Republic of the Philippines pay for its obligations with BF Corporation, and the delay in payment was simply a
SUPREME COURT matter of delayed processing of BF Corporation’s progress billing statements. 6
Manila
SECOND DIVISION
G.R. No. 174938 October 1, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,
vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C.
RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND
BENJAMIN C. RAMOS, Respondents.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to arbitration proceedings
pursuant to a contract entered into by the corporation they represent if there are
allegations of bad faith or malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and
October 5, 2006 resolution. The Court of Appeals affirmed the trial court's decision
holding that petitioners, as director, should submit themselves as parties tothe
arbitration proceedings between BF Corporation and Shangri-La Properties, Inc.
(Shangri-La).
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-Laand the members of its board of directors: Alfredo C. Ramos,
Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III,
and Benjamin C. Ramos.1
BF Corporation alleged in its complaint that on December 11, 1989 and May 30,
1991, it entered into agreements with Shangri-La wherein it undertook to construct
for Shangri-La a mall and a multilevel parking structure along EDSA.2
Shangri-La had been consistent in paying BF Corporation in accordance with its
progress billing statements.3However, by October 1991, Shangri-La started
defaulting in payment.4
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the
construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to
BF Corporation eventually completed the construction of the buildings. 7 Shangri-La
allegedly took possession of the buildings while still owing BF Corporation an
outstanding balance.8
BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith
in directing Shangri-La’s affairs. Therefore, they should be held jointly and severally
liable with Shangri-La for its obligations as well as for the damages that BF
Corporation incurred as a result of Shangri-La’s default.10
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G.
Licauco III, and Benjamin C. Ramos filed a motion to suspend the proceedings in
view of BF Corporation’s failure to submit its dispute to arbitration, in accordance
with the arbitration clauseprovided in its contract, quoted in the motion as follows:11
35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the
Owner or the Project Manager on his behalf and the Contractor, either during the
progress or after the completion or abandonment of the Works as to the construction
of this Contract or as to any matter or thing of whatsoever nature arising there under
or inconnection therewith (including any matter or thing left by this Contract to the
discretion of the Project Manager or the withholding by the Project Manager of any
certificate to which the Contractor may claim to be entitled or the measurement and
valuation mentioned in clause 30(5)(a) of these Conditions or the rights and
liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions), the
owner and the Contractor hereby agree to exert all efforts to settle their differences
or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and procedures of the Philippine
Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on the parties. The
decision of the Arbitrators shall be a condition precedent to any right of legal action
that either party may have against the other. . . .12 (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to suspend proceedings. 13
In the November 18, 1993 order, the Regional Trial Court denied the motion to
suspend proceedings.14
On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint,
with compulsory counter claim against BF Corporation and crossclaim against
Shangri-La.15 They alleged that they had resigned as members of Shangri-La’s board
of directors as of July 15, 1991.16
After the Regional Trial Court denied on February 11, 1994 the motion for
reconsideration of its November 18, 1993 order, Shangri-La, Alfredo C. Ramos,
Rufo B. Colayco,Maximo G. Licauco III, and Benjamin Ramos filed a petition for
certiorari with the Court of Appeals.17
On April 28, 1995, the Court of Appeals granted the petition for certiorari and
ordered the submission of the dispute to arbitration.18
Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for
review on certiorari with this court.19On March 27, 1998, this court affirmed the
Court of Appeals’ decision, directing that the dispute be submitted for arbitration.20
Another issue arose after BF Corporation had initiated arbitration proceedings. BF
Corporation and Shangri-La failed to agree as to the law that should govern the
arbitration proceedings.21 On October 27, 1998, the trial court issued the order
directing the parties to conduct the proceedings in accordance with Republic Act No.
876.22
Shangri-La filed an omnibus motion and BF Corporation an urgent motion for
clarification, both seeking to clarify the term, "parties," and whether Shangri-La’s
directors should be included in the arbitration proceedings and served with separate
demands for arbitration.23
Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions,
praying that they be excluded from the arbitration proceedings for being non-parties
to Shangri-La’s and BF Corporation’s agreement.24
On July 28, 2003, the trial court issued the order directing service of demands for
arbitration upon all defendants in BF Corporation’s complaint. 25 According to the
trial court, Shangri-La’s directors were interested parties who "must also be served
with a demand for arbitration to give them the opportunity to ventilate their side of
the controversy, safeguard their interest and fend off their respective
positions."26 Petitioners’ motion for reconsideration ofthis order was denied by the
trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave
abuse of discretion in the issuance of orders compelling them to submit to arbitration
proceedings despite being third parties to the contract between Shangri-La and BF
Corporation.28
In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition
for certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary
parties in the arbitration proceedings.30 According to the Court of Appeals:
[They were] deemed not third-parties tothe contract as they [were] sued for their acts
in representation of the party to the contract pursuant to Art. 31 of the Corporation
Code, and that as directors of the defendant corporation, [they], in accordance with
Art. 1217 of the Civil Code, stand to be benefited or injured by the result of the
arbitration proceedings, hence, being necessary parties, they must be joined in order
to have complete adjudication of the controversy. Consequently, if [they were]
excluded as parties in the arbitration proceedings and an arbitral award is rendered,
holding [Shangri-La] and its board of directors jointly and solidarily liable to private
respondent BF Corporation, a problem will arise, i.e., whether petitioners will be
bound bysuch arbitral award, and this will prevent complete determination of the
issues and resolution of the controversy.31
The Court of Appeals further ruled that "excluding petitioners in the arbitration
proceedings . . . would be contrary to the policy against multiplicity of suits."32
The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003
and January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil
Case No. 63400, are AFFIRMED.33
The Court of Appeals denied petitioners’ motion for reconsideration in the October
5, 2006 resolution.34
On November 24, 2006, petitioners filed a petition for review of the May 11, 2006
Court of Appeals decision and the October 5, 2006 Court of Appeals resolution. 35
The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF
Corporation’s allegation that they are solidarily liable with Shangri-La.37Neither did
they bind themselves personally nor did they undertake to shoulder Shangri-La’s
obligations should it fail in its obligations.38 BF Corporation also failed to establish
fraud or bad faith on their part.39
Petitioners also argue that they are third parties to the contract between BF
Corporation and Shangri-La.40Provisions including arbitration stipulations should
bind only the parties.41 Based on our arbitration laws, parties who are strangers to an
agreement cannot be compelled to arbitrate.42
Petitioners point out thatour arbitration laws were enacted to promote the autonomy
of parties in resolving their disputes.43 Compelling them to submit to arbitration is
against this purpose and may be tantamount to stipulating for the parties. 44
Separate comments on the petition werefiled by BF Corporation, and Maximo G.
