending before Branch 257 of the RTC, docketed as Civil Case No. CV 090346.
This Court recognizes the great possibility that issues raised in Civil Case No. CV 090346 may involve matters that are rightfully arbitrable per the arbitration clause of
the 2005 Lease Contract. However, since the records of Civil Case No. CV 09-0346
are not before this Court, We can never know with true certainty and only

4.

a.

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

b.

Decision dated 29 October 2010 of the Regional Trial Court,

Branch 274, of Paraaque City in Civil Case No. 10-0255,

c.

Decision dated 27 April 2010 of the Metropolitan Trial Court,

Branch 77, of Paraaque City in Civil Case No. 2009-307; and

REFERRING the petitioner and the respondent to arbitration pursuant to

the arbitration clause of the 2005 Lease Contract, repeatedly included in
the 2000 Lease Contract and in the 1976 Amended Deed of Donation.

Let a copy of this Decision be served to Branch 257 of the RTC of Paraaque for its
consideration and, possible, application to Civil Case No. CV 09-0346.
No costs.
SO ORDERED.
Brion, Del Castillo, Abad,* and Perlas-Bernabe, JJ., concur.

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