Licauco III, Alfredo C.Ramos and Benjamin C. Ramos. 45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with
petitioners that Shangri-La’sdirectors, being non-parties to the contract, should not
be made personally liable for Shangri-La’s acts.46 Since the contract was executed
only by BF Corporation and Shangri-La, only they should be affected by the
contract’s stipulation.47 BF Corporation also failed to specifically allege the unlawful
acts of the directors that should make them solidarily liable with Shangri-La for its
obligations.48
Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the
parties should undergo arbitration "clearly contemplated the inclusion of the
directors of the corporation[.]"49 BF Corporation also argued that while petitioners
were not parties to the agreement, they were still impleaded under Section 31 of the
Corporation Code.50Section 31 makes directors solidarily liable for fraud, gross
negligence, and bad faith.51 Petitioners are not really third parties to the agreement
because they are being sued as Shangri-La’s representatives, under Section 31 of the
Corporation Code.52
BF Corporation further argued that because petitioners were impleaded for their
solidary liability, they are necessary parties to the arbitration proceedings. 53 The full
resolution of all disputes in the arbitration proceedings should also be done in the
interest of justice.54
In the manifestation dated September 6, 2007, petitioners informed the court that the
Arbitral Tribunal had already promulgated its decision on July 31, 2007. 55 The
Arbitral Tribunal denied BF Corporation’s claims against them. 56Petitioners stated
that "[they] were included by the Arbitral Tribunal in the proceedings conducted . . .
notwithstanding [their] continuing objection thereto. . . ."57 They also stated that
"[their] unwilling participation in the arbitration case was done ex abundante ad
cautela, as manifested therein on several occasions."58 Petitioners informed the court
that they already manifested with the trial court that "any action taken on [the
Arbitral Tribunal’s decision] should be without prejudice to the resolution of [this]
case."59
Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos
reiterated their arguments that they should not be held liable for Shangri-La’s default
and made parties to the arbitration proceedings because only BF Corporation and
Shangri-La were parties to the contract.
In its memorandum, Shangri-La argued that petitioners were impleaded for their
solidary liability under Section 31 of the Corporation Code. Shangri-La added that
their exclusion from the arbitration proceedings will result in multiplicity of suits,
which "is not favored in this jurisdiction." 60 It pointed out that the case had already
been mooted by the termination of the arbitration proceedings, which petitioners
actively participated in.61 Moreover, BF Corporation assailed only the correctness of
the Arbitral Tribunal’s award and not the part absolving Shangri-La’s directors from
liability.62
BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the
required memorandum.
In its counter-manifestation, BF Corporation pointed out that since "petitioners’
counterclaims were already dismissed with finality, and the claims against them were
likewise dismissed with finality, they no longer have any interest orpersonality in the
arbitration case. Thus, there is no longer any need to resolve the present Petition,
which mainly questions the inclusion of petitioners in the arbitration
proceedings."64 The court’s decision in this case will no longer have any effect on the
issue of petitioners’ inclusion in the arbitration proceedings. 65
The petition must fail.
The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding
effect on BF Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so
that principles may be established for the guidance of the bench, bar, and the public.
In De la Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that
case already escaped from prison and ruled on the issue of excessive bails:
While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is
moot and academic should not preclude this Tribunal from setting forth in language
clear and unmistakable, the obligation of fidelity on the part of lower court judges to
the unequivocal command of the Constitution that excessive bail shall not be
required.67
This principle was repeated in subsequent cases when this court deemed it proper to
clarify important matters for guidance.68
Thus, we rule that petitioners may be compelled to submit to the arbitration
proceedings in accordance with Shangri-Laand BF Corporation’s agreement, in order
to determine if the distinction between Shangri-La’s personality and their
personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties
to avoid litigation and settle disputes amicably and more expeditiously by themselves
and through their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil Code, 69 which was
approved as early as 1949. It was later institutionalized by the approval of Republic
Act No. 876,70 which expressly authorized, made valid, enforceable, and irrevocable
parties’ decision to submit their controversies, including incidental issues, to
arbitration. This court recognized this policy in Eastboard Navigation, Ltd. v.
Ysmael and Company, Inc.:71
As a corollary to the question regarding the existence of an arbitration agreement,
defendant raises the issue that, even if it be granted that it agreed to submit its
dispute with plaintiff to arbitration, said agreement is void and without effect for it
amounts to removing said dispute from the jurisdiction of the courts in which the
parties are domiciled or where the dispute occurred. It is true that there are
authorities which hold that "a clause in a contract providing that all matters in
dispute between the parties shall be referred to arbitrators and to them alone, is
contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities
which favor "the more intelligent view that arbitration, as an inexpensive, speedy and
amicable method of settling disputes, and as a means of avoiding litigation, should
receive every encouragement from the courts which may be extended without
contravening sound public policy or settled law" (3 Am. Jur., p. 835). Congress has
officially adopted the modern view when it reproduced in the new Civil Code the
provisions of the old Code on Arbitration. And only recently it approved Republic
Act No. 876 expressly authorizing arbitration of future disputes. 72 (Emphasis
supplied)
In view of our policy to adopt arbitration as a manner of settling disputes, arbitration
clauses are liberally construed to favor arbitration. Thus, in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc., 73 this court said:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration
— along with mediation, conciliation and negotiation — is encouraged by the
Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens the
resolution of disputes, especially of the commercial kind. It is thus regarded as the
"wave of the future" in international civil and commercial disputes. Brushing aside a
contractual agreement calling for arbitration between the parties would be a step
backward.
Consistent with the above-mentioned policy of encouraging alternative dispute
resolution methods, courts should liberally construe arbitration clauses. Provided
such clause is susceptible of an interpretation that covers the asserted dispute, an
order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.74(Emphasis supplied)
A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed
in Republic Act No. 9285:75
SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to
actively promote party autonomy in the resolution of disputes or the freedom of the
party to make their own arrangements to resolve their disputes. Towards this end, the
State shall encourage and actively promote the use of Alternative Dispute Resolution
(ADR) as an important means to achieve speedy and impartial justice and declog
court dockets. As such, the State shall provide means for the use of ADR as an
efficient tool and an alternative procedure for the resolution of appropriate cases.
Likewise, the State shall enlist active private sector participation in the settlement of
disputes through ADR. This Act shall be without prejudice to the adoption by the
Supreme Court of any ADR system, such as mediation, conciliation, arbitration, or
any combination thereof as a means of achieving speedy and efficient means of
resolving cases pending before all courts in the Philippines which shall be governed
by such rules as the Supreme Court may approve from time to time.
SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due
regard to the policy of the law in favor of arbitration.Where action is commenced by
or against multiple parties, one or more of whomare parties who are bound by the
arbitration agreement although the civil action may continue as to those who are not
bound by such arbitration agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an arbitration clause for
purposes ofavoiding litigation and expediting resolution of the dispute, that
interpretation shall be adopted. Petitioners’ main argument arises from the separate
personality given to juridical persons vis-à-vis their directors, officers, stockholders,
and agents. Since they did not sign the arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in
accordance with the arbitration agreement. Moreover, they had already resigned as
directors of Shangri-Laat the time of the alleged default.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are
separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. 76 This means that while
it is not a person, naturally, the law gives it a distinct personality and treats it as such.
A corporation, in the legal sense, is an individual with a personality that is distinct
and separate from other persons including its stockholders, officers, directors,
representatives,77 and other juridical entities. The law vests in corporations
rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own.78 For instance, they have the power to sue and
enter into transactions or contracts. Section 36 of the Corporation Code enumerates
some of a corporation’s powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under
this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate ofincorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions
of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided
in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers asmay be essential or necessary to carry
out its purpose or purposes as stated in its articles of incorporation. (13a)
Because a corporation’s existence is only by fiction of law, it can only exercise its
rights and powers through itsdirectors, officers, or agents, who are all natural
persons. A corporation cannot sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a
corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives, are its
own. A stockholder, director, or representative does not become a party to a contract
just because a corporation executed a contract through that stockholder, director or
representative.
Hence, a corporation’s representatives are generally not bound by the terms of the
contract executed by the corporation. They are not personally liable for obligations
and liabilities incurred on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the parties’ autonomy in
resolving their disputes. This court recognized in Heirs of Augusto Salas, Jr. v.
Laperal Realty Corporation79 that an arbitration clause shall not apply to persons who
were neither parties to the contract nor assignees of previous parties, thus:
A submission to arbitration is a contract. As such, the Agreement, containing the
stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs.
But only they.80 (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:
The provision to submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a contract. As a rule,
contracts are respected as the law between the contracting parties and produce effect
as between them, their assigns and heirs. Clearly, only parties to the Agreement . . .
are bound by the Agreement and its arbitration clause as they are the only signatories
thereto.82 (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine International Air
Terminals Co., Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al. 84
As a general rule, therefore, a corporation’s representative who did not personally
bind himself or herself to an arbitration agreement cannot be forced to participate in
arbitration proceedings made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this
piercing the veil of corporate fiction.
Piercing the corporate veil is warranted when "[the separate personality of a
corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues."85 It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation."86
When corporate veil is pierced, the corporation and persons who are normally treated
as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.
Among the persons who may be treatedas the corporation itself under certain
circumstances are its directors and officers. Section 31 of the Corporation Code
provides the instances when directors, trustees, or officers may become liable for
corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs
of the corporation or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been
reposed inhim in confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation. (n)
Based on the above provision, a director, trustee, or officer of a corporation may be
made solidarily liable with it for all damages suffered by the corporation, its
stockholders or members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to a
patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in
directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict
with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
a) "When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto";87
b) "When a director, trustee or officer has contractually agreed or stipulated
to hold himself personally and solidarily liable with the corporation"; 88 and
c) "When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action." 89
When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction should
be pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts or
tribunals must first determine whether circumstances exist towarrant the courts or
tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one
tribunal or court in a proceeding participated in by all parties involved, including
current representatives of the corporation, and those persons whose personalities are
impliedly the sameas the corporation. This is because when the court or tribunal
finds that circumstances exist warranting the piercing of the corporate veil, the
corporate representatives are treated as the corporation itself and should be held
liable for corporate acts. The corporation’s distinct personality is disregarded, and
the corporation is seen as a mere aggregation of persons undertaking a business
under the collective name of the corporation.
Hence, when the directors, as in this case, are impleaded in a case against a
corporation, alleging malice orbad faith on their part in directing the affairs of the
corporation, complainants are effectively alleging that the directors and the
corporation are not acting as separate entities. They are alleging that the acts or
omissions by the corporation that violated their rights are also the directors’ acts or
omissions.90 They are alleging that contracts executed by the corporation are
contracts executed by the directors. Complainants effectively pray that the corporate
veilbe pierced because the cause of action between the corporation and the directors
is the same.
In that case, complainants have no choice but to institute only one proceeding against
the parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single
cause of action is prohibited. Institution of more than one suit for the same cause of
action constitutes splitting the cause of action, which is a ground for the dismissal
ofthe others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may not institute more
than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action;effect of. — If two or more suits are
instituted on the basis of the same cause of action, the filing of one or a judgment
upon the merits in any one is available as a ground for the dismissal of the others.
(4a)
all instances and for all purposes, is the same as its directors, stockholders, officers,
and agents. It does not result in an absolute confusion of personalities of the
corporation and the persons composing or representing it. Courts merely discount the
distinction and treat them as one, in relation to a specific act, in order to extend the
terms of the contract and the liabilities for all damages to erring corporate officials
who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the
piercing of the corporate veil, parties who are normally treated as distinct individuals
should be made to participate in the arbitration proceedings in order to determine
ifsuch distinction should indeed be disregarded and, if so, to determine the extent of
their liabilities.

It is because the personalities of petitioners and the corporation may later be found to In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation
be indistinct that we rule that petitioners may be compelled to submit to arbitration. failed to prove the existence of circumstances that render petitioners and the other
directors solidarily liable. It ruled that petitioners and Shangri-La’s other directors
However, in ruling that petitioners may be compelled to submit to the arbitration were not liable for the contractual obligations of Shangri-La to BF Corporation. The
proceedings, we are not overturning Heirs of Augusto Salas wherein this court Arbitral Tribunal’s decision was made with the participation of petitioners, albeit
with their continuing objection. In view of our discussion above, we rule that
affirmed the basic arbitration principle that only parties to an arbitration agreement
petitioners are bound by such decision.
may be compelled to submit to arbitration. In that case, this court recognizedthat
persons other than the main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered parties to an arbitration WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11,
agreement entered into by their assignor because the assignor’s rights and obligations 2006 and resolution of October 5, 2006 are AFFIRMED.
are transferred to them upon assignment. In other words, the assignor’s rights and
obligations become their own rights and obligations. In the same way, the SO ORDERED.
corporation’s obligations are treated as the representative’s obligations when the
corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its
policy against multiplicity of suits and unnecessary delay. This court said that "to
split the proceeding into arbitration for some parties and trial for other parties would
"result in multiplicity of suits, duplicitous procedure and unnecessary delay." 91 This
court also intimated that the interest of justice would be best observed if it
adjudicated rights in a single proceeding.92 While the facts of that case prompted this
court to direct the trial court to proceed to determine the issues of thatcase, it did not
prohibit courts from allowing the case to proceed to arbitration, when circumstances
warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s

rights, and the incidental issue of whether piercing of the corporate veil is warranted,
should be determined in a single proceeding. Such finding would determine if the
corporation is merely an aggregation of persons whose liabilities must be treated as
one with the corporation.

However, when the courts disregard the corporation’s distinct and separate
personality from its directors or officers, the courts do not say that the corporation, in
 Republic of the Philippines
SUPREME COURT
Manila
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.
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 2dismissing 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:
Art. 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.
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".
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.
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.

WHEREFORE, the instant petition is hereby GRANTED. The Order dated August
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 19, 1998 of Branch 85 of the Regional Trial Court of Lipa City is hereby
heirs. 17 But only they. Petitioners, as heirs of Salas, Jr., and respondent Laperal NULLIFIED and SET ASIDE. Said court is hereby ordered to proceed with the
hearing of Civil Case No. 98-0047.
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 Costs against private respondents.
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 have SO ORDERED.
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".

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
 Republic of the Philippines On 29 June 2009, an ad hoc arbitral tribunal6 was constituted. In an Order dated 15
SUPREME COURT April 2013,7 the arbitral tribunal approved BCA's request to apply in court for the
Manila issuance of subpoena, subject to the conditions that the application will not affect its
proceedings and the hearing set in October 2013 will proceed whether the witnesses
SECOND DIVISION attend or not.

G.R. No. 210858 June 29, 2016 On 16 May 2013, BCA filed before the RTC a Petition for Assistance in Taking
Evidence8 pursuant to the Implementing Rules and Regulations (IRR) of "The
Alternative Dispute Resolution Act of 2004," or Republic Act No. 9285 (RA 9285).
DEPARTMENT OF FOREIGN AFFAIRS, Petitioner,
In its petition, BCA sought the issuance of subpoena ad testificandum and
vs.
subpoena duces tecum to the following witnesses and documents in their custody:9
BCA INTERNATIONAL CORPORATION, Respondent.

DECISION Witnesses Documents to be produced

1. Secretary of Foreign a. Request for Proposal dated September 10, 1999 for
CARPIO, J.:
Affairs or his the MRP/V Project;
representative/s, b. Notice of Award dated September 29, 2000
The Case specifically awarding the MRP/V Project Company to
Undersecretary Franklin implement the MRP/V Project;
This petition for review1 assails the Orders dated 11 October 20132 and 8 January M. Ebdalin and c. Department of Foreign Affairs Machine Readable
2014,3 as well as the Resolution dated 2 September 2013,4 of the Regional Trial Ambassador Belen F. Passport and Visa Project Build-Operate-Transfer
Court of Makati City (RTC), Branch 146, in SP. PROC. No. M-7458. Anota Agreement dated February 8, 2001;
d. Department of Foreign Affairs Machine Readable
The Facts Passport and Visa Project Amended Build-Operate-
Transfer Agreement dated April 5, 2002;
In an Amended Build-Operate-Transfer Agreement dated 5 April 2002 (Agreement), e. Documents, records, papers and correspondence
petitioner Department of Foreign Affairs (DFA) awarded the Machine Readable between DFA and BCA regarding the negotiations
Passport and Visa Project (MRPN Project) to respondent BCA International for the contract of lease of the PNB building,
Corporation (BCA), a domestic corporation. During the implementation of which was identified in the Request for Proposal as
the MRPN Project, DFA sought to terminate the Agreement. However, BCA the Central Facility Site, and the failure of said
opposed the termination and filed a Request for Arbitration, according to the negotiations;
provision in the Agreement: f. Documents, records, reports, studies, papers and
correspondence between DFA and BCA regarding
the search for alternative Central Facility Site;
Section 19.02. Failure to Settle Amicably - If the Dispute cannot be settled amicably
g. Documents, records, papers and correspondence
within ninety (90) days by mutual discussion as contemplated under Section 19.01
between DFA and BCA regarding the latter’s
herein, the Dispute shall be settled with finality by an arbitrage tribunal operating
submission of the Project Master Plan (Phase One
under International Law, hereinafter referred to as the "Tribunal", under
of the MRP/V Project);
the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the
h. Documents, records, papers and correspondence
United Nations General Assembly on December 15, 1976, and
among DFA, DFA’s Project Planning Team,
entitled "Arbitration Rules on the United Nations Commission on the International
Questronix Corporation, MRP/V Advisory Board
Trade Law". The DFA and the BCA undertake to abide by and implement the
and other related government agencies, and BCA
arbitration award. The place of arbitration shall be Pasay City, Philippines, or such
regarding the recommendation for the issuance of
other place as may be mutually agreed upon by both parties. The arbitration
the Certificate of Acceptance in favor of BCA;
proceeding shall be conducted in the English language.5 (Emphasis supplied)
i. Certificate of Acceptance for Phase One dated June
 9, 2004 issued by DFA;
j. Documents, records, papers and correspondence
between DFA and BCA regarding the approval of
the Star Mall complex as the Central Facility Site;
k. Documents, records, papers and correspondence
among DFA, Questronix Corporation, MRP/V
Advisory Board and other related government
agencies, and BCA regarding the recommendation
for the approval of the Stare Mall complex as the
Central Facility Site;
l. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
request for BCA to terminate its Assignment
Agreement with Philpass, including BCA’s
compliance therewith;
m. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
demand for BCA to prove its financial capability to
implement the MRP/V Project, including the
compliance therewith by BCA;
n. Documents, records, papers and correspondence
between DFA and BCA regarding the DFA’s
attempt to termiante the Amended BOT
Agreement, including BCA’s response to DFA and
BCA’s attempts to mutually discuss the matter with
DFA;
o. Documents, records, papers and correspondence
among DFA and MRP/V Advisory Board, DTI-
BOT Center, Department of Finance and
Commission on Audit regarding the delays in the
implementation of the MRP/V Project, DFA’s
requirement for BCA to prove its financial
capability, and the opinions of the said government
agencies in relation to DFA’s attempt to terminate
the Amended BOT Agreement; and
p. Other related documents, records, papers and
correspondence.
2. Secretary of Finance a. Documents, records, papers and correspondence
or his representative/s, between DFA and Department of Finance
specifically former regarding the DFA’s requirement for BCA to prove
Secretary of Finance its financial capability to implement the MRP/V
Juanita D. Amatong Project and its opinion thereon;
b. Documents, records, papers and correspondence
between DFA and DOF regarding BCA’s
compliance with DFA’s demand for BCA to
c.
d.
e.
3. Chairman of the a.
Commission on Audit
or her representative/s,
specifically Ms.
Iluminada M.V. Fabroa b.
(Director IV)
c.
d.
e.
4. Executive Director or a.
any officer or
representative of the
Department of Trade
and Industry Build-
Operate-Transfer
Center, specifically
Messrs. Noel Eli B. b.
Kintanar, Rafaelito H.
Taruc and Luisito Ucab
c.
further prove its financial capability to implement
the MRP/V Project;
Documents, records, papers and correspondence
between DFA and DOF regarding the delays in the
implementation of the MRP/V Project;
Documents, records, papers and correspondence
between DFA and DOF regarding the DFA’s
attempted termination of the Amended BOT
Agreement; and
Other related documents, records, papers and
correspondence.
Documents, records, papers and correspondence
between DFA and COA regarding the COA’s
conduct of a sectoral performance audit on the
MRP/V Project;
Documents, records, papers and correspondence
between DFA and COA regarding the delays in
and its recommendation to fast-track the
implementation of the MRP/V Project;
Documents, records, papers and correspondence
between DFA and COA regarding COA’s advice to
cancel the Assignment Agreement between BCA
and Philpass "for being contrary to existing laws
and regulations and DOJ opinion";
Documents, records, papers and correspondence
between DFA and COA regarding DFA’s
attempted termination of the Amended BOT
Agreement; and
Other related documents, records, papers and
correspondence.
Documents, records, papers and correspondence
between DFA and BOT Center regarding the
delays in the implementation of the MRP/V
Project, including DFA’s delay in the issuance of
the Certificate of Acceptance for Phase One of the
MRP/V Project and in approving the Central
Facility Site at the Star Mall complex;
Documents, records, papers and correspondence
between DFA and BOT Center regarding BCA’s
financial capability and the BOT Center’s opinion
on DFA’s demand for BCA to further prove its
financial capability to implement the MRP/V
project;
Documents, records, papers and correspondence

d.
e.
5. Chairman of the DFA a.
MRP/V Advisory Board
or his representative/s,
specifically DFA
Undersecretary Franklin
M. Ebdalin and MRP/V
Project Manager,
specifically Atty.
Voltaire Mauricio b.
c.
d.
e.
f.
between DFA and BOT Center regarding the
DFA’s attempt to terminate the Amended BOT
Agreement, including the BOT Center’s
unsolicited advice dated December 23, 2005 stating
that the issuance of the Notice of Termination was
"precipitate, and done without first carefully
ensuring that there were sufficient grounds to
warrant such an issuance" and was "devoid of
merit";
Documents, records, papers and correspondence
between DFA and BOT Center regarding the
DFA’s unwarrented refusal to approve BCA’s
proposal to obtain the required financing by
allowing the entry of a "strategic investor"; and
Other related documents, records, papers and
correspondence.
Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA[‘s] performance of its obligations
for Phase One of the MRP/V Project, the MRP/V
Advisory Board’s recommendation for the issuance
of the Certificate of Acceptance of Phase One of
the MRP/V Project and its preparation of the draft
of the Certificate of Acceptance;
Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding the latter’s recommendation for the DFA
to approve the Star Mall complex as the Central
Facility Site;
Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA’s request to allow the investment of
S.F. Pass International in Philpass;
Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding BCA’s financial capability and the
MRP/V Advisory Board’s opinion on DFA’s
demand for BCA to further prove its financial
capability to implement the MRP/V Project;
Documents, records, papers and correspondence
between DFA and the MRP/V Advisory Board
regarding the DFA’s attempted termination of the
Amended BOT Agreement; and
Other related documents, records, papers and
correspondence.
On 1 July 2013, DFA filed its comment, alleging that the presentation of the
witnesses and documents was prohibited by law and protected by the deliberative
process privilege.
The RTC Ruling
In a Resolution dated 2 September 2013, the RTC ruled in favor of BCA and held
that the evidence sought to be produced was no longer covered by the deliberative
process privilege. According to the RTC, the Court held in Chavez v. Public Estates
Authority10 that acts, transactions or decisions are privileged only before a definite
proposition is reached by the agency and since DFA already made a definite
proposition and entered into a contract, DFA's acts, transactions or decisions were no
longer privileged.11
The dispositive portion of the RTC Resolution reads:
WHEREFORE, the petition is granted. Let subpoena ad testificandum [and
subpoena] duces tecum be issued to the persons listed in paragraph 11 of the Petition
for them to appear and bring the documents specified in paragraph 12 thereof, before
the Ad Hoc Tribunal for the hearings on October 14, 15, 16, 17, 2013 at 9:00 a.m.
and 2:00 p.m. at the Malcolm Hall, University of the Philippines, Diliman, Quezon
City.12
On 6 September 2013, the RTC issued the subpoena due es tecum and subpoena ad
testificandum. On 12 September 2013, DFA filed a motion to quash the
subpoena duces tecum and subpoena ad testificandum, which BCA opposed.
In an Order dated 11 October 2013, the RTC denied the motion to quash and held
that the motion was actually a motion for reconsideration, which is prohibited under
Rule 9.9 of the Special Rules of Court on Alternative Dispute Resolution (Special
ADR Rules).
On 14, 16, and 17 October 2013, Undersecretary Franklin M. Ebdalin (Usec.
Ebdalin), Atty. Voltaire Mauricio (Atty. Mauricio), and Luisi to Ucab (Mr. Ucab)
testified before the arbitral tribunal pursuant to the subpoena.
In an Order dated 8 January 2014, the RTC denied the motion for reconsideration
filed by DFA. The RTC ruled that the motion became moot with the appearance of
the witnesses during the arbitration hearings. Hence, DFA filed this petition with an
urgent prayer for the issuance of a temporary restraining order and/or a writ of
preliminary injunction.
In a Resolution dated 2 April 2014, the Court issued a temporary restraining order
enjoining the arbitral tribunal from taking cognizance of the testimonies of Usec.
Ebdalin, Atty. Mauricio, and Mr. Ucab.
The Issues
DFA raises the following issues in this petition: (1) the 1976 UNCITRAL
Arbitration Rules and the Rules of Court apply to the present arbitration proceedings,
not RA 9285 and the Special ADR Rules; and (2) the witnesses presented during the
14, 16, and 17 October 2013 hearings before the ad hoc arbitral tribunal are
prohibited from disclosing information on the basis of the deliberative process
privilege.
The Ruling of the Court
We partially grant the petition.
Arbitration is deemed a special proceeding13 and governed by the special provisions
of RA 9285, its IRR, and the Special ADR Rules. 14 RA 9285 is the general law
applicable to all matters and controversies to be resolved through alternative dispute
resolution methods. 15 While enacted only in 2004, we held that RA 9285 applies to
pending arbitration proceedings since it is a procedural law, which has retroactive
effect:
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. 16 (Emphasis supplied)
The IRR of RA 9285 reiterate that RA 9285 is procedural in character and applicable
to all pending arbitration proceedings.17 Consistent with Article 2046 of the Civil
Code, 18 the Special ADR Rules were formulated and were also applied to all
pending arbitration proceedings covered by RA 9285, provided no vested rights are
impaired. 19Thus, contrary to DFA's contention, RA 9285, its IRR, and the Special
ADR Rules are applicable to the present arbitration proceeding. The arbitration
between the DFA and BCA is still pending, since no arbitral award has yet been
rendered. Moreover, DFA did not allege any vested rights impaired by the
application of those procedural rules.
RA 9285, its IRR, and the Special ADR Rules provide that any party to an
arbitration, whether domestic or foreign, may request the court to provide assistance
in taking evidence such as the issuance of subpoena ad testificandum and
subpoena duces tecum.20 The Special ADR Rules specifically provide that they shall
apply to assistance in taking evidence,21 and the RTC order granting assistance in
taking evidence shall be immediately executory and not subject to reconsideration or
appeal.22 An appeal with the Court of Appeals (CA) is only possible where the RTC
denied a petition for assistance in taking evidence. 23 An appeal to the Supreme
Court from the CA is allowed only under any of the grounds specified in the Special
ADR Rules.24 We rule that the DFA failed to follow the procedure and the hierarchy
of courts provided in RA 9285, its IRR, and the Special ADR Rules, when DFA
directly appealed before this Court the RTC Resolution and Orders granting
assistance in taking evidence.
DFA contends that the RTC issued the subpoenas on the premise that RA 9285 and
the Special ADR Rules apply to this case. However, we find that even without
applying RA 9285 and the Special ADR Rules, the RTC still has the authority to
issue the subpoenas to assist the parties in taking evidence.
The 1976 UNCITRAL Arbitration Rules, agreed upon by the parties to govern them,
state that the "arbitral tribunal shall apply the law designated by the parties as
applicable to the substance of the dispute. Failing such designation by the parties, the
arbitral tribunal shall apply the law determined by the conflict of laws rules which it
considers applicable. "25 Established in this jurisdiction is the rule that the law of the
place where the contract is made governs, or lex loci contractus.26 Since there is no
law designated by the parties as applicable and the Agreement was perfected in the
Philippines, "The Arbitration Law," or Republic Act No. 876 (RA 876), applies.
RA 876 empowered arbitrators to subpoena witnesses and documents when the
materiality of the testimony has been demonstrated to them. 27 In Transfield
Philippines, Inc. v. Luzon Hydro Corporation, 28 we held that Section 14 of RA 876
recognizes the right 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.
Considering that this petition was not filed in accordance with RA 9285, the Special
ADR Rules and 1976 UNCITRAL Arbitration Rules, this petition should normally
be denied. However, we have held time and again that the ends of justice are better
served when cases are determined on the merits after all parties are given full
opportunity to ventilate their causes and defenses rather than on technicality or some
procedural imperfections. 29More importantly, this case is one of first impression
involving the production of evidence in an arbitration case where the deliberative
process privilege is invoked.
Thus, DFA insists that we determine whether the evidence sought to be subpoenaed
is covered by the deliberative process privilege.1âwphi1 DFA contends that the RTC
erred in holding that the deliberative process privilege is no longer applicable in this
case. According to the RTC, based on Chavez v. Public Estates Authority,30 "acts,
transactions or decisions are privileged only before a definite proposition is reached
by the agency," and since, in this case, DFA not only made "a definite proposition"
but already entered into a contract then the evidence sought to be produced is no
longer privileged.31
We have held in Chavez v. Public Estates Authority32 that:
Information, however, on on-going evaluation or review of bids or proposals being
undertaken by the bidding or review committee is not immediately accessible under
the right to information. While the evaluation or review is still on-going, there are no
"official acts, transactions, or decisions" on the bids or proposals. However, once the
committee makes its official recommendation, there arises a "definite proposition" on
the part of the government. From this moment, the public's right to information
attaches, and any citizen can access all the non-proprietary information leading to
such definite proposition.
xxxx
The right to information, however, does not extend to matters recognized as
privileged information under the separation of powers. The right does not also apply
to information on military and diplomatic secrets, information affecting national
security, and information on investigations of crimes by law enforcement agencies
before the prosecution of the accused, which courts have long recognized as
confidential. The right may also be subject to other limitations that Congress may
impose by law.
There is no claim by PEA that the information demanded by petitioner is privileged
information rooted in the separation of powers. The information does not cover
Presidential conversations, correspondences, or discussions during closed-door
Cabinet meetings which, like internal deliberations of the Supreme Court and other
collegiate courts, or executive sessions of either house of Congress, are recognized
as confidential. This kind of information cannot be pried open by a co-equal branch
of government. A frank exchange of exploratory ideas and assessments, free
from the glare of publicity and pressure by interested parties, is essential to
protect the independence of decision-making of those tasked to exercise
Presidential, Legislative and Judicial power. This is not the situation in the instant
case.
We rule, therefore, that the constitutional right to information includes official
information on on-going negotiations before a final contract. The information,
however, must constitute definite propositions by the government and should not
cover recognized exceptions like privileged information, military and diplomatic
secrets and similar matters affecting national security and public order. Congress has
also prescribed other limitations on the right to information in several legislations.
(Emphasis supplied)
Contrary to the RTC's ruling, there is nothing in our Chavez v. Public Estates
Authority33 ruling which states that once a "definite proposition" is reached by an
agency, the privileged character of a document no longer exists. On the other hand,
we hold that before a "definite proposition" is reached by an agency, there are no
"official acts, transactions, or decisions" yet which can be accessed by the public
under the right to information. Only when there is an official recommendation can a
"definite proposition" arise and, accordingly, the public's right to information
attaches. However, this right to information has certain limitations and does not
cover privileged information to protect the independence of decision-making by
the government.
Chavez v. Public Estates Authority34 expressly and unequivocally states that the right
to information "should not cover recognized exceptions like privileged
information, military and diplomatic secrets and similar matters affecting national
security and public order." Clearly, Chavez v. Public Estates Authority35 expressly
mandates that "privileged information" should be outside the scope of the
constitutional right to information, just like military and diplomatic secrets and
similar matters affecting national security and public order. In these exceptional
cases, even the occurrence of a "definite proposition" will not give rise to the public's
right to information.
Deliberative process privilege is one kind of privileged information, which is
within the exceptions of the constitutional right to information. In In Re:
Production of Court Records and Documents and the Attendance of Court Officials
and Employees as Witnesses, 36 we held that:
Court deliberations are traditionally recognized as privileged
communication. Section 2, Rule 10 of the IRSC provides:
Section 2. Confidentiality of court sessions. - Court sessions are executive in
character, with only the Members of the Court present. Court deliberations are
confidential and shall not be disclosed to outside parties, except as may be provided
herein or as authorized by the Court.
Justice Abad discussed the rationale for the rule in his concurring opinion to the
Court Resolution in Arroyo v. De Lima (TRO on Watch List Order case): the rules
on confidentiality will enable the Members of the Court to "freely discuss the issues
without fear of criticism for holding unpopular positions" or fear of humiliation for
one's comments. The privilege against disclosure of these kinds of
information/communication is known as deliberative process privilege,
involving as it does the deliberative process of reaching a decision. "Written
advice from a variety of individuals is an important element of the government's
decision-making process and that the interchange of advice could be stifled if courts
forced the government to disclose those recommendations;" the privilege is intended
"to prevent the 'chilling' of deliberative communications."
The privilege is not exclusive to the Judiciary. We have in passing recognized the
claim of this privilege by the two other branches of government in Chavez v. Public
Estates Authority (speaking through J. Carpio) when the Court declared that -
[t]he information x x x like internal deliberations of the Supreme Court and other
collegiate courts, or executive sessions of either house of Congress, are recognized
as confidential. This kind of information cannot be pried open by a co-equal branch
of government. A frank exchange of exploratory ideas and assessments, free from
the glare of publicity and pressure by interested parties, is essential to protect the
independence of decision-making of those tasked to exercise Presidential,
Legislative and Judicial power. (Emphasis supplied)
In Akbayan v. Aquino, 37 we adopted the ruling of the U.S. Supreme Court in NLRB
v. Sears, Roebuck & Co,38 which stated that the deliberative process privilege
protects from disclosure "advisory opinions, recommendations, and deliberations
comprising part of a process by which governmental decisions and policies are
formulated." We explained that "[w]ritten advice from a variety of individuals is an
important element of the government's decision-making process and that the
interchange of advice could be stifled if courts forced the government to disclose
those recommendations"; thus, the privilege is intended "to prevent the 'chilling' of
deliberative communications."39
The privileged character of the information does not end when an agency has
adopted a definite proposition or when a contract has been perfected or
consummated; otherwise, the purpose of the privilege will be defeated.
The deliberative process privilege applies if its purpose is served, that is, "to protect
the frank exchange of ideas and opinions critical to the government's decision[-
]making process where disclosure would discourage such discussion in the
future." 40 In Judicial Watch of Florida v. Department of Justice, 41 the U.S. District
Court for the District of Columbia held that the deliberative process privilege's
"ultimate purpose x x x is to prevent injury to the quality of agency decisions by
allowing government officials freedom to debate alternative approaches in private,"
and this ultimate purpose would not be served equally well by making the privilege
temporary or held to have expired. In Gwich 'in Steering Comm. v. Office of the
Governor, 42 the Supreme Court of Alaska held that communications have not lost
the privilege even when the decision that the documents preceded is finally made.
The Supreme Court of Alaska held that "the question is not whether the decision has
been implemented, or whether sufficient time has passed, but whether disclosure of
these preliminary proposals could harm the agency's future decision[-]making by
chilling either the submission of such proposals or their forthright consideration."
Traditionally, U.S. courts have established two fundamental requirements, both of
which must be met, for the deliberative process privilege to be invoked. 43 First, the
communication must be predecisional, i.e., "antecedent to the adoption of an agency
policy." Second, the communication must be deliberative, i.e., "a direct part of the
deliberative process in that it makes recommendations or expresses opinions on legal
or policy matters." It must reflect the "give-and-take of the consultative
process."44 The Supreme Court of Colorado also took into account other
considerations:
Courts have also looked to other considerations in assessing whether material is
predecisional and deliberative. The function and significance of the document in the
agency's decision-making process are relevant. Documents representing the ideas
and theories that go into the making of policy, which are privileged, should be
distinguished from "binding agency opinions and interpretations" that are "retained
and referred to as precedent" and constitute the policy itself.
Furthermore, courts examine the identity and decision-making authority of the office
or person issuing the material. A document from a subordinate to a superior official
is more likely to be predecisional, "while a document moving in the opposite
direction is more likely to contain instructions to staff explaining the reasons for a
decision already made."
Finally, in addition to assessing whether the material is predecisional and
deliberative, and in order to determine if disclosure of the material is likely to
adversely affect the purposes of the privilege, courts inquire whether "the document
is so candid or personal in nature that public disclosure is likely in the future to stifle
honest and frank communication within the agency." As a consequence, the
deliberative process privilege typically covers recommendations, advisory
opinions, draft documents, proposals, suggestions, and other subjective
documents that reflect the personal opinions of the writer rather than the policy
of the agency. 45 (Emphasis supplied)
Thus, "[t]he deliberative process privilege exempts materials that are 'predecisional'
and 'deliberative,' but requires disclosure of policy statements and final opinions 'that
have the force of law or explain actions that an agency has already taken."’46
In City of Colorado Springs v. White, 47 the Supreme Court of Colorado held that the
outside consultant's evaluation report of working environment and policies was
covered by the deliberative process privilege because the report contained
observations on current atmosphere and suggestions on how to improve the division
rather than an expression of final agency decision. In Strang v. Collyer,48 the U.S.
District Court for the District of Columbia held that the meeting notes that reflect the
exchange of opinions between agency personnel or divisions of agency are covered
by the deliberative process privilege because they "reflect the agency's group
thinking in the process of working out its policy" and are part of the deliberative
process in arriving at the final position. In Judicial Watch v. Clinton,49 the U.S.
District Court for the District of Columbia held that handwritten notes reflecting
preliminary thoughts of agency personnel were properly withheld under the
deliberative process privilege. The U.S. District Court reasoned that "disclosure of
this type of deliberative material inhibits open debate and discussion, and has a
chilling effect on the free exchange of ideas."
This Court applied the deliberative process privilege in In Re: Production of Court
Records and Documents and the Attendance of Court Officials and Employees as
Wltnesses50 and found that court records which are "predecisional" and "deliberative"
in nature - in particular, documents and other communications which are part of or
related to the deliberative process, i.e., notes, drafts, research papers, internal
discussions, internal memoranda, records of internal deliberations, and similar papers
- are protected and cannot be the subject of a subpoena if judicial privilege is to be
preserved. We further held that this privilege is not exclusive to the Judiciary and
cited our ruling in Chavez v. Public Estates Authority.51
The deliberative process privilege can also be invoked in arbitration proceedings
under RA 9285.
"Deliberative process privilege contains three policy bases: first, the privilege
protects candid discussions within an agency; second, it prevents public confusion
from premature disclosure of agency opinions before the agency establishes final
policy; and third, it protects the integrity of an agency's decision; the public should
not judge officials based on information they considered prior to issuing their final
decisions."52 Stated differently, the privilege serves "to assure that subordinates
within an agency will feel free to provide the decision[-]maker with their uninhibited
opinions and recommendations without fear of later being subject to public ridicule
or criticism; to protect against premature disclosure of proposed policies before they
have been finally formulated or adopted; and to protect against confusing the issues
and misleading the public by dissemination of documents suggesting reasons and
rationales for a course of action which were not in fact the ultimate reasons for the
agency's action."53
Under RA 9285,54 orders of an arbitral tribunal are appealable to the courts. If an
official is compelled to testify before an arbitral tribunal and the order of an arbitral
tribunal is appealed to the courts, such official can be inhibited by fear of later being
subject to public criticism, preventing such official from making candid discussions
within his or her agency. The decision of the court is widely published, including
details involving the privileged information. This disclosure of privileged
information can inhibit a public official from expressing his or her candid opinion.
Future quality of deliberative process can be impaired by undue exposure of the
decision-making process to public scrutiny after the court decision is made.
Accordingly, a proceeding in the arbitral tribunal does not prevent the possibility of
the purpose of the privilege being defeated, if it is not allowed to be invoked. In the
same manner, the disclosure of an information covered by the deliberative process
privilege to a court arbitrator will defeat the policy bases and purpose of the
privilege.
DFA did not waive the privilege in arbitration proceedings under the Agreement.
The Agreement does not provide for the waiver of the deliberative process privilege
by DFA. The Agreement only provides that:
Section 20.02 None of the parties shall, at any time, before or after the expiration or
sooner termination of this Amended BOT Agreement, without the consent of the
other party, divulge or suffer or permit its officers, employees, agents or contractors
to divulge to any person, other than any of its or their respective officers or
employees who require the same to enable them properly to carry out their
duties, any of the contents of this Amended BOT Agreement or any information
relating to the negotiations concerning the operations, contracts, commercial or
financial arrangements or affair[s] of the other parties hereto. Documents
marked "CONFIDENTIAL" or the like, providing that such material shall be kept
confidential, and shall constitute prima facieevidence that such information
contained therein is subject to the terms of this provision.
Section 20.03 The restrictions imposed in Section 20.02 herein shall not apply to
the disclosure of any information:
xxxx
C. To a court arbitrator or administrative tribunal the course of proceedings
before it to which the disclosing party is party; x x x55 (Emphasis supplied)
Section 20.02 of the Agreement merely allows, with the consent of the other
party, disclosure by a party to a court arbitrator or administrative tribunal of the
contents of the "Amended BOT Agreement or any information relating to the
negotiations concerning the operations, contracts, commercial or financial
arrangements or affair[s]of the other parties hereto." There is no express waiver of
information forming part of DFA's predecisional deliberative or decision-making
process. Section 20.02 does not state that a party to the arbitration is compelled to
disclose to the tribunal privileged information in such party's possession.
On the other hand, Section 20.03 merely allows a party, if it chooses, without the
consent of the other party, to disclose to the tribunal privileged information in
such disclosing party's possession. In short, a party can disclose privileged
information in its possession, even without the consent of the other party, if the
disclosure is to a tribunal. However, a party cannot be compelled by the other
party to disclose privileged information to the tribunal, where such privileged
information is in its possession and not in the possession of the party seeking the
compulsory disclosure.
Nothing in Section 20.03 mandates compulsory disclosure of privileged information.
Section 20.03 merely states that "the restrictions imposed in Section 20.02," referring
to the "consent of the other party," shall not apply to a disclosure of privileged
information by a party in possession of a privileged information. This is completely
different from compelling a party to disclose privileged information in its possession
against its own will.
specify their claims before the RTC and, thereafter, the RTC shall determine which
evidence is covered by the deliberative process privilege, if there is any, based on the
standards provided in this Decision. It is necessary to consider the circumstances
surrounding the demand for the evidence to determine whether or not its production
is injurious to the consultative functions of government that the privilege of non-
disclosure protects.

Rights cannot be waived if it is contrary to law, public order, public policy, morals,
or good customs, or prejudicial to a third person with a right recognized by
law. 56 There is a public policy involved in a claim of deliberative process privilege -
"the policy of open, frank discussion between subordinate and chief concerning
administrative action."57Thus, the deliberative process privilege cannot be waived.
As we have held in Akbayan v. Aquino, 58 the deliberative process privilege is closely
related to the presidential communications privilege and protects the public
disclosure of information that can compromise the quality of agency decisions:
WHEREFORE, we resolve to PARTIALLY GRANT the petition
and REMAND this case to the Regional Trial Court of Makati City, Branch 146, to
determine whether the documents and records sought to be subpoenaed are protected
by the deliberative process privilege as explained in this Decision. The Resolution
dated 2 April 2014 issuing a Temporary Restraining Order is superseded by this
Decision.
SO ORDERED.

Closely related to the "presidential communications" privilege is the deliberative

process privilegerecognized in the United States. As discussed by the U.S. Supreme
Court in NLRB v. Sears, Roebuck & Co, deliberative process covers documents
reflecting advisory opinions, recommendations and deliberations comprising part of
a process by which governmental decisions and policies are formulated. Notably, the
privileged status of such documents rests, not on the need to protect national security
but, on the "obvious realization that officials will not communicate candidly
among themselves if each remark is a potential item of discovery and front page
news," the objective of the privilege being to enhance the quality of agency
decisions. (Emphasis supplied)

As a qualified privilege, the burden falls upon the government agency asserting the
deliberative process privilege to prove that the information in question satisfies both
requirements - predecisional and deliberative. 59 "The agency bears the burden of
establishing the character of the decision, the deliberative process involved, and the
role played by the documents in the course of that process." 60 It may be overcome
upon a showing that the discoverant's interests in disclosure of the materials
outweigh the government's interests in their confidentiality.61 "The determination of
need must be made flexibly on a case-by-case, ad hoc basis," and the "factors
relevant to this balancing include: the relevance of the evidence, whether there is
reason to believe the documents may shed light on government misconduct, whether
the information sought is available from other sources and can be obtained without
compromising the government's deliberative processes, and the importance of the
material to the discoverant's case."62

In the present case, considering that the RTC erred in applying our ruling
in Chavez v. Public Estates Authority,63and both BCA's and DFA's assertions of
subpoena of evidence and the deliberative process privilege are broad and lack
specificity, we will not be able to determine whether the evidence sought to be
produced is covered by the deliberative process privilege. The parties are directed to